Opinion
Case No. 00-34451-DOT
March 30, 2001
William J. Doran, III, Esquire, Chaplin, Papa Gonet, Richmond, VA, for Debtors
MEMORANDUM OPINION
Hearing held on January 10, 2001, on trustee's objection to debtors' claimed homestead exemption for funds garnished by Virginia Credit Union. Argument was presented at hearing on whether debtors' homestead deed was timely filed. At the conclusion of hearing, the court took the matter under advisement of whether debtors' homestead deed filing was timely under the statutory requirement that property must be set apart "on or before the fifth day after the date initially set for the" 11 U.S.C. § 341 meeting of creditors. VA. CODE ANN. § 34-17 (Repl. Vol. 1996).
For the reasons set forth below, the court will sustain the objection and find that $2,900.00 garnished from debtors' wages may not be exempted by debtors under Virginia Code § 34-4 because the exemption was untimely filed.
Under Virginia Code § 34-4, the homestead exemption, debtors are entitled "to hold exempt from creditor process arising out of debt, real and personal property, or either, to be selected by the householder, including money and debts due the householder not exceeding $5,000 in value." VA. CODE ANN. § 34-4 (Repl. Vol. 1996 Cum. Supp. 2000).
I. Procedural History and Findings of Fact.
Debtors Charlie Jackson and Theresa P. Jackson filed a voluntary petition for relief under chapter 7 on August 10, 2000. On August 9, a homestead deed was signed by debtors. The § 341 meeting of creditors was scheduled for September 15. On August 11, the clerk's office mailed to debtors' counsel a notice of deficient filing because the bankruptcy petition was not verified by the original signature of attorney for debtors as required by Local Bankruptcy Rule 5005-1(C)(4). On August 29, the case was dismissed for failure to comply with LBR 1007-1(A). A notation on debtors' counsel's deficiency notice indicates that counsel went to the clerk's office to correct the deficiency on August 16. Debtors' counsel filed a motion to vacate dismissal order on August 31 and noticed hearing on motion for October 4.
On September 29, 2000, debtors filed a homestead deed to exempt household property, including $2,900.00 in wages that had been garnished pursuant to a garnishment order with a return date of August 17. The garnished wages were sent by creditor's counsel to the chapter 7 trustee on September 6.
The motion to vacate dismissal was granted by the court on October 4, 2000, and an order reinstating the case was entered on October 11. On October 5, notice was mailed of the rescheduled § 341 meeting of creditors, and the § 341 meeting was held on October 12. The trustee filed a timely objection to the homestead exemption on November 16, on the basis that debtors had not filed a timely homestead deed to perfect their claimed exemption.
The homestead exemption for the $2,900.00 in garnished wages was not included on schedule C for property claimed as exempt, filed by debtors on August 31, 2000. At hearing, debtors' counsel requested permission to amend the schedule pursuant to Federal Rules of Bankruptcy Procedure 1007 and 1009 and to reflect the property affected by the proposed homestead exemptions. The court granted leave to amend but stipulated that allowing amendment of the schedule would not affect the court's ultimate ruling on the issue of perfection of the homestead exemption.
F.R.Bankr.P. 1009(a) provides debtors with a general right to amend a schedule at any time before the case is closed provided that notice is given to the trustee and any other affected entities. The court may order an amendment to the schedules upon motion by the party in interest.
A review of the case file revealed that as of March 26, 2001, debtors still had not amended schedule C to include the $2,900.00 in garnished wages.
II. Positions of the Parties.
The issue in this case is whether debtors' homestead deed was timely filed. Before that question can be answered it must be determined whether the five-day period prescribed by the Virginia Code begins to run based on the date of the original § 341 meeting scheduled for September 15, 2000, or based on the rescheduled meeting held on October 12.
A. Trustee's Position.
The trustee asserts that the homestead deed filed on September 29, 2000, was untimely, citing Virginia Code § 34-17 which requires that the property be set apart on or before the fifth day after the date initially scheduled for the § 341 meeting but not thereafter.See VA. CODE ANN. § 34-17. The § 341 meeting was initially set for September 15, and therefore the deed filed on September 29 was filed after the five-day limit.
