Opinion
Case No. 23-50881
2023-12-08
IN RE: Katie MARCUCCI, Debtor.
James A. Coutinho, Andrew Dennis Rebholz, Allen Stovall Neuman & Ashton LLP, Columbus, OH, for Trustee. Derek Michael Shaw, Calig Law Firm, Columbus, OH, for Debtor.
James A. Coutinho, Andrew Dennis Rebholz, Allen Stovall Neuman & Ashton LLP, Columbus, OH, for Trustee. Derek Michael Shaw, Calig Law Firm, Columbus, OH, for Debtor. MEMORANDUM OPINION AND ORDER SUSTAINING TRUSTEE'S OBJECTION TO DEBTOR'S CLAIM OF HOMESTEAD EXEMPTION IN REAL PROPERTY LOCATED AT 1722 HAWTHORNE PARKWAY, GROVE CITY, OH 43123 Mina Nami Khorrami, United States Bankruptcy Judge
Introduction
Before the Court is the contested matter arising from Trustee's Objection to Debtor's Claim of Homestead Exemption in Real Property Located at 1722 Hawthorne Parkway, Grove City, OH 43123 (Doc. #26) (the "Objection") filed by the Chapter 7 trustee, James A. Coutinho ("Trustee"); the Response to Objection to Homestead Exemption (Doc. #27) (the "Response") filed by the debtor, Katie Marie Marcucci ("Debtor"); and the Reply to Debtor's Response to Objection to Homestead Objection (Doc. #31) (the "Reply") filed by the Trustee. The parties agreed that an evidentiary hearing was not necessary and entered into certain stipulations as to the facts in the case, which were filed with the Court on September 30, 2023 (Doc. #32) (the "First Stipulation of Facts"). On October 26, 2023, the Court, sua sponte, held a hearing on the Objection (the "Hearing"). At the Hearing, the Court raised concerns regarding certain facts that the parties had not stipulated to and sought clarification of the legal issues raised by the parties. Based on this, the Court granted the parties until November 27, 2023, to either stipulate to the facts or present evidence and file any supplemental briefs they deemed necessary. See Order Setting Supplemental Briefing Schedule (Doc. #36). On November 27, 2023, the parties filed the Second Stipulation of Facts (Doc. #38) (the "Second Stipulation of Facts"). That same day, the Trustee also filed the Supplemental Brief in Support of Trustee's Objection to the Debtor's Claim of the Homestead Exemption in Real Property Located at 1722 Hawthorne Parkway, Grove City, Ohio 43123 (Doc. #39) (the "Supplemental Brief"). Debtor did not file a supplemental brief. Based on the Court's consideration of the arguments of counsel, review of the pleadings, including the two stipulations of facts, the briefs, and the Supplemental Brief, the Court finds that Debtor does not have a valid interest in the real property as contemplated by Ohio Revised Code § 2329.66(A)(1)(b) (the "Exemption Statute"). For the reasons stated below, the Objection is sustained, the Response is overruled, and Debtor's homestead exemption (the "Homestead Exemption") is disallowed. This Court makes the following findings of fact and conclusions of law under Fed. R. Civ. P. 52 (applicable here by Fed. R. Bankr. P. 7052 and 9014).
I. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Amended General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. Factual and Procedural Background
On August 8, 2022, the Franklin County Court of Common Pleas, Division of Domestic Relations (the "Domestic Court"), dissolved the marriage between Debtor and her former spouse, Gabriele G. Marcucci ("Former Spouse"), Case No. 22 DR 1885 (the "Dissolution"). See Stipulation of Facts 1: ¶ 1, ECF No. 32; see also Second Stipulation of Facts Ex. B, Judgment Entry and Decree of Dissolution 17: ¶ 3(E), ECF No. 38. The decree of dissolution (the "Decree of Dissolution") incorporated the amended separation agreement (the "Amended Separation Agreement"), which both parties agreed to in its entirety. Id. Pursuant to the Amended Separation Agreement, Former Spouse was awarded the marital home, 1722 Hawthorne Parkway, Grove City, OH 43123 (the "Real Property"). See Stipulation of Facts Ex. A, Am. Separation Agreement 7: ¶ 3(E), ECF No. 32. More specifically, the Amended Separation Agreement provided, in pertinent part:
The Parties are the owners of the marital residence located at 1722 Hawthorne Parkway, Grove City, OH 43123 and Husband is the sole obligee on the first and second mortgages on the property, Pennymac and Kemba Financial Credit Union, respectively. The parties agree that Husband shall retain sole and exclusive ownership use and possession of this real estate, and hold harmless Husband [sic] from all liability thereof; and be responsible for payment of all debt, property taxes, insurance and maintenance thereof. The parties have determined, and agree, that the current equity in the property (at the time of Separation) is $66,135.00. The parties further agree that if or when the property is sold, Wife shall receive one half (1/2) of that determined equity portion, or $33,067.50 at such time.[sic]of sale.Id. (emphasis added). In other words, it provided that Former Spouse, among other things, "shall retain sole and exclusive ownership, use and possession" of the Real Property. Id. It also provided that when the Real Property is sold, Former Spouse must pay Debtor one half of the determined equity portion, which Debtor and Former Spouse agreed was $33,067.50. Id.
Moreover, Section 17 of the Amended Separation Agreement, titled Performance of Necessary Acts, provided in pertinent part:
Upon the failure of either party to execute and deliver any such deed, mortgage, promissory notes, titles, bills of sale, endorsements, forms, conveyances, or other documents, and perform any act which may be required or necessary to carry out and effectuate any and all of the purposes and provisions herein set forth. Upon the failure of either party to execute and deliver any such deed, mortgage, promissory notes, titles, bills of sale, endorsements, form, conveyances, or other document to the other party within 90 calendar days of [sic] the effective date of this Agreement, this Agreement shall constitute and operate as such properly executed document. The County Auditor, County Recorder, and other public and private officials are authorized and directed to accept this Agreement, or a certified copy hereof, in lieu of the document regularly required for the conveyance or transfer pursuant to Civil Rule 70.See Stipulation of Facts Ex. A, Am. Separation Agreement 12-13: ¶ 17, ECF No. 32. Based on these terms, and by agreement of Debtor and Former Spouse, Debtor had ninety days from the effective date of the Amended Separation Agreement (the "Allotted Timeframe"), to execute and deliver a deed, which would transfer her title to the Real Property to Former Spouse (the "Transfer of Title"). Id. The parties agreed that ninety days from the effective date of the Amended Separation Agreement was October 24, 2022. See Second Stipulation of Facts 2: ¶ 9, ECF No. 38; and that if Debtor failed to perform the Transfer of Title within the Allotted Timeframe, the Amended Separation Agreement "shall constitute and operate as such properly executed document" (the "New Instrument of Conveyance"). Id. The parties also agreed that October 25, 2022, was ninety-one days after the effective date. See Second Stipulation of Facts 2: ¶ 10, ECF No. 38. In this case, Debtor did not perform the Transfer of Title within the Allotted Timeframe. See Stipulation of Facts 2: ¶ 6, ECF No. 32.
The Second Stipulation of Facts provides explanation of how the ninety-day period was calculated, in pertinent part:
4. The effective date of the Separation Agreement is determined by ¶ 15, which states that "The effective date of this Agreement shall be the date of the Agreement is executed by the [Ex-Husband] or the [Debtor], whichever date occurs last."See Second Stipulation of Facts 2: ¶ 4, ¶5, ¶9, ¶10, ECF No. 38.
5. The Debtor and her Ex-Husband both signed the Separation Agreement in the presence of a notary on the same day, July 26, 2022. This means that July 26, 2022, is the effective date of the Separation Agreement (the "Effective Date").
. . .
