In re Carpenter

• Decision Date: 27 October 2016
• Docket Number: BK No: 16-10150
• Citation: 559 B.R. 551
• Parties: In re: Richard F. Carpenter, Debtor
• Court: U.S. Bankruptcy Court — District of Rhode Island

559 B.R. 551

In re: Richard F. Carpenter, Debtor

BK No: 16-10150

United States Bankruptcy Court, D. Rhode Island.

Signed October 27, 2016

Charles A. Pisaturo, Jr., Law Offices of Charles A. Pisaturo Jr., Providence, RI, for Debtor.

DECISION AND ORDER ON DEBTOR'S MOTION TO AVOID JUDICIAL LIEN AND CREDITOR'S OBJECTION TO LIEN AVOIDANCE AND HOMESTEAD EXEMPTION

Diane Finkle, U.S. Bankruptcy Judge

This contested matter is one of first impression in this district as it involves application of the Rhode Island homestead exemption under R.I. Gen. Laws § 9-26-4.1 (“Homestead Exemption”) to the mixed-use residential/commercial property of the debtor Richard F. Carpenter located at 298 Montgomery Avenue, Cranston, Rhode Island (“Property”). Mr. Carpenter filed a motion to avoid the judicial lien held by Citizens Bank, N.A. (“Citizens Bank”)¹ (Doc. # 16, “Motion”) against the Property under 11 U.S.C. § 522(f)(1)(A),² Federal Rule of Bankruptcy Procedure 4003, and Rhode Island Local Bankruptcy Rule 4003-2. He asserts that the lien impairs his claimed Homestead Exemption. Citizens Bank objects to the lien avoidance (Doc. # 19, “Objection”), arguing that the Property does not qualify for the Homestead Exemption because its commercial use predominates over its residential use and, even if it applied, Mr. Carpenter's violations of Cranston's zoning ordinances by residing in portions of the Property not authorized for residential use precludes its application. Mr. Carpenter counters that the Homestead Exemption extends to the entirety of the Property because it is, and has been for many years, his sole residence and its predominant use is residential.

The Court held evidentiary hearings on June 20, 2016, and June 30, 2016, and the parties filed post-trial briefs (Doc. # 39, “Citizens Bank's Trial Brief,” and Doc. # 43, “Mr. Carpenter's Trial Brief”). The matter was taken under advisement on October 5, 2016. This decision constitutes the Court's findings of fact and conclusions of law in accordance with Bankruptcy Rules 7052(a), made applicable by Rule 9014(c). After consideration of the testimony and exhibits submitted at the hearing and the parties' arguments, the Court finds that Mr. Carpenter is entitled to the full exemption of $500,000 for the Property under the Homestead Exemption, and Citizens Bank's lien impairs that exemption and is avoidable in its entirety.

I. Jurisdiction and Venue

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and DRI LR Gen 109(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O).

II. Relevant Procedural History

Mr. Carpenter filed his voluntary petition under Chapter 7 of the Bankruptcy Code on January 28, 2016. Upon filing, he claimed the Property exempt under the Homestead Exemption for the full $500,000 amount available, and no formal objections were filed. On March 28, 2016, relying on Bankruptcy Code § 522(f)(1)(A), Mr. Carpenter filed the Motion now under consideration to avoid Citizens Bank's judgment lien against the Property in the approximate amount of $79,889. The Property is valued at $175,000 and is subject to no other encumbrances. On April 14, 2016, Citizens Bank filed its Objection, and Mr. Carpenter filed a memorandum of law responding to the Objection (Doc. # 23). Citizens Bank then filed its response (Doc. # 27).

III. Stipulated Facts

The parties have stipulated to the following pertinent facts (Doc. # 34, “Joint Pre-Trial”). Mr. Carpenter purchased the Property on May 1, 1986, with his then-wife. Since then he has operated his auto repair business, Columbus Services, Inc., from the Property.³ It is located within the City of Cranston's zoning district C-3, “intended primarily for the use of general business,” and described as “mixed-use garage commercial.” Mr. Carpenter began residing there after he separated from his wife between 2004 and 2005. They divorced in 2006, after which she transferred her interest in the Property to him. He applied to the City of Cranston Zoning Board of Review (“Zoning Board”) to convert a 24 foot by 26 foot portion of the Property for residential use, which request was approved on June 11, 2008, on the condition that the Property is owner occupied (“Variance”).

Mr. Carpenter made some improvements to the Property after the Variance was granted to enable him to live there and has continuously resided there as his sole residence since 2004 or 2005.⁴ These alterations consist of space that he uses as “a bedroom, kitchen area, small dining area, a den, a cooking area, two bathrooms, (including a shower stall), and a basement” area once used as an auto lube pit. Joint Pre-Trial, ¶ 20. Mr. Carpenter continues to use the two-bay garage and an office to conduct the auto repair business of Columbus Services. In total, the mixed-use structure consists of 1,952 square feet. The 2015 Cranston Tax Assessment identifies the commercial portion as 1,276 square feet and the residential portion as 676 square feet.⁵ These measurements do not include the basement area of approximately 396 square feet which is used for residential purposes.

