Sheehan v. Ash

• Decision Date: 04 May 2018
• Docket Number: No. 17-1867,17-1867
• Citation: 889 F.3d 171
• Parties: Martin P. SHEEHAN, Trustee–Appellant, and U.S. Trustee, Trustee, v. Keith Doyle ASH; Phyllis Jean Ash, Debtors – Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

889 F.3d 171

Martin P. SHEEHAN, Trustee–Appellant,

and

U.S. Trustee, Trustee,

v.Keith Doyle ASH; Phyllis Jean Ash, Debtors – Appellees.

No. 17-1867

United States Court of Appeals, Fourth Circuit.

Argued: March 20, 2018

Decided: May 4, 2018

ARGUED: Martin Patrick Sheehan, SHEEHAN & NUGENT, PLLC, Wheeling, West Virginia, for Appellant. Eugene Robert Wedoff, Oak Park, Illinois, for Appellees. ON BRIEF: Todd B. Johnson, JOHNSON LAW, PLLC, Morgantown, West Virginia, for Appellees.

Before NIEMEYER and KING, Circuit Judges, and Leonie M. BRINKEMA, United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge King wrote the opinion, in which Judge Niemeyer and Judge Brinkema joined.

KING, Circuit Judge:

Martin P. Sheehan, as the bankruptcy trustee, appeals from the district court's affirmance of the bankruptcy court's ruling that denied Sheehan's objection to exemptions claimed by the debtors. See Sheehan v. Ash , 574 B.R. 585 (N.D.W. Va. 2017), ECF No. 25 (the " Opinion"). Sheehan maintains on appeal that the district court erred in deciding that the applicable bankruptcy statute authorized the debtors to utilize Louisiana's state law statutory scheme to exempt personal property in West Virginia from the debtors' bankruptcy estate. As explained below, we agree with the district court and affirm.

I.

This appeal arises from a Chapter 7 bankruptcy proceeding initiated by Keith and Phyllis Ash in July 2015 in the Northern District of West Virginia.¹ Their bankruptcy was complicated by the fact that the Ashes had recently changed their residence—moving from Louisiana to West Virginia in March 2015—and owned property located in both states. The West Virginia property is in dispute here, and includes a checking account, two television sets, items of clothing, a wedding band, two firearms, and a well- used vehicle. See J.A. 96.² The total value of the debtors' property in West Virginia—subject to their claimed exemptions—is approximately $3,450. Id. To better understand Sheehan's appeal, a brief review of some pertinent legal provisions is warranted.

A.

In a Chapter 7 bankruptcy proceeding, the debtor's legal and equitable property interests become part of the bankruptcy estate. See 11 U.S.C. § 541(a)(1). When the bankruptcy estate is placed under the control of a trustee, he must "collect and reduce to money" the assets of the bankruptcy estate for the benefit of creditors. Id. § 704(a)(1). To prevent the debtor from becoming destitute, the debtor is entitled to exempt certain property from the bankruptcy estate. See Clark v. Rameker , ––– U.S. ––––, 134 S.Ct. 2242, 2247 n.3, 189 L.Ed.2d 157 (2014). Those property exemptions can be derived from either federal or state law, and we are obliged to construe such exemption provisions "liberally in favor of the debtor and the exemption." See In re Nguyen , 211 F.3d 105, 110 (4th Cir. 2000).

Section 522(b)(1) of Title 11 empowers a debtor to choose between two statutory schemes for identifying bankruptcy exemptions, that is, a federal scheme described in § 522(d) or the applicable state scheme defined by state law.³ The federal exemption scheme entitles the debtor to exempt twelve categories of property from the bankruptcy estate. See 11 U.S.C. § 522(d). The state exemption scheme authorizes a debtor to identify exemptions pursuant to the applicable state or local law. Id. § 522(b)(3)(A). Importantly, a state can restrict its domiciliaries to the state exemption scheme by opting-out of the federal scheme. Id. § 522(b)(2) (enabling debtor to use federal exemption scheme "unless the State law that is applicable to the debtor ... does not so authorize").

In claiming the applicable state exemptions, the debtor's domicile is determined by the provisions of § 522(b)(3)(A). Pursuant thereto, the debtor is directed to utilize the state scheme of the "place in which the debtor's domicile has been located for the 730 days immediately preceding the date of the filing of the [bankruptcy] petition." See 11 U.S.C. § 522(b)(3)(A). If the debtor has not lived in a single location for the preceding 730 days, he must utilize the law of "the place in which [his] 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." Id. Pursuant to an unnumbered paragraph—commonly called the "hanging" paragraph—contained in § 522(b)(3), if the foregoing domiciliary rules would "render the debtor ineligible for any exemption," the debtor may claim exemptions under the federal exemption scheme.⁴ A debtor may be rendered ineligible for any exemptions if his state-of-domicile has opted-out of the federal scheme and restricted the use of its local exemption statutes to in-state residents or in-state property.

