In re Suarez
| Citation | 625 B.R. 508 |
| Decision Date | 07 December 2020 |
| Docket Number | Case No.: 19-12442-j7 |
| Parties | IN RE: Mary SUAREZ, Debtor. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of New Mexico |
Wayne Obrien McCook, McCook Law Firm LLC/Upright Law LLC, Albuquerque, NM, for Debtor.
Before the Court is the chapter 7 trustee's (the "Trustee's") objection to debtor Mary Suarez's claim of a homestead exemption in her residence (the "Property"). The chapter 7 trustee maintains that Ms. Suarez cannot claim an exemption in the Property because, having given a warranty deed (the "Warranty Deed") to the Property, absolute in form, to a trust for which she is neither grantor, trustee, nor beneficiary, she no longer owns the Property and the Property is not part of the estate. Despite the language of the Warranty Deed, Ms. Suarez asserts that she has an interest in the Property that she may exempt from the bankruptcy estate under New Mexico law.
On February 25, 2020, the Court held the final hearing on the Trustee's objection. Ms. Suarez and Anjenette Ramos, Ms. Suarez's daughter, testified without objection. After the final hearing, the Court entered an order directing the parties to brief the following issue:
Whether, notwithstanding the execution and recordation of the deed admitted into evidence as Exhibit 4, [Ms. Suarez] has an equitable interest in the Property, such as a life estate, which she can exempt in her bankruptcy case under NMSA 1978, § 42-10-9 and applicable bankruptcy law. The briefs should address the effect of the undisputed fact that there is no writing evidencing a life estate and no recorded grant of a life estate to [Ms. Suarez].
Briefing having been completed, the matter is now before the Court. The Court will overrule the Trustee's objection.
In 2015, Ms. Suarez, who lived in Texas, began looking for a home in Albuquerque. Anjenette Ramos and her husband, Donald Ramos (collectively, "the Ramoses") and Ms. Suarez verbally agreed that the Ramoses would provide Ms. Suarez $50,000 for a down payment on her purchase of a house, if Ms. Suarez obtained financing in her name for the balance required for the purchase, and that during the remainder of her life Ms. Suarez would assume responsibility for mortgage payments, property taxes, and maintenance and utility costs for the house. Ms. Suarez and the Ramoses verbally agreed that Ms. Suarez would be entitled to live in the house for the rest of her life and that the Ramoses would recoup their down payment from sale of the house after Ms. Suarez's death. This oral agreement (the "Oral Agreement") was never memorialized in writing. After obtaining a loan of $70,849.75 from Wells Fargo Bank and receiving $50,000 from the Ramoses, Ms. Suarez purchased a condominium (the "Property") and moved into it over Labor Day weekend in 2015. Consistent with the Oral Agreement, once the sale closed, Ms. Suarez owned the Property in fee simple and the Ramoses held a contract right to repayment of the down payment funds. Since then, Ms. Suarez has occupied the Property continuously and is solely responsible for payment of, and has paid, the mortgage and property taxes, as well as insurance, repairs and maintenance, and utility costs.
In December 2015, in an effort to ensure that the Ramoses recouped the $50,000 down payment in accordance with the Oral Agreement, Ms. Suarez executed the Warranty Deed transferring the Property to the Ramos Living Trust ("the Trust").2 The Ramoses are the trustees of the Trust. The parties intended that the Trust would own the Property in fee simple upon Ms. Suarez's death in exchange for the $50,000 the Ramoses paid to enable Ms. Suarez to make the down payment to purchase the Property. The Ramoses and Ms. Suarez verbally agreed that, despite the absolute language of the Warranty Deed, Ms. Suarez retained the right to live in the Property until her death and until then remained responsible for paying the mortgage payments, property taxes, and maintenance and utility costs. These terms of the Oral Agreement were not included in the Warranty Deed, which is the most recently recorded document evidencing ownership of the Property.3 In addition, the Trust documents are silent regarding whether Ms. Suarez is entitled to live in the Property until her death.4
On October 26, 2019, Ms. Suarez filed a voluntary petition under chapter 7 of the Bankruptcy Code. On Schedule A/B, Ms. Suarez stated that she owned the Property, valued at $139,967, in fee simple, but later stated, in the same schedule, that Ms. Suarez claimed a homestead exemption in the Property in the amount of $57,611.
