McCallister v. Wells

Filing 14

MEMORANDUM DECISION AND ORDER. The Court REVERSES the bankruptcy courts decision and REMANDS for proceedings consistent with this ruling. Signed by Judge B. Lynn Winmill. (alw)

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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
In the Matter of:

Case No. 4:20-cv-00086-BLW

DUSTIN JADE WELLS,
Debtor,
______________________________

MEMORANDUM DECISION
AND ORDER

KATHLEEN McCALLISTER,
Plaintiff,
v.
DUSTIN JADE WELLS,
Defendant.

INTRODUCTION
This appeal deals with a so-called “vanishing homestead exemption”1 in the
context of a Chapter 13 bankruptcy.
In 2019, Debtor Dustin Jade Wells declared bankruptcy and claimed his
home as exempt under Idaho statutory law. Later, during the pendency of his
bankruptcy, Wells sold the home with no intent of reinvesting the proceeds in a

1

See generally In re Williams, 515 B.R. 395, 401 (Bankr. D. Mass. 2014) (characterizing
state homestead exemption statutes as providing for vanishing exemptions; discussing cases).
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new home. He used the proceeds to pay a creditor.
Idaho’s homestead exemption statute allows debtors to exempt proceeds
from a voluntary sale of the homestead for a one-year period but only if the sale
was made “in good faith for the purpose of acquiring a new homestead . . . .” Idaho
Code § 55-1008(1). Here, the bankruptcy court held that the proceeds from the sale
of Wells’ homestead were exempt under the Idaho statute. The trustee appeals,
arguing that the homestead exemption vanished by operation of law when Wells
sold the homestead without reinvesting the proceeds in another home and with no
intent to do so. The Court agrees and will reverse.
STANDARD OF REVIEW
The Court will apply a de novo standard of review because the appeal
involves interpreting the Bankruptcy Code and Idaho’s homestead statute. See
generally Smith v. IRS (In re Smith), 828 F.3d 1094, 1096 (9th Cir. 2016) (“The
court reviews de novo the bankruptcy court’s interpretation of the bankruptcy
code.”); United States v. Cabaccang, 332 F.3d 622, 624-25 (9th Cir. 2003) (en
banc) (“The construction or interpretation of a statute is a question of law that we
review de novo.”).
BACKGROUND
Debtor Dustin Jade Wells filed a chapter 13 bankruptcy petition in May
2019. He valued his home at $625,000 and claimed $100,000 of the equity as

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exempt under Idaho’s homestead exemption.
The trustee objected, arguing that the relevant Idaho statute limited the
debtor to the lesser of $100,000 or the net value of the homestead exemption. In
this case, the net value was $57,677.64, given that the home was subject to two
mortgage liens totaling $567,322.36 ($625,000 – $567,322.36 = $57,677.64).
Wells responded by amending his schedules, increasing the stated value of the
residence to $668,000 and then stating the homestead exemption as “100% of the
fair market value, up to any applicable statutory limit.” The trustee did not object
to this amended homestead exemption.
Later, as part of a settlement agreement with his largest creditor, Box
Canyon Dairy, Wells agreed to sell the home and pay Box Canyon $45,000 at
closing. The trustee objected to Wells’ motion to sell the home to the extent it
would allow him to use proceeds from the sale to pay Box Canyon directly. The
trustee relied on Idaho statutory law which states that if a homestead is voluntarily
liquidated, the exempt proceeds must be reinvested in another homestead within a
year; otherwise, the proceeds lose their exempt status. See Idaho Code § 55-1008.
In January 2020, the bankruptcy court overruled the trustee’s objection and
entered an order permitting the sale and the payment of proceeds directly to Box
Canyon. The trustee appeals.