IV. Applicable Law

A. Section 522(f) and the Burden of Proof

Section 522(f)(1) authorizes a debtor to avoid a judicial lien “to the extent that such a lien impairs an exemption to which the debtor would have been entitled” under federal or state law. See In re Derocha , 503 B.R. 553, 554 (Bankr. D.R.I. 2014) (quoting In re Kology , 499 B.R. 20, 40 (Bankr. D. Mass. 2013) ). Ordinarily, the debtor bears the burden of proof to establish that a lien is avoidable. See In re McNeilly , 249 B.R. 576, 579 (1st Cir. BAP 2000). However, when the grounds for an objection to lien avoidance rest upon a challenge to the debtor's claimed homestead exemption, Bankruptcy Rule 4003(c)⁶ shifts that burden to the creditor; in essence converting it to a timely objection to the claimed exemption if filed within the 30-day deadline prescribed under Rule 4003(b). See In re Betz , 273 B.R. 313, 320 (Bankr. D. Mass. 2002) (citations omitted).

Here, Citizens Bank filed its Objection challenging Mr. Carpenter's Homestead Exemption 13 days before the deadline for objections to exemptions expired. Therefore, it bears the burden to prove by a preponderance of the evidence “that the exemption is not properly claimed,” and if it produces “evidence to rebut the presumption of validity, then the burden of production shifts to [Mr. Carpenter] to come forward with unequivocal evidence to demonstrate that the exemption is properly claimed.” In re Stijakovich – Santilli , 542 B.R. 245, 254–55 (9th Cir. BAP 2015) (citations omitted). A debtor's entitlement to an exemption is to be determined as of the petition date. See In re Perry , 357 B.R. 175, 178 (1st Cir. BAP 2006).

B. The Rhode Island Homestead Exemption

Unlike in a number of other states, a debtor need not record a declaration of homestead to claim the Rhode Island Homestead Exemption; it applies automatically up to $500,000 “in the land and buildings ... by an owner of a home or an individual who rightfully possesses the premises ... and who occupies or intends to occupy the home as his or her principal residence.” R.I. Gen. Laws § 9-26-4.1(a) (2016). The statute extends to “a sole owner, lessee ... joint tenant, tenant by the entirety, or tenant in common ....” R.I. Gen. Laws § 9-26-4.1(b) (2016).⁷ For its application to a particular real estate parcel, it “creates two conditions precedent ... : (1) ownership or rightful possession; and (2) occupation of or intent to occupy the premises.” In re Tetreault , 11 A.3d 635, 639–40 (R.I. 2011).

Similar to other homestead exemption statutes, “The Homestead exemption is a longstanding precept of property law formulated to protect the family and the home from the reach of creditors.” In re Ryan , 282 B.R. 742, 749 (D.R.I. 2002) (citing 40 Am. Jur. 2d Homestead § 4 (1999) ). “The underlying policy of homestead exemptions is to ‘promote the stability and welfare of the state by securing to the householder a home, so that the homeowner and his or her heirs may live beyond the reach of financial misfortune ....’ ” In re Tetreault , 11 A.3d at 641 (quoting Public Health Trust of Dade Cty v. Lopez , 531 So.2d 946, 948 (Fla. 1988) ); see also In re DeMasi , 227 B.R. 586, 588 (D.R.I. 1998) (“[T]he obvious intent [of the Homestead Exemption is] to protect a debtor's family home.”). It must be construed “liberally in favor of debtors.” In re Tetreault , 11 A.3d at 641 (citations omitted); see also In re Perry , 357 B.R. at 180 (“Generally, federal courts must construe all exemption statutes liberally, in the debtor's favor ‘to reflect their remedial purposes.’ ”) (citing Caron v. Framington Nat'l Bank (In re Caron) , 82 F.3d 7, 10 (1st Cir. 1996) ).

V. Analysis

A. Scope of the Homestead Exemption

Resolution of this contested matter hinges on whether Mr. Carpenter can invoke the Homestead Exemption for his Property in which he both resides and conducts a commercial enterprise. It is a question that has not been addressed by the Rhode Island Supreme Court (or for that matter the lower state courts). Citizens Bank contends that Mr. Carpenter is not entitled to do so because the statute does not contemplate a commercial structure as a “home,” citing to case law from other jurisdictions for support. This argument is not supported by the statute and undermines the legislative intent and purposes of the Rhode Island exemption.

In the first instance, the Court must look to the language of the Homestead Exemption statute itself. “When a debtor has claimed a homestead exemption under state law, his entitlement to the exemption must be determined by examining the applicable state law, rather than relying upon decisions from other jurisdictions.” In re Shell , 295 B.R. 129, 131 (Bankr. D. Alaska 2003) (citing In re Brizida , 276 B.R. 316, 322 (Bankr. D. Mass. 2002) ). This Court, in the absence of a definitive Rhode Island Supreme Court ruling...