Kersting v. Kersting (In re Kersting)
| Decision Date | 19 November 2020 |
| Docket Number | Bankruptcy Case No. 15-06919-ESL,BAP NO. PR 19-046 |
| Parties | DEBORAH ANN KERSTING, Debtor. TIRSO R. CASTILLO MARIA, Appellant, v. DEBORAH ANN KERSTING, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, First Circuit |
NOT FOR PUBLICATION
Appeal from the United States Bankruptcy Court for the District of Puerto Rico
(Hon. Enrique S. Lamoutte, U.S. Bankruptcy Judge)
Before Harwood, Panos, and Katz, United States Bankruptcy Appellate Panel Judges.
Eduardo J. Mayoral, Esq., on brief for Appellant.
Wigberto Mercado Barbosa, Esq., on brief for Appellee.
Tirso R. Castillo Maria (the "Appellant") holds a judicial lien on the debtor's residence arising from a judgment against the debtor and her now-deceased husband. In her bankruptcy case, the debtor moved to avoid the Appellant's judicial lien, claiming it impaired the homestead exemption to which she was entitled under Puerto Rico law. The Appellant objected to the lien avoidance motion and the claimed exemption, and then moved for summary judgment, arguing that the debtor was not entitled to exempt the full value of her residence, or to avoid his lien in its entirety, because she only owned 50% of the property. The other 50%, the Appellant claimed, belonged to the undivided probate estate of the debtor's deceased husband and, as such, it was not property of the bankruptcy estate and could not be exempted. Concluding that the debtor was entitled to exempt 100% of the value of her residence pursuant to Puerto Rico homestead law and that the Appellant's lien impaired that exemption, the bankruptcy court denied the Appellant's summary judgment request, overruled his objection to the exemption, and granted the lien avoidance motion. The Appellant appealed that order, as well as the bankruptcy court's denial of reconsideration.
For the reasons set forth below, we AFFIRM both orders.
Deborah Ann Kersting (the "Debtor") and Larry Fritz Kersting were married in 1978, forming a legal conjugal partnership. They had two children. In 1987, they purchased property located in Carolina, Puerto Rico (the "Property"), where they resided.
In 2006, the Appellant sued the Kerstings in the local court and, in September 2011, he obtained a judgment against them in the amount of $78,188.07, plus interest and attorney's fees.The judgment was presented to the Puerto Rico property registry on January 5, 2012, and recorded on August 10, 2012, giving rise to a lien on the Property.
Shortly thereafter, the Kerstings executed a homestead deed with respect to the Property, which was filed in the Puerto Rico property registry on March 6, 2012, and recorded on August 10, 2012.
Mr. Kersting passed away on December 6, 2014. He died intestate and was survived by the Debtor and their two children. On January 4, 2015, Mr. Kersting's children executed a deed of "repudiation of inheritance," waiving their rights in their father's estate.
The Debtor filed a chapter 7 petition in September 2015. On her bankruptcy schedules, she listed a "fee simple" interest in the Property and claimed the full $115,000.00 value of the Property as exempt under P.R. Laws Ann. tit. 31, §§ 1858-1858k, known as the Puerto Rico Homestead Protection Act (the "Homestead Protection Act"). The Debtor listed two secured creditors: (1) Banco Popular de Puerto Rico with a $20,520.98 claim secured by a mortgage on the Property; and (2) the Appellant with a $78,188.07 claim secured by a judicial lien on the Property.
The Appellant objected to the Debtor's claimed homestead exemption ("Objection to Exemption") on the basis that the Debtor was not the sole owner of the Property and could not exempt its full value. The Debtor countered that she could exempt the full value of the Property pursuant to her rights under the Homestead Protection Act, which continued after her husband's death. She also maintained that, although 50% of the Property passed to her husband's heirs(their two children), the children had repudiated their share of the inheritance and, therefore, their share of the Property passed to her by operation of law.
The Debtor also filed a motion seeking to avoid the Appellant's judicial lien under § 522(f) (the "Motion to Avoid Lien") because it impaired the homestead exemption to which she was entitled under Puerto Rico law.1 The Appellant opposed the motion on the same grounds asserted in his Objection to Exemption—namely, that the Debtor could not exempt the full value of her homestead because she was not the sole owner of the Property.