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DISCUSSION
1. Mootness
Preliminarily, Wells argues that this appeal is moot. He points out that a plan
has already been confirmed, all estate property has vested in the him, he has
received funds from the homestead sale, and he has paid those funds to Box
Canyon Dairy.
There are two mootness doctrines to consider: Article III mootness and
equitable mootness. See In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir.
2012). Article III mootness focuses on whether there is an actual case or
controversy before the court. See id.; U.S. Const. art. III, § 2, cl. 1. Equitable
mootness, on the other hand, “occurs when a ‘comprehensive change of
circumstances’ has occurred so ‘as to render it inequitable for this court to consider
the merits of the appeal.’” Thorpe, 677 F.3d at 880. Wells focuses solely on
equitable mootness, and he carries the burden of establishing mootness. See
generally Suter v. Goedert, 504 F.3d 982, 986 (9th Cir. 2007) (“the burden of
establishing mootness is on the party advocating its application”).
The Ninth Circuit looks at the following factors to determine equitable
mootness: “whether a stay was sought, whether the plan has been substantially
consummated, whether third party rights have intervened, and, if so, whether any
relief can be provided practically and equitably.” Thorpe, 677 F.3d at 880.
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Considering these factors, the Court is not persuaded that this appeal is equitably
moot.
First, although the trustee did not seek a stay, she did ensure that the plan
anticipated her appeal. The confirmed plan includes this provision:
Discharge shall not be entered upon completion of plan payments
unless Box Canyon Dairy shall have received a minimum of
$55,000 on Claim No. 1 paid through the Trustee. The $55,000 is
separate and apart from the proceeds of the sale of the home and
gifts. If Trustee should succeed in her appeal and should the
proceeds from the sale of the home be accounted through the Plan
and Trustee, or actually go through her office, it shall not count
towards the $55,000.
Ch. 13 Plan, Bk. Dkt. 209, Part 8, ¶¶ 1.4 & 5.3 (emphasis added). Granted, the
better practice would have been to seek a stay. But given the trustee’s objections
below, along with this provision in the plan, the Court is not persuaded that the
trustee sat on her rights or otherwise permitted developments to proceed without
her participation. Likewise, the Court is not persuaded that the trustee sat on her
rights by failing to object to the amended homestead exemption. At that time, there
was no indication that Wells intended to sell the property at all so it would have
been premature for the trustee to object. As discussed below, the Ninth Circuit
rejected a similar argument in England v. Golden (In re Golden), 789 F.2d 698 (9th
Cir. 1986). See discussion infra ¶ 2.B.
Second, even assuming Wells’ plan has been substantially consummated, the
Court may still provide effective relief given the plan provision that anticipates
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what will happen if the trustee succeeds on this appeal. See Thorpe, 677 F.3d at
882 n.7 (observing that even if a plan is substantially consummated, “that would
not be the end of the inquiry”).
Third and fourth, Box Canyon, a third party, will be affected by this appeal.
But, again, this possibility was anticipated in the plan. Additionally, it is still
possible for the court to practically and equitably provide relief to the appellant. As
for the equities of the situation, the trustee correctly points out that Box Canyon
has received an inequitable distribution. Otherwise, the court is persuaded that, on
remand, the bankruptcy court will be able to craft a practical resolution to this
matter that is in keeping with the plan provision anticipating a potentially
successful appeal. Accordingly, the Court declines to find this appeal equitably
moot.
2.

The Homestead Exemption
A.

The Statutory Framework

The filing of a Chapter 13 bankruptcy petition creates a bankruptcy estate
generally consisting of all of the debtor’s property. 11 U.S.C. § 541(a). The
Bankruptcy Code authorizes the debtor to exempt certain kinds of property from
the estate, which enables the debtor to retain those assets post-bankruptcy.
§ 522(b)(1) & (d). One such exemption is the homestead exemption, which

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protects up to $25,150 in equity in the debtor’s home. § 522(d)(1). 2 Some states,
including Idaho, have opted out of the federal exemptions and instead provide their
citizens with different, often more generous, protections than those afforded under
the Bankruptcy Code. See generally Law v. Siegel, 571 U.S. 415, 418 (2014)
(citing Victor D. López, State Homestead Exemptions and Bankruptcy Law: Is It
Time for Congress To Close the Loophole? 7 Rutgers Bus. L.J. 143, 149-65 (2010)
(listing state exemptions)
Idaho’s homestead exemption statute, as it applies to Wells, protects up to
$100,000 in home equity. See Idaho Code § 55-1008. 3 The statute further provides
that if the homestead is sold “in good faith for the purpose of acquiring a new
homestead,” the exemption will cover the sale proceeds for up to one year as well
as any new homestead purchased with the proceeds. Id. As already noted, Wells

2

Section 522(d)(1) provides for a $15,000 exemption, but that number adjusts upward
every three years beginning in April 1998. See 11 U.S.C. § 104.
3

The relevant part of the statute provides:
Except as provided in section 55-1005, Idaho Code, the homestead is exempt from
attachment and from execution or forced sale for the debts of the owner up to the
amount specified in section 55-1003, Idaho Code. The proceeds of the voluntary sale
of the homestead in good faith for the purpose of acquiring a new homestead . . . up
to . . . [$175,000] shall likewise be exempt for one (1) year from receipt, and also
such new homestead acquired with such proceeds.

