Pasquina v. Cunningham

United States Court of Appeals
For the First Circuit

No. 06-2786

IN RE: MAURICE F. CUNNINGHAM, DEBTOR,

WILLIAM J. PASQUINA,

Appellant,

v.

MAURICE F. CUNNINGHAM,

Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. F. Dennis Saylor, IV, U.S. District Judge]

Before

Lynch and Lipez, Circuit Judges,
and Barbadoro,* District Judge.

John G. Neylon with whom Neylon & O'Brien, P.C. was on brief
for appellant.
George J. Nader with whom Riley & Dever, P.C. was on brief
for appellee.

January 22, 2008

*
Of the District of New Hampshire, sitting by designation.
 LIPEZ, Circuit Judge. This bankruptcy case requires us to

decide whether the post-petition sale of the debtor's home, for

which he had obtained a homestead exemption under the law of

Massachusetts protecting it from creditors, causes the proceeds of

the sale to lose their exempt status under the Bankruptcy Code and

become subject to pre-petition, nondischargeable debt. We conclude

that the proceeds from the sale of the home retain the exempt

status of the home itself. We therefore affirm the district

court's ruling that the proceeds from the sale of Maurice F.

Cunningham's homesteaded property cannot be liable for his pre-

petition debt to William J. Pasquina.

I.

Pasquina hired Cunningham, a former high school classmate, to

work in his legal practice in 1982. In 1995, Pasquina was injured

in a car accident and was unable to continue to practice law.

Therefore, Pasquina wanted to sell his legal practice to

Cunningham, but they were unable to come to an agreement. Pasquina

then entered unsuccessful negotiations with Pierce & Associates

("Pierce") for the sale of his practice. During the course of

Pasquina's negotiations with Pierce, Cunningham misled both

Pasquina and Pierce into believing that he would join Pierce.

Instead, Cunningham secretly removed clients' files from Pasquina's

records, covertly opened his own practice, and continued to

represent Pasquina's former clients without paying Pasquina his

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share of the earned legal fees or reimbursing him for the expenses

he had advanced the clients. In response to Pasquina's lawsuit,

the Massachusetts Superior Court entered its initial judgement of

$191,072.30 on June 20, 2001, having found that Cunningham breached

his fiduciary duties to Pasquina during the period after the

accident.1

In November 2001, by filing a Declaration of Homestead with

the Commonwealth of Massachusetts Registry of Deeds, Cunningham

designated his residence at 795 Johnson Street in North Andover,

Massachusetts as his homestead. Once property is properly claimed

as a homestead pursuant to the Massachusetts Homestead Act, it is

shielded from most of an owner's creditors:

An estate of homestead to the extent of $300,000 in the
land and buildings may be acquired pursuant to this
chapter by an owner or owners of a home or one or all who
rightfully possess the premise by lease or otherwise and
who occupy or intend to occupy said home as a principal
residence. Said estate shall be exempt from the laws of
conveyance, descent, devise, attachment, levy on
execution and sale for payment of debts or legacies
except [in certain listed exceptions].

Mass. Gen. Laws ch. 188, § 1.2 Soon after Cunningham's declaration

of homestead, Pasquina attempted to collect upon his superior court

1
The court adjusted its judgement on April 1, 2003 to account
for the revenue that Cunningham had subsequently received from
cases that originated with Pasquina. The final judgment was
$291,554.55 with the accumulation of interest.
2
In 2004, the homestead protection increased from $300,000 to
$500,000. See 2004 Mass. Legis. Serv. ch. 218. Since Cunningham
filed for bankruptcy prior to the increase, his homestead exemption
is limited to $300,000.

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judgment on December 12, 2002 by obtaining a $250,000 writ of

attachment against the Johnson Street property.