Ms. Suarez claims an exemption under the New Mexico homestead exemption statute, NMSA 1978, § 42-10-9, pursuant to 11 U.S.C. § 522(b)(1), (3).5 To be exemptible, the property interest claimed as exempt must be property of the bankruptcy estate.6 State law governs whether and to what extent Ms. Suarez has an interest in the Property and whether that interest is exemptible, but the Bankruptcy Code governs whether any such property interest is property of the estate.7
As a preliminary matter, the Court addresses the Trustee's argument that Ms. Suarez waived her claim to an exemptible equitable interest in the Property because she did not argue that she had an equitable interest in her response to the Trustee's objection or in response to the Trustee's discovery request asking the basis for Ms. Suarez's claim of exemption. The Court overruled the objection at the final hearing. Since filing her petition, Ms. Suarez consistently has maintained that, although the Property was transferred to the Trust, she nevertheless has an interest in the Property that is exemptible under New Mexico law. The issue was not waived because the precise nature of Ms. Suarez's interest has been at issue throughout these proceedings.
Generally, a warranty deed transfers fee simple ownership of property to the grantee.8 In keeping with the general effect of a warranty deed, the Trustee argues that fee simple ownership of the Property was conveyed to the Trust and that Ms. Suarez no longer holds any interest in the Property. She further reasons that 1) because Ms. Suarez had no interest in the Property, the Property did not become part of the estate and 2) since only property of the estate can be exempted from the estate, Ms. Suarez cannot claim an exemption in the Property. As the objecting party, the Trustee "bears the burden of proving that the exemption is not properly claimed."9
The Trustee's objection presents three questions. First, whether the terms of the Oral Agreement merged into the Warranty Deed. If not, whether the Oral Agreement is enforceable. Finally, if the Oral Agreement is enforceable, whether Ms. Suarez has an interest in the Property that became part of the bankruptcy estate when Ms. Suarez filed her petition and that may be exempted under New Mexico law. The Court addresses these questions in turn.
Because the Trustee acknowledges that the Ramoses and Ms. Suarez intended for Ms. Suarez to continue to live in the Property even after the Warranty Deed was signed, the Court understands the Trustee's argument to be based on the merger doctrine, under which agreements related to the conveyance of property are "presumed to be merged in a subsequently delivered and accepted deed ...."10 More specifically, terms in a contract for the sale of real estate that (1) "inhere in the very subject-matter of the deed, such as title, possession, emblements, etc.; (2) [that were] carried into the deed and of the same effect; [and] (3) ... of which the subject-matter conflicts with the same subject-matter in the deed" are presumed to be merged.11
Even where the terms of an agreement differ from or contradict the terms of deed, however, courts will not apply the merger doctrine when the evidence shows that the terms of the deed are the result of a mutual mistake by the parties.12 "For a mistake to be mutual and common to both parties, it must appear that both parties have done what neither intended."13 A mutual mistake may be shown by evidence extrinsic to the written agreement "even if the inconsistency cannot be detected on the face of the agreement and becomes clear only in light of surrounding circumstances."14
Here, there is no mention in the Warranty Deed of the Oral Agreement, Ms. Suarez's right to live in the Property, or Ms. Suarez's obligation to maintain the Property and pay the mortgage and other costs. However, both Ms. Ramos and Ms. Suarez credibly testified, and the Trustee does not dispute, that they intended the Property to be Ms. Suarez's until her death. Consistent with that position, Ms. Suarez stated on Schedule A/B that she owned the Property in fee simple on the petition date. After the Warranty Deed was executed, Ms. Suarez continued to live in the Property, pay the mortgage and other expenses, and maintain the Property. The Ramoses have never lived in the Property and have not sought to sell the Property.
The Warranty Deed also states that the deed is subject to "all restrictions, reservations, and easements of record, if any, with warranty covenants." Under New Mexico statutes, use of the term "warranty covenants" indicates that the property is "free from all former and other grants, bargains, sales, taxes, assessments and encumbrances of what kind and nature soever [sic]."15 Contrary to that covenant, the Property is not free from all encumbrances, since it is collateral for Ms. Suarez's loan from Wells Fargo Bank and subject to Ms. Suarez's right to an ownership interest in and to possess the Property for the remainder of her life. In addition, the Warranty Deed is silent as to Ms. Suarez's obligation under the Oral...
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