Which Exemption Laws Apply in a Chapter 7 Where the Debtor Moved to Michigan from Florida Before Filing? (Part 2 of 3)

Recall in Part 1 of our Chapter 7 Bankruptcy blog series that “Joe” is a former Florida resident who filed chapter 7 after he moved to Michigan. Under the bankruptcy code, Florida was considered to be his domicile because he lived in Florida for the 180-day period preceding the 730-day period preceding the filing of his case. The bankruptcy Code requires Joe to use the Florida exemptions, but the Florida exemptions are widely held to be available only to Florida residents. Joe may be domiciled in Florida for bankruptcy exemption purposes, but he is no longer a Florida resident. So, an argument can be made that Joe cannot use the Florida exemptions. It can alternatively be argued that, if Joe is permitted to use the Florida exemptions, the Florida exemptions do not have extraterritorial application to property located outside its borders.

His main assets are as follows:

• Florida entireties bank account
• Michigan residence (entireties)
• Household goods, artwork, jewelry, retirement accounts, clothing and family pictures (now all located in Michigan)

The debtor has chosen the exemptions under 11 U.S.C. § 522(b)(3) which permits him to claim the following assets exempt:

                § 522(b)(3)(A)-  those exemptions available under the law of his domicile state (Florida);

                § 522(b)(3)(B)- Property held as tenants by the entireties if exempt under applicable non-bankruptcy law; and,

                § 522(b)(3)(C)- Tax exempt retirement funds.

The Detroit bankruptcy court in this case must look to Michigan choice of law rules.    “Federal courts are bound by the choice of law rules of the forum state.”  In re Nelms, No. 04-53521, 2005 Bankr. LEXIS 138 (Bankr. E.D. Mich. Feb. 2, 2005). 

Let’s start with the Florida entireties bank account. Is it exempt under applicable non-bankruptcy law? Which state’s law is applicable? If Michigan law applies to the bank account it would not be exempt because Michigan does not recognize tenancy by the entireties for bank accounts. Some courts have found that bank accounts are not governed by the law of their situs (where the account was opened) because technology has made it so that a bank account is readily accessible almost anywhere. There are a couple of ways that it seems clear that Florida law should apply in this case. The US Supreme Court has held that “property interests are created and defined by state law.  Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”  Butner v. United States, 440 U.S. 48, 54-55, 59 L. Ed. 2d 136, 99 S. Ct. 914 (1979).  “Since property law in general and the law of co-tenancies in particular are creatures of state law, the ‘applicable nonbankruptcy law’ is the applicable … law of tenancy by the entirety.”); In re Furkes, 65 B.R. at 234 (debtor’s tenant by the entirety interest in real estate subjected to “state law scrutiny,” heeding Butner); In re Cerreta, 116 B.R. 402, 404, 406 (Bankr. D. Vt. 1990) (“the laws regarding tenants by the entireties are products of State Law.”).  Those concepts seem to point to the fact that the property interest in the Florida bank account and the rights that go along with it were created under Florida law and should be governed by Florida law.

Michigan law also seems to support the application of Florida law. The rule in Michigan is that “the situs of intangible assets is the domicile of the owner unless fixed by some positive law.”  In re Rapoport’s Estate, 317 Mich. 291, 26 N.W.2d 777 (1947). The debtor’s domicile here is Florida under the fiction used for purposes of state law exemptions under § 522(b)(3)(A). Under § 522(b)(3)(B) above, however, the debtor’s domicile is not what the court looks at, but rather “applicable nonbankrutpcy law.” Whether for this purpose you consider the debtor’s domicile to be Florida or Michigan, there is “positive law” dictating which state’s law should apply.  Florida has a specific statute on this issue.  Fla. Statute § 655.55 provides:

(1) The law of this state… governs all aspects, including without limitation the validity and effect, of any deposit account in a branch or office in this state of a deposit or lending institution…regardless of any provision of any law of the jurisdiction of the residence, location, or domicile of such other party, whether or not such deposit account bears any other relation to this state.”

Florida by statute protects bank accounts held as entireties property. Fla. Stat. § 655.79 states that:

(1) “Any deposit or account made in the name of two persons who are husband and wife shall be considered a tenancy by the entirety unless otherwise specified in writing.

(2) The presumption created in this section may be overcome only by proof of fraud or undue influence or clear and convincing proof of a contrary intent.”

It is my position in our case that Joe’s Florida entireties bank account is exempt under 11 U.S.C.  § 522(b)(3)(B) because Florida law is the governing applicable nonbankruptcy law.

Michigan conflicts rules regarding real estate follow the concept of lex loci rei sitae.  “Rights and remedies of property are governed by laws of the state in which it is situate.”  U.S. Truck Co. v. Pennsylvania Surety Corp., 259 Mich. 422, 243 N.W. 311, 312 (Mich. 1932). Therefore, Michigan law is the applicable non-bankruptcy law regarding the Michigan real estate. In Joe’s case the Michigan property is entireties property because it is held by husband and wife. The property is protected from liquidation by the chapter 7 trustee because Joe has no unsecured debts for which he and his wife are jointly liable.

In Part 3 of our blog series, we will be discussing an analysis of the exemption of the personal property.