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Homestead Cap May Not Apply To Recently-Established Residence On Previously Owned Property

In Greene v. Savage (In re Greene), 09 C.D.O.S. 12414 (9th Cir. October 2, 2009), the court ruled that a debtor who acquires real property more than 1215 days before filing bankruptcy but moved onto the property within the period is not subject to the homestead exemption cap under Bankruptcy Code Section 522(p)(1). The court analyzed the issue under Nevada law and the Bankruptcy Code and held that the 1215-day period in Section 522(p)(1) runs from the time of acquisition, not the time of residency.

In Greene, the debtor purchased a parcel of undeveloped land in Nevada in 1994. In August, 2004, Greene moved onto the property and was living in a trailer, and he recorded a homestead exemption the same month. On August 11, 2005, Greene was cited by Washoe Count for illegally using the trailer as a dwelling, and he told authorities that he slept on the property in a tent. On October 15, 2005, Greene filed a voluntary chapter 7 petition and claimed the property as fully exempt under Nevada's homestead exemption at a value of $240,000. A creditor objected to the claim of exemption and contended that it should be reduced to $125,000 because the debtor moved onto the property and declared his homestead within the 1215-day period provided in Section 522(p)(1). The bankruptcy court agreed, and the district court affirmed. The Ninth Circuit reversed in part and ruled that the debtor was entitled to claim the full amount of the homestead exemption.

Section 522(p)(1) limits the claim of homestead exemption upon a residence acquired during the 1215-day period preceding the petition date, as follows:

Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $136,875 [the amount was raised in 2007] in value in —

(A) real or personal property that the debtor or a dependent of the debtor uses as a residence;

(B) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;

(C) a burial plot for the debtor or a dependent of the debtor; or

(D) real or personal property that the debtor or dependent of the debtor claims as a homestead.

Section 522(p) was enacted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) , and the court held that its purpose is to close the so-called “mansion loophole” in which a wealthy debtor may shield assets by purchasing a lavish home in a state with an unlimited homestead exemption such as Texas or Florida shortly before filing bankruptcy.

Following the recent 5th Circuit case of Wallace v. Rogers, 513 F.3d 212 (5th Cir. 2008), the court held that the first step in the analysis is to consider the homestead laws of the state. The Nevada homestead exemption, which derives from the state's constitution, provides that the homestead shall be exempt from any process of law, and it has been held to be absolute with few exceptions. The Nevada Supreme Court case of Savage v. Pierson, 157 P.3d 697, (Nev. 2007) held that a debtor must hold some form of equity in real property in order to claim the exemption, which “contemplates more than a general ‘interest’ in the property or the right to possession, it contemplates ownership.” Id. at 700-701. Therefore, the court held that although the Nevada the homestead exemption is a broad legal protection, it is not a property interest itself.

Turning to the language of Section 522(p)(1), the court carefully considered the meaning of the terms “interest,” and “acquire” and “amount.” Black's Law Dictionary defines “interest” as “a legal share in something; all or part of a legal or equitable claim to or right in property.” Black’s Law Dictionary 885 (9th ed. 2009). The court cited “possessory interests, leasehold interests, and ownership interests” as examples of interests in real property, and it noted that such interests “run with the land” in that they pass from one purchaser to another. To the contrary, the court held that a homestead is a “personal right or privilege” that does not “run with the land.”

Furthermore, the term “acquire” is at odds with the language used to refer to homesteads, the court held. For example, the verb used to refer to a homestead exemption in Section 522(p) is “claim,” as follows: “real or personal property that the debtor or dependent of the debtor claims as a homestead.” 11 U.S.C. § 522(p)(1)(D) (emphasis added). Furthermore, Black’s Law Dictionary provides that “acquire” means “[t]o gain possession or control of; to get or obtain.” Black’s Law Dictionary 26 (9th ed. 2009). Therefore, the court held that Congress intended a substantive difference by its use of distinct terms and that the term “acquire” refers to gain possession or control “by purchasing or gaining an ownership interest” in property.

Finally, the court explained that the term “amount of interest” refers to an interest capable of quantification. In particular, the exception provided in Section 522(p)(2)(B) provides that the homestead cap does not apply to an “interest transferred from a debtor’s previous principal residence (which was acquired prior to the beginning of such 1215-day period) into the debtor’s current principal residence, if the debtor’s previous and current residences are located in the same State.” Since the residence itself is not transferred, the court held that the exception refers to a monetary value or equity transferred from the previous residence. In accord with the Massachusetts case of In re Lyons, 355 B.R. 387 (Bankr. D. Mass. 2006), the homestead is not a quantifiable interest; it is a classification of property under state law.” Id. at 390.

In light of Nevada law and the language of Section 522(p)(1), the court ruled that the 1215-day period runs from the time the debtor acquired ownership of real property, even if the debtor moved onto the property within the period. Greene has the potential to aid debtors with investment properties in states with generous homestead exemptions similar to Nevada's in that debtors may file bankruptcy relatively soon after establishing residency, notwithstanding the homestead cap in Section 522(p)(1).

By Reno F.R. Fernandez III