9. October 24, 2022, was the date ninety (90) days after the Effective Date.
10. The next day, October 25, 2022, was the date ninety-one (91) days after the Effective Date.
At the Hearing, the parties further agreed that Former Spouse never recorded the New Instrument of Conveyance with the Franklin County Recorder. See Hearing, ECRO at 2:38:39 p.m. In fact, the general warranty deed for the Real Property still reflects the names of both Debtor and Former Spouse. See Stipulation of Facts 2: ¶ 4, Ex. B, General Warranty Deed 16-19, ECF No. 32. Debtor moved out of the Real Property on or about April 3, 2022. See Second Stipulation of Facts 2: ¶ 8, ECF No. 38. Debtor's dependents, however, still reside at the Real Property with Former Spouse. See Stipulation of Facts 2: ¶ 5, ECF No. 32. As of the date of the Hearing, Former Spouse has not sold the Real Property. See Stipulation of Facts 2: ¶ 7, ECF No. 32.
Several months after the Dissolution and the effective date of the Amended Separation Agreement, Debtor filed a voluntary petition for chapter 7 relief on March 20, 2023. See Stipulation of Facts 2: ¶ 8, ECF No. 32. In the petition (Doc. #1) (the "Petition"), Debtor listed the Real Property on Schedule A/B with a value of $234,900.00. See Pet. 10, ECF No. 1. Debtor listed her interest as "Joint interest with Separated Spouse" and that the "Spouse is to assume and maintain Mortgage." Id. However, Debtor was not separated from Former Spouse when the Petition was filed, as her marriage had been dissolved on August 8, 2022. See Stipulation of Facts 1: ¶ 1, ECF No. 32. Initially, Debtor did not claim an exemption in the Real Property. See Schedule C of Pet. 16-17, ECF No. 1. But on July 11, 2023, Debtor filed an Amended Schedule C (Doc. #18), to include the Homestead Exemption. See Stipulation of Facts 2: ¶ 10, ECF No. 32. See also Am. Schedule C 1, ECF No. 18. The amount of the exemptible interest in dispute is $33,067.50. See Second Stipulation of Facts 2: ¶ 11, ECF No. 38.
III. Arguments of the Parties
This matter hinges on whether Debtor's interest in the funds payable to her upon sale of the Real Property, as provided for in the Amended Separation Agreement, (the "Contingent Right to Payment") is a valid interest in the Real Property as contemplated by the Exemption Statute. As such, the resolution of this dispute directly impacts whether the Homestead Exemption is properly claimed.
Trustee challenges the Homestead Exemption and argues that Debtor does not have an exemptible interest in the Real Property. More specifically, Trustee contends that the Real Property is owned entirely by Former Spouse because Debtor's title to the Real Property was conveyed to him via the New Instrument of Conveyance on October 25, 2022. Trustee asserts that the Homestead Exemption is not proper because Debtor has no interest in the Real Property— "any sticks from the bundle"—let alone a fee simple ownership. Tr.'s Reply 3, ECF No. 31. Trustee also argues that there is "no circumstance or eventuality where Debtor has or will ever have any ownership, control, or interest in the parcel or land at the Real Estate." Tr.'s Suppl. Br. 4, ECF No. 39. Trustee further states that when applying the Exemption Statute, "Ohio courts do not apply some vague and ill-defined concept of an 'interest' but, instead, require debtors to prove legally cognizable interests such as through inheritance, a trust, dower, or deed-based future interest." Tr.'s Reply 5, ECF No. 31. Trustee contends that Debtor has no legally cognizable interest in the Real Property under Ohio law and Debtor's only remaining asset related to the Real Property is a monetary claim (the "Monetary Claim"), which will be paid to Debtor when the Real Property is sold. The Monetary Claim, Trustee argues, is a contingent, contractual right to payment, and not an interest in the Real Property as contemplated by the Exemption Statute and as such, the Homestead Exemption is not proper.
