United States District Court, D. Maine
ORDER ON BANKRUPTCY APPEAL
A. WOODCOCK, JR. UNITED STATES DISTRICT JUDGE.
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.
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.
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.
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
The Bankruptcy Court Proceedings
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”).
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.
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.
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.
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.
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.
Memorandum of Decision
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.
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.
POSITIONS OF THE PARTIES
Brief of Appellant Nathaniel Hull
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
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.
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
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 ...