Opinion ID: 4552253
Heading Depth: 2
Heading Rank: 3

Heading: Analysis of the Present Case

Text: Having erected the applicable legal framework, we now turn to the issue before us. No one disputes that on the day Rockwell filed for bankruptcy, he properly protected $47,500 of - 9 - his property from the bankruptcy estate by claiming Maine's homestead exemption, 14 M.R.S. § 4422(1). No one disputes that Rockwell sold the property and pocketed the $47,500 without spending it on a new Maine homestead within six months of the sale, which Maine law requires.4 The sole dispute is whether that $47,500 (or what Rockwell didn't spend of it) lost its protection when Rockwell failed to reinvest in a homestead within the six-month limitation and should be available to pay creditors. At the outset, we recognize that the Supreme Court instructs that the rules of the Bankruptcy Code have the first and final say, even where equity might demand a different result. In Law v. Siegel, the Supreme Court held that the bankruptcy court had improperly awarded the value of the debtor's homestead exemption to pay for the Chapter 7 trustee's administrative expenses, even though the trustee generated those expenses solely when responding to the debtor's deliberate fraud. 571 U.S. at 422. The Court explained that the Bankruptcy Code permits debtors 4 As detailed above, Rockwell continued to live at the B Street property until September 2017, when he moved into the Bancroft Court residence. No one disputes that he has no ownership interest in this property or that Rockwell spent his B Street proceeds on repairs and other care for the Bancroft Court property. Rockwell argued to the bankruptcy court that this qualifies as investing in a homestead under Maine law, so that money is still exempt from the estate. The bankruptcy court did not resolve this argument because it determined that the B Street proceeds were exempt, regardless of how Rockwell later spent them. For the same reason, we do not address that argument here. - 10 - to claim a homestead exemption and for the value of that exemption to be protected from paying, among other things, the administrative expenses of the estate. Id. The debtor in that case properly claimed the homestead exemption and no one filed a timely objection. Id. at 423. Despite the debtor's post-petition conduct, which included submitting fraudulent documents to the bankruptcy court in an effort to wrest a share of the estate back to himself, and despite the fact that this fraud directly caused the trustee to incur approximately half a million dollars in legal fees, the Code did not permit the bankruptcy court to make the debtor's homestead exemption available to defray those legal fees. Id. at 418-22, 427-28 (explaining that the bankruptcy court may not contravene express provisions of the Bankruptcy Code by ordering that the debtor's exempt property be used to pay debts and expenses for which that property is not liable under the Code). The bankruptcy court's mandate, therefore, is to reach . . . an end result required by the Code. Id. at 426. 2. Exemptions are Analyzed on the date the Debtor Files for Bankruptcy With this framing in mind, we recognize that the Code (which we know is supreme here) instructs that the estate does not begin anew when a debtor converts a Chapter 13 bankruptcy proceeding into a Chapter 7 proceeding. 11 U.S.C. § 348(a) (conversion from Chapter 13 to Chapter 7 does not effect a change - 11 - in the date of the filing of the petition, the commencement of the case, or the order for relief). [N]othing in the Code den[ies] debtors funds that would have been theirs had the case proceeded under Chapter 7 from the start. Harris, 135 S. Ct. at 1838. So, without a doubt, we examine Rockwell's claim of a homestead exemption on the date he filed for his Chapter 13 bankruptcy. As previously noted, no one disputes that Rockwell properly claimed Maine's homestead exemption on that date. 3. The Complete Snapshot Rule Applies Therefore, the final concept we must wrestle with is whether to apply the partial or complete snapshot rule: that is, we consider whether to examine Rockwell's claimed homestead exemption as unchanging, in accordance with the complete snapshot rule, or apply the partial snapshot rule and afford Rockwell the homestead exemption only so far as he maintains his homestead. Again, the Code answers this question for us. Property that is properly exempted under § 522 is immunized against liability for prebankruptcy debts, subject only to a few exceptions. In re Cunningham, 513 F.3d at 323; accord 11 U.S.C. § 522(c)(1)-(3). The