Bundle of sticks is an idiom used to describe property rights—"a collection of individual rights which, in certain combinations, constitute property." State ex rel. New Wen, Inc. v. Marchbanks, 159 Ohio St. 3d 15, 2020-Ohio-63, 146 N.E.3d 545, ¶ 1. State law creates and defines property interests. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Additionally, the Supreme Court has acknowledged, "Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law." Rodriguez v. FDIC, 589 U.S. —, 140 S. Ct. 713, 718, 206 L.Ed.2d 62 (2020).
In response, Debtor disputes Trustee's characterization of her interest in the Real Property as a contractual obligation or Monetary Claim. Instead, she argues that her equity portion or future interest ("Future Interest") in the Real Property is a valid interest in the Real Property as contemplated by the Exemption Statute. Debtor's Response 4, ECF No. 27. In support of this contention, Debtor advances four arguments. First, Debtor argues that the Exemption Statute is to be construed liberally and in favor of Debtor. Second, Debtor asserts that the homestead exemptions have been allowed in cases where a debtor holds less than fee simple ownership. Third, Debtor argues that her name remains on the deed, which strengthens her position that she has a valid interest in the Real Property. Finally, in some instances, courts have allowed debtors to claim a homestead exemption in a residence "subject to a separation agreement." Debtor's Response 6-7, ECF No. 27. As a result, Debtor claims that her Future Interest in the Real Property, in combination with the fact that her children live at the Real Property, satisfy the Exemption Statute. Thus, Debtor argues, the Homestead Exemption is proper.
IV. Legal Analysis
A. Burden of Proof
An exemption that has been claimed by a debtor is presumptively valid. In re Peacock, 292 B.R. 593, 596 (Bankr. S.D. Ohio 2002) (citations omitted). Under Fed. R. Bankr. P. 4003(c), the objecting party carries the burden of proving that the exemption is not claimed properly. Fed. R. Bankr. P. 4003(c). For this burden, the standard of proof is a preponderance of the evidence. In re Kimble, 344 B.R. 546, 551 (Bankr. S.D. Ohio 2006) (citations omitted). In other words, the objecting party initially has the burden of production and the burden of persuasion to offer evidence to rebut the presumption of validity. In re Peacock, 292 B.R. at 596 (citations omitted). However, "[i]f the objecting party produces evidence to rebut the exemption, the burden of production shifts to the debtor to demonstrate the propriety of the claimed exemption." Id. (citations omitted).
B. Property of the Estate
When a debtor files a bankruptcy petition, a debtor's estate is created. In re Twin City Hosp., No. 10-64360, 2011 WL 2946172, at *3, 2011 Bankr. LEXIS 2783, at *9 (Bankr. N.D. Ohio July 21, 2011) (citing 11 U.S.C. § 541(a)). The chapter 7 trustee appointed in the case is the representative of the bankruptcy estate. See 11 USC § 323. And as trustee, he/she is also responsible for the administration and liquidation of the non-exempt assets of the estate. See 11 USC § 704. Section 541 governs what property is included in the bankruptcy estate. See 11 U.S.C § 541. Property of the estate consists of "all legal and equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). This definition is broad "and includes practically every conceivable interest that a debtor may have in property." In re Greer, 242 B.R. 389, 393 (Bankr. N.D. Ohio 1999) (citations omitted).
However, a debtor may exempt certain property from the bankruptcy estate. Menninger v. Schramm (In Schramm), 431 B.R. 397, 400 (B.A.P. 6th Cir. 2010) (citation omitted). 11 U.S.C. § 522(d) creates a list of exempt property, but also allows a state to "opt-out" of the federal exemptions and "create its own exemption framework." Schramm, 431 B.R. at 400 (citation omitted). Ohio is an "opt-out" state; therefore, if domiciled in Ohio, the debtor's right to an exemption is governed by Ohio law. Id. See also OHIO REV. CODE § 2329.662 (LEXIS through 2023-2024 legislation). "To effectuate the goals of providing honest debtors a fresh start and affording debtors life's basic necessities, Ohio courts follow the rule that the exemption statutes are to be construed liberally in favor of the debtors, and that any doubt in interpretation should be in favor of granting the exemption." In re Kyle, 510 B.R. 804, 808 (Bankr. S.D. Ohio 2014) (citation omitted). In contrast, "a court cannot create an exemption where one does not exist; nor can a court go contrary to the express language of the statute." In re Bunnell, 322 B.R. 331, 334 (Bankr. N.D. Ohio 2005) (citation omitted).