B. Debtors' Position.
Debtors assert that on August 29, 2000, when the case was dismissed, there was no longer a § 341 meeting set for September 15, and therefore, they could not have attended the meeting. There was no case-in-being after the case was dismissed, and they should not be bound by the September 15 date in filing their homestead deed. To support their argument, debtors cite Goldburg Co. v. Salyer, 50 S.E.2d 272 (Va. 1948) in which the court held that the homestead is remedial in nature and therefore must be liberally construed in favor of the debtors and strictly construed against the creditor. See id. at 582. Debtors contend that the five-day period should begin to run after the § 341 meeting was actually held on October 12, 2000.
III. Discussion.
The issue presented of timeliness of filing debtor's homestead deed in a dismissed and later reinstated chapter 7 case is one of first impression for this court. However, a review of relevant statutory and case law persuades the court that debtors' homestead deed was untimely filed.
After an extensive search of relevant case law, the court finds no bankruptcy cases in the Eastern District of Virginia or in the Fourth Circuit that specifically address this issue.
A. The Virginia Homestead Exemption.
Under 11 U.S.C. § 541, the filing of a bankruptcy petition creates an "estate" composed of all legal and equitable interests in property wherever located and by whomever held. Pursuant to § 552(b), debtors can exempt property from the bankruptcy estate. Generally, under § 522(b)(1), debtors may exempt property as designated under § 522(d), which provides for a standard federal exemption. However, under § 522(b)(1), states may "opt out" of the federal exemption provision in § 522(d), by replacing the federal exemptions allowed under § 552(d) with exemptions available through state or local law. It has long been held that by allowing states to specify bankruptcy exemptions, Congress permitted states to specify the substance and procedure by which exemptions were claimed. See In re Nguyen, 226 B.R. 547 (Bankr. E.D. Va. 1998), affd sub nom. Mayer v. Nguyen (In re Nguyen), 211 F.3d 105, 108 (4th Cir. 2000); Zimmerman v. Morgan (In re Morgan), 689 F.2d 471, 472 (4th Cir. 1982) (entitling debtor to exempt for bankruptcy purposes any property that is exempt under . . . state or local law) (internal quotations omitted). Here, Virginia has opted out of the federal provision and therefore does not authorize debtors to claim the § 522(d) exemption.
Under Virginia Code § 34-3.1, "[n]o individual may exempt from the property of the estate in any bankruptcy proceeding the property specified in subsection (d) of § 522 of the Bankruptcy Reform Act (Public Law 95-598), except as may otherwise be expressly permitted under this title." As a result, debtors in Virginia may claim only those exemptions defined by Virginia law, rather than standard federal exemptions as allowed by § 522(d). The statutory provision creating the Virginia homestead exemption permits Virginia debtors selectively to exempt real and personal property up to a specified value of $5,000.00. The Virginia homestead exemption is defined in Virginia Code § 34-4 and entitles debtors "to hold exempt from creditor process arising out of debt, real and personal property, or either, to be selected by the householder, including money and debts due the householder not to exceed $5,000 in value."
Householders are also entitled to the property or estate exemptions available in Virginia Code §§ 34-26, 34-27, 34-29, and 64.1-151.3. See VA. CODE ANN. § 34-4.
Virginia Code § 34-13 allows a householder to set apart personal property in lieu of or in addition to real property set aside under §§ 34-6, 34-26, 34-27, 34-29, and 64.1-151.3, not to exceed the total value, when added to any real estate set apart, that he or she is entitled to hold exempt under those sections. See In re Haynesworth, 145 B.R. 222, 223 (Bankr. E.D. Va. 1992). Other statutory provisions specify both the manner and time period within which debtors must set apart these exemptions in real and personal property.
Virginia Code § 34-14 details how personal property must be set apart in order to secure the benefits of the exemptions of personal property under §§ 34-4, 34-4.1, or 34-13. Section 34-14 reads in relevant part as follows:
Such personal estate selected by the householder . . . shall be set apart in a writing signed by him. He shall, in the writing, designate and describe with reasonable certainty the personal estate so selected and set apart and each parcel or article, affixing to each his cash valuation thereof. Such writing shall be admitted to record, to be recorded as deeds are recorded in the county or city wherein such householder resides.
