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Sheehan v. Ash

United States District Court, N.D. West Virginia

June 27, 2017

MARTIN P. SHEEHAN, Appellant/Trustee,



         Trustee Martin P. Sheehan (“Trustee”) appeals an order entered by the Honorable Patrick M. Flatley, United States Bankruptcy Judge (“Bankruptcy Court”), overruling his objection to certain exemptions claimed by Keith Doyle Ash and Phyllis Jean Ash (“Debtors”) in their voluntary petition for bankruptcy pursuant to Chapter Seven of the Bankruptcy Code. The question presented is whether Louisiana's exemptions, which the Bankruptcy Code directs the Debtors to apply, encompass personal property situated outside Louisiana at the time of filing. For the reasons that follow, the Court concludes that the Debtors may apply Louisiana's exemptions to their personal property in West Virginia, and thus AFFIRMS the Bankruptcy Court's Order.

         I. BACKGROUND

         A. Factual Background

         The parties stipulated to the relevant facts before the Bankruptcy Court. The Debtors lived in Louisiana from 2011 until March 2015, at which time they relocated to West Virginia. On July 24, 2015, the Debtors filed a voluntary petition for bankruptcy in the Northern District of West Virginia under Chapter 7 of the Bankruptcy Code (Dkt. No. 8-8 at 1). At the time of filing, the Debtors owned real and personal property still situated in Louisiana. The Debtors also owned personal property situated in West Virginia, including a checking account, appliances, televisions, clothing, a wedding band, two guns, a 2002 Geo Tracker, and a possible payment of workers' compensation.[1] Id. at 1-2. It is this personal property that is at issue in this appeal.

         B. Bankruptcy Exemptions

         When an individual debtor files for bankruptcy, “all legal or equitable interest[s] of the debtor in property” become part of a bankruptcy estate. 11 U.S.C. § 541(a). “To help the debtor obtain a fresh start, however, the Bankruptcy Code allows debtors to exempt from the estate limited interests in certain kinds of property.” Clark v. Rameker, 134 S.Ct. 2242, 2244 (2014) (quotation omitted) (quoting Rousey v. Jacoway, 544 U.S. 320, 325 (2005)). According to the House Judiciary Committee, “‘[t]he historical purpose' of bankruptcy exemptions has been to provide a debtor ‘with the basic necessities of life' so that she ‘will not be left destitute and a public charge.'” Id. at 2247 n.3 (quoting H.R. Rep. No. 95-595, at 126 (1977)). Indeed, “statutes creating debtors' exemptions must be construed liberally in favor of the debtor and the exemption.” In re Nguyen, 211 F.3d 105, 110 (4th Cir. 2000).

         “Congress designed the exemption system . . . to allow states to participate in th[e] regulation of debtor/creditor relations.” Hovis v. Wright, 751 F.2d 714, 715-16 (4th Cir. 1985). As the Fourth Circuit has explained,

[t]he Bankruptcy Code provides two alternative exemption schemes. Unless state law provides otherwise, a debtor may choose to exempt from the estate either property listed in the federal bankruptcy exemptions set forth in § 522(d) of the Bankruptcy Code or property exempt under applicable state or local law, together with property exempt under federal, non-bankruptcy law. 11 U.S.C. § 522(b)(1). However, § 522(b)(2) of the Bankruptcy Code authorizes the states to opt out of the federal bankruptcy exemption scheme and thereby deny debtors the right to elect the federal bankruptcy exemptions contained in § 522(d). By opting out, a state restricts its debtors to any exemptions available under state or local law and federal, non-bankruptcy law.

Sheehan v. Peveich, 574 F.3d 248, 251 (4th Cir. 2009). In essence, Congress expressly delegated to the states “the power to create state exemptions in lieu of the federal bankruptcy exemption scheme.” Id. at 252. These two alternatives are described generally as the “federal exemptions” and the “state exemptions.”

         The Bankruptcy Code directs debtors to identify their applicable state law as follows:

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.

11 U.S.C. § 522(b)(3)(A). Prior to The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), the statute had instead directed debtors “to apply the exemption laws from the state that was their domicile for the 180 days immediately preceding the date of the filing of the petition or the state where they were domiciled for the greater portion of that 180-day period.” In re Stephens, 402 B.R. 1, 3 (B.A.P. 10th Cir. 2009). The more lengthy 730-day “look-back” window reflects a congressional effort to curb debtors from forum shopping for a state with more favorable exemptions. See In re Willis, 495 B.R. 856, 859-60 (Bankr. W.D. Wis. 2013); H.R. Rep. No. 109-31, pt. 1, at 15-16 (2005), as reprinted in 2005 U.S.C.C.A.N. 88, 102 (discussing how the window prevents debtors from moving to states with generous exemptions for home equity).

