In re Varanasi, 06-50143.

• Decision Date: 27 March 2008
• Docket Number: No. 06-50143.,06-50143.
• Parties: In re Vijay V. VARANASI, Joetta J. Varanasi, Debtor(s).
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio

Page 430

394 B.R. 430

In re Vijay V. VARANASI, Joetta J. Varanasi, Debtor(s).

No. 06-50143.

United States Bankruptcy Court, S.D. Ohio, Eastern Division.

March 27, 2008.

COPYRIGHT MATERIAL OMITTED

Joetta J Varanasi, Cambridge, OH, Stephen C Heine, Heine and Ferguson, Cambridge, OH, for debtor.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION ON TRUSTEE'S OBJECTION TO EXEMPTION

C. KATHRYN PRESTON, Bankruptcy Judge.

This cause came on for hearing upon the Objection to Debtors' Claim of Exemptions (Doc. 23) filed by Chapter 7 Trustee, and the Debtors' Reply thereto (Doc. 27). Present at the hearing were Brent A. Stubbins, Trustee and counsel for the Trustee, Stephen Heine, counsel for Debtors, and debtors Vijay V. Varanasi and Joetta J. Varanasi (hereinafter "Debtors").

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the General Order of Reference entered in this District. This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(B).

Debtors filed their case in the Southern District of Ohio, and claimed an exemption in certain residential real estate under New Hampshire state law pursuant to 11 U.S.C. § 522(b)(3). The Trustee objects to Debtors' exemption under New Hampshire law, arguing that 11 U.S.C. § 522(b)(3), which allows Debtors to claim an exemption under New Hampshire law rather than Ohio law in this case, is unconstitutional.

I. FINDINGS OF FACT

The facts germane to resolution of this matter are not in dispute: On January 22 1979, Debtors purchased residential property located at 9346 Ruth Lane, Cambridge, Ohio. Debtors lived there until November, 1983, then moved to New Hampshire where Mr. Varanasi (the Debtor-Husband) accepted a position as a software engineer. Though Debtors moved to New Hampshire and purchased a residence there, they retained the property in Cambridge, Ohio and rented it to tenants while they lived in New Hampshire. In 2002, Mr. Varanasi was laid off from his place of employment. Debtors sold their New Hampshire home and lived off the proceeds while Mr. Varanasi continued to seek new employment in New Hampshire. Ultimately, failing to secure a new position, Debtors moved back to the property in Cambridge, Ohio in July 2004.

In Ohio, Mr. Varanasi began working for Lear Electric on a production line. Debtors filed a Petition for Relief under Chapter 13 of the Bankruptcy Code on January 17, 2006 in the Southern District of Ohio. Mrs. Varanasi is an approved substitute teacher, but is unable to teach due to her health. On March 27, 2006, the Debtors converted their case to Chapter 7, because of unforeseen and involuntary changes in Mr. Varanasi's work schedule which resulted in a significant decrease in his income. The Chapter 7 First Meeting of Creditors was held on April 26, 2006.

The value of the Cambridge residence is approximately $50,000, and the Debtors own it free and clear of any liens. In their Schedules, the Debtors listed unsecured creditors with claims totaling approximately $68,000. Debtors have claimed their Cambridge property wholly exempt under the New Hampshire homestead exemption. If they were eligible for and claimed the applicable Ohio exemptions, which allows a homestead exemption of $5,000 per person,¹ the residence would be subject to the Trustee's administration, which could render up to $40,000.00 for the benefit of the creditors of the estate. Thus, the impact of the selection of the New Hampshire exemptions is to deplete the potential assets of the bankruptcy estate by that amount.

II. ARGUMENTS OF THE PARTIES

The Trustee does not dispute that Debtors correctly applied § 522(b)(3)(A) to determine applicable exemption laws. The Trustee asserts that 11 U.S.C. § 522(b)(3)(A) violates the equal protection and due process rights of creditors, and is hence unconstitutional. Specifically, the Trustee argues, § 522(b)(2) allows Ohio to "opt out" of the federal exemption scheme, craft its own exemption scheme, and apply that scheme to Ohio residents,² then § 522(b)(3)(A) essentially obviates that right by impairing Ohio's decision to "opt out" of the federal exemptions if the resident has lived in Ohio for less than 730 days before the date the debtor files for bankruptcy. This, according to the Trustee, results in an unconstitutional taking prohibited by the Fifth Amendment of the United States Constitution, and violates due process and equal protection guaranteed by the Constitution. He further suggests that § 522(b)(3) violates the Uniformity and Contract clauses of the United States Constitution. Tangentially related to that argument, Trustee also posits that the state of New Hampshire does not have the constitutional authority to impose its exemptions on Ohio residents. The Trustee claims Debtors should only be allowed to claim an exemption under Ohio law, which allows a homestead exemption of $5,000 per person,³ or under the federal exemption scheme, which allows a homestead exemption up to $18,450.⁴

