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Friday, April 11, 2014

When is a Waiver Not a Waiver? The New Rules of Massachusetts Homesteads

     Last month, Judge William Hillman of the Boston Bankruptcy Court, in In re Maria A. D’Italia, Case No. 13-16051-WCH (March 18, 2014), confronted the following questions:  if a debtor signs a waiver of homestead rights in a guarantee, does that waiver then either: (a) release or subordinate the debtor's homestead vis-à-vis the creditor’s judgment and execution based on the debtor’s guarantee liability;  or (b) prohibit the debtor from avoiding the creditor’s execution on her home as a “judicial lien” under 11 U.S.C. §522(f)(1)?

     Judge Hillman answered both questions in the negative. To understand his answers, let’s review the homestead law in Massachusetts.

Massachusetts Homestead Basics

     In 2010, Massachusetts overhauled its homestead laws.  Under the revised laws:
  •       A homestead is now automatic without the need to file a declaration of homestead, and protects equity in a residence up to $125,000.00 in value (M.G.L. c. 188, §§1 & 4).
  •          If a homeowner records a homestead declaration in the appropriate registry of deeds signed by all owners of the residence, the homestead protects up to $500,000.00 in equity in the residence; however, the homestead declaration must be separate and not included in the deed to the property (M.G.L.. c. 188, §§1 & 3).
  •            The homestead (whether automatic or declared, and except as noted below for elderly and disabled individuals) remains “whole and unallocated” for joint tenants or tenants by the entirety (i.e., co-owning spouses) when the tenants are asserting their interests separately against one of their creditors, but the tenants cannot exceed the applicable homestead limit (i.e., "stack" the homestead amounts) when they assert the homestead together (M.G.L. c. 188, §1). Tenants in common and holders of beneficial interests get protection equal to their ownership percentage multiplied by the homestead amount (i.e., a 30% tenant in common would have homestead protection of $150,000.00 based on a $500,000.00 total homestead in the entire property).
  •          An “elderly” person’s homestead– over 62 years of age – and a disabled person ‘s homestead applies to their entire ownership interest asserted separately. In other words, a home owned in a tenancy by the entirety by two elderly spouses gets up to $1 million of equity in protection for a declared homestead ($500,000 x 2), because each person can claim up to $500,000.00 in their separate property interest, and "stack" the homesteads to claim an aggregate exemption of $1 million together (M.G.L.. c. 188, §§1 & 2).
  •           Homesteads apply to “homes” owned by sole owners, joint tenants, tenants by the entirety, tenant in common, life estate holders, and the holders of beneficial interests in a real estate trust holding title to a residence. A homestead benefits the spouses and minor children (under 21) of any of those owners who live in the home, whether or not those family members have an ownership interest in the home.  A “home” can be a single family dwelling, a 2-4 family home, a manufactured home, a condo unit,  or a residential coop unit. The homestead protection also extends to the home’s sale proceeds and to insurance proceeds from a fire or casualty loss on the home (M.G.L. c. 188, §1).
  •           The instances in which homesteads are waived, released or trumped by a debt are more limited than before. Specifically:
o     Homesteads are subject to (and ineffective against): (a) liens for federal, state and local taxes and assessments; (b) a lien recorded prior to the creation of the homestead; (c) prior recorded mortgages and certain mortgages recorded after the creation of the homestead (see below); (d) child support and alimony orders; and (e) an execution to enforce a judgment based on the owner’s fraud, mistake, duress, undue influence or lack of capacity (M.G.L. c. 188, §3)[1].

o      A homestead is subject to a mortgage signed by all the owners of the property; however, if the mortgage is signed by fewer than all of the owners of the property, then the mortgage takes priority over only the homestead of the owner(s) who signed the mortgage. The homestead is subject to a mortgage on the property regardless of whether the mortgage addresses the subordination or waiver of the homestead. No release or recorded subordination of the homestead is necessary for the mortgage to prevail over the homestead (M.G.L. c. 188, §9).

o     Otherwise, there is no subordination of a homestead to any other lien unless the owner records a release of the homestead (M.G.L. c. 188, §10(2)).
  •          A homestead is terminated or released only if:
o     The owners sell the property to a non-family member (M.G.L. c. 188, §10(1)); however, there is no release or termination(unless there is an express release) if the deed: (a) is between spouses or former spouse, or co-owners who jointly hold the homestead; (b) a trustee of a trust holding the property and a trust beneficiary; or (c) between a life tenant and a remainderman (M.G.L. c. 188, §10(5)(b)).

