One of the most hotly debated aspects of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was whether the unlimited homestead exemption in states such as Florida and Texas should be curtailed in bankruptcy proceedings. In a compromise, Congress adopted three specific limitations on the homestead exemption:
1) Section 522(o) disallowed value added to the homestead with intent to hinder, delay or defraud creditors within 10 years prior to bankruptcy;
2) Section 522(p) capped the value of "any amount of interest that was acquired" by the debtor within 1,215 days prior to bankruptcy at $125,000 per debtor (now $136,875) and
3) Section 522(q) imposed a cap on homesteads of persons who owe certain debts for fraud or securities violations.
Section 522(p) was intended to close the "mansion loophole" in which "wealthy individuals could shield millions of dollars from creditors by filing bankruptcy after converting non-exempt assets into expensive and exempt homesteads in one of the handful of states that have unlimited homestead exemptions - usually Florida and occasionally Texas." In re Kane, 336 B.R. 477, 482 (Bankr. D. Nev. 2006). Although §522(p) was a radical departure from prior law, it allows generous homestead exemptions in several respects. First, it does not limit interests acquired more than 1,215 days before bankruptcy or amounts that can be demonstrated to have been rolled over from a homestead owned in the same state more than 1,215 days before bankruptcy. Additionally, even if the cap applies, it still allows retained equity of $136,875 per debtor. As a result, the section will only come into play in 10 states and the District of Columbia, which allow homestead exemptions greater than the cap: Arizona ($150,000), D.C. (unlimited), Florida (unlimited), Iowa (unlimited), Kansas (unlimited), Massachusetts ($500,000), Minnesota ($200,000), Nevada ($350,000), Oklahoma (unlimited), Rhode Island ($200,000) and Texas (unlimited). In re Kane, Appendix.
Title vs. Equity
The phrase "any amount of interest that was acquired" by the debtor has given rise to two distinct interpretations by the bankruptcy courts. The only circuit court to consider the issue expressly refused to choose between the two lines of cases. A recent opinion described the competing lines of cases as follows:
Courts have differing opinions as to what it means to acquire an interest in property. One line of cases holds that it refers to acquiring title/purchasing the interest within the 1,215-day period and would basically include any equity accumulated. In re Anderson, 374 B.R. 848 (Bankr. D. Kan. 2007); In re Blair, 334 B.R. 374 (Bankr. N.D. Tex. 2005) In re Sainler, 344 B.R. 669 (Bankr. M.D. Fla. 2006). Other cases hold that any amount of equity appreciation acquired by the debtor during the 1,215-day period would not fall within the limitation. In re Rasmussen, 349 B.R. 747 (Bankr. M.D. Fla. 2006); In re Chouinard, 358 B.R. 814 (Bankr. M.D. Fla. 2006).
In re Fehmel, 2008 WL 2151797 (Bankr. W.D. Tex. 2008), slip op. at 17
The difficulty arises from the use of the words "any amount" paired with "interest that was acquired." The words "any amount" suggests a dollar amount, while "interest that was acquired" indicates a legal interest such as title.
The equity line of cases focuses upon "any amount" that was "acquired." The words "any amount" refer to value, while the word "acquired" refers to active conduct. Taken together, this approach looks to the value that was actively acquired during the 1,215-day period and excludes amounts resulting from passive appreciation.
The leading case advocating this approach is In re Rasmussen, 349 B.R. 747 (Bankr. M.D. Fla. 2006). The court looked at the words "any amount of interest" to conclude that this referred to a quantitative measure. "Amount is a quantitative term. A homeowner may be thought of as having an amount of equity in a home. It would be usual to refer to a homeowner having an amount of fee simple ownership in a home." Rasmussen, at 756.
Rasmussen also looked at §522(p)(2), which states that "any amount of such interest does not include any interest transferred from a debtor's previous principal residence...." The court stated: "This second use of the term ‘interest' can only refer to the equity in the prior residence that is rolled into the current homestead." Id.
Other courts following this approach include In re Rogers, 354 B.R. 792 (N.D. Tex. 2006), aff'd on other grounds, 513 F.3d 212 (5th Cir. 2008); In re Reinhard, 377 B.R. 315 (Bankr N.D. Fla. 2007); and In re Choinard, 358 B.R. 814 (Bankr. M.D. Fla. 2006).
On the other hand, the title cases stress the meaning of the words "interest" and "acquire." In the Blair case, the court stated, "One does not actually ‘acquire' equity in a home. One acquires title to a home." In re Blair at 376. The court in Sainlar focused on the meaning of the words "acquire" and "interest":
The word "acquired" is not a term of art in the law of property but one in common use. The plain import of the word is "obtained as one's own." Black's Law Dictionary set forth [that] "acquire" means: "to gain possession or control of; to get or obtain." "Interest" is defined as "a legal share in something; all or part of a legal or equitable claim to or right in property." Title to real property is acquired, equity is not. Equity is the difference between value and debt. It is not a constant, but fluctuates based upon market conditions and when mortgage principal is paid. A debtor who holds title to property obtained that property as the debtor's own. The debtor's interest in the property is his legal right in the property
In re Sainlar at 672-73
Another court focused on the practical impact of using the title approach.
The title theory allows the court to focus on when the debtor acquired its interest in the property as opposed to the myriad of points during which equity was accumulated. It also avoids the incongruous result where property is acquired outside of the 1,215-day period but the exemption is limited based on equity accumulated during this period...
The title theory also conforms with the structure of §522. Section 522(d) contains a set of exemptions, most of which are limited by dollar amount. If the debtor owns property worth more than the amount of the exemption, the excess portion is nonexempt regardless of how it was applied. Here, the statute provides that if the interest in property is acquired within 1,215 days, the exemption is limited to $136,875 per debtor. Once the value of the property exceeds the cap, the excess logically belongs to the estate; whether the equity increased due to improvements or passive appreciation.
In re Fehmel at 18
Both approaches attempt to avoid an undesirable result. The equity cases attempt to protect the debtor who acquires property within the 1,215-day period with equity below the cap amount but whose property appreciated above the statutory limit due to forces outside of the debtor's control. On the other hand, the title cases try to avoid the result where property is purchased prior to the 1,215-day period (and thus would be exempt) but substantial amounts of equity are accumulated during the period.
The Fifth Circuit was squarely faced with the issue of equity vs. title in Matter of Rogers, 513 F.3d 212 (5th Cir. 2008). In the Rogers case, the debtor acquired title to the property more than 1,215 days before bankruptcy, but did not occupy the property as a homestead until during the designated period. The bankruptcy court held that the exemption should be allowed based on the title approach. The district court affirmed the bankruptcy court, but applied the equity approach to hold that the debtor did not obtain any additional equity in the property when it became the homestead. In re Rogers, 354 B.R. 792 (N.D. Tex. 2006). The Fifth Circuit did not adopt one position or the other, finding that the homestead was exempt under either approach. "We find it unnecessary at this time to pick a side in the title versus equity debate. A homestead interest is not the equivalent of title or equity." 513 F.3d at 222. However, the court did not end the inquiry there. It noted that the appellant did not quarrel with the title or equity theories, but was "simply advocating a more expansive definition of ‘interest' that includes a ‘homestead interest.'" 513 F.3d at 223. Thus, the Fifth Circuit had to delve deeper into the meaning of an interest. The court concluded that the term "interest" referred to "vested economic interest."
Based on our review of the statutory language, we conclude that the term "interest" as used in §522(p)(1) refers to vested economic interests that the debtor acquires in the homestead property during the 1,215-day period preceding the filing of the petition. Thus, a homestead interest established within the statutory period, without more, does not fall within the purview of §522(p)(1).
Unlike a homestead interest, title and equity both constitute vested economic interests in the homestead property that can be acquired during the 1,215-day period preceding the filing of the petition. These interests are vested because they have an ascertainable economic value at the moment they are acquired by the debtor. In contrast, for purposes of federal bankruptcy law, the homestead exemption is valueless until it is claimed in bankruptcy, such that any value attributable to the exemption is not realized by the debtor until after the filing of the petition..."Value" as used in §522(p)(1) refers to the economic value of the property interests acquired within the statutory period, not the value of the exemption claimed by the debtor.
513 F.3d at 224: Change in Status as Acquisition
Several cases have dealt with the circumstance where the debtor owned an interest in the property outside the 1,215-day period, but the nature of that interest changed within the look-back period.
Cases involving previously owned property becoming homestead generally find that this does not involve acquiring an amount of interest in property. Matter of Rogers, supra; In re Reinhard, 377 B.R. 315 (Bankr. N.D. Fla. 2007); In re Lyons, 355 B.R. 387 (Bankr. D. Mass 2006); and contra, In re Greene, 346 B.R. 835 (Bankr. D. Nev. 2006).
A second scenario applies where property owned by a trust or corporation is transferred to the debtors within 1,215 days of bankruptcy. In Aroesty v. Bankowski, 385 B.R. 1 (1st Cir. B.A.P. 2008), the court held that when property was transferred from a nominee trust of which the debtor was the sole beneficiary into the debtor's individual name, the debtor had acquired an interest in property within 1,215 days. The court held that the change from a beneficial interest to full legal title constituted acquiring an interest. In the case of In re Zecher, 2006 Bankr. LEXIS 3424 (Bankr. D. Mass. 2006), property owned by the debtor's limited liability company was transferred to the debtor within the statutory period. The court found that while the debtor had a prior interest in the property through the LLC, the previous interest was a personal property interest in ownership of the company. When the debtor acquired an interest in real estate through the title, the debtor acquired an amount of interest that would trigger the statute.
A third scenario involves marital transfers. In In re Presto, 376 B.R. 554 (Bankr. S.D. Tex. 2007), the debtor and his wife acquired a residence as community property outside of the 1,215-day period. During the look-back period, the debtor divorced his spouse and was awarded the property. He then sold the property and rolled the equity into a new homestead which he claimed as exempt in the bankruptcy. The debtor argued that because he had held an interest in the first residence, albeit a community property interest with his wife, more than 1,215 days before bankruptcy, the rollover provisions of §522(p)(2) should protect him. The court disagreed, finding that, "[a]s a result of the Divorce Decree, the Morning Breeze Property became the Debtor's sole and separate property. He went from owning a half interest in the undivided whole to owning the entire property in fee simple. Therefore, the monetary value of Evelyn Presto's community property interest is equal to half of the total value of the Morning Breeze Property on the date of the divorce." Id. at 577.
In another case, the debtor and his wife owned property as tenants by the entirety more than 1,215 days before bankruptcy. The title was transferred to the wife and then the property was transferred back to the couple as tenants by the entirety. Only the final transfer occurred within 1,215 days before bankruptcy. The husband then filed bankruptcy. The court initially held that "[a]s the debtor held no interest in the Property when his wife held the deed in her name only, the Debtor acquired an interest in the Property in 2005." In re Leung, 356 B.R. 317, 321 (Bankr. D. Mass. 2006). The court then rejected the debtor's argument that he did not "acquire" an interest in the property because he passively accepted a gift from his wife. The court found that accepting title to the property and claiming it as his homestead was enough to constitute an acquisition. Finally, the court rejected the argument that the debtor could qualify the second tenants by the entirety interest as a rollover from a previous principal residence based on the original tenants-by-the-entirety interest. The court rejected this argument, finding that a rollover could not be applied to a single property that changed status as opposed to successive properties owned.