Web posted and Copyright © December 1, 2005, American Bankruptcy Institute.
This month's Update continues the series of articles examining BAPCPA in detail.
David A. Samole
Kozyak Tropin & Throckmorton, P.A.; Miami
David L. Rosendorf
Kozyak Tropin & Throckmorton, P.A.; Miami
Web posted and Copyright © December 1, 2005, American Bankruptcy Institute.
ne of the most talked-about provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is its limitation on the homestead exemption. Specifically, newly created 11 U.S.C. §522(p) provides generally that a debtor's claim of homestead is limited to $125,000 in value if the homestead was acquired within 1,215 days pre-petition.
This provision was enacted, in part, to prevent pre-bankruptcy asset planning by which debtors were acquiring homesteads for the primary purpose of taking advantage of certain states' favorable homestead laws. Some states, including Florida, Iowa, Kansas, South Dakota, and Texas, have no cap on the value of a homestead that may be exempted under state law. Whether coincidental or not, several of these jurisdictions have tended to see a pattern of purchases of expensive homesteads made sufficiently in advance of bankruptcy filings to qualify for the state law exemptions.1
In re McNabb
Shortly after the enactment of BAPCPA,2 an Arizona bankruptcy court published an opinion that significantly circumscribed the applicability of the §522(p) limitation. In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005). Under 11 U.S.C. §522, debtors may elect to avail themselves of either the federal exemptions provided in the Bankruptcy Code, or the exemptions available to them under state law, unless the state has passed a law that prohibits such an election. More than two-thirds of the states have "opted out" of the federal exemptions and do not permit such an election. The McNabb court held that the newly enacted $125,000 limitation in subsection (p) only applied in states where the debtor could elect either the federal or state exemptions, and not in states that have "opted out" from the federal exemptions.
The net effect of the McNabb ruling was to render the newly legislated homestead limitation applicable only in Texas and Minnesotathe only two states that have not chosen to opt out of the federal exemptions and that permit homestead exemption claims in excess of $125,000. Notably, based on the McNabb ruling, §522(p) would be inapplicable to Florida, a notorious debtor safe-haven that has an unlimited homestead exemption but has opted out of the federal exemptions.
The basis for Judge Randolph J. Haines' holding in McNabb was his strict reading of §522(p), which states that the $125,000 cap applies only "as a result of electing under subsection (b)(3)(A) to exempt property under state or local law." In opt-out states, however, debtors may not "elect" state exemptions, as those are the only exemptions available to them. Judge Haines found the statutory language unambiguous and, while perhaps a drafting glitch by Congress, it was a flaw for Congress to correct.
Although he found the statutory language clear, Judge Haynes recognized that he could look to the statute's legislative history if his interpretation would lead to absurd results. He concluded, however, that the result espoused by his interpretation was consistent with the pre-BAPCPA statutory scheme that had existed under the Code and its various predecessors. Further, Judge Haines determined the legislative history to be "virtually useless" and said that it provided no clue to the intended significance of the "as a result of electing" language. Finally, Judge Haines concluded that if Congress had intended to apply the cap to all state exemptions, whether by election or by default, in both opt-in and opt-out states, there would have been no need to refer to an election at all. Judge Haines found support for this reading in other provisions of BAPCPA, which apply unambiguously to all state exemptions, regardless of whether or not they resulted from an election. Nonetheless, Judge Haines did acknowledge that "it makes little sense to limit the cap to the few remaining opt-out states, nor to permit debtors to shield assets by obtaining a homestead in some other state merely because that state precludes the alternative of claiming far less generous federal exemptions."
Judge Haines' ruling was supported by a strict application of rules of statutory construction, and certainly noted an obvious flaw in the BAPCPA language drafted by Congress. But this strict reading was not free from doubt, and it set the stage for an inevitable controversy over interpreting and applying the amendments and legislative history.
In re Kaplan
On Oct. 6, 2005, a Florida bankruptcy court issued an opinion contrary to McNabb, holding that the $125,000 homestead exemption cap contained in §522(p) applies to all state law homestead exemptions regardless of whether it was the debtor or the state legislature that elected state law exemptions. In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005). In Kaplan, Judge Robert A. Mark acknowledged the drafting flaw in §522(p) noted by Judge Haines, but focused heavily on the legislative intent of Congress. Judge Mark remarked that the statutory language regarding "electing" state law exemptions was ambiguous as to whether it was meant to refer specifically to the debtor's election, or was meant to apply to debtors who were utilizing the state law exemptions under §522(b)(3), whether they had a choice or not. Judge Mark explained that even if a strict reading of the statute appeared to limit the homestead exemption cap to non-opt-out states, the legislative history of BAPCPA should still be considered, since contrary legislative intent is clearly expressed.
