Vincent Howard and our Rubidoux consumer bankruptcy lawyers were interested to see an appeals court ruling rejecting an interesting argument that would have permitted the debtors to keep more of the equity in their property. In Massey v. Pappalardo, the First U.S. Circuit Court of Appeals Bankruptcy Appellate Panel ruled that Damon and Marie Massey may not claim "100% FMV" in their home and car as exemptions. The Masseys filed for Chapter 13 bankruptcy in March of 2011, naming joint ownership in a single-family home and a 1995 Saturn. They contended that the phrase "100% FMV" was compelled by a Supreme Court ruling. Trustee Denise Pappalardo challenged the claimed exemptions as beyond limits and made in bad faith. The bankruptcy court ultimately allowed them to claim only the maximum statutory exemption.
The Masseys' petition indicated that they each had a one-third interest in their Massachusetts home and jointly owned the car. They elected to use federal exemptions, but claimed "100% FMV" in the home and car in their filings. This was despite the fact that the home had a mortgage in an amount greater than its value (that is, their home was underwater). No liens were reported on the car. Pappalardo objected to the exemptions as well as to confirmation of their plan, saying they were above statutory exemption limits and were an improper attempt to capture any appreciation in value the property might yield after their petition. Because of this, she suggested they might fail the liquidation test and that their plan should not be confirmed. The Masseys argued that "100% FMV" was permitted as a way to claim in-kind exemptions by the Supreme Court's 2010 Schwab v. Reilly. After initially ruling that the objection was untimely, the bankruptcy judge reconsidered and sustained the objection to the exemptions, ruling the Masseys may exempt no more than the statutory maximum. They appealed.
The First Circuit's BAP agreed, in a opinion that analyzed the effects of Schwab at some length. Under federal exemptions, the Masseys are permitted to claim interest up to $3,450 in their car (which exceeds its claimed value) and up to $21,625 in their home (in which they had no equity). Schwab said time limits for objecting to an exemption don't apply when the exemption is valid, and while it provided guidelines for attempts to claim in-kind exemptions, the BAP noted that it cast doubt on the merits of such exemptions. Bankruptcy courts since then have mainly found that the decision did not allow in-kind exemptions; debtors may claim only their interest in property up to exemption limits. The BAP agreed with this consensus, it said. A hearing was unnecessary because the Masseys' claim for 100% FMV was facially invalid, it said. Ignoring the post-petition equity issue, it upheld the bankruptcy court.
At Howard Law, P.C., our Westminster personal bankruptcy attorneys are not surprised to see this ruling. While it would certainly be helpful for debtors to claim full market value of their property (particularly underwater homes), it doesn't look like that was the intent of the Supreme Court's ruling. Rather, the court appeared to be inviting debtors to give it a try because trustees are then in a better position to understand what they're trying to exempt. However, Vincent Howard and our Temecula individual bankruptcy lawyers would have been interested in an analysis of the post-petition appreciation issue. Particularly with homeowners who are underwater, there's a chance that the home might appreciate during the three to five years of the Chapter 13 plan. Debtors disappointed by their lack of equity might be very interested in using exemptions on that recaptured equity, if they can.
Led by partner Vincent Howard, Howard Law offers bankruptcy planning and representation to individuals across California. To learn more or tell us about your situation, call our Costa Mesa office today at 1-800-872-5925 or send us a message through our website.