In re Hess

• Decision Date: 27 March 2020
• Docket Number: No. 19-11925-ta7,19-11925-ta7
• Citation: 618 B.R. 13
• Parties: IN RE: Timothy W. HESS, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

618 B.R. 13

IN RE: Timothy W. HESS, Debtor.

No. 19-11925-ta7

United States Bankruptcy Court, D. New Mexico.

Signed March 27, 2020

James Clay Hume, Hume Law Firm, Alameda, NM, Albert W. Schimmel, III, Schimmel Law Office, Albuquerque, NM, for Debtor.

James A. Askew, Benjamin A. Jacobs, Daniel A. White, Askew & White, LLC, Edward Alexander Mazel, Mazel Law, LLC, Jacqueline Ortiz, Office of the New Mexico Attorney General, Albuquerque, NM, for Trustee.

OPINION

David T. Thuma, United States Bankruptcy Judge

On February 3, 2020, the Court held a final hearing on the chapter 7 trustee's objection to Debtor's homestead exemption. The basis for the objection is that Debtor does not own the house he seeks to exempt. Debtor responded that he leases the house, pays the mortgage, pays for upkeep, and owns the limited liability company that owns the house. Based on the evidence taken at the final hearing and being otherwise sufficiently advised, the Court concludes that the trustee's objection is meritorious and should be sustained.

I. FACTS

The Court finds:¹

In 2009, Debtor bought a house at 13445 Panorama Loop NE, Albuquerque, New Mexico 87123. He has lived there since.

Although Debtor bought the house in his own name, a few months later he conveyed it to BHA's Property 13445 LLC, a New Mexico limited liability company ("BHA 13445").² Debtor is the only member of BHA 13445. He testified that he conveyed the house to a limited liability company for tax purposes.

In the past Debtor has owned investment properties. Apparently for the purpose of limiting potential liability, he conveyed the properties to limited liability companies he owned.³ Debtor also transferred his IRA to a limited liability company (Snowgoose LLC); he owns a limited liability company whose sole asset is a small utility trailer (Fargo Enterprises LLC); and he owns another limited liability company whose only asset is a bank account of unknown value (Braveheart Assets LLC). Finally, Debtor owns a corporation whose only asset is a checking account of unknown value (Guard Bird Inc.).

BHA 13445 conveyed the house back to Debtor in 2016 because he wanted to refinance the mortgage. The refinanced note and mortgage are in the name of Debtor, not BHA 13445. Debtor reconveyed the house to BHA 13445 in July 2018.

The Debtor filed this case on August 21, 2019. Debtor filed his bankruptcy schedules and statement of financial affairs on the petition date. On Debtor's Schedule A/B, Debtor checked that he did not "own or have any legal or equitable interest in any residence, building, land, or similar property." However, Debtor listed a 100% ownership interest in BHA 13445, along with the following other entities:

BHA Property 503 LLC;⁴

Braveheart Assets LLC;⁵

BHAs Property 566 LLC;⁶

Fargo Enterprises LLC;

Snowgoose LLC;⁷ and

Guard Bird Inc.

Of Debtor's total assets of $165,536.51, $5,957 (3.6%) is owned personally and $159,579.51 (96.4%) is owned by the scheduled limited liability companies and corporation.

Debtor stated that BHA 13445 "owns Debtor's principal residence at 13445 Panorama [Loop] NE, Albuquerque, NM 87123. Value of residence is $119,000. Balance due on mortgage to Chase is $77,869. House need[s] new roof and stucco."

On Debtor's Schedule C, he claimed an exemption of $53,452⁸ in the house under New Mexico's homestead exemption, N.M.S.A. § 42-10-9.

Debtor did not disclose any executory contracts or unexpired leases on his Schedule G.

On October 1, 2019, the chapter 7 trustee objected to Debtor's claimed homestead exemption, arguing that Debtor could not claim the exemption because he did not own the house. Debtor responded on October 22, 2019:

Debtor is and has always been the sole member and managing member of the LLC [BHA 13445] since its formation.

At the time of the conveyance to the LLC, the subject property was and remains encumbered by a mortgage to JPMorgan Chase Bank. Debtor was and remains solely obligated to pay the note to JPMorgan Chase Bank secured by the subject property.

Since the time of its original acquisition by the Debtor and the conveyance of the property to the LLC, Debtor has continuously occupied dwelling on the subject property.

Since the conveyance of the property to the LLC, Debtor has individually paid each and every monthly mortgage payment, all the real estate taxes, kept the subject property insured, and has maintained the subject property in exchange for his right to occupy the dwelling on subject property owned by the LLC. Debtor maintains that this agreement is a lease and entitles him to claim the subject property as exempt from trustees in insolvency proceedings under the provisions of the New Mexico Homestead Exemption law quoted above.

