Wednesday, January 30, 2008

Fifth Circuit Rules on Homestead Cap

The Fifth Circuit started off the new year with an opinion construing the homestead cap under 11 U.S.C. Sec. 522(p)(1). Matter of Rogers, 2008 U.S. App. LEXIS 129 (5th Cir. 1/4/08). While the case addresses a fairly narrow issue, it is significant because it appears to be the first appellate court opinion construing the new statute.

The issue in Rogers was whether a debtor triggered Sec. 522(p)(1)'s homestead cap when a property acquired more than 1,215 days prior to bankruptcy became the debtor's homestead within the statutory period. Sec. 522(p)(1) states that a debtor may not exempt "any amount of interest" in a homestead that was acquired by the debtor within 1,215 days before bankruptcy which exceeds $125,000 in value. The debtor inherited the property in 1994, but did not make it her homestead until January 2004 after she separated from her husband. The property was awarded to her in the parties' subsequent divorce in April 2004.

The debtor filed for bankruptcy in September 2005 and a creditor objected to the homestead exemption. The bankruptcy court denied the objection to exemption and the district court affirmed this ruling. However, the courts gave different reasons for their rulings. The bankruptcy court ruled that because the debtor obtained title to the property outside of the 1,215 day period that the cap did not apply. The district court ruled that it was impossible to have "a quantity of classification as homestead." As a result, it ruled that the word "interest" referred to the equity acquired by the debtor during the 1,215 day period. Because a homestead designation did not enhance the debtor's equity in the property, the district court held that the cap did not apply.

The split between the bankruptcy court and the district court mirrors a split within the cases nationally. In general, the proponents of the title and equity theories are each trying to avoid what they perceive to be a bad result. The cases which hold that the words "any amount of interest" refers to when the debtor acquired title were ruling on cases where the debtor acquired legal title more than 1,215 days prior to bankruptcy but enhanced their equity within the statutory period. The judges in these cases hold that where title is acquired outside of the statutory period that any enhancement of equity during the 1,215 days is not relevant because title is something which can be acquired, while equity is not. The equity cases generally deal with the situation where the debtor acquired a property whose equity was initially below the cap, but where passive appreciation increased the value beyond the amount of the cap. These cases reject the challenge to the homestead on the basis that the debtor did not acquire any more equity in the property during the statutory period but simply had the value increased by market forces.

The Fifth Circuit found it unnecessary to resolve the conflict. It found that at a minimum, the debtor must acquire "vested economic interests" within the 1,215 day period in order for the cap to apply. The court concluded that "A debtor acquires an interest in property, not in an exemption." As a result, it found that a property's change in status from non-homestead to homestead was not sufficient to trigger the limitation on what could be exempted.

The Fifth Circuit also dismissed as a red herring the argument that the debtor acquired her interest in the property through the divorce decree. Because the property had been inherited, it was the debtor's separate property. The divorce decree merely confirmed the property's status as her separate property rather than conveying any new interest.

Disclaimer: I have a case pending which may turn on the title vs. equity distinction. While I have tried to accurately summarize the distinctions between the two lines of cases, anyone interested in these issues should read the cases for themselves.

No comments: