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Stornawaye Financial Corp. v. Hill

Court: Court of Appeals for the First Circuit
Date filed: 2009-04-01
Citations: 562 F.3d 29
Copy Citations
39 Citing Cases
Combined Opinion
          United States Court of Appeals
                     For the First Circuit


No. 08-9006

                        IN RE DAVID HILL,

                             Debtor.

                      ____________________

                STORNAWAYE FINANCIAL CORPORATION,

                      Plaintiff, Appellant,

                               v.

                           DAVID HILL,

                      Defendant, Appellee.



                    APPEAL FROM THE BANKRUPTCY
              APPELLATE PANEL FOR THE FIRST CIRCUIT



                             Before

                   Torruella, Selya and Lipez,
                         Circuit Judges.


     Michael B. Feinman, with whom Feinman Law Offices was on
brief, for appellant.
     Isaac H. Peres for appellee.


                          April 1, 2009
            SELYA, Circuit Judge.        This bankruptcy appeal concerns a

matter of first impression at the circuit court level. The pivotal

question is this: May a debtor's homestead exemption be denied,

under 11 U.S.C. § 522(g), with respect to residential property

fraudulently transferred but voluntarily reconveyed pre-petition in

response to efforts of a creditor?            The bankruptcy court answered

this question affirmatively.        The bankruptcy appellate panel (the

BAP) disagreed, holding that section 522(g) does not authorize a

denial of the exemption in these circumstances.                  In re Hill, 387

B.R. 339 (BAP 1st Cir. 2008).            We find the language of section

522(g) to be plain and unambiguous.            Consequently, we affirm.

            At this stage of the proceedings, the material facts are

not   seriously    disputed.       In    2000,    the    debtor,    David   Hill,

personally guaranteed a $250,000 bank loan made to a corporation.

Subsequently, Stornawaye Financial Corporation became the holder in

due course of both the promissory note evidencing the debt and the

concomitant guaranty.

            In May of 2004, the debtor and his wife, Tina R. Hill,

sold their Connecticut residence and as tenants by the entirety

purchased    a    home   at   11   River      Meadow    Drive,    West   Newbury,

Massachusetts (the Property).              They recorded the deed, which

contained no homestead declaration,1 on May 11.                  The Hills paid


      1
       Massachusetts law requires that "an estate of homestead in
real property" be recorded either as part of the deed of conveyance
or in a subsequent writing "duly signed, sealed and acknowledged

                                        -2-
$1,000,000 for the Property, $450,000 of which was fronted by a

mortgagee.

          On August 26, 2004, the Hills transferred the Property to

Mrs. Hill for $1.00.     Five days later, Mrs. Hill recorded a

declaration of homestead.      On the same date, she and her husband

refinanced   the   mortgage,     slightly   reducing   their     monthly

installment payments.

          The other shoe dropped on January 18, 2005: Stornawaye

sued the Hills in a Massachusetts state court to collect the

balance owed on the guaranteed indebtedness.       It alleged, among

other things, that the Property (which it sought to attach) had

been fraudulently conveyed with the Hills' connivance.         Mrs. Hill

was served on January 31.   She informed the debtor.

          The suit galvanized the Hills into corrective action.

Acting on the advice of counsel, Mrs. Hill re-transferred the

Property to their joint names as tenants by the entirety.            The

deed, which restored the status quo ante, was dated February 2,

2005, and was recorded the next day.          The debtor immediately

recorded a declaration of homestead.




and recorded." Mass. Gen. Laws ch. 188, § 2. The rights emanating
from a declaration of homestead are delineated in a separate
subsection. See id. § 1. No Massachusetts homestead exemption may
be claimed pursuant to 11 U.S.C. § 522(b)(3) unless a declaration
has been duly filed and recorded in compliance with state law. See
In re Garran, 338 F.3d 1, 4-5 (1st Cir. 2003).

                                  -3-
                 On April 4, 2005, the debtor filed a straight bankruptcy

petition under Chapter 7.            See 11 U.S.C. §§ 701-727.         He opted for

the    state      exemption     scheme   and    claimed    a    $500,000     homestead

exemption referable to his interest in the Property.                       Stornawaye

objected to the claimed exemption and initiated an adversary

proceeding in the bankruptcy court.                  Amidst other requests for

relief, its complaint sought to bar a discharge in bankruptcy.

Upon       the   conclusion     of   trial,    the   bankruptcy      court   reserved

decision.

                 On May 4, 2007, the court rendered a bench decision.