Code enumerates those exceptions, where property that is properly exempt on the day of filing (here, the day the snapshot is taken) can be later incorporated into the estate (because the snapshot was only partial and can therefore be edited). See 11 U.S.C. § 522(c). Those exceptions include: (1) debt from certain - 12 - taxes and customs duties, (2) debt related to domestic support obligations, (3) liens that cannot be avoided or voided, including tax liens, and (4) debts for a breach of fiduciary duty to a federal depository institution. In re Cunningham, 513 F.3d at 323. Therefore, we must conclude that the complete snapshot rule applies to homestead exemptions taken pursuant to § 522, where none of the statute's enumerated exceptions applies. None of these explicit exceptions applies to Rockwell's case, nor does Hull contend that one does, so Rockwell's homestead exemption taken on the day he filed for bankruptcy must be viewed as unchanging, even in the face of his later sale of the property. This result lines up with the Code's priority of providing a fresh start for debtors. [W]hile a Chapter 7 debtor must forfeit virtually all his prepetition property, he is able to make a 'fresh start' by shielding from creditors his postpetition earnings and acquisitions. Harris, 135 S. Ct. at 1835. Debtors can best make a fresh start where they can make healthy financial choices moving forward, knowing what property is out of the reach of the pre-petition creditors. Indeed, exemptions in bankruptcy cases are part and parcel of the fundamental bankruptcy concept of a fresh start. Schwab v. Reilly, 560 U.S. 770, 791 (2010) (internal quotation marks and citations omitted); accord In re Cunningham, 513 F.3d at 324 (The efficacy of the fresh start policy requires finality that allows a debtor to rebuild his life - 13 - without fear of lingering creditors.). [A] central purpose of the [Bankruptcy Code] is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy 'a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.' Grogan v. Garner, 498 U.S. 279, 286 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)). By protecting Rockwell's exempt property, which was properly exempted on the day of filing, from later being made available to creditors, the bankruptcy court in this case supported Rockwell in achieving the fresh start that the Code prizes. We addressed this aspect of the Code before in In re Cunningham, involving a Chapter 7 filing, where we considered whether the post-petition sale of the debtor's home, for which he had obtained a homestead exemption under the law of Massachusetts protecting it from creditors, cause[d] the proceeds of the sale to lose their exempt status under the Bankruptcy Code and become subject to pre-petition, nondischargeable debt. In re Cunningham, 513 F.3d at 320. Cunningham, the debtor in that case, had properly claimed a homestead exemption under Massachusetts law. Later, he sold his home, made approximately $150,000 from - 14 - the sale, and moved to Florida.5 Id. at 322. One of Cunningham's creditors moved to have the proceeds from the sale used to satisfy Cunningham's debt. Id. at 321-22. The creditor argued, similar to Hull's argument here, that the once-exempt interest in the homestead was proper at the time Cunningham filed for bankruptcy, but once he sold the property, it no longer enjoyed the protection of Massachusetts' homestead exemption and therefore could be collected to satisfy Cunningham's debts. Id. at 322. When analyzing that case, we noted that § 522(c) has an immunizing effect on any exempt assets, other than those explicitly excepted, and those exempt assets are therefore exempt from pre-petition debt collection during and after the bankruptcy. Id. at 323-24. Though we did not address the rule by name, our approach in In re Cunningham was compatible with the complete snapshot rule, when we held that because the exemption was proper on the day Cunningham filed for bankruptcy, Cunningham's interest in that asset was permanently immuniz[ed] from pre-petition debt collection, even if he later sold that homestead. Id. at 322-325. Our analysis does not differ here. 5The Massachusetts homestead exemption in place at the time did not exempt proceeds recovered from a sale of the homestead. See In re Cunningham, 513 F.3d at 321. - 15 - 4. Hull's Concerns Trying to distinguish our Cunningham holding, Hull urges us to view this as a distinct Chapter 13 issue because Rockwell sold his home while proceeding in that type of bankruptcy. He tells us that [t]he differences between a [C]hapter 7 case and a [C]hapter 13 case bear on the