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
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$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).
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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.
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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.
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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.
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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
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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.
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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.
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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.
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"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
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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.
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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.
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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.
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