In re Rody

• Decision Date: 06 February 2012
• Docket Number: No. 4:11–bk–17790–JMM.,4:11–bk–17790–JMM.
• Citation: 468 B.R. 384
• Parties: In re Dean A. RODY and Soroya H. Mohammadpour, Debtors.
• Court: U.S. Bankruptcy Court — District of Arizona

468 B.R. 384

In re Dean A. RODY and Soroya H. Mohammadpour, Debtors.

No. 4:11–bk–17790–JMM.

United States Bankruptcy Court, D. Arizona.

Feb. 6, 2012.

Kathryn L. Johnson, Law Office of Kathryn L. Johnson, PL, Tucson, AZ, for Debtors.

Stanley J. Kartchner, Tucson, AZ, for Trustee.

Office of the U.S. Trustee, Phoenix, AZ.

MEMORANDUM DECISION

JAMES M. MARLAR, Chief Judge.

Dean Rody and Soroya Mohammadpour (“Debtors”) claimed various items of personal property exempt under 11 U.S.C. § 522(d). The chapter 7 Trustee objected that the Debtors were required to claim the Arizona exemptions, which, he asserted, applied beyond state borders (ECF No. 30). It was undisputed that Debtors, who had moved to Massachusetts prepetition, met the domiciliary requirements of the Bankruptcy Code for application of the Arizona exemptions. Debtors responded, however, that Arizona's “opt-out” statute for use of the state exemptions was restricted to residents of Arizona. Thus, because they were not Arizona residents on the petition date, they maintained they were entitled to use the federal exemptions pursuant to the default rule of 11 U.S.C. § 522(b)(3). The contested matter was heard and taken under advisement. The Court now renders its decision overruling the Trustee's objection.

I. Jurisdiction

The Court has jurisdiction over this core matter under 28 U.S.C. § 1334; see also 28 U.S.C. § 157(b)(2)(B). Venue is proper in this district under 28 U.S.C. § 1408.

II. Facts and Procedure

Debtors resided in Arizona from 2000 to May 16, 2011. On May 17, 2011, they moved permanently to Massachusetts and were residing there on the petition date. On June 21, 2011, Debtors filed a joint chapter 7 petition in Arizona.

On Amended Schedule C, Debtors claimed various items of personal property exempt pursuant to 11 U.S.C. § 522(d). Debtors used the federal exemptions even though they met the domiciliary requirements for the Arizona exemptions in accordance § 522(b)(3), which provides:

(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 to 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 in 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;

....

If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d).

Since Debtors had not been in Massachusetts for 730 days prior to filing bankruptcy, but had lived in Arizona for the 180 days immediately preceding the 730–day period (or a longer portion of such 180–day period than any other place), they met the domiciliary requirements for the Arizona exemption statutes.

As permitted by 11 U.S.C. § 522, Arizona has elected to “opt out” of the federal exemption scheme, such that Arizona debtors can only use the state exemptions. The opt-out statute, provides, in pertinent part:

[I]n accordance with 11 U.S.C. § 522(b), residents of this state are not entitled to the federal exemptions provided in 11 U.S.C. 522(d). Nothing in this section affects the exemptions provided to residents of this state by the constitution or statutes of this state.

A.R.S. § 33–1133(B) (emphasis supplied.)

Debtors believed they were ineligible for the Arizona exemptions because they were residents of Massachusetts on the petition date. Given the “plain language” of A.R.S. § 33–1133(B), Debtors followed the default rule in the “hanging paragraph” of § 522(b)(3), cited above, which states: “[I]f the effect of the domiciliary requirement ... is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d)” of § 522. 11 U.S.C. § 522(b)(3).

The Trustee filed a timely objection to the claimed exemptions (ECF No. 30) solely on the grounds that Debtors were required to claim the Arizona exemptions. Debtors filed a response in opposition (ECF No. 32), maintaining that, as nonresidents, they were not eligible to use the Arizona exemptions.

The Trustee replied that Debtors' “strained reading” of A.R.S. § 33–1133(B) “would defeat the federal bankruptcy exemption scheme that preserves to individual states the right to opt out of the federal exemptions and require the use of the state's exemption laws.” Trustee's Reply at 1:20–23 (ECF No. 33). The Trustee contended that the Arizona exemptions were available to the nonresident Debtors because (1) A.R.S. § 33–1133(B) did not explicitly prohibit their use by nonresidents, and (2) opt-out state statutes have extraterritorial application, citing In re Arrol, 170 F.3d 934 (9th Cir.1999) (interpreting California law).

