Capelli v. Capelli
Filing
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MEMORANDUM OPINION AND ORDER AFFIRMING DECISION OF THE BANKRUPTCY COURT: The decision of the United States Bankruptcy Court is AFFIRMED. This case is DISMISSED and ORDERED STRICKEN from the active docket of this Court. (copy Clerk, US Bankruptcy Court) Signed by Chief Judge John Preston Bailey on 1/29/15. (jss)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
Elkins
SARA CAPELLI,
Appellant,
v.
Civil Action No. 2:14-CV-87
Bankruptcy No. 2:12-BK-01443
Judge Bailey
STEPHEN GREGORY CAPELLI, JR.,
Appellee.
MEMORANDUM OPINION AND ORDER
AFFIRMING DECISION OF THE BANKRUPTCY COURT
This is an appeal of an Order of the United States Bankruptcy Court entered
September 29, 2014, which overruled Sara Capelli’s objection to the exemptions claimed
by the Debtor. In re Capelli, 518 B.R. 873 (Bankr. N.D. W.Va. 2014).
On December 4, 2013, the Debtor filed a voluntary Chapter 7 bankruptcy petition in
the United States Bankruptcy Court for the Northern District of West Virginia. Because the
Debtor had moved to West Virginia from Virginia less than 730 days before the petition
date, he was disqualified by the domiciliary requirement of 11 U.S.C. § 522(b)(3)(A) from
claiming state law exemptions under West Virginia law. Because the state in which he
resided for 180 days prior to the 730 day period, Virginia, is an opt-out state which limits
its exemptions to residents of Virginia, the Debtor was unable to claim Virginia’s state law
exemptions.
The issue presented by this case is one of the statutory construction of § 522(b)(3),
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which provides as follows:
(3) Property listed in this paragraph is-(A) subject to subsections (o) and (p), any property that is
exempt under Federal law, other than subsection (d) of this
section, or 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;
(B) any interest in property in which the debtor had,
immediately before the commencement of the case, an interest
as a tenant by the entirety or joint tenant to the extent that such
interest as a tenant by the entirety or joint tenant is exempt
from process under applicable nonbankruptcy law; and
(C) retirement funds to the extent that those funds are in a fund
or account that is exempt from taxation under section 401, 403,
408, 408A, 414, 457, or 501(a) of the Internal Revenue Code
of 1986.
If the effect of the domiciliary requirement under subparagraph (A) is to
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render the debtor ineligible for any exemption, the debtor may elect to
exempt property that is specified under subsection (d).
In the typical case, the statute is clear that a debtor, being entitled to the exemptions
of either state, would be able to utilize the federal exemptions set forth in § 522(d), by virtue
of the final phrase of § 522(b)(3). This case is complicated by the fact that the Debtor and
his estranged spouse own property in Virginia as tenants by the entireties, which he could,
but elected not to, exempt under § 522(b)(3)(B). The Debtor contends that the fact that he
could have exempted that property under § 522(b)(3)(B) is no impediment to his use of the
federal exemptions. On the other hand, Ms. Capelli contends that since the Debtor is
eligible for the exemption provided in § 522(b)(3)(B), the final phrase of § 522(b)(3) is
inapplicable.
The final phrase provides that “[i]f the effect of the domiciliary requirement under
subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect
to exempt property that is specified under subsection (d).”
Judge Flatley held that:
the court finds that the legislative history and intent behind § 522(b)(3), and
particularly the concluding sentence thereof, makes clear that “ineligible for
any exemption” means “ineligible for [any single] exemption [under
subparagraph (A)].” This interpretation is supported by the notion that
debtors could historically claim as exempt both property according to the
exemption scheme of their domicile and property held as a tenancy by the
entirety, which may be located outside their domicile; the fact that Congress
did not change the relationship between what is now § 522(b)(3)(A) and (B),
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and, in fact, expanded the scope of exemptible property under § 522(b)(3) by
adding subparagraph (C); and the express reference to § 522(b)(3)(A) in the
concluding sentence of § 522(b)(3), whose operation is premised upon the
effect of a domiciliary analysis; an analysis which is not linked at all to the
application of subparagraphs (B) or (C).
