Chief Bankruptcy Judge Michael G. Williamson in Tampa, Fla., tackled a confounding question raising innumerable issues like a law school final exam. He arrived at his answer by applying a baseball adage – a tie goes to the runner – combined with astute analysis informed by precedent from the Florida Supreme Court.
A woman filed a chapter 7 petition while living with her mother in a home held in the name of a living trust that the mother created. The debtor and two siblings were beneficiaries under the trust.
The mother died two weeks after her daughter’s bankruptcy. The daughter amended her schedules to list her one-third interest in the house as an exempt homestead.
The trustee objected to the exemption, contending that the trustee’s hypothetical lien attached first to the home since it was not the debtor’s homestead when the exemption snapshot was taken on the filing date.
Judge Williamson allowed the homestead exemption in his Sept. 19 opinion.
He began with the proposition that the Florida Constitution provides that a homestead exemption inures to the benefit of the owner’s heirs. However, that theory only protected the home from claims of the mother’s creditors, not from liens (hypothetical or otherwise) against the bankrupt daughter.
Judge Williamson went on to say that the trustee’s hypothetical lien did not attach to the home on the filing date since the mother owned the home at that time.
That’s where the baseball adage kicked in, because the trustee’s lien attached at the exact moment when the debtor got her one-third ownership interest in the home. Yet the notion that a tie goes to the debtor (or exemptions should be generously construed in favor of the debtor) was not the only basis for Judge Williamson’s decision.
The deciding factor was Milton v. Milton, where the Florida Supreme Court held that an heir could assert the homestead exemption to defeat a judgment lien entered against him before his mother’s death. The Florida court upheld the homestead exemption because the heir occupied the house within a reasonable time after his mother’s death. Although Milton was not a bankruptcy case, it was nonetheless on point because the judgment lien was equivalent to a trustee’s hypothetical judicial lien.
Judge Williamson reached the same conclusion as Bankruptcy Judge Robert J. Kressel of Minneapolis, who held in March that a debtor could claim a homestead exemption in a house inherited within 180 days of bankruptcy. To read ABI’s discussion of Judge Kressel’s opinion, click here.