In contrast, the Debtors argue that § 522(b)(3) is constitutional because: (1) the Trustee does not have a vested property interest in the Debtors' homestead protected by the Takings Clause of the Fifth Amendment; (2) filing bankruptcy is not a fundamental right and Congress' enactment of § 522(b)(3) was a reasonable exercise of its authority to prevent abuse of the bankruptcy process; and (3) New Hampshire's homestead exemption may be claimed in real property located outside its borders.

III. CONCLUSIONS OF LAW

11 U.S.C. § 522(l) requires a debtor to file a list of property that the debtor claims as exempt, and unless a party in interest objects, the debtor's exemptions will be allowed. The "objecting party has the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr.P. 4003(c).

A. New Hampshire Exemption

Pursuant to the Bankruptcy Act of 1978, a debtor is allowed to claim certain assets exempt from the debtor's bankruptcy estate under 11 U.S.C. § 522. Since passage of the 1978 Act, the provisions of the Bankruptcy Code have been amended numerous times, most recently by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA").⁵ BAPCPA amended § 522, to provide, in pertinent part, as follows:

(b)(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection.

(2) Property listed in this paragraph is property that is specified under subsection (d), unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize.

(3) Property listed in this paragraph is —

(A) subject to subsections (o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor's domicile has been located for the 730 days immediately preceding the date of the filing of the petition or if the debtor's domicile has not been located at a single State for such 730-day period, the place in which the debtor's domicile was located for 180 days immediately preceding the 730-day period or for a longer portion of such 180-day period than in any other place[.]

11 U.S.C. § 522(b). Pursuant to the statute, a debtor can choose to claim certain property exempt under the federal exemption scheme provided in 11 U.S.C. § 522(d) or under applicable state law exemptions. 11 U.S.C. § 522(b). However, individual states may prohibit debtors from using the federal exemption scheme, which is commonly referred to as "opting-out" of the federal exemptions. See 11 U.S.C. § 522(b)(2). The effect of "opting-out" is to allow states to create more generous or more restrictive exemptions for debtors than those provided by the federal exemptions listed in § 522(d). Ohio has "opted out"; New Hampshire has not.

However, "[a] debtor may only claim the state law exemptions available in her state of residence if she has lived in that state for two or more years as of the petition date." In re Underwood, 342 B.R. 358, 360 (Bankr.N.D.Fla.2006). If a debtor has not lived in her state of residence for two years, her exemptions shall be those allowed by the state "in which the debtor's domicile was located for 180 days immediately preceding the [two year] period." 11 U.S.C. § 522(b)(3)(A). The Debtors in the instant case have not resided in Ohio for two years, and thus, they cannot claim the exemptions set forth in Ohio law. The Debtors did, however, live in New Hampshire for the entire 180 day period preceding the 2 year period before the petition date of this case. Accordingly, pursuant to § 522(b)(3)(A), the Debtors must look to New Hampshire law or federal law for the purpose of determining exemptions. Therefore, the Debtors have properly claimed exemptions under New Hampshire law.

Furthermore, pursuant to New Hampshire law, debtors may elect to use either the state's exemption scheme or the federal exemptions. See In re Vaillancourt, 260 B.R. 66, 70 (Bankr.N.H.2001) (noting the repeal of the state statute that prohibited the use of federal exemptions). New Hampshire's homestead exemption provides, in part, that "[e]very person is entitled to $100,000 worth of his or her homestead ... which is owned and occupied as a dwelling by the same person...." N.H.Rev.Stat. Ann. § 480:1. Although the New Hampshire homestead exemption can only be claimed if the debtor is occupying or residing in the property that is being claimed exempt, "[t]he New Hampshire homestead exemption may be utilized by the [d]ebtor to exempt an interest in property located outside New Hampshire because the language of the homestead statute, [N.H.Rev.Stat. Ann. § ] 480:1, does not limit the homestead exemption to property located in New Hampshire." In re Weza, 248 B.R. 470, 473 (Bankr.D.N.H.2000).

In this case, the...