In re Mbazira
| Docket Number | 13-16586-CJP |
| Decision Date | 24 August 2022 |
| Parties | In re: SAFINA N. MBAZIRA, Debtor |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
In the matter before the Court, chapter 7 trustee John Desmond (the "Trustee") objects [Dkt. No. 222] (the "Objection") to the Massachusetts homestead exemption claimed by debtor Safina Mbazira (the "Debtor") on three grounds: (i) that the funds in issue are the proceeds of a mortgage on the homestead property that was avoided and preserved for the benefit of the estate and, as such, cannot be claimed as exempt; (ii) that even if the proceeds could be claimed as exempt under the Massachusetts homestead statute, the Debtor would be barred from claiming them as exempt by 11 U.S.C. § 522(g)[1]; and (iii) that the Debtor having passed away during the pendency of this case, she is no longer entitled to the homestead exemption under Massachusetts law. The Debtor's interest in the claim of exemption is now held by her probate estate, which is represented by her son Ismael Rajab ("Rajab"), as its Probate Court-appointed personal representative. Rajab asks that the Objection be overruled. For the reasons set forth below, the Court will disallow the exemption.
On November 12, 2013, the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. At the time, she owned a three-family home at 977 Trapelo Road, Waltham, Massachusetts (the "Property"), subject to two mortgages that the Debtor had given.
The first is a mortgage given by the Debtor to Mortgage Electronic Registration Systems ("MERS") as nominee for Fremont Investment and Loan on July 25, 2005, securing a promissory note of the same date in the principal amount of $528,000 (the "First Mortgage"). The present holder of that mortgage, by assignment, is U.S. Bank N.A., as Trustee relating to J.P. Morgan Mortgage Acquisition Corp. 2005-FRE1 Asset Backed Pass-Through Certificates, Series 2005-FRE1 ("U.S. Bank"). On the basis of this mortgage, U.S. Bank filed a secured proof of claim in the amount of $931,359.17. The second mortgage, like the first, is a mortgage given by the Debtor to MERS as nominee for Fremont Investment and Loan on July 25, 2005, securing a promissory note of the same date in the principal amount of $132,000 (the "Second Mortgage"). The present holder of this mortgage is unclear.[2]
In her bankruptcy case, the Debtor claimed the Property as exempt under Mass. Gen. Laws ch. 188, § 3, in the amount of $500,000. Also, through an adversary proceeding in the case, the Debtor, then a debtor-in-possession under chapter 11, sought and, on March 31, 2015, obtained a judgment that avoided the First Mortgage under §§ 544(a)(3) and 550(a) and preserved the avoided lien for the benefit of the estate under § 551.[3] The judgment was affirmed on appeal first by the District Court and ultimately by the Court of Appeals for the First Circuit (the "First Circuit"). See U.S. Bank, N.A. v. Desmond (In re Mbazira), 15 F.4th 106 (1st Cir. 2021).
On May 15, 2018, while the judgment remained on appeal, the Debtor died. On April 23, 2019, upon consideration of a motion to dismiss the case filed by the U.S. Trustee and a motion to appoint a chapter 11 trustee filed by U.S. Bank, the Court ordered the appointment of a chapter 11 trustee, and the Trustee was appointed. As chapter 11 trustee, the Trustee moved to intervene and be substituted as appellee in the appeal then pending at the First Circuit, and that motion was granted. While the appeal remained pending, the Court, on June 12, 2019, converted the case to one under chapter 7 on the unopposed motion of the chapter 11 trustee, and the Trustee was appointed chapter 7 trustee.
On the Trustee's motion after conversion of the case to chapter 7, the Court approved his sale of the Property for $715,629.00, which amount was less than the amount due under the avoided and preserved First Mortgage. Pursuant to § 363(f), the sale order declared that the sale would be free and clear of all existing liens, claims, encumbrances, and interests, with any such liens, claims, encumbrances, and interests attaching instead to the net proceeds of the sale. The sale closed on August 16, 2019. In a limited objection he filed to the sale motion, which objection the Court overruled, Rajab asserted that, he would be entitled to payment of the Debtor's homestead exemption from the sale proceeds if the First Circuit affirmed the avoidance of the First Mortgage.
