BANKRUPTCY LAW (Homestead Exemption): In a recent case, the federal Second District Court of Appeal (NY, NJ, Connecticut) held that any “residence” in which the debtor has an interest is eligible for application of the homestead exemption. The court adopted the “minority rule,” which holds that “residence” includes a non-primary residence (e.g., a vacation home, or a property in which a spouse or child lives), and thus federal, controls the application of the homestead exemption.
As a result, a debtor may seek to have the homestead apply to her non-primary residence, if the federal courts in that state have taken a position on the application of the federal defeinitions of “homestead” and “residence.”
Notably, California law allows a debtor to assert a homestead exemption as to property in which the debtor’s spouse or former spouse lives. Calif. Code of Civil Procedure Sec. 704.720(d).
The Maresca court said:
“When a debtor files for bankruptcy, she may “exempt” certain interests from her “estate,” thus removing them from the pool of assets available to satisfy her creditors. 11 U.S.C. § 522(b)(1); see also id. § 541(a)(1) (defining property of the estate to include “all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case”). With some exceptions not relevant here, a debtor may also “avoid the fixing of” judicial liens on encumbered property that would otherwise be subject to an exemption. Id. § 522(f)(1)(A); see Owen v. Owen, 500 U.S. 305, 311-13, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991).
“[T]he bankruptcy court adopted what it called the “minority ‘plain meaning’ approach,” [under] which the term “residence” is interpreted, using traditional canons of construction, to include primary and non-primary residences. See, e.g., In re Demeter, 478 B.R. 281, 286-92 (Bankr. E.D. Mich. 2012).
“[Para.] When a debtor files for bankruptcy, she may “exempt” certain interests from her “estate,” thus removing them from the pool of assets available to satisfy her creditors. 11 U.S.C. § 522(b)(1); see also id. § 541(a)(1) (defining property of the estate to include “all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case”). With some exceptions not relevant here, a debtor may also “avoid the fixing of” judicial liens on encumbered property that would otherwise be subject to an exemption. Id. § 522(f)(1)(A); see Owen v. Owen, 500 U.S. 305, 311-13, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991).
“[Para.] The federal exemption at issue in this case, referred to as the “homestead” exemption, allows the debtor to exempt—and thereby avoid a judicial lien upon—her “aggregate interest, not to exceed [$23,675] in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence.” Id. § 522(d)(1) & (f)(1)(A); see 4 Collier on Bankruptcy ¶ 522.09.”
In re Melissa Maresca, 982 F.3d 859 (2020)
Argued: October 22, 2020.
Decided: December 14, 2020 When representing clients, attorneys rely on the words of the law (a “statute”) and ask the court to implement the plain, obvious meaning of its words. When it comes to federal statutes, however, it is easy to overlook the “comments” by the lawyers for the Congressional committees that draft the statutes, or the agencies which implement them.In a recent unanimous 9th Circuit decision by the Honorable Mary M. Schroeder, the comments to a consumer lending statute were critical to holding a bank accountable.In Gilliam v. Levine, Case No. 18-56373 (9th Circuit, 2020), the court recounts that the borrower obtained a loan as trustee for a family trust. The purpose of the loan was to make home repairs. the home itself was the sole asset of the trust. Another family member, who occupied the home, with the trust beneficiary.
The home, i.e., the asset of the family trust, secured the loan.
The borrower later discovered that the due date for the final loan payment was 1 year earlier than she had been led to believe. The borrower was alarmed, and sued to cancel (rescind) the loan under federal law, Truth in Lending Act (TILA), 15 U.S.C. § 1601, et seq., and the Real Estate Settlement Practices Act (RESPA), 12 U.S.C. § 2601. The borrower also asserted a claim under California’s Fair Lending Law [Rosenthal Act], 1788.1(b) of California’s Rosenthal Act, California Civil Code §§ 1788.1(b).
This relief is only available where the borrower is a consumer. 15 U.S.C. § 1635(i)(4); 12 U.S.C. § 2606(a); Cal. Civ. Code § 1788.2(e). The trial court, Hon. Philip Gutierrez, concluded that because the loan went to the trust, it was not a consumer loan. The trial court dismissed the case.
The 9th Circuit reversed the trial judge. The appellate court noted federal Consumer Financial Protection Bureau’s Official Staff Commentary to Regulation Z (mortgage loans), which suggested the opposite result in this case. The Commentary, for example, stated that “[c]redit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization.” 12 C.F.R. pt.1026, Supp. 1, § 1026.3 Comment 3(a)-10.
The “certain trusts” that fall under the rubric of “natural persons,” entitled to protection for loans made to benefit a natural person, and not an organization, include the trust in this case, which was formed for tax or estate planning purposes [which benefit people]. As a result, where individuals invest assets in the trust, the regulation thus effectuates TILA’s definition of consumer credit transactions. 12 C.F.R. pt.1026, Supp. 1, § 1026.3 Comment 3(a)-10.
The trust in question was “primarily for personal, family, or household purposes.” 15 U.S.C. § 1602(i). The borrower was the aunt (as Trustee); the niece was the beneficiary; and the trust property was a private home. As a result, the loan was a “consumer credit transaction,” which was subject to the Fair Lending Laws. And the Comment makes the point: Look to the substance of the transaction. Here it was to benefit a consumer, not a company. 12 C.F.R. pt. 1026, Supp. 1, and § 1026.3 Comment 3(a)-10.i.
For as much as it has been vilified by certain political interests, the CFPB remains in force, and fortunately, it remains a source of protection for consumers. It will be interesting to see if the case if appealed to the Supreme Court (quite likely), and whether it will be upheld.
WARNING: THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY
A trust itself cannot sue or be sued. (Presta (2009) 179 CA4 909, 914). “As a general rule, the trustee is the real party in interest with standing to sue and defend on the trust’s behalf.” (Estate of Bowles (2008) 169 CA4 684, 691)
11 USC Sec.521 governs surrender of property; debtors who stated that they would “surrender” home were compelled to do so. (David Failla, et al v. Citibank, N.A. [11th Cir., Oct. 2016])
Some mortgage terms don’t look like they sound. For example, a “balloon mortgage” is a mortgage loan in which the monthly payments are not large enough to repay the loan by the end of the term. So at the end of the term, the remaining balance comes due in a single large payment. (Source: Loan One Real Estate & Mortgage Glossary)
This means the borrower needs to be aware what is going to happen at the end of the loan repayment term.