         BAPCPA also added what is known as the “hanging paragraph.” At the end of § 522(b)(3), an unnumbered provision states that, “[i]f the effect of the domiciliary requirement under subparagraph (A), ” quoted above, “is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d), ” which lists the federal bankruptcy exemptions. This provision ensures that a debtor may apply the federal exemptions if his applicable state under § 522(3)(A) is an opt-out state, but the limitations of its exemption law nonetheless prevent the debtor from taking “any exemption.”[2]

         The parties agree that, because the Debtors relocated to West Virginia less than 730 days prior to filing, their prior domicile, Louisiana, provides the applicable law (Dkt. No. 8-8 at 1). Louisiana is an “opt-out” state that does not permit an “individual debtor” to take advantage of the federal exemptions. See La. Stat. Ann. § 13:3881(B)(1) (“In cases instituted under the provisions of Title 11 of the United States Code, entitled ‘Bankruptcy', there shall be exempt from the property of the estate of an individual debtor only that property and income which is exempt under the laws of the state of Louisiana and under federal laws other than Subsection (d) of Section 522 of Title 11 of the United States Code.”).[3] Therefore, the Debtors are confined to the Louisiana exemptions.

         C. Procedural Background

         On July 24, 2015, the Debtors filed a voluntary petition for bankruptcy pursuant to Chapter 7 of the Bankruptcy Code (Dkt. No. 8-3 at 1). At that time, they held assets with a total value of $85, 771. The Debtors' real property, a house on approximately two acres in Coushatta, Louisiana, accounted for $65, 000. The remaining $20, 771 in assets comprised personal property located in both Louisiana and West Virginia. Id. at 8. As discussed, the Bankruptcy Code instructed the Debtors to claim exemptions pursuant to Louisiana law, and they did so on Schedule C of their petition. Id. at 15.

         The Trustee objected to the Debtors' claims of exemptions for personal property located outside Louisiana at the time of filing (Dkt. No. 8-4). He argued “that the State of Louisiana lacks the power as a sovereign entity to prescribe exemptions for property which was not within the State of Louisiana on the date of filing and further that the use of such exemptions is prohibited by the Due Process clause of the Fourteenth Amendment.” Id. at 2. The Trustee relied on the “presumption against extraterritoriality” of federal law, as well as traditional principles of state sovereignty, to argue that laws promulgated by states cannot apply to property outside their borders. Id. (citing Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct. 1659 (2013)).

         In its Order, the Bankruptcy Court overruled the Trustee's objection. It reasoned that, because Congress incorporated state exemptions into the Bankruptcy Code, federal law - not state law -creates the possibility that a state's exemption laws will be applied outside a state's borders (Dkt. No. 8-9 at 4-5). To determine whether Louisiana's exemptions should be applied to property in other states, it adopted the majority approach, which liberally construes state exemptions to apply extraterritorially absent state-specific restrictions to the contrary. Id. at 5. Moreover, it declined to apply a “presumption against extraterritoriality” to states, noting that the Supreme Court has applied the rule only to international concerns. Id. at 5-6. The Trustee appealed from this judgment.


         District courts have jurisdiction to hear appeals “from final judgments, orders, and decrees . . . of bankruptcy judges entered in cases and proceedings” under the Bankruptcy Code. 28 U.S.C. § 158(a). Such proceedings include “core proceedings, ” which encompass “allowance or disallowance of . . . exemptions from property of the estate.” Id. § 157(b)(2)(B). Indeed, the “[g]rant or denial of a claimed exemption is a final appealable order from a bankruptcy proceeding.” Sumy v. Schlossberg, 777 F.2d 921, 923 (4th Cir. 1985).


         A district court sitting in its capacity as a bankruptcy appellate court reviews “findings of fact only for clear error, but consider[s] the relevant legal questions de novo.” In re Varat Enters., Inc., 81 F.3d 1310, 1314 (4th Cir. 1996). When the parties do not dispute the relevant facts, the Court's review is de novo. See In re Jones, 591 F.3d 308, 310 (4th Cir. 2010).

         IV. ...

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