In some states, like Vermont and Ohio, property cannot be a homestead if ownership is through a limited liability corporation, or LLC.
In other states, like Nevada, property owned through an LLC can be a homestead, according to Bankruptcy Judge Colleen A. Brown of Burlington, Vt.
A man attempted unsuccessfully to strip a judicial lien from his home under Section 522(f). The debtor failed because the home was not his “homestead” at the time the lien attached, Judge Brown said in her Nov. 8 opinion.
The man and a woman purchased a home in their own names. Later, they transferred title to an LLC of which they were the sole owners and members. It was undisputed that the man had always lived in the home and paid all expenses and taxes. Title was in the LLC when a judgment lien attached to the home.
The judgment creditor opposed stripping the judicial lien, contending that the home was not a homestead at the time the lien attached.
Judge Brown therefore focused on whether a home owned through an LLC can be a homestead in Vermont.
To be designated a homestead in Vermont, someone must have an ownership interest and occupy the property. The debtor argued that his continued occupancy of the property, payment of all expenses, and his control over the LLC gave him an equitable interest that Vermont would recognize as a homestead.
Under Vermont law, Judge Brown said that an LLC gives a member the right to share in profits and receive distributions. However, she said that “when an LLC owns property, its members do not own that property in their individual capacity.”
Therefore, Judge Brown said, “even if [the debtor] was the sole member of [the LLC], that would not entitle him to an ownership interest in the Property during the time the LLC held title to the Property, equitable or otherwise.” She also said that Vermont has “narrowly” construed “the right to a homestead interest based upon equitable title.”
Judge Brown said that Ohio law “mirrors” Vermont law. The Sixth Circuit Bankruptcy Appellate Panel, she said, held that a debtor had no interest in an LLC’s property and therefore could not claim a homestead exemption in Ohio.
Nevada, however, is different, because that state “defines a homestead broadly” and does not designate how title must be held, Judge Brown said. Consequently, the Ninth Circuit Bankruptcy Appellate Panel ruled in 2016 that the debtor in Nevada could claim a homestead exemption because he retained the indicia of ownership by possession, use of the property, and payment of the mortgage, taxes and insurance.
“Vermont law is categorically distinguishable from Nevada’s,” Judge Brown said, because Vermont has “a more ‘rigorous definition’ of equitable title than” Nevada law.
Presumably, there would be no reason a prospective debtor could not transfer property from an LLC to himself or herself before filing, unless the LLC had creditors who might claim that the transfer was a fraudulent transfer. If it were a fraudulent transfer with “actual intent,” the debtor could lose his or her discharge by trying to resurrect a homestead exemption.