The Court held a final hearing on the trustee's objection on February 3, 2020. Debtor was the only witness. Debtor was credible and straightforward in his testimony. Debtor testified that his lease of the house was an oral month-to-month lease.⁹

II. DISCUSSION

A. Is the House Property of the Estate?

11 U.S.C. § 541 lists the assets that become estate property when a petition is filed. It states in part:

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case....

On the petition date, the house was wholly owned by BHA 13445, and BHA 13445 was wholly owned by Debtor. Thus, while Debtor's BHA 13445 membership interest clearly became estate property, the house did not. See, e.g. , Fowler v. Shadel , 400 F.3d 1016, 1019 (7th Cir. 2005) ("The corporate assets of [individual debtor's corporation] Inc. are not property of the debtor and therefore cannot become property of Fowler's bankruptcy estate. Hence, the question of an exemption does not arise"); In re Ealy , 307 B.R. 653, 657 n.1 (Bankr. E.D. Ark. 2004) ("corporate assets are generally not property of an individual debtor's bankruptcy estate"); In re Rodio , 257 B.R. 699 (Bankr. D. Conn. 2001) (property of LLC in which Debtor is a member is not property of Debtor's estate); Manson v. Friedberg , 2013 WL 2896971, at *3 (S.D.N.Y. June 13, 2013) (same); In re Strak , 2018 WL 6566622, at *2 (Bankr. D.N.J. Dec. 11, 2018) ; In re Dieffenbacher , 556 B.R. 79, 85 (Bankr. E.D.N.Y. 2016). The only asset in the estate directly related to the house is Debtor's interest as the tenant under the oral month-to-month lease.

B. The New Mexico Homestead Exemption.

If property is part of their bankruptcy estate, New Mexico debtors may elect to claim either state or federal exemptions to exempt some of that property. See 11 U.S.C. § 522(b)(2).¹⁰ Debtor elected to use the New Mexico exemptions, N.M.S.A. § 42-10-1 et seq. These include New Mexico's homestead exemption:

Each person shall have exempt a homestead in a dwelling house and land occupied by the person or in a dwelling house occupied by the person although the dwelling is on land owned by another, provided that the dwelling is owned, leased or being purchased by the person claiming the exemption. Such a person has a homestead of sixty thousand dollars ($60,000) exempt from attachment, execution or foreclosure by a judgment creditor and from any proceeding of receivers or trustees in insolvency proceedings and from executors or administrators in probate. If the homestead is owned jointly by two persons, each joint owner is entitled to an exemption of sixty thousand dollars ($60,000).

N.M.S.A. § 42-10-9.

New Mexican exemption statutes are to be construed liberally in favor of debtors. In re Carlson , 303 B.R. 478, 482 (10th Cir. BAP 2004) ("to effect their humanitarian purposes exemption laws must be liberally construed in favor of the claimant of an exemption"); In re Holley , 2019 WL 4307565, at *3 (Bankr. D.N.M. Sept. 9, 2019) ; In re Johnson , 593 B.R. 331, 338 (Bankr. D.N.M. 2018) ; In re Bushey , 559 B.R. 766, 774 (Bankr. D.N.M. 2016).

C. What Estate Property Can be Exempt under the New Mexico Homestead Exemption?

As shown above, the house is not property of the estate. Debtor lives in the house, however, under a claimed oral month-to-month lease.¹¹ Debtor urges that his leasehold interest is enough to allow him to exempt the house.

There is no New Mexico case law interpreting the portion of the New Mexico homestead exemption statute relating to a dwelling house a person occupies that is "leased or being purchased by the person claiming the exemption."

In re Cohen , 2012 WL 400719, at *3 (Bankr. D.N.M. Feb. 7, 2012). It is clear, however, that debtors may not exempt property that is not in the estate. In Owen v. Owen , 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991) the Supreme Court stated:

No property can be exempted (and thereby immunized), however, unless it first falls within the bankruptcy estate. Section 522(b) provides that the debtor may exempt certain property "from property of the estate"; obviously, then, an interest that is not possessed by the estate cannot be exempted.

500 U.S. at 308, 111 S.Ct. 1833 (emphasis in original); see also In re Rogers , 513 F.3d 212, 225 (5th Cir. 2008) ("it is a well-recognized principle of law that one's homestead right in property can never rise any higher than the right, title, or interest that he owns in the property attempted to be impressed with a homestead right") (emphasis in original); In re Casserino , 290 B.R. 735, 740 (9th Cir. BAP 2003) ("an owner of a possessory interest in leased property in which he resides may claim a homestead exemption to the extent of that interest"); Cohen , 2012 WL 400719, at *4 ("the amount of a debtor's homestead exemption is necessarily limited to the value of the estate the debtor holds in the property at issue").

Here, Debtor's estate includes the tenant's interest in an oral month-to-month lease of the house. Debtor may claim the...