Look to the States: How the State-Specific Interpretation Clarifies BAPCPA's § 522 Ambiguity and Protects State Exemption Laws

• Author: Kay E. Oskvig
• Pages: 867-892

Look to the States: How the State-Specific Interpretation Clarifies BAPCPA’s § 522 Ambiguity and Protects State Exemption Laws Kay E. Oskvig  A BSTRACT : After Congress revised the Bankruptcy Code in 2005, courts have taken divergent views about how to apply 11 U.S.C. § 522 in relation to state exemptions. Three main interpretations have developed: anti-extraterritoriality, preemption, and state-specific. This Note advocates the state-specific approach, as it prevents forum shopping without rendering state exemption laws void or futile. The state-specific view requires courts to consider both state case law and public policy. When state statutes remain silent, courts applying the state-specific interpretation should liberally construe the exemption statutes in favor of the debtor and allow extraterritorial application . I. INTRODUCTION ...................................................................................... 869 II. DEVELOPMENT OF DIVERGENT INTERPRETATIONS AFTER BAPCPA ...... 870 A. G OALS OF B ANKRUPTCY E XEMPTIONS ................................................ 871 B. E XEMPTION P LANNING ..................................................................... 873 C. BAPCPA’ S E FFORT TO D ISCOURAGE F ORUM S HOPPING ...................... 874 III. EXTRATERRITORIAL APPLICATION OF EXEMPTIONS .............................. 875 A. A VAILABILITY OF F EDERAL E XEMPTIONS TO N ON -R ESIDENT D EBTORS ......................................................................................... 876 B. E XTRATERRITORIAL A PPLICATION OF S TATE E XEMPTION L AWS .......... 877 1. Anti-Extraterritoriality Interpretation: Exemptions Cannot Apply Across State Boundaries ................................ 878  J.D. Candidate, The University of Iowa College of Law, 2014; B.A., Iowa State University, 2010. The author would like to thank Professor Patrick Bauer for his advice on selecting this topic, and Phil Garland, Eric Lam, Kyle Oskvig, and Seth Tracy for their comments. 868 IOWA LAW REVIEW [Vol. 99:867 2. Preemption Interpretation: Federal Laws Supersede State Exemption Laws ............................................................ 878 3. State-Specific Interpretation: Individualized Analysis ......... 879 IV. INTERPRETING STATE AND FEDERAL EXEMPTIONS UNDER § 522 .......... 879 A. P REEMPTION ’ S P REFERENCE FOR B ROAD F EDERAL P URPOSES O VER S TATE C OURT H OLDINGS AND S TATUTES ........................................... 879 1. The Iowa Cases: How In re Stephens and In re Williams Preempted Iowa’s Precedent ................................................. 880 2. Extensions of the Preemptive View: In re Shell and In re Adams ....................................................................................... 882 B. S TATE -S PECIFIC T REATMENT OF S TATE P RECEDENT ........................... 883 1. Deference to State Statutory Language ................................ 884 2. Deference to State Court Holdings Denying Extraterritorial Exemptions .................................................. 884 3. Liberal Application in Favor of the Debtor .......................... 886 V. COURTS SHOULD USE THE STATE-SPECIFIC INTERPRETATION IN ORDER TO LIBERALLY CONSTRUE EXEMPTIONS IN FAVOR OF DEBTORS AND PROVIDE MARKET STABILITY .......................................... 887 A. T HE S TATE -S PECIFIC I NTERPRETATION E NCOURAGES C OURTS TO C ONSTRUE E XEMPTIONS L IBERALLY IN F AVOR OF D EBTORS ................ 888 B. T HE S TATE -S PECIFIC I NTERPRETATION O FFERS G REATER S TABILITY AND P REDICTABILITY ........................................................................ 889 C. F URTHER R ECOMMENDATIONS TO I NCREASE C LARITY ........................ 891 VI. CONCLUSION ......................................................................................... 892 2014] LOOK TO THE STATES 869 I. INTRODUCTION In 2004, Thomas Hogan had his therapist inform Hogan’s wife, Doylene Roberts, that Hogan was “moving on” and that Roberts should do the same. 1 Through his therapist, Hogan told Roberts that he had a girlfriend, that his girlfriend was expecting his child, and that his girlfriend was going to move in with him. 2 Hogan also informed Roberts that he had pled guilty to a charge of bank fraud and that, as part of his sentence, he would be under house arrest at the house he was currently living at in Newport Beach, California—a house that Roberts had herself purchased. 3 Roberts initiated divorce proceedings and moved to Iowa to be closer to her family. 4 As a result of Hogan’s frequent use of Roberts’ credit card and general reliance on her income throughout their marriage, 5 Roberts filed for bankruptcy in Iowa in 2010. Roberts sought to claim the Newport Beach house as an exempt asset under Iowa law. 6 The trustee in Roberts’ case objected to the claimed exemption, arguing that the Newport Beach house was an out-of-state—extraterritorial—exemption, and for that reason not exempt. 