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.

Bankruptcy Court Stakes Out Unique Position on Sec. 522(b)(3)(A) as Choice of Law Rule, Relies on Former State's Law Without Regard to Actual Residenc

A new decision from Bankruptcy Judge Craig Gargotta is likely to prompt discussion as the court held that a debtor could be prohibited from using federal exemptions based on the law of his prior residence even though that state's law only prohibited "residents" of the state from using the federal exemptions. In re Camp, No. 08-11056 (Bankr. W.D. Tex. 9/25/08). In so ruling, Judge Gargotta disagreed with the opinion in In re Battle, 366 B.R. 636 (Bankr. W.D. Tex. 2006) from his Western District colleague Leif Clark.

The Facts

Melvin Camp moved to Texas from Florida. Under 11 U.S.C. Sec. 522(b)(3)(A), his choice of exemptions was governed by the law of Florida because he had not resided in Texas for the requisite 730 days. Mr. Camp was a prime candidate to use the federal exemptions. His paltry possessions added up to only $24,205, but included cash of $3,100, a lot which was not his homestead valued at $4,500 and a pickup truck worth $13,750. Under the federal exemptions, he would be able to keep all of these assets.

The Debtor's lawyer had no doubt read In re Battle, which held that Sec. 522(b)(3)(A)'s mandate to apply Florida law meant to apply it exactly as written. Since Florida law prohibited residents of Florida from using the federal exemptions and Mr. Camp was NOT a resident of Florida, he should be able to claim federal exemptions and keep his property.

The Trustee objected to the Debtor's exemptions claiming that In re Battle was incorrectly decided. The Bankruptcy Court agreed with the Trustee and denied the exemption.

When Does A Statute Not Mean What It Says? When It is a Choice of Law Provision.

The Florida statute appears clear. It states that "residents of this state shall not be entitled to the federal exemptions provided in s. 522(d) of the Bankruptcy Code of 1978." Based on this language, Judge Clark's Battle opinion held that where Florida had adopted a limitation applicable to residents of Florida and Congress had deemed that the statute apply to persons who no longer resided in Florida, that the statute should be applied exactly as written--in other words, that Texans subject to Florida exemption law were not prohibited from using the federal exemptions.

Judge Gargotta acknowledged that, "At first blush, these courts' reasoning appears sound. It relies exclusively on the language of the applicable opt-out statute." Opinion, p. 4.

However, Judge Gargotta went on to consider Congress's intent in adopting these provisions and how they should be applied.

Florida has thus expressed its judgment that its residents who file bankruptcy should be restricted to claiming Florida exemptions. Congress decided when it enacted the 1978 Bankruptcy Code to honor such decisions by the states that have made them, by expressly incorporating such "opt-out" provisions by reference in Sec. 522(b)(2).

Residency restrictions in a state's exemption laws, including residency restrictions applicable to its opt-out statute, are equivalent to choice of law provisions--they address the question of what state's laws should determine the exemptions of a debtor who has moved from one state to another. (citation omitted). However, by adopting Sec. 522(b)(2) and (3)(A), congress expressed its own judgment that, in instances where a debtor moves from one state to another within 730 days before filing bankruptcy, his exemptions should be determined by the laws (including any opt-out law) of his former domiciliary state. Thus, the issue in this case (and in Battle and similar cases) arises because of the conflict between a state law choice of law provision and the federal choice of law provision contained in Sec. 522(b)(2) and (3)(A). Such conflicts are traditionally resolved by applying the doctrine of preemption. (citations omitted).

The courts deciding Battle and similar cases, however, did not address this conflict between the applicable state opt-out statute and the federal statute, Sec. 522(b)(3)(A), or the question of preemption. Instead, those courts assumed, without discussion, that Sec. 522(b)'s incorporation of each state's substantive exemption laws also incorporated the state law choice of law provisions that each state applies to its exemption laws outside of bankruptcy (e.g., the residency restriction in its opt-out statute). In doing so, those courts have effectively written out of Sec. 522(b)(3)(A) Congress's own considered policy judgment on which state's law should apply when a debtor moves before filing bankruptcy.

Opinion, pp. 4-5.

The resourceful Judge Gargotta came up with an interesting example to make his point about how literally following a state's laws could frustrate the intent of Congress. Idaho law provides that residents of Idaho are entitled to use the Idaho exemptions and that nonresidents are entitled to use the law of the state of their residence. If this provision were applied literally, a debtor who moved from Idaho to another state would automatically be allowed to use the law of the new state despite Congress's mandate to apply Idaho law.

Judge Gargotta ultimately concluded that the proper approach was to apply the laws of the prior state "as if he had not moved for purposes of determining what property he may claim as exempt." Opinion, p. 8. Indeed, he adopted the position that in applying Sec. 522(b)(3)(A), the court must disregard the reality that the debtor actually resides in the state where he lives.

For example, if thirty days before filing bankruptcy a debtor moved from Texas to Louisiana and purchased a home, Sec. 522(b)(3)(A) requires the bankruptcy court to "disregard the element of reality" of the actual state of the debtor's residence (Louisiana), and instead engage in the fiction of considering the state of his or her former residence (Texas) to be the state where he or she currently resides. If the debtor chooses state exemptions, Texas exemption laws would apply to the debtor's home and other property located within the state--in this case, within "Louisiana qua Texas." This is not, however, the extraterritorial application of Texas's exemption laws. It is not under the authority of the State of Texas that its exemption laws are being applied to property outside Texas. Rather, it is a federal choice of law statute--Sec. 522(b)(3)(A)--that has expressly provided that the exemption laws of a particular state--Texas--are applicable to a debtor who, by definition, is no longer a domiciliary of that state and so whose property is almost certainly no longer located within that state.

Opinion, p. 11.

What Does It All Mean?
This is a difficult opinion to digest. It will likely result in the death of many trees (or perhaps the consumption of many electrons) as law professors try to sort this out. Judge Gargotta acknowledged that, "(N)o other court has yet expressly held that a state residency restriction in an opt-out statute is a choice of law provision that is preempted by Sec. 522(b)(3)(A)." Opinion, p. 7.

However, despite the density of the reasoning, there is a simple logic to the result--namely, that a debtor should neither be advantaged or disadvantaged by a move within 730 days before bankruptcy. While Sec. 522(b)(3)(A) has often been viewed as a measure designed to punish debtors who move to exemption friendly states, it can also have the reverse effect. If a debtor moves from Texas with its unlimited exemption to Maryland which has no homestead exemption, the Debtor could enjoy the benefits of the Texas exemption in Maryland.