In re Aroesty

• Decision Date: 10 April 2008
• Docket Number: BAP No. MB 07-048.,BAP No. MB 07-049.,Bankruptcy No. 06-14993-JNF.
• Parties: Hannah B. AROESTY, Debtor. Hannah B. Aroesty, Appellant, v. Carolyn Bankowski, Chapter 13 Trustee, and Francis Sullivan, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, First Circuit

Page 1

385 B.R. 1

Hannah B. AROESTY, Debtor Hannah B. Aroesty, Appellant, v. Carolyn Bankowski, Chapter 13 Trustee, and Francis Sullivan, Appellees.

BAP No. MB 07-048.

BAP No. MB 07-049.

Bankruptcy No. 06-14993-JNF.

United States Bankruptcy Appellate Panel of the First Circuit.

April 10, 2008.

Herbert Weinberg, Esq., on brief for Appellant.

Carolyn A. Bankowski, on brief for Appellee Bankowski.

Before VAUGHN, CARLO, and KORNREICH, United States Bankruptcy Appellate Panel Judges.

VAUGHN, Bankruptcy Judge.

Hannah B. Aroesty (the "Debtor") appeals from the bankruptcy court's order sustaining objections by Francis Sullivan and Carolyn A. Bankowski, Chapter 13 Trustee (the "Trustee"), to the Debtor's claim of homestead exemption to the extent the exemption exceeds $125,000. Francis Sullivan and the Trustee do not dispute the validity of the Debtor's homestead exemption, but seek to impose the $125,000 limitation set forth in § 522(p)(1) of the Bankruptcy Code.¹ The issue presented here is whether legal title in real property transferred by a nominee trust to the Debtor within 1,215 days of her petition date, is an interest acquired by the Debtor, triggering the limitation under § 522(p)(1). For the reasons set forth below, the Panel affirms the decision of the bankruptcy court.

BACKGROUND

The facts are undisputed. The Debtor has owned and resided at the subject property located in Newton, Massachusetts (the "Property"), since 1985. The Debtor became the sole owner of the Property on December 1, 1999, when her ex-husband conveyed his interest in the Property to her as part of their divorce settlement. On October 6, 2000, the Debtor conveyed the Property to her parents as trustees of a nominee trust (the "Trust"). The Debtor was the sole beneficiary of the Trust. On December 19, 2006, three transactions occurred: the Debtor recorded a declaration of homestead as the beneficiary of the Trust, the Trust conveyed the Property to the Debtor, and the Debtor recorded a second declaration of homestead as the title owner of the Property. The deed making this conveyance was recorded.

Shortly thereafter, on December 27, 2006, the Debtor filed a voluntary Chapter 13 petition. In her schedules, the Debtor lists the Property value as $1,064,512 and total liens of $658,000, leaving a net equity of $406,512 in the Property. The Debtor then claimed the full $500,000 homestead exemption in the Property under Massachusetts state law. See Mass. Gen. Laws, ch. 188, § 1; 11 U.S.C. § 522(b) (permitting debtors to elect exemptions under the Bankruptcy Code or under applicable nonbankruptcy law). Francis Sullivan and the Trustee filed separate objections to the Debtor's claimed homestead exemption under § 522(p)(1). On June 7, 2007, the bankruptcy court held a hearing on the matter and sustained the objections, denying the Debtor's claimed exemption amount to the extent it exceeded $125,000. This appeal followed.²

JURISDICTION

A bankruptcy appellate panel is duty-bound to determine its jurisdiction before proceeding to the merits even if not raised by the litigants. See In re George E. Bumpus, Jr. Constr. Co., 226 B.R. 724 (1st Cir. BAP 1998). A bankruptcy appellate panel may hear appeals from "final judgments, orders and decrees [pursuant to 28 U.S.C. § 158(a)(1)] or with leave of the court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3)]." Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). "A decision is final if it `ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'" Id. at 646 (citations omitted). "An order granting or denying a claimed exemption is a final, appealable order." Khan v. Bankowski (In re Khan), 375 B.R. 5, 8 (1st Cir. BAP 2007); Howe v. Richardson (In re Howe), 232 B.R. 534, 535 (1st Cir. BAP 1999), aff'd, 193 F.3d 60 (1st Cir.1999).

STANDARD OF REVIEW

The Panel generally applies the clearly erroneous `standard to findings of fact and de novo review to conclusions of law. See T.I. Fed. Credit Union v. Del-Bonis, 72 F.3d 921, 928 (1st Cir.1995); Western Auto Supply Co. v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F.3d 714, 719 n. 8 (1st Cir.1994). There are no disputed facts involved in the bankruptcy court's decision, and the Panel's review of the order denying the claimed exemption is de novo.