7 Courts are divided on the correct approach for extraterritorial exemptions. 8 The federal government provides debtors with a set of federal bankruptcy exemptions, but states can choose to “opt out” of the federal framework and offer their own state-defined exemptions. 9 States that elect to opt out often limit their exemptions to residents and/or property located within the state. 10 In cases like Roberts’, where the debtor wants to claim outof-state property, courts are faced with the question of whether to grant an extraterritorial exemption according to the state’s exemption scheme or impose federal exemptions regardless of state law. In answering this 1. In re Roberts, 443 B.R. 531, 534 (Bankr. N.D. Iowa 2010). 2. Id. 3. Id. 4. Id. at 535. 5. Id. at 534–35. 6. Id. at 535–36. 7. Id. at 536. Roberts ultimately succeeded and was permitted to claim the Newport Beach house as an exempt asset. Id. at 534. 8. See infra Part III (discussing the availability of federal exemptions and the extraterritorial application of state exemption laws). 9. See 11 U.S.C. § 522(b)(2) (2012) (allowing states to opt out of federal exemptions, stating: “Property listed in this paragraph is property that is specified under subsection (d), unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize.”). 10. See, e.g. , IDAHO CODE ANN. § 11-602(1) (2010). Under Idaho law, a “resident” is an individual intending to maintain Idaho as their home. Id. § 11-602(2). The Idaho homestead exemption is limited to $100,000. Id. § 55-1003 (2012). 870 IOWA LAW REVIEW [Vol. 99:867 question, the courts are split into three camps: anti-extraterritoriality, preemption, and state-specific. Anti-extraterritoriality courts refuse to grant exempt status to out-of-state properties. Preemption courts hold that because bankruptcy is a federal construct, the Federal Bankruptcy Code preempts state exemption statutes; thus, such courts determine whether to grant exemptions based solely on the federal exemption scheme. 11 Finally, a majority of courts adopt a state-specific approach and examine extraterritorial exemptions on a state-by-state basis according to state law. 12 These three conflicting interpretations make state exemption claims dubious and bankruptcy proceedings unpredictable, which in turn decreases market stability. Further contributing to the confusion is the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), which Congress enacted in 2005 13 to address rampant forum shopping. 14 In response to this disagreement, this Note advocates for the state-specific interpretation, which requires courts to interpret and apply a state’s statutory language and case law before granting or denying an extraterritorial homestead exemption. Part II provides an overview of the purpose of exemption laws and the federal government’s attempts to decrease forum shopping. Part III introduces extraterritoriality and further elucidates on the three interpretations. Part IV discusses and compares the major cases supporting the preemption and state-specific interpretations. Finally, Part V argues that the state-specific interpretation is the best analytical tool to protect state sovereignty while maintaining federal exemptions. II. DEVELOPMENT OF DIVERGENT INTERPRETATIONS AFTER BAPCPA In 2011, individuals filed 1.3 million bankruptcy petitions in the United States. 15 Debtors file for bankruptcy for a number of reasons. 16 Poor 11. See Fernandez v. Miller ( In re Fernandez), [2010–2011 Transfer Binder] Bankr. L. Rep. (CCH) ¶ 82,050, at 103,191–92 (W.D. Tex. Aug. 5, 2011) (describing the split between the courts and the resulting interpretative schemes). 12. See In re Jevne, 387 B.R. 301, 304–05 (Bankr. S.D. Fla. 2008) (adopting the state-specific interpretation after analyzing the three interpretations). 13. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (codified as amended in scattered sections of 11, 12, 18 & 28 U.S.C. (2006 & Supp. V 2011)). 14. See infra text accompanying notes 31–32. 15. OFFICE OF JUDGES PROGRAM, STATISTICS DIV., ADMIN. OFFICE OF THE U.S. COURTS, 2011 REPORT OF STATISTICS REQUIRED BY THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005, at 5 (2012), available at http://www.uscourts.gov/uscourts/ Statistics/BankruptcyStatistics/BAPCPA/2011/BAPCPA-report.pdf. 16. See id. 2014] LOOK TO THE STATES 871 financial management can lead to loan defaults, 17 or divorce proceedings costs or medical bills can rise to insurmountable levels. 18 Whatever the cause, bankruptcy ensures that a debtor’s creditors are fairly reimbursed by distributing the debtor’s assets once it becomes apparent that he or she will be unable to repay his or her debts, while simultaneously seeking to help the debtor get a fresh start after the distribution process is complete. Balancing the competing interests of the creditor, debtor, and conflicting policy aims often proves...