After the closing, the Trustee filed the Objection. Rajab, as the personal representative of the probate estate, responded to the Objection and argued that it should be overruled.[4] At a preliminary hearing on the Objection, the Court merely continued the matter until the then-pending appeal from the judgment avoiding the First Mortgage was resolved. Upon completion of the appellate process, the Court held a second hearing at which it heard the party's arguments, arranged for the filing of further briefs, and took the matter under advisement.
The Court has jurisdiction over objections to a debtor's claims of exemption, which arise under the Bankruptcy Code and in bankruptcy cases, pursuant to 28 U.S.C. §§ 157(a) () and 1334(b) (). An objection to a claim of exemption is a core proceeding. See 28 U.S.C. § 157(b)(2)(B). Accordingly, I have authority to enter a final order with respect to the Objection.
A party objecting to a claim of exemption bears the burden of proving that the objection is not properly claimed. Fed.R.Bankr.P. 4003(c). The operative facts here are matters of record in this case and uncontroverted. The Trustee has articulated essentially three objections to the claim of exemption.
i. Arguments of the Parties
The Trustee argues that the Debtor is not eligible for the homestead exemption she claimed because she has passed away and there exists no person for whose benefit it might continue-no surviving spouse, former spouse, or minor children who occupy or intend to occupy the home as their principal residence-and, under Massachusetts law, eligibility for an estate of homestead continues after the death of the declarant only for such beneficiaries. There being none, the Trustee reasons, the estate of homestead, and the Debtor's eligibility to claim the property as exempt, terminated upon her death. The Trustee acknowledges that in a bankruptcy case, a debtor's eligibility for an exemption is generally fixed and determined as of the petition date, and that the Debtor passed away years after the commencement of her case. Relying on In re Williams, 515 B.R. 395 (Bankr. D. Mass. 2014),fcrz hyhtfhe Trustee contends that this rule is subject to an exception, such that when an exemption claimed under state law contains a limitation that does not conflict with the Bankruptcy Code and its policies, that limitation should be enforced. The Trustee further maintains that the limitation in question does not conflict with the Bankruptcy Code or its policies because after a debtor's death, the purpose of the homestead can no longer be fulfilled. Allowing this exemption would only benefit the Debtor's adult heirs, who would not otherwise benefit under the Massachusetts homestead statute, to the detriment of her creditors.
Rajab responds that the rule is clear, as articulated in Pasquina v. Cunningham (In re Cunningham), 513 F.3d 318, 324 (1st Cir. 2008) and other cases, that a debtor's eligibility for an exemption is determined as of the date of the bankruptcy filing. He also points out that Williams did not involve the death of a debtor and contends that, under all cases that have addressed the issue, the death of a debtor has not been construed as cause to depart from the general rule. He further argues that Fed.R.Bankr.P. 1016 ( ) is cause to address the homestead exemption as if the Debtor's death had not occurred.
ii. Analysis
The Court's determination of the controversy in this case is guided by the First Circuit's holdings in Cunningham and later in In re Rockwell, 968 F.3d 12, 21 (1st Cir. 2020), cert, denied sub nam. Hull v. Rockwell, 141 S.Ct. 1372 (2021). In Cunningham, a creditor had argued that the debtor's post-petition voluntary sale of certain exempt property had made the proceeds of the sale available to satisfy a nondischargeable pre-petition debt.[5] The First Circuit viewed this position as "at odds with the immunizing effect of § 522(c)," In re Cunningham, 513 F.3d at 323, under which, as a general rule, property exempted under § 522 "is not liable during or after the case for any debt of the debtor that arose, or that is determined under section 502 of this title as if such debt had arisen, before the commencement of the case," 11 U.S.C. § 522(c). The court held that "[i]t is a basic principle of bankruptcy law that exemptions are determined when a petition is filed" In re Cunningham, 513 F.3d at 324.
As to this general proposition, there is widespread agreement. See, e.g., Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193, 1199 (9th...
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