o     There is a recorded release of the homestead signed by the owner and any non-owner spouse or former spouse living in the home (M.G.L. c. 188, §10(2)).

o     The owner abandons the home; however, the homestead termination applies only to those owners and family members who actually abandon the home, and not to any family member who do not abandon the home. Also, the owner’s absence from his or her home due to military service cannot constitute “abandonment” (M.G.L. c. 188, §10(3)).

o     The trustee of a realty trust or a beneficiary of the trust records a release of the homestead on the property held in trust, or the beneficiary abandons the homesteaded property (M.G.L. c. 188, §10(4)).

o     The owner records a new declaration of homestead on other property; however, that new declaration does not affect the homestead rights of the owner’s spouse, former spouse or minor children still residing in the old property.

Application of Massachusetts Homestead Law to the Claimed Homestead Waiver

     Judge Hillman focused on three statutes: (a) the Massachusetts homestead law, specifically the release and termination provisions in c. 188, §10; (b) 11 U.S.C. §522(f)(1), which permits a debtor to avoid a “judicial lien” (such as an execution) if it impairs a debtor’s claim of exemption; and (c) 11 U.S.C. §522(e), which states that any exemption waiver signed by a debtor in favor of an unsecured claimholder is unenforceable in the debtor’s bankruptcy case, as is any waiver of the debtor’s right to avoid a judicial lien under §522(f).

     The facts of the case were that the debtor had signed a guarantee of a commercial lease and a loan, in connection with the build-out of a Dunkin’ Donut franchise. The guarantee stated that the debtor/guarantor “irrevocably waives, to the fullest extent permitted by law, all defenses which at any time may be available in respect of the Guarantor’s Obligations hereunder by virtue of any homestead exemption, statute of limitations, valuation, stay, moratorium law or other similar law now or hereafter in effect.” The creditor did not record either the guarantee or any other document reflecting this waiver.

     The business deal fell apart, and the creditor holding the guarantee sued, obtained a $539,000.00 judgment and execution, and recorded the execution against the residence in Buzzard’s Bay, Massachusetts, owned by the debtor and her spouse. The debtor's spouse had recorded a homestead declaration on their residence in 2009, and the debtor asserted a $500,000.00 exemption in the residence in her Chapter 7 bankruptcy case. The creditor filed a timely objection to the homestead, asserting that the homestead was invalid as to the creditor because of the waiver in the guarantee. The debtor responded to the objection, and also filed a motion to avoid the creditor’s judicial lien under 11 U.S.C. §522(f).

     The stakes: if the homestead exemption was good despite the waiver, the debtor could avoid the creditor’s judicial lien on her residence in full.[2] 

     Judge Hillman did validate the debtor’s homestead exemption despite the creditor’s objection, based on the lack of a recorded release reflecting the guarantee waiver. He relied on M.G.L. c. 188, §10, which requires such a document to be recorded.  He also relied on 11 U.S.C. §522(e), which automatically invalidates any waiver of exemption in favor of an unsecured claim.  He considered §522(e) along with §522(f)(1), and held that a judicial lienholder whose lien is avoidable is in essence an “unsecured creditor”. As such, the creditor holding an avoidable judicial lien is subject to§522(e)’s invalidation of any waiver of exemptions (he also noted that if the judicial lien was NOT avoidable, it did not matter whether the debtor had waived his or her exemption on the property).

     The link to Judge Hillman’s decision is here: https://ecf.mab.uscourts.gov/cgi-bin/show_case_doc?46,441971,,89110135. Judge Hillman is always a pleasure to read, because he is a writer who says a lot with a few words. To put it simply (as he would): if the release or waiver of a Massachusetts homestead is not recorded, there is no release of the homestead. Period.

         [1] But see In re Weinstein, 164 F.3d  677 (1st Cir. 1999) and Owen v. Owen, 500 U.S. 305(1991), in which state limitations on homesteads were federally pre-empted under 11 U.S.C. §522(f)(1), to the extent that the judicial lien to be avoided would have prevailed over the homestead under state law.

         [2] The Court did not address debtor’s first attempt to avoid the creditor’s judicial lien in this decision, because it denied the debtor’s motion (without prejudice) because the debtor had omitted necessary allegations under 11 U.S.C. §522(f)(1). The debtor refiled the motion with the proper allegations, and the motion is pending (with opposition from the creditor, focused on the debtor’s lack of an appraisal to support her alleged value of her residence). 

©Kevin C. McGee

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