Idaho Code § 55-1008(1) (emphasis added). Note that the statute now protects up to
$175,000 in equity. That limit, however, is applicable to debtors who filed bankruptcy on
or after March 20, 2020. Wells filed before that date and is thus subject to the previous,
$100,000 statutory limit.
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did not reinvest the proceeds from the sale of his home into a new one, nor did he
intend to do so.
B.

Ninth Circuit Authority

The Ninth Circuit has held that if debtors exempt a homestead under a state
statute, they must comply with the entire statute; they cannot choose favorable
provisions and discard unfavorable ones. See generally Golden, 789 F.2d at 70001. Put differently, “When a debtor elects to avail himself of the exemptions the
state provides, he agrees to take the fat with the lean . . . .” Zibman v. Tow (In re
Zibman), 268 F.3d 298, 304 (5th Cir. 2001). This rule is illustrated in two Ninth
Circuit cases that ultimately control this appeal: England v. Golden (In re Golden),
789 F.2d 698 (9th Cir. 1986), and Wolfe v. Jacobson (In re Jacobson), 676 F.3d
1193 (9th Cir. 2012).
In In re Golden, 789 F.2d 698, a chapter 7 debtor sold his house before
declaring bankruptcy. Id. at 699. He claimed the proceeds from the sale were
exempt under California’s homestead exemption statute, which required proceeds
to be reinvested within six months. Id. Golden did not reinvest the proceeds but
nevertheless argued that proceeds were exempt. Id. at 700.
The Ninth Circuit disagreed: “Applying California law, we . . . hold that
when the debtor fails to reinvest homestead proceeds within a period of six months
in which the debtor has control of those proceeds, the proceeds should revert to the
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trustee.” Id. (citation omitted). The court rejected the debtor’s argument that the
trustee’s silence during the six-month reinvestment period prevented the trustee
from claiming the proceeds. The court explained that the trustee had no right to
claim the proceeds during that period; thus there was no reason for the trustee to
“notify the debtor of a claim not yet in existence.” Id. at 701. Instead, the court
effectively placed the burden on the debtor to act to maintain an exemption that
might otherwise vanish given the statutory language. Id. at 701. “Given the clarity
of the provisions requiring reinvestment, Golden could not have reasonably relied
on the trustee’s silence as an indication of a permanent exemption.” Id.
Under Golden, the proceeds from the sale of Wells’ home lost their exempt
status because Wells did not sell his home for the purpose of purchasing a new
home and did not, in fact, invest the proceeds in a new home within the statutory
period. Granted, Wells’ situation is distinguishable because Golden sold his house
before filing bankruptcy (and thus had proceeds in hand – not a homestead – when
he filed) and Wells sold his after filing (and thus had a homestead – not proceeds –
when he filed). Given this difference, Wells could argue that the reinvestment
requirement was not triggered for Wells because the property was being claimed as
exempt – not proceeds. The bankruptcy court took note of this fact, observing that
under the snapshot rule, it was significant that on the date Wells filed his petition,
the homestead property “wasn’t in the form of proceeds but rather was in the form
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of land. The debtor hadn’t sold it.” Oral Ruling Tr., Dkt. 4-2, at 32:22-25.
But the Ninth Circuit addressed this situation – that is, a post-petition sale of
a homestead – in In re Jacobson, 676 F.3d 1193, and was not persuaded that this
factual distinction required a different ruling than the one handed down in Golden.
In In re Jacobson, chapter 7 debtors claimed a state homestead exemption and then
later, post-petition, sold the home. Id. at 1198. The debtors did not reinvest the
proceeds within the statutory period but nevertheless argued that the exemption
should apply because, under the “snapshot rule,” exemptions are fixed at the time
the petition is filed. See id. at 1199; see generally White v. Stump, 266 U.S. 310,
313 (1924). The bankruptcy court agreed with the debtors, and the Ninth Circuit
BAP affirmed.
The Ninth Circuit reversed, relying on its earlier decision in Golden. The
court stated:
There is no material difference between Golden and this case. The
homestead exemption gave the Jacobsons clearly defined rights with
respect to the . . . property. The Jacobsons had a right to $150,000 in
proceeds. . . . That right was contingent on their reinvesting the
proceeds in a new homestead within six months of receipt. The
Jacobsons did not abide by that condition and thus forfeited the
exemption.
Id. at 1199 (emphasis added; citations to the governing state homestead statute,
Cal. Civ. P. Code §§ 704.730(a)(3) & 704.720(b), omitted).
Otherwise, the Jacobson Court was unpersuaded by the debtor’s policy
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arguments. Among other things, the Jacobsons had argued that honoring the
statutory reinvestment requirement would incentivize trustees to delay closing
cases during the reinvestment period. The Ninth Circuit found this concern “too
speculative.” Id. at 1200. And, more broadly, the court held that the Bankruptcy
Code “demands respect for the ways in which states balance the rights of debtors
and creditors.” Id.
Jacobson is almost directly on point. The only notable difference is that
Wells is a chapter 13 debtor whereas the Jacobsons filed a chapter 7 petition. But
that distinction does not help Wells. Rather, it could potentially help the trustee
because in chapter 13 cases, the Bankruptcy Code contains a provision mandating
that all property coming into the debtor’s possession after the commencement of
the case, and before the case is closed, dismissed, or converted, becomes property
of the estate. See 11 U.S.C. § 1306. Chapter 7 does not contain any similar
provision, and other courts have held that chapter 7 debtors who own a homestead
on the date of filing enjoy an unconditional state exemption, notwithstanding a
reinvestment requirement for proceeds. See Lowe v. DeBerry (In re DeBerry), 884
F.3d 526, 529-30 (5th Cir. 2018) (holding that if a chapter 7 debtor owned a
homestead on the date of filing and later sold that homestead, the homestead was
nonetheless subject to an unconditional state homestead exemption). These cases
do not help Wells, though, given that he is a chapter 13 debtor. Accordingly, under
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Jacobson and Golden, Wells is foreclosed from arguing that the proceeds from his
homestead sale were exempt.
C.

