By: Donald L Swanson
Does a Chapter 7 debtor have appellate standing to protect the homestead exemption?
That’s an issue addressed (sort of) in Karamoussayan v Massachusetts Department of Revenue (In re Karamoussayan), Case No. 22-041, First Circuit Bankruptcy Appellate Panel (decided April 11, 2024).
Chronology
Here’s a chronology.
September 9, 2022 — Debtor files a voluntary Chapter 13 petition
October 12, 2022 – Debtor objects to a $14,933.12 secured tax claim filed by Massachusetts Department of Revenue, asserting that such claim is not properly perfected on his homestead.
November 9, 2022 – Bankruptcy Court overrules Debtor’s objection.
November 14, 2022 – Debtor appeals to the First Circuit BAP.
March 2, 2023 – Debtor’s Chapter 13 case is converted, involuntarily, to Chapter 7.
September 7, 2023, First Circuit BAP requires supplemental briefing to address whether, in light of the conversion to Chapter 7, “Debtor has standing to pursue” the appeal.
April 11, 2024 – First Circuit BAP dismisses Debtor’s appeal “for lack of jurisdiction” because the Chapter 7 Debtor “failed to establish that he has been ‘directly and adversely’ harmed” by the appealed Order.”
May 24, 2024 – Chapter 7 Trustee files a report of “No Distribution.”
June 28, 2024 – Bankruptcy Court grants Debtor a discharge under § 727.
August 22, 2024 – Chapter 7 Trustee is discharged.
Rationale
Here is a summary of the First Circuit BAP’s rationale for it’s no-jurisdiction ruling.
“Standing” is a jurisdictional element which cannot be waived and can be raised at any time.”
–Person Aggrieved
Only a “person aggrieved” has standing to appeal from a bankruptcy court order.
A litigant is a “person aggrieved” only if the challenged order “directly and adversely” affects his or her pecuniary interests: i.e., the order either “diminishes his property, increases his burdens, or detrimentally affects his rights.” Such direct and adverse affects cannot be merely contingent or speculative.
–Chapter 7
In Chapter 7 cases, it is normally the trustee alone, not the Chapter 7 debtor, who possesses standing to appeal from bankruptcy orders affecting the property of the estate.
- That’s because the Chapter 7 estate and trustee divest the debtor of all right, title and interest in nonexempt property—and of any pecuniary interest in the trustee’s disposition of nonexempt property.
Two exceptions are recognized for a Chapter 7 debtor’s standing, and concrete evidence is required for both:
- by establishing that a successful appeal would generate assets in excess of liabilities, entitling debtor to distribution of a surplus; and
- by establishing that the challenged order would adversely affect the terms and conditions of debtor’s Chapter 7 discharge.
–No Evidence of a Surplus
A “surplus” in Chapter 7 is something to distribute to Debtor after payment of all claims.
Here, Debtor has not even attempted to demonstrate that a reversal would result in a surplus. And Debtor he would be hard-pressed to do so because the total amount of allowable claims far exceeds the value of Debtor’s nonexempt assets, even if the appealed order were to be reversed.
And a reversal “would merely result in reclassification of the Secured Tax Claim as a priority unsecured claim, not disallowance of the claim.” And that tax claim “would have to be fully paid before the Debtor would receive a distribution.”
–No Evidence of an Adverse Effect on the Discharge
“Debtor has not argued—let alone demonstrated—that the Order adversely affects his chapter 7 discharge.”
Debtor’s Pecuniary Interest Argument
Debtor asserts that, because of the value available in the residence for his homestead exemption:
- if the Department’s claim is not properly secured by the residence, Debtor would be entitled to all of the equity for his homestead exemption; but
- if the Department’s claim is properly secured, the tax lien would need to be paid from homestead proceeds before any money is available for Debtor’s homestead exemption.
Additionally, Debtor argues:
- if sufficient value is available in Debtor’s personal property assets, which assets are also subject to the Department’s lien, a sale-first of that personal property would pay the Department’s lien in full and protect the equity available for Debtor’s homestead exemption; but
- if the homestead were sold first and the lien paid from homestead proceeds, Debtor’s homestead exemption would be impaired by $14,933.
The First Circuit BAP rejects the latter argument like this: “even if the $14,933 Secured Tax Claim were to be paid from the Debtor’s share” of the homestead’s equity,
- “it is far from certain that the net result would negatively affect the Debtor’s financial interests” because Debtor would still be liable for other nondischargeable tax claims.
Further, the BAP reasons that “any potentially adverse impact on the Debtor’s pecuniary interests is contingent on the outcome of a variety of scenarios, including”:
- “whether the Secured Tax Claim is paid from foreclosure sale proceeds or from the sale proceeds of the Nonexempt Assets”;
- “the amount of Nonexempt Assets sale proceeds available for distribution”;
- “the amount of administrative claims (which would be paid ahead of priority tax claims).”
The BAP concludes:
- “Because there are so many contingencies and variables, the Debtor cannot meet his burden of establishing that the Order has a ‘direct’ adverse impact on his pecuniary interests.”
Sympathy
It’s easy to have some sympathy for the Debtor here:
- if there actually is a potential for impairment vs. non-impairment of the homestead exemption, depending on which assets are sold first, the Debtor’s pecuniary loss could be real.
Conclusion
Tough break for the Debtor.
Also, it would undoubtedly be easier for Debtor to accept a loss on the merits, rather than on a refusal to be heard.
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