In addition to these requirements detailing how the homestead exemption must be set apart, debtors must also comply with the time limits in the Virginia Code for claiming a homestead exemption. It is a longstanding premise that the state law, rather than federal law, provides the procedure for claiming Virginia exemptions. See Nguyen, 211 F.3d at 109; Morgan, 689 F.2d at 472;Haynesworth, 145 B.R. at 226 (holding that when calculating the five-day period, Virginia Code §§ 1-13.3 1-13.3:1 but not the Federal Rules of Bankruptcy Procedure should govern).
B. When Virginia Homestead Exemption Must be Set Apart.
Under Virginia Code § 34-17, the real or personal estate which a householder is entitled to hold as exempt may be set apart at any time before it is subjected to sale by creditor process. If creditor process does not require sale of the property, it must be set aside before it is turned over to the creditor. A different rule applies in bankruptcy cases. According to Virginia Code § 34-17, "[t]o claim an exemption in bankruptcy, a householder who (i) files a voluntary petition in bankruptcy . . . shall set such real or personal property aparton or before the fifth day after the date initially set for the meeting held pursuant to 11 U.S.C. § 341, but not thereafter." (emphasis added).
The Virginia Code contains two relevant sections with regard to computing the five-day period of Virginia Code § 34-17. See Haynesworth, 145 B.R. at 225. The first of those sections, Virginia Code § 1-13.3, excludes the day on which the event or judgment occurred. The Code provides that when a statute or rule of court requires notice to be given, or any other act to be done within a certain time after any event or judgment, that time shall be in addition to the day on which the event or judgment took place. See VA. CODE ANN. § 1-13.3 (Repl. Vol. 1996 Cum. Supp. 2000). The second section referring to computation of time, § 1-13.3:1, provides that:
When the last day fixed by statute, or by rule . . . for any act to be done in the course of judicial proceedings falls on a Saturday, Sunday, legal holiday, or any day on which the clerk's office is closed, as authorized by statute, the . . . act may be done on the next day that is not a Saturday, Sunday or legal holiday, or day on which the clerk's office is closed as authorized by statute.
Therefore, under Virginia Code §§ 1-13.3 13.3:1, the date of the § 341 meeting of creditors is not included in the five-day period and if the last day of the five-day period falls on a Saturday, Sunday, legal holiday, or any day that the clerk's office is closed, the homestead deed may be filed on the next day that is not a Saturday, Sunday legal holiday, or day that the clerk's office is closed. See Haynesworth, 145 B.R. at 225 .
IV. Conclusions of Law.
Debtors filed this chapter 7 case on August 10, 2000, at which point a § 341 meeting of creditors was scheduled for September 15. However, on August 29, before the § 341 meeting could be held, debtors' case was dismissed under the local rules due to a procedural deficiency. The case was later reinstated on October 11, and the § 341 meeting was held on October 12. Procedurally, when a case is dismissed, the § 341 meeting scheduled for that case is canceled. Debtors filed their homestead deed on September 29 during the period the case stood dismissed. The Virginia statute requires that exempt personal property must be set apart on or before the fifth day after the date initially set for the § 341 meeting. See VA. CODE ANN. § 34-17. If debtors fail to comply, they are not entitled to the exemption. See Nguyen, 211 F.3d at 110.
The court must decide whether the five-day period of § 34-17 should be based on the initial meeting scheduled for September 15 before the case was dismissed or on the date that the § 341 meeting was actually held, October 12. If the former is the date from which counting begins, debtors did not timely file the deed and are not entitled to the exemption. Alternatively, debtors are entitled to the exemption if the actual § 341 meeting is used.
Based on general rules of statutory construction, in deciding whether to begin counting from the meeting scheduled for September 15 or the meeting held on October 12, the court must examine the relevant statutes to determine whether the language is clear. See Dominion Bank. N.A. v. Osborne (In re Osborne), 165 B.R. 183 (W.D. Va. 1994). Debtors argue that there was no § 341 meeting to attend on September 15 and that therefore the five-day period should not begin on that day. However, the statutory language of § 34-17 does not require that the § 341 meeting actually be held before the five-day period begins; rather, § 34-17 requires that exempt property must be set apart "on or before the fifth day after the date initially set for the . . ." § 341 meeting. VA. CODE ANN. § 34-17 (emphasis added).