Supreme Court Authority

Wells argues that Golden and Jacobson conflict with three Supreme Court
decisions: Owen v. Owen, 500 U.S. 305 (1991); Taylor v. Freeland & Kronz, 503
U.S. 638 (1992); and Law v. Siegel, 571 U.S. 415 (2014). The Court disagrees; two
of these cases were decided in the early 1990s – roughly 20 years before the 2012
Jacobson decision – and none of these cases overrules either Golden or Jacobson.
Taking the cases in chronological order, the first stop is Owen v. Owen, 500
U.S. 306 (1991). In that case, Dwight Owen owned a condo subject to a $160,000
judgment lien held by his ex-wife. (His ex-wife had obtained the judgment before
he purchased the condo.) Mr. Owen filed a bankruptcy petition and declared the
condo exempt. By operation of state law, the condominium remained subject to his
ex-wife’s lien. Id. at 307. The Supreme Court held that Mr. Owen could avoid the
lien because state law directly conflicted with the Bankruptcy Code (specifically
11 U.S.C. § 522(f)) which allows debtors to avoid preexisting liens. Id. at 308.
There is no such conflict here. At the time Wells declared bankruptcy he had
the right to – and did – claim a homestead exemption. But the state statute sets
forth conditions to maintain that exemption when there is a sale, and Wells did not
comply with those requirements and thus failed to maintain the exemption. There
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is nothing about that Idaho’s statutory reinvestment requirement that directly
conflicts with the Bankruptcy Code. Further, in dicta, the Owen Court stated that
nothing in the Bankruptcy Code “limits a State’s power to restrict the scope of its
exemptions; indeed, it could theoretically accord no exemptions at all.” Id.
Accordingly, this Court cannot disregard the reinvestment requirement in the Idaho
statute. Cf. Ford v. Konnoff (In re Konnoff), 356 B.R. 201, 208 (B.A.P. 9th Cir.
2006) (rejecting the notion that Owen effectively overruled Golden).
Next up is Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). In that case,
the debtor, Emily Davis, declared bankruptcy while she was pursuing an
employment discrimination claim in state court. Id. at 640. She claimed the money
she expected to win in the lawsuit as exempt. At the initial meeting of creditors, the
trustee was informed that Davis might win $90,000 in her lawsuit. The trustee
decided not to object; he doubted the lawsuit had any value. Id. That turned out to
be a mistake; Davis settled her case for $110,000 and then turned over a portion of
the settlement to her attorneys to cover their fees. The trustee demanded that the
law firm turn over monies it had received from Davis. The firm refused, arguing
that it should be able to keep the fees because Davis had claimed the proceeds as
exempt, and the trustee had not timely objected. Id.
The Court agreed with the firm, holding that because there was no objection,
the exemption became final. The Court explained that “[d]eadlines may lead to
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unwelcome results, but they prompt parties to act and they produce finality. In this
case, despite what respondents repeatedly told him, Taylor did not object to the
claimed exemption.” Id. at 644. The Court held that, having failed to object, the
trustee could not later seek to deprive Davis and the law firm of the exemption. Id.
Taylor is inapplicable here. True, the trustee did not object to Wells’
amended exemption, but that is irrelevant because the homestead exemption
vanished when Wells did not reinvest the proceeds in another homestead. Taylor
