Business Law
Homestead Exemptions: 9th Circuit Won’t Allow “100% of Value” Exemptions – Maybe . . . . .
The following is a case summary written by Kathleen A. Cashman-Kramer regarding the recent decision of the Ninth Circuit Court of Appeals in Munding vs. Masingale, 108 F.4th 1195 (9th Cir. 2024). To view the published opinion, click here.
Summary and Factual Background
In the case of Munding vs. Masingale, 108 F.4th 1195 (9th Cir. 2024), the Ninth Circuit Court of Appeals addressed whether debtors Rosana and Monte Masingale (“Debtors” or “Masingales”) could exempt the full fair market value of their homestead property from their bankruptcy estate, despite the statutory cap on homestead exemptions.
In 2015, the Masingales filed for Chapter 11 bankruptcy and claimed a homestead exemption for their residence in Greenacres, Washington, listing the exemption as “100% of FMV” (fair market value) on their Schedule C. At that time, they believed the value of the property to be $165,430 with liens totaling $130,724. No party in interest objected to this exemption within the 30-day period following the creditors’ meeting as required by the Bankruptcy Code. Id. at 1196-97.
The Masingales’ Chapter 11 Plan and Disclosure Statement indicated that they were not claiming an above-limit exemption and that creditors would be paid before any above-limit exemptions were allowed. Id at 1198-99.
In late 2018 after motion by the U.S. Trustee’s office, the case was converted to Chapter 7 and the Chapter 7 trustee was appointed. Then, in 2021, Mrs. Masingale moved (Mr. Masingale had died) to sell the property because it had appreciated in value, and she wanted to take advantage of the appreciation as well as the “100% of value” exemption claimed. She specifically took the position in her motion that the estate was not entitled to any proceeds because of the exemption specified. She later withdrew the motion when the state and the Trustee objected. The Trustee then opposed Mrs. Masingale’s motion to compel him to abandon the property; he then sold the property for $422,000. Id. at 1200. The bankruptcy court ruled that the Masingales were only entitled to the statutory cap of $45,950 for their homestead exemption, with the remaining proceeds from the sale going to the bankruptcy estate. The BAP, at 644 B.R. 530, reversed the bankruptcy court and allowed Mrs. Masingale to exempt the full proceeds of the sale; the Trustee and the state appealed to the Ninth Circuit, which reversed the BAP.
The Decision
In a rather lengthy decision which relied to a certain extent on two U.S. Supreme Court decisions, the Ninth Circuit ultimately reversed the BAP and held that the Masingales did not properly claim an above-limit exemption that required an objection within the 30-day period.
Here’s the part that gets murky: the Ninth Circuit spends much time discussing that cases of Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), and Schwab v. Reilly, 560 U.S. 770, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010), which the BAP found to be controlling when it reversed the bankruptcy court. Specifically, the Ninth Circuit noted that in Taylor, the Supreme Court found that a debtor may exempt from the bankruptcy estate an interest in their residence, up to a statutory limit, but may also exempt more than the statutory amount if no party in interest objects within thirty days of the creditors’ meeting, even if the debtor had no colorable basis for claiming the exemption. Id. at 1201-1202. The decision in Schwab considered whether the trustee was required to object when the debtor in her schedule of exempt property declared the value of the assets “to be an amount within the limits that the Code prescribes” (Schwab at 774, 130 S.Ct. 2652) and held that the trustee was not required to object within the 30-day window. Id. at 1202.
The Ninth Circuit observed that the Supreme Court in Schwab came to a different result than in Taylor. In Taylor the debtor did not, like the debtor here, state the value of the claimed exemption as a specific dollar amount at or below the limits the Code allowed and the decision focused on a trustee’s obligation to object to the debtor’s entry of a ‘value claimed exempt’ that was not plainly within the limits the Code allows. It then noted that in Schwab, “the opposite is true. The amounts … are facially within the limits the Code prescribes and raise no warning flags that warranted an objection.” Id. Because of this distinction, Schwab allowed the trustee to retain the excess sale proceeds for distribution to creditors, even though no party in interest had lodged an objection within the 30-day window. Id. at 789–91, 130 S.Ct. 2652.” Id. at 1203.
After all this Supreme Court discussion, the Ninth Circuit then distinguished this case from both of those cases because the representations the Debtors made in their Chapter 11 Plan and Disclosure Statement, indicating that they were not claiming an above-limit exemption, were significant and binding. Specifically, it noted that, during the time the case was in Chapter 11, the representations made by the Debtors were made when the Masingales were serving as debtors-in-possession and owed attendant fiduciary obligations to their creditors [citations omitted]. Id. at 1205. Just because the case was converted to Chapter 7 did not change the representations the debtors had made. As a result of this, the Ninth Circuit relied on that part of the Schwab decision in which the Supreme Court stated that: “[w]here, as here, it is important to the debtor to exempt the full market value of the asset or the asset itself, our decision will encourage the debtor to declare the value of her claimed exemption in a manner that makes the scope of the exemption clear, for example, by listing the exempt value as “full fair market value (FMV)” or “100% of FMV.”” Id at 1203.
The Ninth Circuit concluded that the Masingales had not “properly” claimed an “above the limit” exemption based upon the facts of this case – i.e., the representations they had made in the Chapter 11 Disclosure Statement – and, as a result, their homestead exemption was limited to the statutory cap. Consequently, everything over that was property of the estate. Id. at 1208.
Author’s Commentary
The Ninth Circuit noted in its decision that the Official Form 106C was changed to deal with this very issue, and it even included a screen shot of this particular revised document to show that it was be hard to abuse it in this manner in the future (“100% of fair market value, up to any applicable statutory limit”). As a result, the impact of Masingale may be limited.
Now that the Ninth Circuit has addressed this issue, it will be interesting to see whether anyone enters a dollar figure higher than the statutory limit on schedule C. Part of the Ninth Circuit’s logic in this case revolved around the fact that the case began as a Chapter 11, and the Court specifically reminded the debtor that the debtor owed creditors a fiduciary duty, and the debtors made equivocal statements about the claimed exemption during the 30-day objection period. Query whether absent the chapter 11 aspect of the case, would a court reach the same result? This author suggests that the chapter 11 aspect of this case – the representations and fiduciary duties by the Debtor – is the only reason for this result.
Lessons to counsel include: assure that the schedules are clear and consistent across all bankruptcy documents to avoid disputes and objections; understand fiduciary duties; calendar all dates, even those which you might not think you will need; and timely file objections as necessary.
These materials were authored by Kathleen A. Cashman-Kramer, an Director at Fennemore Law’s San Diego office with editorial contributions from ILC member Hon. Meredith Jury (ret.).