outcome of this appeal. According to Hull, our analysis of the homestead exemption should include changes based on post-petition activity because after Rockwell filed his petition, he retained, exclusive of the [C]hapter 13 trustee, possession of the house and the attendant decision-making authority over what to do with it and the proceeds arising from its sale.6 Essentially, the complete snapshot rule does not apply to a Chapter 13 proceeding because under Chapter 13, the debtor maintains control of his property. The Code continues to inform our approach and we find this argument unavailing. The Code considers the transition from 6 Though not dispositive, we disagree with Hull's characterization of Rockwell's control. While it is true that a hallmark of Chapter 13 proceedings is that the debtor retains possession of his property, see 11 U.S.C. §§ 1322, 1327, the bankruptcy court still exercises control over the debtor. Once the court confirms the debtor's plan, the debtor is bound by the plan's provisions, id. § 1327(a), and the debtor must obtain the court's approval for any modification of the confirmed plan. Id. § 1329. In order to discharge his debt (a debtor's goal in bankruptcy), absent approval by the court under special circumstances, the debtor must complet[e] . . . all payments under the [Chapter 13] plan. Id. § 1328(a). - 16 - a Chapter 13 to a Chapter 7 case and specifies how to examine these cases: we look to the date the petition was filed when evaluating exemptions. 11 U.S.C. § 348(f). The bankruptcy court looks at the debtor's assets on the conversion date (as Hull urges us to do here), rather than the petition date only when the debtor converts in bad faith. Id. § 348(f)(2); see Harris, 135 S. Ct. 1837-38. Hull does not allege Rockwell converted to a Chapter 7 bankruptcy in bad faith and the bankruptcy court made no such finding. The Code does not contain any other provisions (and Hull does not cite any) that instruct the bankruptcy court to treat a Chapter 7 debtor differently if he converted his case from Chapter 13. See Law, 571 U.S. at 425 ([f]ederal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code. (emphasis omitted)). Rather, the Code values the right of Chapter 13 debtors to convert to Chapter 7 proceedings and specifies that the conversion right cannot be waived. 11 U.S.C. § 1307(a). We are unpersuaded by Hull's implication that we should ignore the connection between Chapter 13 and Chapter 7 proceedings. Many debtors . . . fail to complete a Chapter 13 plan successfully. Harris, 135 S. Ct. at 1835 (citing Katherine Porter, The Pretend Solution: An Empirical Study of Bankruptcy Outcomes, 90 Tex. L. Rev. 103, 107–111 (2011) for the proposition that only one third of Chapter 13 cases results in the debtor - 17 - successfully discharging debt). The simple fact of this case is that Rockwell did convert his case to a Chapter 7 bankruptcy, as many Chapter 13 debtors ultimately do.7 See id. As a result, we must view this as what it is: a Chapter 7 case. Hull further argues that our holding will effectively read the six-month limitation out of the Maine statute in bankruptcy proceedings. Where, as here, the debtor exempts their homestead under Maine law and then later sells the homestead, Maine's six-month period for protecting the value of that homestead would not apply. From our perspective, that is what the Code requires. To interpret § 522(c) as conferring merely an ephemeral exemption, subject to post-termination events, would undermine that basic principle and its relationship to the fresh start policy of the Bankruptcy Code. In re Cunningham, 513 F.3d at 324; see Myers, 318 U.S. at 628 ([A debtor's] right to a homestead exemption becomes fixed at the date of the filing of the petition in bankruptcy and cannot thereafter be enlarged or altered by anything the [debtor] may do.). As one bankruptcy court aptly put it: [a] debtor is not required to maintain exempt property in its exempt state indefinitely after filing in order to avoid a 7 We do not decide whether sale proceeds continue to be exempted under the Maine homestead exemption if the six-month period expires after the petition date in a Chapter 13 case where there is no conversion to Chapter 7. - 18 - retroactive loss of the exemption. In re Hageman, 388 B.R. 896, 900 (Bankr. C. D. Ill. 2008). Finally, Hull reminds us that other circuits that have addressed similar questions have reached a result that is (or seems) at odds with the result we reach here. Hull points us to the Ninth Circuit's approach in In re Jacobson where a Chapter 7 debtor claimed a homestead exemption