Monday, March 14, 2016

Bankruptcy Appeals Court: Massachusetts Homestead Exemption Insulates Three Vacant Lots Against Creditor's Forced Sale Where Parcels Are Contiguous & Used In Connection With Homeowner's Primary Residence As Of Declaration Filing Date

From a client alert from the law firm Nutter McClennen & Fish LLP:
  • [T]he chapter 7 bankruptcy case of In re: Nealon involved a bankruptcy filing by an individual who worked as a contractor (the "Debtor"). Prior to the bankruptcy case, a former customer of the Debtor succeeded in obtaining an arbitration award against the Debtor arising out of an extensive residential real estate remodeling project that ended poorly.

    In 2014, the Debtor filed for bankruptcy protection, listing among his assets real estate with a value of $420,000 secured by a mortgage in the amount of $307,192. In his filing, the Debtor claimed an exemption in the property pursuant to the Massachusetts homestead law. The Debtor also listed the former customer as an unsecured creditor with a claim based on the arbitration award of nearly $300,000.

    The former customer objected to the claimed homestead exemption. The bankruptcy court sustained the objection after concluding that the exemption extended only to the one specific parcel on which the Debtor's residence was situated, and not to three adjacent parcels that the Debtor had sought to subdivide in the past.

    As a result of the bankruptcy court decision, the adjacent parcels were not protected by the homestead exemption and, without protection, the parcels were at risk of being sold to satisfy creditor claims.

    Before any sale occurred, however, the Debtor appealed, arguing that the bankruptcy court applied the wrong standard by erroneously focusing on the Debtor's original intent to subdivide the property rather than his family's actual use of all of the property at the time of the declaration of homestead.

    The BAP [ie. Bankruptcy Appellate Panel] sided with the Debtor, concluding that the critical issue was the Debtor's usage and not any intent to retain or convey away the property.(1)

    Although the Debtor won before the BAP, the fight may not be over. The customer has the right to seek further appellate review before the United States Court of Appeal for the First Circuit. As of this writing, no such appeal has been filed, but the time to do so has not yet expired.

For the court ruling, see In re Nealon, BAP No. MW 15-035, Bankruptcy Case No. 14-40719-HJB (B.A.P. 1st Cir. January 20, 2016).
(1) From the court ruling:
  • The Nealons testified about the various uses that the family made of the vacant lots surrounding their home both before and after the filing of the Declaration of Homestead, including sledding, snowshoeing, cross country skiing, hiking, snowboarding, riding off-road vehicles, storing boats during the winter, and gathering lumber, firewood, and holiday greens.

    He also introduced photographs depicting his family's use of the vacant lots for such activities. Ms. Matthews did not produce any evidence to counter the Nealons' testimony and documentary evidence regarding their use of the vacant lots and, therefore, it is unrefuted.

    The bankruptcy court acknowledged the Nealons' various activities, but found that "there is no reason why those activities should not have happened regardless of what the party's intention was ultimately with respect to the property. The property had not yet been sold and these various activities are neither consistent nor inconsistent with any intention to retain the property."

    Based on cases such as Edwards, Fiffy, and Kology, however, these are precisely the kinds of activities that establish a debtor's use and occupancy of surrounding land in connection with a principal residence for purposes of the Massachusetts homestead statute.

    Whatever his intentions were through late 2011, Mr. Nealon produced evidence that, as of the date of the declaration in December 2013, he used and occupied the entire Property in connection with his principal residence. As such, the bankruptcy court erred in disregarding evidence of the Nealons' use of the Property, and in determining that Mr. Nealon's homestead exemption did not include Lots 2A, 2C and 2D.

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