On February 28, 2003, Cunningham filed for bankruptcy under

Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et. seq., and

claimed in the bankruptcy proceedings a $300,000 homestead

exemption on the Johnson Street property pursuant to 11 U.S.C. §

522(b). He also disclosed Pasquina's lien on the residence.3

Under 11 U.S.C. § 522(f) a debtor can avoid the fixing of a

judicial lien on property that is exempted from the bankruptcy

estate.4 Therefore, before the bankruptcy court, Cunningham moved

pursuant to § 522(f) for an order avoiding Pasquina's $250,000 writ

of attachment.5 On February 4, 2004, Pasquina filed an objection

to Cunningham's motion to avoid the writ of attachment and

3
As our chronology indicates, Pasquina obtained the superior
court judgment against Cunningham prior to Cunningham's filing of
the declaration of homestead. The Massachusetts Homestead Act
contains an exception for "a debt contracted prior to the
acquisition of said estate of homestead." However, we ruled in In
re Weinstein that the Massachusetts prior debt exception is pre-
empted by the Bankruptcy Code. 164 F.3d 677, 682 (1st Cir. 1999).
Understandably, Pasquina does not invoke the Massachusetts prior
contracted debt exception in his arguments here.
4
While a debtor can typically avoid the fixing of a judicial
lien on his interest in exempt property, he cannot avoid the fixing
of a judicial lien for domestic support obligations. 11 U.S.C. §
522(f)(1)(A).
5
Cunningham stated in this motion that the Johnson Street
property was appraised at $495,000 and was subject to $260,000 in
outstanding mortgages. Therefore, absent the lien, his equity
interest in the property would be less than $235,000, all of which
would be eligible for the homestead exemption.

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Cunningham's claim of a homestead exemption. The bankruptcy court

denied Pasquina's objections both on the merits and because the

objections were time-barred,6 thereby allowing Cunningham to avoid

the lien on the Johnson Street property.

Subsequently, Pasquina filed a timely motion in the bankruptcy

court requesting that the court determine that Cunningham's debt to

him was nondischargeable. In July 2005, the court found that the

debt should not be discharged because Cunningham acted fraudulently

while in a fiduciary capacity, see 11 U.S.C. § 523(a)(4), and

because Cunningham caused willful and malicious financial injury to

Pasquina, see 11 U.S.C. § 523(a)(6).7 On September 20, 2005, the

bankruptcy court closed its adversary proceedings.

Meanwhile, Pasquina learned that Cunningham had listed his

Johnson Street property for sale. On August 18, 2005, Pasquina

filed a motion in the Massachusetts Superior Court arguing that the

homestead exemption for the Johnson Street property would terminate

upon the sale of the property. Moreover, he claimed that the

6
For these reasons, the bankruptcy court deemed Pasquina's
objections to be frivolous and sanctioned him for filing them.
Pasquina did not appeal this decision.
7
Section 523(a) provides that certain types of debts are not
subject to the Bankruptcy Code's discharge provisions. More
specifically, a debtor who files for Chapter 7 bankruptcy is not
discharged from debt obtained by "fraud or defalcation while acting
in a fiduciary capacity, embezzlement, or larceny," 11 U.S.C. §
523(a)(4), or by "willful and malicious injury by the debtor to
another entity or to the property of another entity," 11 U.S.C. §
523(a)(6).

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proceeds that would belong to Cunningham's wife, which Pasquina

alleged would constitute at least half of the total proceeds, would

not be protected by the homestead exemption. In response to this

motion, the superior court enjoined Cunningham and his wife from

distributing or using any of the sale proceeds if they were to sell

the Johnson Street property. Then, Pasquina filed an emergency

motion with the superior court arguing that if the Johnson Street

property was sold, the proceeds from the sale of the Johnson Street

property should be available to satisfy Pasquina's debt because the

homestead exemption would be terminated.

On November 3, 2005, Cunningham filed in bankruptcy court "A

Motion for Order Confirming Sale Proceeds . . . as Exempt," asking

the bankruptcy court to rule that the proceeds from the post-

petition sale of the Johnson Street property were exempt from

nondischarged debt just as the homestead had been exempt. On

November 21, Cunningham and his wife sold the Johnson Street

property and moved to a condominium in Florida.8 Net proceeds from

the sale of the homestead property were about $150,000.

On December 7, 2005, the bankruptcy court ruled on

Cunningham's motion, deciding that under 11 U.S.C. § 522(c) the

sale proceeds from the homestead were exempt from liability for

Pasquina's debt. That provision states:

8
Title to the Florida residence was held only in the name of
Cunningham's wife. The record indicates that the residence was
purchased before Cunningham filed the bankruptcy petition.

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 [P]roperty exempted under this section is not liable
during or after the case for any debt of the debtor that
arose . . . before the commencement of the case, except
[for certain debts, such as tax and child support
obligations].

The bankruptcy court also found that it could not adjudicate the

rights of Cunningham's wife because it had no jurisdiction over

her.

Pasquina appealed to the district court. In a thorough and

well-reasoned opinion, the court found that the conversion of the

homestead property into proceeds by means of voluntary sale does

not remove the protections of § 522(c) from the property. In re

Cunningham, 354 B.R. 547, 557 (D. Mass. 2006). On appeal to us,

Pasquina claims that the district court incorrectly applied federal

bankruptcy law to protect funds that should have been available to

satisfy a nondischargeable debt. He argues that Massachusetts

state law governs the disposition of the proceeds from the

voluntary sale of a homestead and that these proceeds became

subject to pre-petition debts for which the debtor remains liable.