First, it capped the debtor's potential homestead exemption at

$125,000 on the ground that the Property had been acquired within

the    1,215-day      period     preceding     the   filing     of   the   bankruptcy

petition.        See 11 U.S.C. § 522(p).        Second, it determined that even

this reduced sum was unavailable; in its view, 11 U.S.C. § 522(g)

precluded the debtor from taking any exemption because the Property

had been voluntarily transferred and then reconveyed as a result of

a creditor's efforts.

                 Third,   the   bankruptcy      court     sustained    Stornawaye's

objection to the granting of a discharge.2                     It reasoned that the

transfer of the Property had been undertaken with the intent to

hinder, delay, or defraud a creditor.                See id. § 727(a)(2)(A).       In


       2
       This appeal concerns only the dispute over the claimed
homestead exemption. Details concerning Stornawaye's objection to
a discharge are supplied only for context.

                                          -4-
reaching this conclusion, the court rejected the Hills' explanation

that they had deeded their home to Mrs. Hill in order to refinance

it and obtain a superior interest rate.          The court also offered two

other grounds for denying a discharge, each of which involved the

debtor's failure seasonably to disclose and turn over certain tax

refunds.      See id. §§ 727(a)(2)(A)-(B), 727(a)(4)(A).

              On appeal to the BAP, the debtor assigned error to the

denial   of    a   discharge,   the   capping    of   his   claimed     homestead

exemption, and the preclusion of that exemption.                 The BAP upheld

the denial of the discharge based on the debtor's failure to turn

over tax refunds in a timeous manner.           In re Hill, 387 B.R. at 349-

50.   It did not pass upon the other grounds related to denying a

discharge that the bankruptcy court had formulated.

              As to the homestead exemption, the BAP ruled in favor of

the debtor on both facets of the dispute.                   It held that the

statutory cap did not apply in bankruptcy cases (like this one)

that had been instituted prior to April 20, 2005.                See id. at 348-

49.   With respect to the exemption itself, the BAP held that the

plain language of section 522(g) limited its applicability to

"property     that   the    trustee   recovers."      Id.   at    346   (emphasis

supplied). Because the Property had been reconveyed as a result of

an action by a creditor, not an action by a trustee, the statute

did not pertain.      Id.    This further appeal ensued.




                                       -5-
               Congress has provided bankruptcy litigants with a two-

track opportunity for intermediate review: they may appeal either

to a district court or to a bankruptcy appellate panel.                       See 28

U.S.C. § 158.        Regardless of which track an appellant selects, our

task is the same: in either event, we concentrate on the bankruptcy

court's decision, reviewing its findings of fact for clear error

and its conclusions of law de novo.                 In re Healthco Int'l, Inc.,

132 F.3d 104, 107 (1st Cir. 1997).               Because this standard of review

is identical to that employed by both of the intermediate appellate

tribunals,      we   cede     no   special      deference   to   the   intermediate

decision itself.        Id.

               In this venue, the debtor no longer pursues his claim of

entitlement to a discharge. The sole remaining issue is whether he

is entitled to the homestead exemption.3                Stornawaye advances two

reasons why he has no such right.                We examine each reason in turn.

               Stornawaye's most loudly bruited remonstrance involves

the proper interpretation of section 522(g).                     Before turning to

that       remonstrance,    we     pause   to    rehearse   some    bedrock    legal

principles.

               Statutory interpretation begins with the language of the

statute.       United States v. Ron Pair Enters., Inc., 489 U.S. 235,

241 (1989); Ruiz v. Bally Total Fitness Holding Corp., 496 F.3d 1,



       3
      Stornawaye does not contest that the exemption, if available
at all, is capped at $500,000.

                                           -6-
8 (1st Cir. 2007).    We assume that the words Congress chose, if not

specially defined, carry their plain and ordinary meaning.      Boivin

v. Black, 225 F.3d 36, 40 (1st Cir. 2000).            If that meaning

produces a plausible (though not inevitable) result, that is

generally the end of the matter.        Plumley v. S. Container, Inc.,

303 F.3d 364, 369 (1st Cir. 2002).          Of course, plain meaning

sometimes must yield if its application would bring about results

that are either absurd or antithetical to Congress's discernible

intent.   See Baez v. INS, 41 F.3d 19, 24 (1st Cir. 1994).

           With this foundation in place, we turn to the text of

section 522(g).      The statute provides in pertinent part that,

notwithstanding certain enumerated provisions of the Bankruptcy

Code,

           the debtor may exempt under subsection (b) of
           this section property that the trustee
           recovers under section 510(c)(2), 542, 543,
           550, 551, or 553 of this title, to the extent
           that the debtor could have exempted such
           property under subsection (b) of this section
           if such property had not been transferred, if
           —

                  (1)(A)   such transfer  was  not  a
           voluntary transfer of such property by the
           debtor; and (B) the debtor did not conceal
           such property . . .

