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Hull v. Rockwell

United States District Court, D. Maine

September 24, 2019

NATHANIEL RICHARD HULL, Chapter & Trustee, Appellant,
JEFFREY J. ROCKWELL Debtor, d/b/a/ Rockwell Productions formerly d/b/a/ Rockwell Productions Inc. Appellee.



         This bankruptcy appeal presents a narrow question of law that calls on the Court to resolve conflicting provisions of state and federal law. To be eligible for a state homestead exemption, a resident who claims the exemption and sells the residence must invest the exempt proceeds in another residence within six months of the sale. If the person claiming the exemption fails to make a timely investment, the exemption disappears or becomes-in the language of the law-a vanishing exemption. By contrast, in bankruptcy law, the well-known snapshot doctrine dictates that the rights and obligations of the debtor become frozen as of the date of a bankruptcy filing, much as a snapshot freezes the image of an object as of a specific time. If the snapshot is complete, it cannot be changed; if partial, it is subject to revision based on subsequent events.

         In this case, a person, who filed in chapter 13 and converted into a chapter 7 bankruptcy, sold the residence during the chapter 13 proceeding and failed to invest the proceeds of the sale of the residence within six months as state law requires. The issue on appeal is whether the person loses the exemption or retains it; or, applying terms of bankruptcy law, whether the snapshot is complete or partial. In practical terms, the resolution of this question determines whether the amount of the claimed exemption may be retained by the person filing in bankruptcy or must be transferred to the trustee for distribution in accordance with bankruptcy law.

         The Bankruptcy Court, in a well-researched and thoughtful opinion, ruled that the homestead exemption does not vanish, because the snapshot is complete as of the date of bankruptcy filing. The effect of the Bankruptcy Court ruling is to allow the person claiming the exemption to retain it despite the failure to comply with the six-month limitation. Although there are persuasive arguments for either position, the Court agrees with the Bankruptcy Court and affirms its ruling.

         I. BACKGROUND

         A. Procedural History

         On September 20, 2018, chapter 7 trustee Nathaniel R. Hull filed an appeal pursuant to 28 U.S.C. § 158 from the August 23, 2018 Order of the United States Bankruptcy Court for the District of Maine overruling Mr. Hull’s objection to Mr. Rockwell’s claimed homestead exemption. Notice of Appeal (ECF No. 1). On November 2, 2018, Mr. Hull filed his brief in support of the appeal. Br. of the Appellant (ECF No. 5) (Appellant’s Br.). On December 3, 2018, Appellee Jeffrey J. Rockwell filed his response. Br. of Appellee Jeffrey J. Rockwell (ECF No. 7) (Appellee’s Opp’n). On December 17, 2018, Mr. Hull filed his reply. Reply Br. of Appellant (ECF No. 8) (Appellant’s Reply).

         B. The Bankruptcy Court Proceedings

         1. Facts

         The facts are undisputed. Jeffrey J. Rockwell purchased the property and buildings located at 24 B Street, South Portland, Maine, in 2001. Bankruptcy Appeal, Attach. 4 at 2 (ECF No. 1) (Mem. of Decision); Appellee’s Opp’n at 2. On August 19, 2015, Mr. Rockwell filed a voluntary petition for relief in Bankruptcy Court, pursuant to the Bankruptcy Reform Act of 1978, 11 U.S.C. §§ 101, et seq. Mem. of Decision at 2; Appellee’s Opp’n at 2. At the time of his petition, he owned and resided at the property. Mem. of Decision at 2; Appellee’s Opp’n at 2 (“The Appellee had owned the Property since 2001 and it was the Appellee’s primary residence”).

         According to Mr. Rockwell’s chapter 13 bankruptcy schedule, pursuant to 11 U.S.C. § 522(b)(3)-which allows a debtor to claim available state law exemptions- he claimed an exemption under Maine’s homestead exemption statute, 14 M.R.S.A. § 4422(1), in the maximum statutory amount of $47, 500, based on his equity in the property. Mem. of Decision at 2.

         In November 2015, the Bankruptcy Court confirmed Mr. Rockwell’s chapter 13 plan of reorganization. Id. His plan anticipated he would directly pay the holder of the first mortgage on the property and retain the B Street property. Id. However, by December of 2016, Mr. Rockwell decided to sell the property. Appellee’s Opp’n at 2. Mr. Rockwell sought permission from the Bankruptcy Court to sell the property for $160, 000 and to apply any non-exempt proceeds from the sale to the chapter 13 plan. Id.

         At the hearing on the motion to sell the B Street property, the chapter 13 trustee, in his words, “mildly” voiced concerns about the sale price but expected the Bankruptcy Court would grant the motion to sell as a proper exercise of Mr. Rockwell’s business judgment. Mem. of Decision at 2. On January 12, 2017, the Bankruptcy Court approved the change, authorizing Mr. Rockwell to sell the B Street property and to pay from the proceeds of the sale (1) his ordinary and customary closing expenses, (2) the balance due to U.S. Bank, and (3) to contribute any non-exempt sale proceeds to his chapter 13 plan. Id.

