In re Fernandez

• Decision Date: 26 January 2011
• Docket Number: No. 09–32896.,09–32896.
• Citation: 445 B.R. 790
• Parties: In re Alfred L. FERNANDEZ, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Texas

445 B.R. 790

In re Alfred L. FERNANDEZ, Debtor.

No. 09–32896.

United States Bankruptcy Court, W.D. Texas, San Antonio Division.

Jan. 26, 2011.

[445 B.R. 792]

Salvador C. Ramirez, Salvador C. Ramirez & Associates, El Paso, TX, for Debtor.

Memorandum Decision on Objection to Exemption LEIF M. CLARK, Bankruptcy Judge.

The chapter 7 trustee in this case, Marshall Miller, objected to the debtor's claim of a homestead exemption. As of the filing date, the debtor resides in Texas. His address is 11685 Bunky Henry, El Paso, Texas. However, the debtor used to live in Nevada. The debtor relocated to Texas approximately one year before this bankruptcy filing. In his original schedules, he claimed his Texas home as exempt pursuant to the Texas homestead laws. The trustee objected, stating that the debtor was not eligible to claim the Texas homestead, by virtue of the provisions of section 522(b)(3) of the Bankruptcy Code. The debtor then amended his Schedule C, and claimed the selfsame home as exempt under Nevada's homestead laws. The trustee once again objected, now noting that the debtor could not use the Nevada homestead laws to claim a state law exemption in a home that was located in a state other than Nevada. The debtor responded that, under the authority of a decision by another judge of this court,¹ the Nevada statute could, at least in the context of the federal exemption scheme, have extraterritorial application. In other words, says the debtor, unless Nevada law itself would prohibit it, ² a debtor can use the Nevada homestead exemption to claim a homestead exemption under section 522(b)(3), even though the home located not in Nevada, but in Texas.

[445 B.R. 793]

The parties do not dispute the base facts. The debtor owns a home in El Paso, Texas, located at 11685 Bunky Henry. The debtor purchased the home some years ago and lived there. He was laid off from his job and was forced to relocate to Nevada for work. However, he never sold his Texas home, and always intended to keep it as his homestead, and never intended to abandon it. He kept up the payments on the home for the entire time he was in Nevada (about 7 years). Eventually, he was able to move back to Texas, about a year before this bankruptcy filing, and he once again took up residence in his home in El Paso. He filed this bankruptcy case the last day of 2009.

Analysis

Section 522(b) permits an individual debtor who files for bankruptcy to claim certain property as exempt. The effect of the claim of exemption is that such property, if exempted, “is not liable during or after the case for any debt of the debtor that arose, or that is determined under section 502 of [title 11] as if such debt had arisen, before the commencement of the case ...” 11 U.S.C. § 522(c). The effect is important, because it serves a uniquely federal purpose. The property claimed as exempt cannot be administered by the trustee (once the exemption determination becomes final) and pre-petition creditors (other than creditors with in rem rights that otherwise survive the bankruptcy process) cannot enforce their claims against the property. The determination of exemption for bankruptcy purposes would not be binding vis-à-vis a post-bankruptcy creditor seeking to enforce its claim against that selfsame property however. Such a creditor would only be barred from collection action against that property if it would also be exempt under applicable non-bankruptcy law. See Davis v. Davis (In re Davis), 170 F.3d 475, 479 (5th Cir.1999) (“§ 522(c) sought to leave exempt property exposed to post-bankruptcy liability only to the extent it would have been exposed if the bankruptcy had not occurred. This interpretation is the most plausible reading of § 522(c)”).³

To implement this function, section 522(b) gives the debtor the option to select either the federal exemption scheme set out in section 522(d), or the state exemption scheme applicable to the debtor, as determined by the domiciliary provisions of section 522(b)(3)(A).⁴ However, the debtor's option in section 522(b)(1) is limited by section 522(b)(2), which says that the debtor will not have the right to choose federal exemptions if applicable state law, as determined under the same domiciliary

[445 B.R. 794]

rule in section 522(b)(3)(A), prohibits that choice. See 11 U.S.C. § 522(b)(2), (b)(3)(A). Many states have “opted out” pursuant to this section, including Nevada. See Nev.Rev.Stat. Ann. § 21.090(3) (2010). Texas is one of a minority of states that permits debtors the choice provided in section 522(b)(1).