11 U.S.C. § 522(g).    Stornawaye insists that this statute forbids

the debtor's use of the exemption in the circumstances of this case

and that, in all events, construing the statute to allow an




                                  -7-
exemption here would contravene its core purpose.                    We test these

hypotheses.

              To    begin,   the   plain   language     of   section       522(g)      is

inhospitable to Stornawaye's linguistic argument.                         By its own

terms,    the      statute   applies   only   to    "property      that    a   trustee

recovers."         "Trustee" and "creditor" are separate nouns, with

distinct meanings, and the Bankruptcy Code does not treat them as

synonyms.          Compare, e.g., 11 U.S.C. §§ 701-703 (establishing

procedures for disinterested persons to serve as trustees), with,

e.g., id. § 101(10) (defining "creditor").

              The contrary authority on which Stornawaye relies is not

persuasive.        The centerpiece of its argument is the decision in In

re Carpenter, 56 B.R. 704 (Bankr. D.R.I. 1986).4                     The Carpenter

court held on similar facts that section 522(g) precludes a debtor

from taking an exemption in property voluntarily transferred by him

and   later     reconveyed     pre-petition        through   the    efforts       of    a

creditor.       Id. at 707.        In support, the court cited only cases

involving post-petition actions by creditor committees.                     Id.   More

importantly, Carpenter defied the plain meaning of section 522(g)

even while recognizing that the text of the statute seemed to


      4
       The bankruptcy court also mentioned In re Snyder, 108 B.R.
150 (Bankr. N.D. Ohio 1989). Snyder is of little utility. That
decision merely states, in surveying the case law, that section
522(g) can apply to actions by creditors. See id. at 153-54. As
the sole authority for this proposition, Snyder cites Carpenter.
See id.


                                        -8-
compel a different outcome.          Id.     We conclude, therefore, that

Carpenter,    which   appears   to    have    been    incorrectly    decided,

furnishes no sustenance for Stornawaye's hypothesis.

            In a different iteration of its linguistic argument,

Stornawaye contends that the word "recovers" should be interpreted

"passively," such that it would include a pre-petition reconveyance

of property, so long as that reconveyance results in the property's

inclusion in the later-established bankruptcy estate.                For this

proposition, Stornawaye relies on several cases holding that when

a trustee causes a debtor to retransfer property to the estate

post-petition simply by filing or threatening to file an action,

the trustee has recovered property within the purview of section

522(g).   See, e.g., In re Ringham, 294 B.R. 204, 208-09 (Bankr. D.

Mass.    2003).   Stornawaye    posits     that    the   situation   at   hand

represents a logical extension of these holdings. We do not agree.

            In the first place, giving force to Stornawaye's word

play would eviscerate the meaning of "recovers."               To "recover"

ordinarily means to "get or win back."            Webster's Third New Int'l

Dict. 1898 (1993).5    Here, however, there was nothing to "get . .

. back" — no loss to recoup: by the time that the bankruptcy estate




     5
      In legal parlance, "recover" sometimes means "[t]o obtain by
a judgment." Black's Law Dict. 1302 (8th ed. 2004). Even when
used in this sense (a usage that we do not endorse in the present
context), the word does not permit the reading that Stornawaye
promotes.

                                     -9-
came into existence, the Property had been reconveyed.                     Because

there was never a loss to the estate, there could be no recovery.

            There is, moreover, a second reason why this contention

will not wash.          Section 522(g), in terms, requires not just a

recovery,     but   a   recovery   by   the    trustee,    pursuant   to    powers

delineated in particular sections of the Bankruptcy Code, namely,

11 U.S.C. §§ 510(c)(2), 542, 543, 550, 551, and 553.             Stornawaye is

a creditor, not a trustee; and in Chapter 7 cases these enumerated

powers   are    conferred      exclusively       upon     trustees,   not     upon

creditors.6     While a trustee may be thought to have used these

powers to recover property when he merely threatens to employ them,

a creditor who files a pre-petition suit under state law to annul

a fraudulent conveyance cannot conceivably be thought to have

availed himself of any of these powers.            After all, the bankruptcy

estate was not even in existence when the creditor sued.

            The second branch of Stornawaye's statutory construction

argument is based on the premise that section 522(g) is intended to

be punitive and, therefore, construing it to allow the debtor an

exemption notwithstanding his chicanery would be absurd and/or

inconsistent with statutory purpose.              But that premise for the

argument is unproven.



