Thursday, December 07, 2006

In re Konnoff, Ford v. Konnoff. BAP No. AZ 06-1139-DKPa, published November 14, 2006

This case relates to whether state law can condition exemption status of property beyond the bankruptcy petition date. Below is a summary.


The Ninth Circuit BAP reversed the bankruptcy court and held that in determining exemption scheme pursuant to 11 U.S.C. § 522(b), the applicable state law on the petition date controls the debtor’s exemption rights.

In this case, the debtors sold their home in Arizona. The debtors then filed for bankruptcy and claimed homestead exemption for their home sale proceeds. The chapter 7 trustee objected because according to the Arizona state law, the proceeds were exempt only for 18 months or until the proceeds were reinvested in another home. Because 18 months was about to expire, the trustee filed an objection.

The Ninth Circuit BAP reasoned that the United States Supreme Court decision in Owen v. Owen, 500 U.S. 305 (1991) did not overrule England v. Golden, 789 F.2d 698 (9th Cir. 1986). In Golden, the Ninth Circuit held that where state law of opt-out state conditions the exempt status of property differently than federal exempt status, those conditions must be upheld. Thus, “when a debtor elects to claim an exemption under state law pursuant to 11 U.S.C. § 522, he is required to comply with the state law in effect at the time of the filing of his bankruptcy petition.” Golden, 789 F.2d at 700. In Owen, the Supreme Court held that the provisions of a state law could not limit a debtor’s right to avoid a creditor’s judicial lien on the debtor’s homestead under § 522. In so holding, the Supreme Court held that the “built-in limitations” in state exemptions did not restrict the debtor’s ability to avoid a judgment lien.

The Ninth Circuit BAP latched onto the Supreme Court’s dicta language that “nothing in § 522 … limits a State’s power to restrict the scope of its exemptions; indeed it could theoretically accord no exemption at all.” Owen, 500 U.S. at 308. Although the Ninth Circuit BAP believed that “built-in limitations” was ambiguous, Owen still allowed states to provide limited or no exemption. Thus, the BAP concluded that Arizona’s limit to allow exemption for only 18 months was valid.

Judge Pappas wrote a concurring opinion expressing his deep reservation about this line of reasoning and that he concur out of respect for binding precedent. He pointed out that Golden appears to rest on flawed reasoning and that exemption rights should be determined based on facts on the petition date. By allowing state law condition to follow in the bankruptcy proceeding, he pointed out that the chapter 7 trustee has an incentive to simply keep the bankruptcy case open until the exemption period is over and prohibit the debtors from walking away with what should be their exempt proceeds. In addition, he believes § 522 should be construed so that (1) § 522(b)(1) allows states to dictate what property is exempt and (2) § 522(b)(2)(A) determines the extent of exempt property as of the date of bankruptcy filing and not until some future date after the bankruptcy filing.

The opinion (if you can't find it in Westlaw) is here.

No comments: