The following is an update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), analyzing a recent unpublished disposition of interest:

SUMMARY

In an unpublished disposition, the Ninth Circuit Court of Appeals (the “Court”) applied its precedent to rule that when a debtor with a homestead exemption in Idaho voluntarily sells the homestead while the bankruptcy is pending, he must reinvest the amount of the exemption in another homestead within one year, as required under Idaho law, or the exemption will be lost. Despite this ruling, the Court recognized that the Ninth Circuit (the “Circuit”) precedent on this issue had been highly criticized and is not supported by decisions in other circuits. Moreover, in an “observation,” the Court questioned the “arguably peculiar results” that applying the precedent created. McCallister v. Wells (In re Wells), 2021 WL 5755086 (9th Cir. Dec. 3, 2021).

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FACTS

Debtor Dustin Wells owned a residence in Idaho when he filed a chapter 7 bankruptcy in 2019. Under Idaho law, made applicable because Idaho has opted out of the federal exemptions, the Debtor claimed a homestead exemption of $100,000 on his home. While the bankruptcy was pending, he voluntarily sold the home and received the exempt funds. However, under Idaho Code § 55-1008(1) those funds were exempt only for one year unless reinvested in a homestead. When the Debtor did not buy a new residence within a year, the trustee moved for turnover of the funds but lost in the bankruptcy court. She appealed to the district court, which reversed the bankruptcy court based on Circuit precedent, Wolfe v Jacobson (In re Jacobson), 676 F. 3d 1193 (9th Cir. 2012) and England v Golden (In re Golden), 789 F. 2d 698 (9th Cir. 1986).

The Debtor appealed that decision to the Court, which affirmed the district court.

REASONING

The facts of Jacobsen are nearly identical to those here. A debtor in California owned a residence, claimed an exemption, then sold the homestead during the bankruptcy. California law requires that in order for the proceeds to remain protected, up to the amount of the applicable exemption, a homeowner must reinvest such proceeds in another home within six months of a sale. When the debtor failed to reinvest the funds, the Circuit held that the exemption was lost for failure to comply with the state-law reinvestment requirement. It reasoned that because California had opted out of the federal exemption and exemptions were therefore controlled by California law, the need to reinvest was mandatory to protect the exemption. With the exception of Idaho allowing a year to reinvest, the two states’ laws were identical on this issue. Not surprisingly, the Court held the district court’s application of the Jacobson precedent was not error.

The debtor had argued that two Supreme Court cases, Harris v Viegelahn, 575 U.S. 510 (2015) and Law v Siegel, 571 U.S. 415 (2014), implicitly overruled Jacobsen. The Court swiftly rejected that argument, as both cases turned on other specific provisions of the Bankruptcy Code. Siegel, in fact, embraced the concept that when a debtor claims a state law exemption, the exemption’s scope is determined by state law. Therefore, Jacobson remained good law and controlled this case’s outcome.

In an unusual move, however, for an unpublished disposition from the Circuit, the Court offered additional comment. It recognized that Jacobson has been under fire from several fronts because of the Circuit’s consideration of post-petition acts. The widely-adopted general rule is that exemptions are fixed on the petition date – the “snapshot rule” – such that whatever occurs post-petition does not affect an exemption in bankruptcy. It then offered its observation:

Applying In re Jacobson’s rule in a case like this one leads to arguably peculiar results. The federal government and some States allow a homestead exemption but allow no exemption whatsoever in sale proceeds…. In those jurisdictions, a debtor may claim the full homestead exemption and once the period for objecting to exemptions expires, the debtor may sell the homestead and retain all proceeds. States like California and Idaho grant debtors a more generous exemption by allowing debtors an additional exemption, albeit a time-limited one, in sales proceeds. Yet our ruling… has the perverse result that debtors in those jurisdictions have only a contingent homestead exemption…[so] they have fewer rights during bankruptcy than debtors in other jurisdictions. We see no justification in federal law, state law, or logic for that result. (emphasis in original)

AUTHOR’S COMMENTS

With a limited exception in one Fifth Circuit case, all other circuits which have ruled on the issue uphold the snapshot rule. The Ninth Circuit is the outlier by requiring the post-petition reinvestment of funds when exempted homesteads are sold during bankruptcy. This has resulted in trustees employing strategies to recapture those funds by keeping cases open much longer than otherwise necessary in hopes that debtors will blow the reinvestment requirement. As noted by the Court here, in other jurisdictions with no exemptions in proceeds, the debtors sell and walk away without challenge. There is no public policy which calls for debtors in such states as California and Idaho to be so penalized under the Bankruptcy Code, generally a uniform federal statute.

I hope that this comment will lead to an en banc call on this issue, from this case or some other. If not that, then perhaps a petition for certiorari to the Supreme Court will bring this Circuit in line with the rest of the country. The snapshot rule should be universal.

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.