Debtors' sur-reply (ECF No. 34) was also filed. A hearing took place at which the Court considered the arguments and pleadings, and took the matter under advisement.

III. Issues

1. Whether Arizona's exemption scheme is only applicable to resident debtors.

2. Whether a determination as to the extraterritorial effect of Arizona's personal property exemptions is necessary to decide this matter.

3. Whether the Debtors correctly concluded that they could use the federal exemptions because there were no state exemptions available to them.

IV. Discussion

The commencement of a bankruptcy case creates an estate comprised of all legal and equitable interests in property (including potentially exempt property) of the debtor. 11 U.S.C. § 541. A debtor is entitled to exempt certain assets from the bankruptcy estate. 11 U.S.C. § 522. In general, exemption laws are to be construed liberally in favor of debtors. See Arrol, 170 F.3d at 937.

Because we are a mobile society, Congress enacted a statute which would determine which exemption law would apply to debtors whose domicile has changed near the time of the filing of the petition. The main purpose of this legislation was to prevent opportunistic bankruptcy filings by debtors simply to take advantage of lenient state exemption laws. W.H. Brown, L. Ahern & N. Frass MacLean, Bankr.Exempt. Manual § 4.6 (2011 Thomson Reuters/Westlaw).

This case, however, does not involve forum shopping by Debtors or 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....” In re Greene, 583 F.3d 614, 619 (9th Cir.2009) (citation omitted). Debtors are simply among the growing number of peripatetic debtors who moved to another state and then found themselves subject to the expanded domiciliary rules. See generally, L. Bartell, “The Peripatetic Debtor: Choice of Law and Choice of Exemptions,” 22 Emory Bankr.Dev. J. 401 (Spring 2006).

Since 2005, § 522(b)(3)(A), as amended, has provided a look-back period of 730 days for use of a state's exemptions—a debtor must have been domiciled for that period of time in the state immediately preceding the bankruptcy filing, or else the exemptions of the state where the debtor was domiciled for 180 days or the greater part of 180 days prior to the 730 days would apply. The amendment was a departure from the bankruptcy venue requirements, and courts now must construe exemption laws of other states. See In re Jevne, 387 B.R. 301, 303 (Bankr.S.D.Fla.2008). Congress presumably contemplated the effect of state laws which might restrict their applicability to residents or to in-state property, potentially leaving debtors without any exemptions. That is why it included the default language or hanging paragraph in § 522(b)(3) as a fail-safe mechanism. As cited above, this provision states in relevant part: “[I]f the effect of the domiciliary requirement ... is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d)” of § 522. 11 U.S.C. § 522(b)(3). ¹

Arizona has opted out of the federal bankruptcy exemption scheme only with respect to Arizona residents. The opt-out statute, provides, in pertinent part:

[I]n accordance with 11 U.S.C. § 522(b), residents of this state are not entitled to the federal exemptions provided in 11 U.S.C. 522(d). Nothing in this section affects the exemptions provided to residents of this state by the constitution or statutes of this state.

A.R.S. § 33–1133(B) (emphasis supplied.)

“A.R.S. § 33–1133(B) clearly states that Arizona debtors are only entitled to the exemptions set forth in the Constitution or Statutes of Arizona.” In re Hoffpauir, 125 B.R. 269, 271 (Bankr.D.Ariz.1990). Thus, Arizona residents may not use the federal bankruptcy exemptions. In addition, the statute states that the exemptions are “provided to residents.” Courts must apply the plain meaning of the statute and may not read into a statute an exemption that is not there. Id. The Trustee's suggestion that this statute does not expressly prohibit a nonresident from utilizing the Arizona exemptions is contrary to the plain meaning of the opt-out for residents.

According to a leading treatise, Debtors' approach was the correct one. A debtor's election to exempt property under § 522(d)

may arise if the exemption law of the debtor's domicile requires that the debtor reside within the state to claim exemption rights or if the state law does not permit an exemption to be taken on property located outside the state.

4 Collier on Bankruptcy ¶ 522.06, p. 522–39 (16th ed. 2011) (emphasis added).

Confusingly, the courts have focused on one or the other—either...