In re Robert Nathan Reicher and Suzanne P. Carter-Reicher, No. 21-1270, 2023 U.S. Dist. LEXIS 59494 (C.D. Cal. April 4, 2023)
Dear constituency list members of the Insolvency Law Committee, the following is a case update written by M. Jonathan Hayes analyzing the recent case of interest:
The allowed homestead exemption in Riverside County California, when Robert and Suzanne Reicher filed their chapter 7 petition, was roughly $456,000. Bankruptcy Code section 522(p)(1) however limits the state law exemption to $170,350 where the debtors acquired their home within 3 ½ years of the bankruptcy filing. 11 U.S.C. § 522(p). The Reichers did not deny that the limitation in section 522(p)(1) applied to them. But Bankruptcy Code section 522(m) also provides: “[s]ubject to the limitation in subsection (b), this section shall apply separately with respect to each debtor in a joint case.” 11 U.S.C. § 522(m). The Reichers thereby claimed the California homestead exemption capped at $340,700 plus $49,018, the proceeds from the sale of their prior home invested into the new home allowed by section 522(p)(2). The Trustee objected. The bankruptcy court overruled the objection, and the district court agreed, finding that the federal limit was properly doubled under section 522(m) because they were joint debtors. In re Robert Nathan Reicher and Suzanne P. Carter-Reicher, No. 21-1270, 2023 U.S. Dist. LEXIS 59494 (C.D. Cal. April 4, 2023).
To read the District Court’s order, click here.
On the petition date, the debtors owned a two-thirds interest in a home in Palm Desert, California, where they resided. The remaining one-third was owned by their mother. They had purchased the home approximately three years before the bankruptcy. On the petition date, the value of the property was disputed but appears to range from $440,000 (debtors’ expert) to $520,000 (trustee’s opinion) with a single mortgage of $183,937. Thus, their two-thirds equity, according to the trustee, was $346,666. As noted, the debtors claimed $389,718 exempt.
The trustee objected to the exemption, arguing that they could not double the amount of the exemption and therefore could take no more than $170,350 based on section 522(p)(1). The trustee further disputed, apparently, that the debtors actually reinvested the proceeds of the prior sale. The debtors agreed that section 522(p)(1) applied but responded that they were entitled to twice that amount based on the plain language of section 522(m). The bankruptcy court agreed with the debtors and overruled the objection. The trustee appealed to the district court which affirmed the bankruptcy court.
The sole issue on appeal before the U.S. District Court for the Central District of California was whether section 522(m) permits the debtors to “claim an exemption equal to double the statutory cap set forth in 11 U.S.C. § 522(p)(1).” The district court noted that prior to the 2005 amendments, “it was the settled law of this circuit that if state law provides for only one exemption among joint debtors,  Section 522(m) would not apply.” In re Talmadge, 832 F.2d 1120, 1126-27 (9th Cir. 1987); In re Baldwin, 70 B.R. 612, 618 (9th Cir. BAP 1987); and Rowe v. Jackman (In re Rowe), 236 B.R. 11, 13 (9th Cir. BAP 1999).
But in 2005, Congress added section 522(p) which capped or limited the amount of homestead exemption otherwise permitted under any state law. This federal cap limited the amount of homestead exemption in any state to the arbitrary amount of $125,000 (which subsequent statutory increases raised to $170,350 on the petition date) when the home was purchased (an arbitrarily chosen) 3 ½ years before the petition filing.
The district court reasoned that section 522(p) is purely a federal concept and therefore “whether the § 522(p) cap should be doubled for joint debtors is a question of federal law.” It agreed with In re Nestlen, 441 B.R. 135, 143 (10th Cir. BAP 2010) where the panel could not “conceive of any reason why joint debtors in different states should be subject to different federal caps.”
The district court noted that when Congress amended the Bankruptcy Code in 2005 to add section 522(p), it did not amend section 522(m). If it had intended section 522(m) not to apply to new section 522(p), it could have just said so. The plain language of section 522(m) permits the limited or capped amount in subsection (p) to be doubled when the petition is filed by joint debtors.
The district court also noted pragmatically that subsection (p) was enacted to stop “millionaire mansion forum shopping,” where debtors would move to a state with an unlimited homestead exemption and, in essence, hide their assets in a new home. That is not what happened here. The debtors here downsized “both in size and value” and ended up with a lower exemption than before they moved.
The “settled law” of this circuit is that if state law provides for only one exemption among joint debtors, section 522(m) does not apply and that is not changed by this ruling. The trustee’s main argument was that the debtors were claiming more than one homestead exemption as the Ninth Circuit has made clear they could not do. But that is not what the debtors did. California law does not limit the homestead exemption when the home is purchased some particular time prior to filing bankruptcy. It is, in Riverside County at least, $456,000. The debtors were not trying to double that exemption. They were properly limiting the exemption as dictated by Congress to the amount Congress determined is appropriate for policy reasons, i.e., $170,350 which is doubled for joint debtors.
Had the debtors waited apparently for six more months or so, the limit would not have applied and they would have been entitled to $456,000. But they didn’t wait and therefore the limit—the arbitrary maximum homestead exemption set by Congress—applied.
This ruling is correct in my opinion and thanks to Jenny Doling, with assistance from Hon. Meredith Jury (Ret.), for doing the heavy lifting. This issue has not come up before now because the maximum homestead exemption until 2020 was less or roughly in the same ballpark as the federal cap.
These materials were written by M. Jonathan Hayes. Editorial contributions were provided by the Hon. Meredith Jury, retired Bankruptcy Judge.