     6
       There is a limited set of circumstances, in Chapter 11
cases, in which a creditor may be given permission to exercise some
of these powers. See In re STN Enters., 779 F.2d 901, 904 (2d Cir.
1985). That exception is not apposite here.

                                        -10-
            "In    determining   congressional   intent,   we   employ   the

traditional       tools   of   statutory   construction,    including      a

consideration of the language, structure, purpose, and history of

the statute."      McKenna v. First Horizon Home Loan Corp., 475 F.3d

418, 423 (1st Cir. 2007) (citation and internal quotation marks

omitted).     There is no legislative history that illuminates the

purpose of section 522(g).       See In re Glass, 60 F.3d 565, 569 n.4

(9th Cir. 1995).      Thus, we are left with language, structure, and

evident purpose.

            The phrasing of the statute cuts against Stornawaye's

theory.     Section 522(g) is phrased permissively ("the debtor may

exempt").    This is inconsistent with the claim that the statute is

meant to be generally punitive (that is, designed to punish all

dishonest debtors).

            By the same token, the structure of the statute militates

against Stornawaye's theory.        Most of the operative language in

section 522 is found in subsection (b), which authorizes a debtor

to select either a federal exemption scheme (laid out in subsection

(d)) or a hybrid state and federal exemption scheme (laid out in

subsection (b)(3)).       The fact that Congress allowed debtors to

choose the more generous scheme belies the notion that it meant the

statute to be generally punitive. See generally 4 Lawrence P. King

et al., Collier on Bankruptcy ¶ 522.01 (15th ed. 2003) (noting that




                                    -11-
section 522 is principally concerned with providing debtors with

sufficient resources to effectuate a "fresh start").

           Although      section   522(g)    recognizes    that   the   trustee

ordinarily recovers property for the benefit of the bankruptcy

estate, it provides a further opportunity for a debtor to claim an

exemption in property that was not in the debtor's portfolio when

the bankruptcy proceeding began (so that the property was not

subject   to   section    522(b)).      This   additional    opportunity     is

available only for property involuntarily transferred away and not

concealed by the debtor.      See id. ¶ 523.12[1].        Seen in this light,

it is at least arguable that, as the BAP stated, section 522(g)

reflects a congressional desire to "prevent the situation in which

a trustee incurs expenses, to be paid by the estate, to recover

fraudulently conveyed property, only to have the debtor exempt it

after the effort has been made."         In re Hill, 387 B.R. at 348; cf.

11 U.S.C. § 522(k)(1) (making property exempted under section

522(g) liable for the aliquot share of costs and expenses incurred

in avoiding the transfer).         There is, therefore, no clear evidence

that section 522(g) was sparked by Congress's intention to punish

all dishonest debtors.

           Stornawaye has a fallback position.             It invites us to

deny the debtor's claim of exemption under an alternative theory.

We decline the invitation.




                                      -12-
            Stornawaye's alternative theory runs along the following

lines.     It observes, correctly, that the bankruptcy court denied

the debtor a discharge because, among other things, the debtor had

engaged in pre-petition conduct with the intent to hinder, delay,

or defraud creditors. That finding, Stornawaye says, suggests that

the court found each of the constituent conveyances (that is, the

deed from the Hills to Mrs. Hill, the deed from Mrs. Hill back to

the couple, and the debtor's declaration of homestead) to be

fraudulent.     Building on that platform, Stornawaye asserts that

setting aside the whole series of fraudulent conveyances was an

available remedy in the state court action — a remedy which, if

effectuated, would have left the house in the Hills' joint names

without any valid declaration of homestead.

            This is wishful thinking: the debtor's forensic tapestry

is woven of gossamer strands of speculation and surmise.         In

particular, Stornawaye's theory rests on an incorrect factual

premise.     The record makes manifest that the bankruptcy court's

finding of fraudulent intent was predicated on its assessment of

the initial transfer, which was designed to divest the debtor of

his interest in the Property and place that interest beyond the

reach of his creditors.    The second transfer — the reconveyance —

was curative, not fraudulent. The ensuing declaration of homestead

was, therefore, unexceptionable.




                                -13-
               We need go no further.      We hold that 11 U.S.C. § 522(g)

does     not   authorize   the    bankruptcy     court    to   deny   a   debtor's

homestead      exemption   with    respect      to   property   that      had   been

fraudulently      transferred     and   then    voluntarily     reconveyed      pre-

petition, even though the retransfer came about through the efforts

of   a   creditor.      Consequently,      we    uphold   the   BAP's     decision

reversing the bankruptcy court's contrary order.



Affirmed.




                                        -14-