did not address a homestead exemption – or any exemption with a similar sunset
provision – and is thus unhelpful.
The final Supreme Court case, Law v. Siegel, 571 U.S. 415 (2014), is also
unhelpful. In that case, a chapter 7 debtor falsely claimed that an individual had a
large mortgage on his home and then claimed his home as exempt under the state
homestead exemption statute. At the time, the trustee didn’t know of the fraud and
therefore did not object to the claimed exemption. Id. at 419. Later, after extensive
litigation, the trustee learned of the fraudulent mortgage and asked the bankruptcy
court to surcharge the proceeds of the home sale to recoup some of his litigation
expenses. The bankruptcy court allowed the surcharge. Id. at 419-20. The Supreme
Court reversed, holding that because the trustee had not objected to the exemption,
the exemption became final and the surcharge was unauthorized. Id. at 422-23.
Here, Wells is not arguing that the bankruptcy court allowed an improper
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surcharge on exempt proceeds. Rather, the issue is whether a claimed homestead
exemption can vanish by its own terms, even if the trustee does not object. Law did
not address or rule on that issue, meaning that Golden and Jacobson remain good
law and control the outcome. Further, to the extent Law spoke to the issue, it
confirmed that state-court exemptions come with whatever strings may be
attached: “It is of course true that when a debtor claims a state-created exemption,
the exemption’s scope is determined by state law, which may provide that certain
types of debtor misconduct warrant denial of the exemption.” Id. at 425 (citations
omitted).
To be sure, Golden and Jacobson have been criticized. Jacobson has been
criticized in at least one article; 4 the First Circuit has expressly stated that Jacobson
is “unpersuasive,”5 and two Ninth Circuit BAP Judges have questioned whether
Golden was correctly decided in the first place. 6 But despite these criticisms, both
cases remain good law; this Court is bound to follow them. Plus, although Judge

4

Hon. Alan M. Ahart, In re Jacobson: The Ninth Circuit Court of Appeal Erred by
Holding the Debtor Liable for Her Exempt Homestead Sale Proceeds, 32 Cal. Bankr. J. 409
(2013).
5

Rockwell v. Hull (In re Rockwell), 968 F.3d 12, 23 (1st Cir. 2020).

6

See Gaughan v. Smith (In re Smith), 342 B.R. 801, 809 (B.A.P. 9th Cir. 2006) (Klein, J.,
concurring) (“The issue is difficult, and Golden may not have been correctly decided in 1986.”);
In re Konnoff, 356 B.R. at 208 (Pappas, J., concurring) (stating that Golden deserves
reconsideration).
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Klein criticized Golden, he noted that at least one of “perverse incentives” of the
case – that trustees would prolong cases in an effort to have the exemption
automatically vanish – had not manifested itself in the decades since Golden was
decided. See In re Smith, 342 B.R. at 809 (Klein, J., concurring). As he put it, “the
opportunity for abuse following Golden has remained more theoretical than real.”
Id.
For all these reasons, the Court concludes that Wells’ homestead exemption
vanished when he sold his home and did not reinvest proceeds in another home.
Accordingly, the Court will reverse.
ORDER
For all these reasons, the Court REVERSES the bankruptcy court’s
decision and REMANDS for proceedings consistent with this ruling.
DATED: October 14, 2020
_________________________
B. Lynn Winmill
U.S. District Court Judge

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