In re Kane, No. BK-S-05-17401-BAM.

• Decision Date: 12 January 2006
• Docket Number: No. BK-S-05-17401-BAM.
• Citation: 336 B.R. 477
• Parties: In re Steven C. KANE dba Ideal Office Interiors, Inc. and Linda Siegel Kane dba Office Interiors, Inc., Debtor.
• Court: U.S. Bankruptcy Court — District of Nevada

336 B.R. 477

In re Steven C. KANE dba Ideal Office Interiors, Inc. and Linda Siegel Kane dba Office Interiors, Inc., Debtor.

No. BK-S-05-17401-BAM.

United States Bankruptcy Court, D. Nevada.

January 12, 2006.

COPYRIGHT MATERIAL OMITTED

David Winterton, Esq., Las Vegas, NV, for Debtor.

James F. Lisowski, Sr., Las Vegas, NV, for trustee.

OPINION SUSTAINING TRUSTEE'S OBJECTION TO DEBTORS' HOMESTEAD EXEMPTION

BRUCE A. MARKELL, Bankruptcy Judge.

The debtors in this case, Steven and Linda Siegel Kane, filed a chapter 7 bankruptcy on July 29, 2005. In their schedules, they listed a home in Las Vegas worth $318,000, and noted that it was subject to a $158,000 mortgage, leaving them some $160,000 in equity. Their current schedules claim a homestead exemption in the entire amount of this equity under Nevada law.¹

The Kanes' bankruptcy trustee, James F. Lisowski, Sr., objected to this claim of exemption. He asserts that Section 522(p) of the Bankruptcy Code, a relatively new provision of the Code added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,² limits the exemption to $125,000. Specifically, the trustee asserts that Section 522(p) caps a debtor's homestead exemption at $125,000 — regardless of any higher exemption adopted by state law, such as in Nevada — if the debtor had not owned the homestead or a predecessor homestead in the same state for at least 1,215 days before filing bankruptcy.³

The debtors did not meet this ownership requirement. They lived in California from February 1997 to December 2004. At the first meeting of creditors held under Section 341 (a), they testified that they had purchased their Nevada property at the beginning of 2005. They therefore did not own their Nevada homestead (or a predecessor homestead in Nevada) for the 1,215-day period required by Section 522(p). This is the crux of the trustee's objection.⁴

The actual wording of Section 522(p), however, creates a serious interpretive problem. It says that the $125,000 cap comes into effect "as a result of [a debtor's] electing . . . to exempt property under State or local law . . . . "11 U.S.C. § 522(p). The problem is with the use of the term "electing" as the triggering event: as permitted by Section 522(b)(2), more than two-thirds of the states, including Nevada, have opted-out of the federal exemption scheme. See NEV. REV. STAT. § 21.090.3.⁵ In this context, "opting out" means that residents of those states can use only state and nonbankruptcy exemptions; put another way, the exemptions found in Section 522(d) of the Bankruptcy Code are not available to residents in "opt-out" states such as Nevada. In such "opt-out" states, then, debtors cannot and do not "elect" anything. Since there is no election, nothing happens as the "result of electing."

Does this mean, as the Kanes argue, that the 1,215-day ownership requirement of Section 522(p) does not apply in Nevada and that the Kanes' homestead exemption is therefore not subject to the $125,000 cap?⁶ In the short time that Section 522(p) has been on the books, five courts have already grappled with this puzzling provision, and they have reached divergent results.

Three of the cases involve essentially the same fact pattern that is present here: debtors who did not own their homestead for at least 1,215 days in a state that opted out of the federal exemption scheme, thereby making it impossible for the debtor to "elect" between state and federal exemptions. Judge Mark in Florida and my colleague, Judge Riegle in Nevada, conclude that under these facts, the homestead exemption is capped, while Judge Haines in Arizona says that it isn't because the debtor made no "election." In the fourth case, Judge Friedman in Florida considered the rollover of property within the same state and found no cap, and in the fifth case, Judge Hale in Texas held that the debtors' increased equity in their homestead during the 1,215 days before filing was not subject to the cap.

Judge Mark found the text of Section 522(p) ambiguous, so he looked to its legislative history, which clearly shows that Congress intended for there to be a cap for all debtors. He imposed one, even though the debtor had no choice between state and federal exemptions. In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005). Judge Riegle found that the election requirement of 522(p) was satisfied when the debtor made a decision to claim a homestead exemption. That is, a debtor elects by simply claiming an exemption rather than "electing" not to claim a homestead. She believes this to be the case even though a Nevada debtor has no choice between the federal and state exemptions. Because she finds an election, she finds that the cap applies. In re Virissimo, 332 B.R. 201 (Bankr. D. Nev. 2005).