As the relevant facts are undisputed and the issue before us turns

entirely on the interpretation of law, our review is plenary. See

United States v. Hyde, 497 F.3d 103, 106 (1st Cir. 2007).

II.

The bankruptcy estate, created upon the filing of a Chapter 7

petition, is comprised of a debtor's legal and equitable interests

in property at the time of the petition. Owen v. Owen, 500 U.S.

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305, 308 (1991). Typically, assets in the estate are distributed

to creditors pursuant to a statutory scheme that assigns priorities

to various types of debt. However, particular assets, including a

homestead, may be exempted from the bankruptcy estate and retained

by the debtor in accordance with the federal Bankruptcy Code. "An

exemption is an interest withdrawn from the estate (and hence from

the creditors) for the benefit of the debtor." Id. Under §

522(b), a debtor can choose to use either the federal list of

exemptions set forth in § 522(d) or the exemptions provided by his

state.9 See 11 U.S.C. § 522(b), (d); Owen, 500 U.S. at 308.

Cunningham opted to use Massachusetts's exemption list.

Pasquina objected to Cunningham's claim of a homestead

exemption and his motion to avoid Pasquina's judicial lien, 11

U.S.C. § 522(c).10 The bankruptcy court properly rejected

9
A state is also allowed to "opt-out" of the federal
exemption list, in which case the debtor is restricted to the
exemptions provided by his state. See Owen, 500 U.S. at 308; 11
U.S.C. § 522(b)(1) (stating that a debtor could select from either
list "unless the State law that is applicable to the debtor . . .
specifically does not so authorize"). Massachusetts has not
"opted-out," thereby allowing its residents to elect the federal
exemption list.
10
While § 522(c) allows states to define their own exemptions
under § 522(b), the Bankruptcy Code is not required to take those
exemptions with all of the built-in limitations provided by the
state exemption. See Owen, 500 U.S. at 313-314 ("[W]e conclude
that Florida's exclusion of certain liens from the scope of its
homestead protection does not achieve a similar exclusion from the
Bankruptcy Code's lien avoidance provision."). In Weinstein,
taking our cue from Owen, we emphasized that "the state's ability
to define its exemptions is not absolute and must yield to
conflicting policies in the Bankruptcy Code." 164 F.3d at 683. We

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Pasquina's claims, thereby permanently immunizing the homestead

from pre-bankruptcy debt by withdrawing the property from the

bankruptcy estate. Property that is properly exempted under § 522

is immunized against liability for prebankruptcy debts, subject

only to a few exceptions. Those exceptions include: (1) debt from

certain taxes and customs duties, (2) debt related to domestic

support obligations, (3) liens that cannot be avoided or voided,

including tax liens, and (4) debts for a breach of fiduciary duty

to a federal depository institution. See 11 U.S.C. § 522(c)(1)-

(3); In re Weinstein, 164 F.3d 677, 682 (1st Cir. 1999).

Pasquina's claim that the post-petition voluntary sale of the

exempt property makes the proceeds of the sale available to satisfy

a nondischargeable pre-petition debt is at odds with the immunizing

effect of § 522(c). Section 522(c) states: "[P]roperty exempted

under this section is not liable during or after the case for any

debt of the debtor that arose . . . before the commencement of the

case . . . ." 11 U.S.C. § 522(c)(emphasis added). By the plain

language of the statute, exemptions under § 522(c) persist beyond

the termination of the case, making the property subject to an

exemption unavailable for the satisfaction of pre-petition debt

(other than for the categories of debt noted in § 522(c) itself).

There is only one other proviso to this rule: exempted property is

decided in Weinstein that, "because the Massachusetts prior
contracted debt exception is not one of the types of debt specified
in § 522(c), it is invalid in bankruptcy." Id. at 682.

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not liable during or after the case "[u]nless the case is

dismissed." Id. Cunningham's bankruptcy case was not dismissed;

it was adjudicated.

Moreover, it is a basic principle of bankruptcy law that

exemptions are determined when a petition is filed. In re

Friedman, 38 B.R. 275, 276 (Bankr. E.D. Pa. 1984) ("It is hornbook

bankruptcy law that a debtor's exemptions are determined as of the

time of the filing of his petition."); see also Cunningham, 354

B.R. at 553. To interpret § 522(c) as conferring merely an

ephemeral exemption, subject to post-termination events, would

undermine that basic principle and its relationship to the fresh

start policy of the Bankruptcy Code.