The domiciliary rule, applied to the facts of this case, says that “the place” is Nevada. The debtor lived in more than one state within the 730–day period preceding this bankruptcy filing, and for the greater portion of the 180 day period preceding the 730 day period, the debtor was living in Nevada. As Nevada is an opt-out state, this debtor is not permitted to choose the federal exemptions, unless as a result of the domiciliary rule, the debtor is left with no exemptions to claim. See 11 U.S.C. § 522(b)(3) (savings clause appended after the final lettered subparagraph).⁵ Even if this debtor could use the federal exemptions, however, they would do this debtor little good, as the debtor is trying to claim his home as exempt. According to his schedules, his home is worth $103,195.00, with a secured claim of only $32,000. As a single debtor, the maximum available exemption for his residence is $20,200 (as of the filing date). See 11 U.S.C. § 522(d)(1) (eff. Apr. 1, 2007). Thus, the debtor is limited to the Nevada homestead exemption law for picking a homestead, both as a matter of law and as a matter of practicality. The debtor does not have a home in Nevada, however. The debtor's home is in El Paso, Texas. Thus, the question is squarely presented: can this debtor use the Nevada homestead exemption law to claim his home in El Paso, Texas as exempt, for purposes of section 522?

Nevada gives a debtor a homestead claim of up to $550,000 of equity in property consisting of “a quantity of land, together with the dwelling house thereon and its appurtenances.” Nev.Rev.Stat. Ann. § 115.005, 115.010 (2010). By its express terms, the exemption is not self-limited to property located within the state of Nevada. However, the Nevada Supreme Court, called upon to answer a certified question regarding Nevada's homestead law, noted in passing that “the purpose of the homestead exemption is to preserve the family home despite financial distress, insolvency or calamitous circumstances, and to strengthen family security and stability for the benefit of the family, its individual members, and the community and state in which the family resides.” Jackman v. Nance, 109 Nev. 716, 718, 857 P.2d 7 (1993) (citing to a Colorado state court decision). In other words, the policy behind the exemption is uniquely related to the interests of the state of Nevada. Nevada may have sympathy for debtors who once lived in Nevada, but its exemption laws are designed to serve the needs and interests of the people of Nevada. Former residents are no longer part of the group of persons for whose benefit Nevada enacts its laws.

The Jackman v. Nance case referred to an early decision, Smith v. Stewart, 13 Nev. 65 (1878), construing Nevada's then-new homestead law. Id. The court in Smith explained that the exemption was designed to shelter Nevada residents from execution in Nevada—and explained the mechanism of a claimant designating that home as a homestead by notifying an officer attempting to make a levy at the time of the levy. 13 Nev. at 70. The practical effect of the exemption, then, was to shelter

[445 B.R. 795]

it from execution in Nevada, and any dispute over the homestead would, under Nevada law, arise in the context of a levying creditor attempting to execute pursuant to the laws of the state of Nevada. If the levying creditor were conducting the levy in another state (say Texas), then the issue would not even arise in a Nevada court. Even though the Nevada homestead does not expressly say that its reach is limited to property in Nevada, it is as a practical matter so limited, because Nevada's homestead exemption is only relevant in the context of levies conducted by creditors in Nevada, pursuant to Nevada's collection laws.

This conclusion is consistent with a larger observation regarding exemption statutes. State exemption laws do not have extraterritorial effect. Exemption laws are rooted in a state's internal interests in balancing the competing needs of creditors who count on the state law remedies available for collecting on judgments and of debtors who need a fresh start even in the depths of financial adversity.⁶ Those underlying policy interests, of course, stop at a given state's borders. It is thus not surprising that the vast majority of courts have ruled that a given state's exemption laws have no extraterritorial application. See Laura B. Bartell, The Peripatetic Debtor: Choice of Law and Choice of Exemptions, 22 Emory Bankr. Dev. J. 401, 416 & n. 103 (“Bartell”).⁷

It is, of course true that, under the Constitution, states are expected to accord comity to the judgments of other states. See U.S. Const. art. IV, § 1; see also 28 U.S.C. § 1738.⁸ State courts are also expected

[445 B.R. 796]

to give to the Acts of the legislature of another state “the same full faith and credit ... as they have by law or usage in the courts of [the] State ... from which they are taken.” 28 U.S.C. § 1738. But that is a far cry from the assertion that one state can require another state to apply the first state's laws, which is what “extraterritorial effect” must mean, if it is to mean anything at all.

Even if we were to construe “extraterritorial effect” as another way of stating that states are expected to give full faith and credit to one another's enactments, however, the contention would face another roadblock. The Supreme Court has said, with respect to...