Although neither the statute nor Virginia case law provides any direct guidance on the meaning of "date initially set, " the court cannot interpret this language to mean the date that the meeting was actually held. Indeed, in Bryant v. Smith, 165 B.R. 176 (W.D. Va. 1994), the district court expressly rejected the argument that the Virginia General Assembly intended for debtors to have until five days after the meeting of creditors was actually held to claim their exemptions.See 165 B.R. at 179. There, the court noted that to read the statute as requiring that the meeting must actually be held before the five-day period begins, would be to "ignore entirely the `initially set' language and focus instead on the `held pursuant to 11 U.S.C. § 341' language of the statute." Id. The court found that when reading the statutory language as a whole, it becomes clear that the "held pursuant to" language simply describes the type of meeting upon which the five-day period is contingent and that the timing is instead based on the date that such meeting is initially set. See id. at 179 n. 2.
The court rejects debtors' argument that the actual § 341 meeting date applies simply because no meeting was held on September 15, 2000. Moreover, debtors' argument that they should not be bound by the date of the original § 341 meeting is flawed because once the court vacates dismissal and reinstates a case, the case resumes as though dismissal had never occurred. Accordingly, the September 15 meeting is the date from which the five-day period begins to run, and debtors should have filed their homestead deed on or before September 20, 2000.
Courts generally consider the homestead exemption as remedial in nature and liberally construe it for the benefit of debtors. Virginia law requires that debtors must comply strictly with statutory requirements to be afforded any exemptions. See Homeowner's Fin. Corp. v. Pennington (In re Pennington), 47 B.R. 322, 326 (Bankr. E.D. Va. 1985). Where debtors do not abide by Virginia prerequisites for filing a homestead deed, they are not entitled to the exemption. See Crossroads of Hillsville v. Pavne (In re Payne), 179 B.R. 486, 489 (W.D. Va. 1995), citing In re Emerson, 129 B.R. 82, 84 (Bankr. W.D. Va. 1991), aff'd, 962 F.2d 6 (4th Cir. 1992); In re Heater, 189 B.R. 629, 633 (Bankr. E.D. Va. 1995).
The five-day filing period is one of the strictly-construed procedural requirements. This court stated in In re Haynesworth that in addition to complying with the requirements governing how the property should be set aside, debtors "must comply with the Virginia Code in regard to the time limits for claiming a homestead exemption." 145 B.R. at 224. Legal precedent is unambiguous that timely filing is necessary to successfully claim a homestead exemption. See In re Freedlander, 93 B.R. 446, 448 (Bankr. E.D. Va. 1988).
The court in Haynesworth construed the computation of the five-day period so strictly as to include in counting intermediate Saturdays, Sundays and legal holidays. Thus, in that case, where the five-day period began on Thursday, July 4, even though it was a legal holiday and two of the other five days during the period were Saturday and Sunday, the deed should have been filed on Monday July 8, and debtors were late in filing on July 10. See 154 B.R. at 224.
Further comment is required here because the court recognizes that this ruling is rather technical and may even seem harsh to persons unfamiliar with bankruptcy practice in this district. The procedural posture of this case arises from Eastern District of Virginia local bankruptcy rule provisions that require automatic dismissal of cases where debtors fail to timely comply with various requirements. In addition to the local rule involved in this case, automatic dismissals are triggered by other local rules. See, e.g., LBR 1007-3(C) (dismissing case for failure to file statement of intention); LBR 2003-1(B) (dismissing case for failure to attend meeting of creditors); LBR 3015-2(C) (dismissing case for failure to file chapter 13 plan or amend plan following denial of confirmation).
As stated previously, when a case is dismissed under one of these local rules prior to the § 341 meeting, the meeting is canceled. This case illustrates the local practice that dismissal of a case under any of these rules may be overturned by the court upon appropriate motion. When the court vacates a dismissal and reinstates a case dismissed under the local rules, the case continues as though it had never been dismissed, and if the § 341 meeting has not been previously held, a new one is scheduled.
The practice in this district under these local rules is too well-known to question. Moreover, the court reinstates the overwhelming majority of chapter 7 and 13 cases automatically dismissed under these procedures. Primarily, it depends upon whether debtor wishes to continue with the case. The court's ruling here conforms to established local practice. While the ruling may confer a hardship in this particular case, it is my view that a ruling ignoring the homestead deed filing deadline plainly provided by Virginia Code § 34-17 would result in very undesirable procedural uncertainties and an unwelcomed disruption of a well-settled body of case law.
A separate order will be entered sustaining the objection and denying debtors' claimed homestead exemption.