Saturday, January 22, 2011

Fifth Circuit Adopts Literal Reading of Exemption Statute

One of the reforms adopted by BAPCPA was to increase the amount of time a person had to spend in a state before he could take advantage of that state's exemptions. Under 11 U.S.C. Sec. 522(b)(3)(A), a person must live in a state for 730 days to claim that state's exemptions. If the debtor does not satisfy the 730 day requirement, the law of the state where the debtor lived for the greater portion of the 180 days prior to the 730 days applies. This provision was meant to make it harder for a debtor to enhance his exemptions by moving to a new state prior to bankruptcy. However, a new opinion from the Fifth Circuit shows that the statute can have some unintended consequences. Ingalls v. Camp, No. 09-50852 (5th Cir. 1/21/11). You can find the opinion here.

The debtor moved from Florida to Texas during the 730 days before bankruptcy. As a result, he was required to use exemptions available under Florida law. The debtor claimed federal exemptions. However, Florida law prohibits "residents" from using federal exemptions. The trustee objected, contending that the court should apply Florida law as if the debtor were still a resident of Florida. The Bankruptcy Court agreed and sustained the objection. In re Camp, 396 B.R. 194 (Bankr. W.D. Tex. 2008).

The District Court reversed and was affirmed by the Fifth Circuit. The basis for its reasoning was straightforward. "Residents" of Florida could not use federal exemptions. Camp was not a "resident" of Florida. Therefore, he could select federal exemptions even though his exemptions were determined under Florida law.

The Court of Appeals began with the canon that "courts must presume that a legislature says in a statute what it means and means in a statute what it says there." Opinion. p. 3. The Court found it to be pretty clear that the Florida legislature did not intend for non-residents to be precluded from using federal exemptions.
Therefore, Florida’s opt-out statute, by its own express terms, does not apply to nonresident debtors, who remain eligible to use the federal exemptions because nothing in Florida law specifically disallows them from doing so. (citations omitted). Here, because Camp was not a Florida resident at the time he filed his bankruptcy petition, Florida law does not restrict his access to the federal exemptions.
Opinion, p. 5.

The Fifth Circuit's analysis appears pretty clear, at least as a matter of Florida law. After all, why would Florida care if non-residents claimed federal exemptions? The difficulty with the opinion is that Sec. 522(b)(3)(A) expresses a federal policy that mobile debtors should receive the same exemptions that they would have received if they had stayed put.

States naturally draft their exemption laws to apply to their residents, since that is who they have authority over. It would be simply incomprehensible for Florida to draft an exemption statute to apply to residents of Texas. Florida could have drafted its law to refer to persons to whom Florida law applies, but why would it? Florida is interested in Floridians, while Congress has the responsibility for looking after the broader, national interest.

Congress said to look to Florida law to determine the exemptions of the debtor in this case. Congress could have been more clear and said that the debtor's exemptions would be determined under Florida law as though the debtor still resided in Florida. However, it seems pretty clear that that is what they meant.

In this particular case, the debtor received exemptions which would not have been available to him if he had remained in Florida. However, it is easy to imagine a case where state exemptions depended on residency of the state so that the peculiar wording of a state exemption law could deprive the debtor of exemptions he would otherwise have been entitled to if he had remained in the prior state.

I am a strong proponent of plain meaning analysis. However, this may well be a case where the plain meaning isn't so plain. We know what Congress was trying to accomplish. For those who are not enamored of BAPCPA it is easy to chortle at Congress for shooting for a specific result and falling short through poor drafting. However, in this particular case, the drafting was not particularly obtuse, inelegant or contradictory.

This case is somewhat ironic because of the manner in which it resolved a split between bankruptcy judges in the Western District of Texas. Judge Leif Clark articulated the position adopted by the Fifth Circuit in In re Battle, 366 B.R. 635 (Bankr. W.D. Tex. 2006). Judge Craig Gargotta wrote the opinion which was reversed in the Camp case. Judge Clark has a reputation for being a deep thinker who will go out on a limb in support of a contrarian position. Judge Gargotta has a reputation as being a straightforward by the numbers jurist. Thus, it is ironic that Judge Gargotta took the more nuanced, intellectual position, while Judge Clark said plain meaning full speed ahead. This is the nature of BAPCPA. Reasonable minds can and will disagree and sometimes the results will be surprising.

Disclosure: I represented the Trustee in this case in the appeal to the Fifth Circuit. I was the attorney who did not prevail.

While I am uneasy with the result here, I wish to commend my colleague, Robert W. Berry, who represented the debtor. Mr. Berry has a consumer bankruptcy practice. After receiving an unfavorable ruling from the bankruptcy court, it would have been easy to let the result lie. Instead, Mr. Berry stuck with his client and took the case through two levels of appellate review. That is what good lawyers do.


Anonymous said...

A few thoughts about the Fifth Circuit's decision in Camp:
1) One of the tenets of BAPCPA was to discourage debtors from moving to a new state in order to take advantage of the new state's exemption scheme. BAPCPA was never meant to force a debtor to use the exemption scheme of a debtor's former state. This may appear to be an asymmetrical distinction, but for the Fifth Circuit to decide otherwise would frustrate legislatures in defining the limits of their states' exemptions (e.g., residence requirements, extraterritorial homestead limitations).
2) BAPCPA certainly forces debtors' attorneys to delve deeply into opt-out states' exemption laws (from whence their debtor-clients formerly resided). Our job isn't getting any easier.
3) I've always been a proponent of following the rules. Whether it's the Bankruptcy Code or state exemption law, all statutes are borne of the appropriate legislative body. If we don't defer to statutory language, confusion reigns. No one wants that.
4) In my best "judicial restraint" sales pitch, I told Judge Gargotta (at the Bankruptcy Court level) that Justice Oliver Wendell Holmes would defer to the wishes of the Florida Legislature. I was unsuccessful that day. Apparently reasonable minds may differ.
Finally, thank you for your kind words.
-- Robert W. Berry

Anonymous said...

It is true that I have the reputation for going "out on a limb." However, often I am out there because some other court has refused to read the statute in accordance with its plain meaning. There are many examples. Greystone and Brajkovic come to mind. So does Battle. I also respect Judge Gargotta's being willing to think past a facial reading of the statute. That is what great jurists often must do.

Interestingly, the Fifth Circuit decision does not entirely dispose of the issues presented. For example, suppose a given state's opt out statute does not explicitly limit its application to residents. Is such a statute then applicable? Under what theory? The issue is out there waiting, and is closely related to the question of whether a given state's exemption scheme could ever apply beyond its own borders, and if so under what circumstances and under what legal theory. I guess we'll have to wait for another day to get the answer to that.

Judge Leif Clark

Anonymous said...

This is very inspiring work you have created for us. Some people need to know that these things can ensue to anyone. You have shown me a better view now.

Anonymous said...

The author is really cool. But some of the commentators are just posting stupid words.

Anonymous said...

Thanks for elevating the discussion. There are no "stupid words" -- only "stupid people."

Anonymous said...

I spent several weeks online, with the Nolo Bankruptcy book, and with the current Foundation Bankruptcy treatise, which deals with this whole area in a paragraph or two under the heading of 'extraterritoriality' and simply ignores limits some states place on the application of their opt-out statute to nonresidents - a different issue entirely. Then, a couple of lucky hits on the computer, the long and winding road to CAMP and suddenly an exchange between the lawyers in CAMP and one of the judges. If there is legal heaven, I'm in it. If this says something about the candor and civility of lawyers in Texas, I am on my way (I now live in Florida!) TC