Judge Hoffman Overrules Trustee's Objection to Federal Homestead Exemption in Debtors' Second Home

Monday, May 14, 2012

This article was originally posted at the BBA's Bankruptcy Section Blog. Click here to read the original post.

By Nicholas F. Ortiz,  Ortiz & O'Donnell

In the case of In re Lawrence , No. 11-42045-MSH (Bankr.D.Mass. 2012) Judge Hoffman  recently confronted the issue of whether the federal "homestead" exemption found in 522(d)(1) could be used to protect equity in a second home.  The following was the scenario. The debtors owned two properties and had moved from their Massachusetts home to a Maine property a couple of days before filing their bankruptcy petition.  The debtors first attempted to utilize the Massachusetts bankruptcy exemptions  to exempt their equity in the Maine property. The trustee objected to the extra-territorial use of the Massachusetts homestead exemption.

The debtor responded to the trustee's objection by seeking leave to amend their Schedule C and switch to the federal exemptions.  After the Court granted this request, the trustee renewed his objection, this time arguing that the Maine property could not be exempted under Section 522(d)(1) because it was not the debtor's primary residence.  The Maine property was, until recently, the debtors' second home, and they had claimed the Massachusetts property as their residence on their petition. 

Judge Hoffman noted that the plain language of the federal homestead allowed its use to exempt a "residence" that the debtor "uses" .   The Court reasoned that Congress was capable of qualifying the term "residence" when it chose to do so: the phrase "principal residence" is used  throughout the Bankruptcy Code and elsewhere--but not in Section 522(d)(1).  The Court pointed out that people may have multiple residences--citing the late Mike Wallace as an example--and so whether the Maine home was the primary residence of the debtors on the petition date was immaterial.  The court further examined the "use" requirement and deemed this rather low threshold met with the caveat that "where a debtor had never used a residence prior to filing, bankruptcy courts have held that the residence may not be exempted under [the federal homestead]." The Lawrence debtors had clearly used the Maine property as a residence on the petition date and, therefore, the Court allowed their federal exemption in the Maine property.