The Sixth Circuit established an important precedent protecting individual debtors by declaring they can’t be evicted from their home simply because the trustee tenders a check representing the full value of the homestead exemption.
The circuit’s decision on July 14 made law on seemingly obvious questions about the debtors’ standing and the right to occupy a home before sale. Like here, there will sometimes be no direct precedent because no one previously will have had the temerity to raise questions with obvious answers.
A couple filed a chapter 7 petition, listing their home as worth $108,000, encumbered by a $91,500 mortgage. Alleging that the property was really worth about $200,000, the trustee filed a motion asking the bankruptcy judge to evict the couple, saying that he could not sell the property while they were living there.
The debtors cross moved for an order compelling the trustee to abandon the home on the theory that the home had inconsequential value for creditors. At the hearing on the dueling motions, the trustee tendered the debtors a check for $7,500, representing the full amount of their Tennessee homestead exemption.
Bankruptcy Judge Nicholas W. Whittenburg of Chattanooga, Tenn., held an evidentiary hearing and took appraisal testimony from both sides. He vouched for the debtors’ appraisal, concluding that the property was worth only $108,000. He also said that the trustee had six months to find a buyer and that properties are often sold with tenants in residence. Judge Whittenburg therefore granted the debtors’ motion to compel abandonment and denied the motion to evict.
The trustee appealed and lost again in district court. The trustee lost a third time in the Sixth Circuit, in an opinion authored by Circuit Judge Ronald Lee Gilman.
The trustee contended that the debtors lacked standing to compel abandonment. Using a result-oriented approach, Judge Gilman said that being allowed to keep their home gave them a “practical stake” in the outcome, thus conferring standing. He also said that their homestead exemption was not the debtors’ only remedy in the face of a motion to evict, thus countering the trustee’s argument that tendering the $7,500 check was the only relief to which they were entitled. The debtors’ alternate remedy, he said, was to seek abandonment.
Judge Gilman said that the debtors also had Article III standing because evicting them “would surely constitute injury-in-fact.”
Turning to the merits, Judge Gilman found “no authority for the proposition that the trustee can tender the debtors the homestead exemption and cause them to ‘skedaddle.’” There was, he said, “no basis in precedent or in the Bankruptcy Code.”
On the question of value to support the conclusion of inconsequential value, Judge Gilman invoked the “clear error” standard and said the record was “replete with evidence” supporting the debtors’ valuation.
W. Thomas Bible, Jr. represented the debtors, while Tara A. Twomey of the National Consumer Bankruptcy Rights Center filed an amicus brief on behalf of the debtors.