under California law, a creditor forced the sale of the homestead during the bankruptcy, and the debtor did not reinvest the proceeds of the sale during the six-month period, as required by California's homestead statute. In re Jacobson, 676 F.3d 1193, 1197 (9th Cir. 2012). The Ninth Circuit held that the sale's proceeds belonged to the estate, once the six-month reinvestment period had passed. Id. The Ninth Circuit purported to apply the snapshot rule, explaining that the snapshot rule, in its view, incorporates the entire state law[,] includ[ing] a reinvestment requirement for the debtor's share of the homestead sale proceeds. Id. at 1199. Hull also relies upon the Fifth Circuit's approach in In re Frost, where a Chapter 13 debtor exempted his homestead pursuant to Texas's vanishing homestead law and then did not reinvest the proceeds within the required time limit. In re Frost, 744 F.3d 384, 385 (5th Cir. 2014). The Fifth Circuit held that the debtor lost the protection of the homestead exemption, declining to apply the complete snapshot rule. Id. at 388 ([O]nce a new homestead has - 19 - been purchased, the funds become proceeds from the sale of a former homestead, which fall outside the protection of the Texas statute. (emphasis in original)). We find these cases unpersuasive. Neither of these cases addresses the Code's valued fresh start principles as articulated in Harris, 135 S. Ct. 1829, or the Supreme Court's admonishments in Law, 571 U.S. 415, that courts reach the result required by the text of the Bankruptcy Code. The Ninth Circuit issued its opinion in In re Jacobson in 2012, approximately two years before having the benefit of the Supreme Court's guidance in Law and three years before Harris. See In re Jacobson, 676 F.3d at 1193. The Fifth Circuit issued its opinion in In re Frost one day after the Supreme Court's decision in Law, but does not mention that case, and approximately one year before the Supreme Court's decision in Harris. See In re Frost, 744 F.3d at 384. We are, of course, bound by Supreme Court precedent, not that of our sister circuits, and reach our decision here in accordance with the Supreme Court's guidance. The outcome is also not altered by our own decision in Howison v. Hanley, 141 F.3d 384 (1st Cir. 1998). In that case, more than two years before filing for bankruptcy, the debtor conveyed his interest in his homestead to his wife for no consideration with the admitted purpose of putting it beyond the reach of his creditors. Howison, 141 F.3d at 385. The district - 20 - court found that this was a fraudulent transfer and we affirmed. Id. When analyzing that case, we summarized Maine's homestead exemption statute, 14 M.R.S. § 4422, (the same statute at issue here), and commented that if the debtor sells his homestead, he retains the value of the homestead exemption, but only if he reinvests in a new homestead in six months, as prescribed by the statute. Id. at 386. Howison is not on point. It does observe that under Maine law proceeds received in the sale of an exempt homestead lose the protection of the exemption, and thus become available to creditors, if not reinvested in a residence within six months. Id. We agree. Howison said nothing at all, though, about the issue before us: what to do if the debtor files for bankruptcy protection while the asset (whether home or proceeds of selling the home) is still exempt under Maine law? Howison had no need to say anything about that issue because the debtor in that case had conveyed his interest in his residence well more than six months before he petitioned for bankruptcy. See id. at 385. If there had been any proceeds from that conveyance, the six-month homestead exemption protection would have expired long before the debtor's bankruptcy filing. So, it would have made no difference to the debtor in Howison whether one takes a snapshot at the time of petitioning because, by that time, the proceeds had already become nonexempt and available to creditors. For that reason, this - 21 - court's summary of Maine's homestead statute in Howison has no bearing on the outcome of this case. In some circumstances, perhaps even in this circumstance, the result of this ruling will not prioritize the debt owed to creditors. Yet, Congress balanced the difficult choices that exemption limits impose on debtors with the economic harm that exemptions visit on creditors[,] Schwab, 560 U.S. at 791, and it is not for courts to alter the balance struck by the statute. Law, 571 U.S. at 427. WRAP UP For the foregoing reasons, the district court's order is affirmed. Costs awarded to Rockwell. - 22 -