Unlike Judge Haines, who in McNabb stated that the legislative history "is virtually useless as an aid to understanding the language and intent," Judge Mark noted several passages in the legislative history that, in the aggregate, overwhelmingly reflect Congress' intent that the homestead exemption cap should apply without qualification to all state law exemptions. Ultimately, Judge Mark ruled that the $125,000 homestead cap did apply to debtors who purchase homesteads in Florida within 1,215 days pre-petition. Finally, Judge Mark noted that in the near future, courts would have to deal with "the scores of other issues arising under [BAPCPA]" and hoped that courts in Florida would rule uniformly to enforce the homestead exemption cap for debtors who purchased homesteads within 1,215 days pre-petition.
In re Virissimo
Only weeks later, another court jumped into the fray. On Oct. 31, 2005, a Nevada bankruptcy judge issued an opinion in In re Virissimo, __ B.R. __, 2005 WL 2854341 (Bankr. D. Nev. 2005), which, like Kaplan, concludes that the homestead cap applies in all states, not just the opt-out states. In Virissimo, Judge Linda B. Riegle found that the "electing" language of 11 U.S.C. §522(p) can be construed as referring to the election to claim property as exempt. To the extent the statute is ambiguous, she found, as Judge Mark did in Kaplan, that the legislative history clearly demonstrates an intention to apply the cap to all debtors, not just those who reside in the opt-out states. In light of the conflict with McNabb, the bankruptcy court has certified the Virissimo decision for direct appeal to the Ninth Circuit Court of Appeals under the new provisions added to 28 U.S.C. §158(d) authorizing such certifications. In re Virissimo, ___ B.R. ___, 2005 WL 2854376 (Bankr. D. Nev. 2005). In looking to see which interpretation may hold sway in the higher courts, it may be worthwhile to review the recent Supreme Court decision in Exxon Mobil Corp. v. Allapattah Services Inc., 125 S.Ct. 2611 (2005), which dealt with a similar issue of reconciling a statute with its legislative history. The Allapattah case coincidentally was decided on June 23, 2005, the same day as the decision in the McNabb case. The Supreme Court was confronted with a similar scenario where the plain language of a statutory amendment (in this case, dealing with the law of supplemental jurisdiction) appeared to mandate a result different than that which the legislative history suggested was intended.
In Allapattah, the amended statute omitted one of the exceptions to supplemental jurisdiction contained in the original statute, so that the language of the amended statute appeared to expand supplemental jurisdiction over a category of actions that had been excluded under prior case law. The legislative history, on the other hand, indicated that Congress intended the amendment only to address "one small change" to existing practice, much narrower than what would be caused by giving effect to the plain language. A 5-4 majority of the Supreme Court concluded that the statute was not ambiguous and rejected "at the very outset" the notion that the court should "look to other interpretive tools, including the legislative history." It went on to criticize legislative history as "often murky, ambiguous and contradictory," with a tendency to be an exercise in "looking over a crowd and picking out your friends." The Supreme Court accordingly gave effect to the "plain text" of the statute, notwithstanding that it appeared to be inconsistent with the result suggested by the legislative history.
It would be interesting to see whether the Supreme Court would likewise find the language of §522(p) to be unambiguous, as Judge Haines did in McNabb. If so, the Allapattah decision would suggest that the court should not even consider the legislative history giving rise to its passage and instead conclude, as in Allapattah, that if there was an "unintentional drafting gap...it is up to Congress rather than the courts to fix it." On the other hand, if the Supreme Court found the language of §522(p) to be ambiguous, as the judges did in Kaplan and Virissimo, then it would evaluate whether the statute should be interpreted to implement congressional intent to limit homestead exemptions even in opt-out states such as Florida.
Congress wanted to create a uniform federal exemption law to limit the homestead exemption for debtors that purchased a homestead within 1,215 days pre-petition, and to take away debtors' ability to seek refuge by purchasing homesteads in states with favorable homestead exemption laws. Due to flawed legislative drafting, however, Congress merely shifted that advantage to those jurisdictions that do not permit an election between state and federal exemptionsor, at least, those whose courts will interpret §522(p) strictly without looking to legislative intent. While Florida and other jurisdictions with favorable homestead exemptions may no longer be a debtors' paradise for some, they can still be for others, and bankruptcy judges and litigants alike around the country are left wrestling with the unclear state of the law regarding this issue. Congress has created uniformitya uniform mess.
1 For instance, Article X, §4 of the Florida Constitution permits the owner of a homestead to claim the entire value of the homestead as exempt, subject only to limitation as to the physical size of the property and the requirement that the property be intended for use as the debtor's residence. Under pre-BAPCPA law, the debtor could take advantage of the Florida exemption as long as his or her domicile had been in Florida for 180 days prior to filing, or for a longer portion of the prior 180 days than in any other place. 11 U.S.C. §522(b)(2)(A). Return to article
2 Most BAPCPA amendments become effective in cases filed on or after Oct. 17, 2005, 180 days after its enactment. However, there are exceptions to the general rule, including §522(p), which applies to all cases filed on or after the date of enactment, April 20, 2005. Return to article