The Supreme Court has stated that "a central purpose of the

Bankruptcy Code is to provide a procedure by which certain

insolvent debtors can reorder their affairs, make peace with their

creditors, and enjoy 'a new opportunity in life and a clear field

for future effort, unhampered by the pressure and discouragement of

preexisting debt.'" Grogan v. Garner, 498 U.S. 279, 286

(1991)(quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)).

The Bankruptcy Code facilitates a fresh start, in part, by allowing

property properly exempted under § 522 to be immunized against

liability for pre-petition debts. See Owen, 500 U.S. at 309.

The efficacy of the fresh start policy requires finality that

allows a debtor to rebuild his life without fear of lingering

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creditors. In In re Reed, a Texas debtor sold his homestead, which

he had taken as an exemption pursuant to the state exemption list,

during the pendency of the bankruptcy proceedings. 184 B.R. 733

(Bankr. W.D. Tex. 1995). The trustee for the bankruptcy estate

argued that the post-petition sale of the exempt homestead property

made the proceeds available to satisfy pre-petition debt. The

bankruptcy court disagreed. Id. at 738-39. If "estates could be

reopened to administer such proceeds at virtually any time, [the

reopening would be] robbing bankruptcy administration of any sort

of meaningful finality, and robbing bankruptcy discharge of its

efficacy." Id. at 738.

Pasquina argues that the fresh start and finality interests

are inapplicable in this case because Cunningham is a dishonest

debtor unworthy of the Bankruptcy Code's protection. It is simply

unfair, Pasquina argues, to limit his ability to collect on his

judgement against Cunningham. Congress has not been unresponsive

to such concerns. When Congress chose to impose limits on the

fresh start policy, it did so by providing explicitly that certain

debts are nondischargeable. See 11 U.S.C. § 523(a); Grogan, 498

U.S. at 287 (finding that by allowing certain debts to be

nondischargeable, such as "child support, alimony, and certain

unpaid educational loans and taxes, as well as liabilities for

fraud[,] Congress evidently concluded that the creditors' interest

in recovering full payment of debts in these categories outweighed

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the debtors' interest in a complete fresh start"). In fact,

Pasquina successfully argued to the bankruptcy court that

Cunningham's debt arising from the Massachusetts Superior Court

judgement in favor of Pasquina was nondischargeable because of

Cunningham's fraudulent conduct. However, in deciding which pre-

petition debts could be satisfied from otherwise exempt property,

Congress did not list such a nondischargeable debt in the

itemization set forth in § 522(c)(1)-(3). Therefore, in asking us

to limit the protections afforded Cunningham because he is a

dishonest debtor, Pasquina is effectively asking us to rewrite §

522(c). We cannot do that.11

III.

For the foregoing reasons, we affirm the district court's

judgement that the post-petition sale of Cunningham's home, for

which he had obtained a homestead exemption under the law of

11
We do not break new ground with our decision here, which is
consistent with the decisions of the few courts that have
considered whether proceeds from the post-petition sale of exempt
property are exempt from pre-petition nondischargeable debts. In
Reed, as noted, the bankrupt debtor opted for the state exemption
list and made a post-petition sale of the exempted homestead. 184
B.R. at 735. The Texas bankruptcy court found that "[n]othing in
section 522(c) even vaguely suggests that, as a precondition to
enjoying the protections of that provision, the debtor must
maintain the exempt character of the property." Id. at 738.
Similarly, a bankruptcy appellate panel in the Ninth Circuit
decided that Arizona's requirement that a debtor must reinvest the
proceeds from his homestead within eighteen months of selling the
homestead or lose the homestead exemption was not controlling
because federal bankruptcy law does not allow post-petition uses of
exempt property to change the previously established exemption
status. In re Herman, 120 B.R. 127, 130 (B.A.P. 9th Cir. 1990).

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Massachusetts, did not cause the proceeds of the sale to lose their

exempt status under the Bankruptcy Code and become subject to

Pasquina's pre-petition nondischargeable debt.12

So ordered.

12
Pasquina also asserts that he is a creditor of Cunningham's
wife for reasons that are distinct from his claims against
Cunningham, and that he should be able to collect the wife's share
of the proceeds from the sale of the Johnson Street property
because her share is not subject to the homestead exemption. When
this claim was raised before the bankruptcy court, the court stated
that it did not have jurisdiction over Cunningham's wife because
she was not a party to the case. Pasquina does not address this
jurisdictional point; hence we have no basis for reviewing his
contention that he should be able to collect from Cunningham's
wife.

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