On the other hand, Judge Haines said that though the result was odd, the text of the statute is clear, and he was required to apply it unless and until Congress changed it (which, he suggested, Congress should do). In the meantime, he said, if the debtor made no election between state and federal exemptions, there is no cap. In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005).

Judge Friedman in Florida thought that there should be a cap, but inasmuch as the debtor had rolled over a previous homestead property, he applied the "safe harbor" of Section 522(p)(2)(B) which allows the homestead exemption to remain uncapped if a debtor's new homestead is simply a continuation of the debtor's residence in the state. In re Wayrynen, 332 B.R. 479 (Bankr. S.D. Fla. 2005). Finally, Judge Hale held that for debtors who acquired their homestead more than 1,215 days before filing, the increase in their equity during the 1,215 days before filing was not subject to the cap. In re Blair, 334 B.R. 374 (Bankr. N.D. Tex. 2005).

This court concurs with Judges Mark and Riegle — the cap applies to all debtors who do not satisfy the 1,215-day rule — but for different reasons than either of them advanced. Whether the text is ambiguous or not, it is still possible to consider and implement what Congress unambiguously intended and to overcome the drafters' unfortunate choice of words.⁷

Closing the "Mansion Loophole"

Section 522(p) was intended to address the well-documented and often-expressed concern by members of Congress about the so-called "mansion loophole" by which wealthy individuals could shield millions of dollars from creditors by filing bankruptcy after converting nonexempt assets into expensive and exempt homesteads in one of the handful of states that have unlimited homestead exemptions — usually Florida and occasionally Texas. See, e.g., Havoco of Am., Ltd. v. Hill, 790 So.2d 1018, 1028 (Fla. 2001) ("The transfer of nonexempt assets into an exempt homestead with the intent to hinder, delay, or defraud creditors is not one of the three exceptions to the homestead exemption provided in article X, section 4 [of the Florida Constitution]. Nor can we reasonably extend our equitable lien jurisprudence to except such conduct from the exemption's protection.").⁸

The history of Section 522(p) unequivocally demonstrates that Congress believed that the 2005 legislation closed that loophole, which had repeatedly been discussed and been a concern for nearly a decade. In its report in 1997, the National Bankruptcy Review Commission, which Congress had created in 1994 to review the operation of the bankruptcy system and recommend changes, identified the problem and found:

In deferring to state law exemptions, the current system . . . multiplies the opportunities for forum shopping and prebankruptcy asset conversion. . . . Unlimited homesteads have led to national ridicule and the efforts of some less needy and better represented families to find literal and figurative shelter in generous states.⁹

In the years since the commission's report, during which bankruptcy bills were debated yearly,¹⁰ the mansion loophole was always on legislators' minds.¹¹ See Melissa B. Jacoby, Negotiating Bankruptcy Legislation Through the News Media, 41 HOUSTON L. REV. 1091, 1128-35 (2004), which contains an exhaustive review of the various homestead proposals and a perceptive analysis of the reaction to them in the press.

The debate culminated in 2005. During the debate on S.256, the bill that became the 2005 amendments, Representative James Sensenbrenner, Republican of Wisconsin, assured the House that the bill closed the "`millionaire's mansion' loophole in the current bankruptcy code that permits corporate criminals to shield their multi-million dollar homesteads." 151 CONG. REC. H2048 (daily ed. April 14, 2005). In the Senate, Tom Carper, Democrat of Delaware, told his colleagues: "Under current law, a wealthy individual in a State such as Florida or Texas can go out, if they are a millionaire, and take those millions of dollars and invest that money in real estate, a huge house, property, and land in the State, file for bankruptcy, and basically protect all of their assets. . . . With the legislation we have before us, someone has to figure out that 2½ years ahead of time people are going to want to file for bankruptcy and be smart enough to put the money into a home . . ." Id. at S2415-16 (daily ed. March 10, 2005). These statements on the floor of both chambers were echoed in the House Report on S.256, which flatly stated that: "The bill . . . restricts the so-called mansion loophole' . . . by requiring a debtor to own the homestead for at least 40 months [1,215 days] before he or she can use state exemption law; current law imposes no such requirement." H.R. REP. NO. 109-031 at 15-16 (2005).¹² See also Margaret Howard, Exemptions Under the 2005 Bankruptcy Amendments: A Tale of Opportunity Lost, 79 AM. BANKR. L.J. 397, 402-06 (2005).

But as Section 522(p) is written and as it was enacted, the "result of electing" language effectively makes it applicable to debtors in only four states (Texas, Massachusetts, Minnesota, and Rhode Island) and the ...