The Appellant filed a motion for summary judgment as to both the Objection to Exemption and the Motion to Avoid Lien (the "Summary Judgment Motion"). He contended that the Debtor could not avoid his judicial lien under § 522(f) because she did not have an interest in the Property when his lien attached, as the Property was owned by the conjugal partnership rather than the individual spouses. He maintained that the Debtor had no property interest in her individual capacity until December 6, 2014, when the conjugal partnership dissolved by virtue of her husband's death. As the Debtor had no interest in the Property until after the lien was fixed, he claimed, § 522(f) was inapplicable.
Alternatively, the Appellant contended that, at most, the Debtor owned 50% of the Property at the time his lien attached and the remaining 50% belonged to her husband (whichwould later become part of the probate estate). Under this scenario, the Appellant claimed, the lien was unavoidable as to the 50% of the Property belonging to the Debtor's late husband.
In her opposition, the Debtor reasserted her position that she could exempt the full value of the Property because she and her husband had declared a valid homestead with respect to the Property while he was alive and, as she continued to reside at the Property after his death, the homestead protection continued for her benefit as the surviving spouse. She also argued she was entitled to avoid the Appellant's lien in its entirety because she had an undivided ownership interest "prior, during and after the judicial lien's fixing date" and the lien "indubitably impair[ed]" her exemption.
On June 19, 2017, the bankruptcy court entered an Opinion and Order (the "Lien Avoidance Order"): (1) denying the Summary Judgment Motion; (2) overruling the Appellant's Objection to Exemption; and (3) granting the Motion to Avoid Lien. See In re Kersting, No. 15-06919 (ESL), 2017 Bankr. LEXIS 1695, at *72 (Bankr. D.P.R. June 19, 2017) ("Kersting I").
As explained below, the court ruled that: (1) after the dissolution of the conjugal partnership, the Debtor owned an undivided one-half interest in the Property; (2) the remaining interest was part of an unclaimed inheritance, of which the Debtor was entitled to a quota in usufruct; (3) the Homestead Protection Act afforded the Debtor, as the surviving spouse, the right to protect the homestead against attachment, judgment, or foreclosure; (4) the Debtor held a pre-existing interest in the Property to which the Appellant's judicial lien attached; (5) modification of the Debtor's interest in the Property due to the dissolution of the conjugalpartnership did not affect her ability to avoid that lien under § 522(f); and (6) fixing percentages based on ownership rights was not required and the Debtor was entitled to avoid the Appellant's judicial lien in its entirety.
The bankruptcy court began its analysis by examining whether the Debtor had an interest in the Property as of the petition date and, if so, whether she was entitled to exempt the full value of the Property.
The court observed that, under Puerto Rico law, all property acquired during the marriage is property of the conjugal partnership and, upon dissolution of the marriage (whether by death, divorce or otherwise), each spouse is entitled to receive one-half of the property of the conjugal partnership. Kersting I, 2017 Bankr. LEXIS 1695, at *26-28. The court concluded, therefore, that upon her husband's death, the Debtor had an undivided ownership interest in one-half of the property belonging to the conjugal partnership, including one-half of the Property. Id. at *28.
The court then examined Puerto Rico law governing succession and inheritance, and considered whether the Debtor, as the surviving spouse, had any interest in the remaining portion of the Property belonging to the probate estate. It stressed that, under Puerto Rico law, "inheritance rights are not automatically transmitted to the heir at the time of the decedent's death" and, therefore, "property of the decedent does not shift to the heir until he or she either expressly or tacitly accepts the inheritance." Id. at *30. Emphasizing there was no evidence the Debtor had accepted the inheritance, the court ruled that the remaining 50% interest in the Property was part of an unclaimed inheritance, of which the Debtor was entitled to a "quota, inusufruct," as provided by Puerto Rico law.2 Id. at *40 (citing P.R. Laws Ann. tit. 31, §§ 2411-2416).
The court further ruled, however, that regardless of the Debtor's hereditary rights under the Puerto Rico Civil Code, the Debtor could exempt the full value of the Property by virtue of the Homestead Protection Act, as discussed below.
The court recognized that Article 6 of the Homestead Protection Act provides that the homestead protection "shall continue after the death of any of the spouses for the benefit of the surviving...
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