DISCUSSION

Chapter 188 of the Massachusetts General Laws provides:

An estate of homestead to the extent of $500,000 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[.]

Mass. Gen. Laws. ch. 188, § 1. An estate of homestead is "free from attachment or levy on execution by creditors up to the amount allowed by law." Assistant Recorder of N. Registry Dist. of Bristol County v. Spinelli, 38 Mass.App.Ct. 655, 651 N.E.2d 411, 411 n. 2 (1995). "To acquire an estate of homestead in real property, the fact that it is designed to be held as such shall be set forth in the deed of conveyance by which the property is acquired; or, after the title has been acquired, such design may be declared by a writing duly signed, sealed and acknowledged and recorded in the registry of deeds for the county or district in which the property is situated."³ Mass. Gen. Laws. ch. 188, § 2. "Accordingly, under the explicit requirements of the Massachusetts law statute, the owner of property does not have the right to claim a homestead exemption until the declaration is recorded." In re Perry, 357 B.R. 175, 178 (1st Cir. BAP 2006); see Houghton v. Szwyd (In re Szwyd), 370 B.R. 882, 886 (1st Cir. BAP 2007) (providing that a homestead exemption in Massachusetts does not arise automatically as a matter of law but is an "estate in land" that requires a writing to acquire and terminate).

Section 522(p)(1) of the Bankruptcy Code in relevant part provides:

... a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate [$125,000] ... in value in —

(A) real or personal property that the debtor or a dependent of the debtor uses as a residence[.]

11 U.S.C. § 522(p)(1)(A). Thus, a homestead exemption permitted under state law is subject to the limitation under § 522(p)(1) when three elements exist: (i) an interest in property (ii) is acquired by the debtor (iii) within 1,215 days of the petition filing date. Id. The objecting party has the burden of proving that the debtor is not entitled to the claimed exemption. Fed. R. Bankr.P. 4003(c).

I. Debtor's Beneficial Interest and Homestead Exemption Argument

The Debtor argues that § 522(p)(1) does not apply to her case. The Debtor's position is that an individual may file a declaration of homestead in real property held in trust. The Debtor argues that her beneficial interest in the Property was a legally cognizable interest that she protected by recording her first declaration of homestead. She avers that this protection preserved her right to claim the full $500,000 homestead exemption under Massachusetts law. In support, the Debtor argues that the Massachusetts case of Spinelli is not controlling. The Spinelli court, an intermediate appellate court, held that an individual must have both a beneficial and legal interest in the subject property to be considered an "owner" to claim a homestead exemption.⁴ 38 Mass.App.Ct. at 658-59, 651 N.E.2d 411; see In re Bowers, 222 B.R. 191, 193 n. 3 (Bankr.D.Mass.1998) (citing to Spinelli in noting that a debtor generally may not claim a homestead exemption in trust property); but see Khan, 375 B.R. at 12 (finding that Spinelli is not controlling law in Massachusetts because it was decided by an intermediate appellate court, and the Supreme Judicial Court overruled the strict construction applied in Spinelli in Dwyer v. Cempellin, 424 Mass. 26, 673 N.E.2d 863, 867 (1996)).

A. Merger Theory

First, the Panel notes that there is precedent establishing a debtor's right to claim a homestead exemption in real property held by a trust under a merger theory. See Szwyd, 370 B.R. 882; Khan, 375 B.R. at 9. "[I]n a nominee trust, the legal title of the trustee and the equitable title of the beneficiary merge when the same person hold both titles." Khan, 375 B.R. at 9. As such, when the debtor is the sole trustee and sole beneficiary, the nominee trust ceases to exist, and the debtor is eligible for the Massachusetts homestead exemption as the "owner" of the trust property. Szwyd, 370 B.R. at 890-91. In the instant case, the Debtor was only the beneficiary, and third parties served as the trustees of the Trust. Thus, there was no merger of legal and equitable titles in the Debtor allowing her to claim a homestead exemption under this theory.

B. Spinelli Issue

Next, turning to the Debtor's argument regarding Spinelli the Debtor argues Spinelli is not controlling and a debtor may claim a homestead exemption in trust property. The Trustee alerts the Panel that this issue is a red herring because she objects to the amount of the homestead exemption, not on the basis that the Debtor cannot claim an exemption in trust property. Nonetheless, the Trustee argues that even if the Debtor created an estate of homestead in the Property while it was held in the Trust, that estate of homestead was terminated by the second declaration of homestead she subsequently recorded as the title owner.

For the following reasons, the Panel agrees with the Trustee that it need not consider Spinelli in deciding this appeal. "Mass. Gen. Laws ch. 188 provides three methods for terminating an estate of...