         The closing took place on March 6, 2017. Id. After the closing, $51, 682.87 remained after the first mortgage obligation was satisfied and closing costs were paid; Mr. Rockwell received $47, 500 and Mr. Hull, as chapter 13 trustee, received $4, 182.87. Mem. of Decision at 2. Under 14 M.R.S. § 4422(1)(C), a person claiming a homestead exemption must reinvest the exempted portion of the proceeds of the sale of the residence in a new residence within six months. Id. (“C. That portion of the proceeds from any sale of property which is exempt under this section shall be exempt for a period of 6 months from the date of receipt of such proceeds for purposes of reinvesting in a residence within that period”). However, contrary to the express requirements of Maine’s homestead exemption, Mr. Rockwell did not spend any of the proceeds of the sale on the purchase of a new residence. Bankruptcy Case No. 15-20583 (Bankruptcy Case), Stipulation (ECF No. 144) (Stip.).

         On August 7, 2017, Mr. Rockwell converted his chapter 13 bankruptcy to a chapter 7 bankruptcy case. Appellee’s Opp’n at 3; Mem. of Decision at 2-3. On November 8, 2017, the Bankruptcy Court granted an order of discharge under 11 U.S.C. § 727. Bankruptcy Case, Order Discharging Debtor (ECF No. 123). As of the date of the conversion, Mr. Rockwell had spent $18, 806.23 of the proceeds of the sale, leaving a balance of $28, 693.77. Mem. of Decision at 3. On December 4, 2017, Mr. Hull filed an objection to Mr. Rockwell’s claim of exemptions pursuant to Rule 4003(b) of the Federal Rules of Bankruptcy Procedure, claiming that Mr. Rockwell failed to meet the six-month reinvestment requirement of Maine’s homestead exemption. Bankruptcy Case, Obj. to Debtor’s Claim of Exemptions, at 1-2 (ECF No. 125). The Bankruptcy Court held a trial on May 22, 2018 and overruled Mr. Hull’s objection in its August 23, 2018 Order and Memorandum of Decision. See Order at 1; Mem. of Decision at 1.

         2. Memorandum of Decision

         In its Memorandum of Decision, the Bankruptcy Court “examine[d] the permanence of an exemption claim in proceeds resulting from the sale of the debtor’s homestead in a converted chapter 7 case in a jurisdiction with a temporal limit to its homestead proceeds exemption . . ..” Mem. of Decision at 1. The Bankruptcy Court acknowledged that “[t]here is no specific controlling authority from the United States Court of Appeals for the First Circuit on the exact issue presented in the case and there is no uniform approach among the courts to vanishing state law homestead proceeds exemptions in bankruptcy[.]” Id. at 5.

         The Bankruptcy Court discussed at length the two approaches used by other courts when applying similar exemptions to chapter 7 cases: the partial snapshot view and the complete snapshot view. Id. at 8. As the Bankruptcy Court explained, “[t]he ‘snap-shot’ doctrine provides that the rights of the debtor, and the facts and circumstances that undergird those rights, are locked in as of the petition date.” Id. at 8 n.8. However, some courts interpret the snapshot rule as incorporating the debtor’s post-petition failure to reinvest the proceeds in another residence, as required by the temporal limitation on a state’s homestead exemption, while others hold the exemption as fixed as of the date of filing. Id. at 9-10. After discussing these two approaches, the Bankruptcy Court concluded that “the complete snap-shot view more faithfully adheres to the Code, First Circuit authority, and the practicalities of administering a chapter 7 case.” Id. at 11.


         A. Brief of Appellant Nathaniel Hull

         Mr. Hull’s appeal

challenges the Bankruptcy Court’s conclusion that Maine’s homestead proceeds exemption . . . does not continue to operate during the course of a bankruptcy case and, instead, is frozen in time at the filing date and immutable thereafter, even by the voluntary failure of the debtor to comply with Maine’s statutory reinvestment requirement.

Appellant’s Br. at 4. According to Mr. Hull, “in the absence of an overriding Bankruptcy Code policy that would compel such a drastic departure from the operation of Maine’s exemption scheme, the Bankruptcy Court should adhere to the calibrated limitations placed on exemptions by the State of Maine.” Id. at 5. Mr. Hull contends that the “partial” snapshot rule would reflect the deference Congress has given states to define exemptions under state law, while also adhering to Supreme Court caselaw regarding homestead claims. Id. at 7.

         According to Mr. Hull, the fact that Congress allows states to opt out of the set of federal exemptions in § 522(b) in favor of the state’s own exemptions shows a congressional intent to defer to the state’s interest regarding the applicability of exemptions, a priority reflected in Butner v. United States, 440 U.S. 48, 55 (1979). Appellant’s Br. at 8-9. Furthermore, Mr. Hull argues that applying the partial snapshot approach is in keeping with the purpose behind the homestead exemption under 14 M.R.S. § 4422(1), which is to “preserve the equity value that the homeowners built up in the first home, to the extent of the maximum amount of the exemption.” Appellant’s Br. at 11 (citing In re Grindal, 30 B.R. 651, 653 n.4 (Bankr. D. Me. 1983)). The Bankruptcy Court’s interpretation, Mr. Hull argues, favors non-homeowners over homeowners and results in a dramatic difference in the exempted property allowed for a debtor in a bankruptcy case in comparison with a non-debtor who has not sought bankruptcy protection. Id. at 12-14.

         Mr. Hull contends that the Bankruptcy Court erred in concluding that the six-month limitation under § 522(b) conflicts with the Bankruptcy Code, because Supreme Court cases have “look[ed] to post-petition events to determine the applicability of those exemptions on the filing date.” Id. at 15 (citing White v. Stump, 266 U.S. 310 (1924); Myers v. Matley, 318 U.S. 622 (1943)). Mr. Hull ...

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