518 B.R. at 880.
Judge Flatley added:
Ms. Capelli's interpretation of the concluding sentence of § 522(b)(3)
leads to results which are inconsistent with its language and purpose. To
reiterate, the triggering feature of the concluding sentence is the failure of
“any exemption” based upon a domiciliary requirement. As demonstrated,
neither subparagraphs (B) or (C) are domicile dependent and thus cannot fail
based upon the effect of a domiciliary requirement under subparagraph (A).
Therefore, the term “any exemption” must relate to the failure of any
exemption under subparagraph (A) only.
Moreover, Ms. Capelli's
interpretation would frustrate the purpose of the concluding sentence of §
522(b)(3) which, by preserving an exemption scheme to debtors under §
522(d), in turn promotes the Bankruptcy Code's concept of a fresh start. For
instance, consistent with Ms. Capelli's view, in addition to the unavailability
of exemptions under subparagraph (A), a debtor must also lack resort to any
exemptions under subparagraph (B) and (C) before he or she could invoke
the exemptions provided by § 522(d). That would mean that a debtor with a
minimal amount, for instance no more than $500.00, in a qualifying
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retirement account under subparagraph (C) would be unable to exempt
property listed in § 522(d).
Such a debtor would thus be distinctly
disadvantaged and his or her fresh start at jeopardy; a result demonstrably
at odds with the fail-safe provisions provided by Congress in the concluding
sentence of § 522(b)(3).
518 B.R. at 880-81.
This Court finds that Judge Flatley’s holding is correct. The domiciliary requirement
under § 522(b)(3)(A) has absolutely no effect on subparagraphs (B) or (C).
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requirement cannot render a debtor ineligible for those exemptions. In fact, every debtor
is “eligible” for those exemptions. It is clear that the focus of Congress in enacting the final
phrase was to ameliorate the effect of its amendment to § 522(b)(3)(A), which could leave
a debtor ineligible for any state exemptions.
This Court agrees with Judge Flatley that the interpretation advanced by Ms. Capelli
would be contrary to the fresh start purposes of bankruptcy law. Such an interpretation
would leave a debtor unable to exempt the basics of life, such as furniture, clothing, and
kitchen equipment. As noted by Judge Flatley, such an interpretation would also mean that
a debtor with a minimal amount, for instance no more than $500.00, in a qualifying
retirement account under subparagraph (C) would be unable to exempt property listed in
§ 522(d).
To borrow from Judge Guzman in In re Holland, 366 B.R. 825, (N.D. Ill. 2007)
dealing with a different issue, “[t]he interpretation offered by the trustee also thwarts one
of the primary purposes of the bankruptcy code: to give debtors a fresh start. See In re
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Smith, 640 F.2d 888, 891 (7th Cir. 1981) (stating that Bankruptcy Reform Act of 1978 was
motivated by the government's ‘interest in seeing that a debtor [who] goes through
bankruptcy comes out with adequate possessions to begin his fresh start’ (quotation
omitted)). Indeed, as one commentator notes, ‘by 1970 the fresh start .... had developed
into perhaps the dominant purpose for bankruptcy, and exemptions in bankruptcy were now
recognized ... as central to the revitalization process that the fresh start idea represented.’
William J. Woodward, Jr., Exemptions, Opting Out, and Bankruptcy Reform, 43 Ohio St.
L.J., 335, 342 (1982). To effectuate that purpose, “[e]xemption statutes are ... construed
liberally.” Smith, 640 F.2d at 891. The trustee, however, does just the opposite, narrowly
construing the statute to reduce the number of available exemptions, an approach that
conflicts with the purpose of the code.
“Exemption statutes should be liberally construed in favor of the debtor. If it is
possible to construe an exemption statute in ways that are both favorable and unfavorable
to a debtor, then the favorable method should be chosen. In re Barker, 768 F.2d 191, 196
(7th Cir. 1985); In re Jackson, 95 B.R. 590, 593 (Bankr. C.D. Ill. 1989).” In re Dealey, 204
B.R. 17, 18 (Bankr. C.D. Ill. 1997).
For the reasons stated above, the decision of the United States Bankruptcy Court
is AFFIRMED. This case is DISMISSED and ORDERED STRICKEN from the active
docket of this Court.
It is so ORDERED.
The Clerk is hereby directed to transmit copies of this Order to all counsel of record
herein and to the Clerk of the United States Bankruptcy Court for the Northern District of
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West Virginia.
DATED: January 29, 2015.
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