The state in which the Ashes previously resided—Louisiana—has opted-out of the federal exemption scheme. See La. Rev. Stat. Ann. § 13:3881(B)(1). As a result, a Louisiana-domiciled bankruptcy debtor is obliged to utilize that state's exemption statutes. Unlike certain other states that have opted out of the federal exemption scheme, Louisiana does not restrict the application of its exemption statutes to in-state residents or property. Id. Put another way, a former Louisiana resident is ostensibly permitted to utilize Louisiana's exemption scheme to protect property located in another state, such as in West Virginia. The propriety of such a so-called "extraterritorial application" of state law underlies this appeal.

B.

When the Ashes filed their bankruptcy petition in the Northern District of West Virginia, they submitted a bankruptcy form called a Schedule C, which identified their claims to exempt property. The Ashes were asked on their Schedule C to specify whether they would utilize the federal exemption scheme or a comparable state scheme. They selected the state exemption scheme, seeking to apply the state law of Louisiana and claiming exemptions for property located in both West Virginia and Louisiana. See J.A. 31.⁵

In September 2015, Sheehan—as the trustee—filed his objection to the Ashes' bankruptcy petition, seeking to bar application of the Louisiana exemption scheme to the Ashes' property in West Virginia. Sheehan conceded, however, that the Ashes could utilize the Louisiana exemption scheme for their property in Louisiana. On May 24, 2016, the bankruptcy court overruled Sheehan's objection, concluding that the federal bankruptcy statutes authorized the exemptions claimed by the Ashes. See J.A. 102. Sheehan appealed that ruling to the district court.

In his appeal to the district court, Sheehan argued that traditional limits on state sovereignty bar Louisiana from enacting a law that exempts property located in another state from being included in a bankruptcy estate. In advancing that contention, Sheehan acknowledged that almost all the courts that have addressed the issue have ruled against the proposition he pursues. See, e.g. , In re Arrol , 170 F.3d 934 (9th Cir. 1999) (ruling that recently relocated debtor was entitled to utilize homestead exemption laws of California, his former domicile, to exempt property located in Michigan, where he lived); In re Jevne , 387 B.R. 301, 305–06 (Bankr. S.D. Fla. 2008) (concluding that recently relocated debtor could utilize homestead exemption of Rhode Island, his former domicile, to claim exemption for property located in Florida, where he then resided). Sheehan argued to the district court that those adverse decisions were distinguishable and, in any event, wrongly decided. More specifically, he maintained that those decisions contravene the "presumption against extraterritoriality" recognized by the Supreme Court in a non-bankruptcy setting. See Kiobel v. Royal Dutch Petroleum Co. , 569 U.S. 108, 115–17, 133 S.Ct. 1659, 185 L.Ed.2d 671 (2013) (explaining that, in an alien tort case, "when a statute gives no clear indication of an extraterritorial application, it has none" (citations omitted) ). Sheehan thus asked the district court to overrule the bankruptcy court and apply a presumption against extraterritorial application to the Ashes' exemption claims with respect to their West Virginia property.

On June 27, 2017, the district court Opinion that underlies this appeal rejected Sheehan's appeal from the bankruptcy court. As recognized therein, several federal courts have addressed the proposition sponsored by Sheehan, and the overwhelming majority of those courts have rejected it. The majority approach—which the district court approved and called the "state-specific" approach—is that a "state's exemption laws may be used by out-of-state debtors for out-of-state property to the extent that each state's exemption law permits." See Opinion 595 (quoting In re Fernandez , No. 11-cv-123, slip op. at 20, 2011 WL 3423373 (W.D. Tex. Aug. 5, 2011), ECF No. 9). Thus, when a state exemption scheme does not "explicitly limit the use of the exemptions to in-state residents or to in-state property," it is permissible to apply the state scheme to the debtor's property "wherever located." Id. (citation omitted). Consistent with its approval of the state-specific approach, the court concluded that the Ashes had properly utilized Louisiana law to exempt their West Virginia property. Id. at 597.

II.

A.

Having been unsuccessful in his appeal to the district court, Sheehan has now appealed to our Court. We review de novo a district court's disposition of an appeal from a bankruptcy court, applying the standard of review applied in the district court. See In re Litton , 330 F.3d 636, 642 (4th Cir. 2003). With that de novo standard in mind, we turn to an assessment of Sheehan's appeal to this Court.

B.

Put simply, we agree with the well-reasoned analysis of the district court. In its comprehensive Opinion, the court characterized the issue as, "when Congress [pursuant to 11 U.S.C. § 522(b)(3)(A) ] directed particular debtors to exempt...