Under § 541(a)(1), property of the estate is to be given a broad definition and anything of value should be brought into the estate. In re Hollister, No. 09-34650, 2011 Bankr. LEXIS 66, at *5-6 (Bankr. S.D. Ohio Jan. 7, 2011) (citation omitted). This includes contingent property that may not be subject to possession until the future. Id. at *6 (citations omitted). "By including all legal interests without exception, Congress indicated its intention to include all legally recognizable interests although they may be contingent and not subject to possession until some future time." Booth v. Vaughan (In re Booth), 260 B.R. 281, 286 (B.A.P. 6th Cir. 2001) (citation and internal quotation marks omitted). Section 541 does not state that the debtor must have an enforceable interest for that interest to be included in the bankruptcy estate. Booth, 260 B.R. at 288-89. Consistent with § 541(a)(1)'s broad scope, "courts have held that when a debtor acquires an interest in marital property as a result of filing for divorce prepetition, that interest in martial property subsequently becomes property of the debtor's estate in a later filed bankruptcy case." Moyer v. Slotman (In re Slotman), Nos. GG 11-11037, 12-80232, 2013 Bankr. LEXIS 5560, at *14 (Bankr. W.D. Mich. Dec. 5, 2013) (citations omitted). Here, Debtor possesses the Contingent Right to Payment stemming from the Amended Separation Agreement that divided the couple's property. Accordingly, absent exemption, the Contingent Right to Payment is part of the bankruptcy estate of Debtor.
C. Debtor conveyed title to the Real Property prepetition.
Pursuant to the Amended Separation Agreement, Debtor agreed to voluntarily convey her title in the Real Property to Former Spouse. See Stipulation of Facts Ex. A, Am. Separation Agreement 7: ¶ 3(E), ECF No. 32. To summarize, Debtor had until October 24, 2022, to perform the Transfer of Title; otherwise, the Amended Separation Agreement itself would act as the New Instrument of Conveyance on October 25, 2022. See Stipulation of Facts Ex. A, Am. Separation Agreement 13-14: ¶ 17, ECF No. 32; see also Second Stipulation of Facts 2: ¶ 10, ECF No. 38. Notably, Debtor did not perform the Transfer of Title within the Allotted Timeframe. In fact, county records still reflect that both Debtor and Former Spouse are record owners of the Real Property. See Stipulation of Facts 2: ¶ 4, Ex. B, General Warranty Deed 16-19, ECF No. 32.
The Ohio Supreme Court has held that "a deed does not have to be recorded to pass title." Wayne Bldg. & Loan Co. v. Yarborough, 11 Ohio St.2d 195, 212, 228 N.E.2d 841 (1967) (citation omitted). In In re Estate of Dinsio, the court held that a former wife retained ownership of a property even though there was a twenty-five-year delay in recording a divorce decree because title vested in her when the land was awarded to her pursuant to a divorce decree. 159 Ohio App. 3d 98, 2004-Ohio-6036, 823 N.E.2d 43 (7th Dist.). The court further determined that the domestic relations court "had the authority to enter a judgment divesting the title of the property from [former husband] and vesting it in [former wife], and such judgment had the effect of a conveyance executed in due form of law." Id., at ¶ 18 (citing Ohio Civ.R.70). Therefore, it was not necessary for the deed to be recorded to transfer title. Id. In other words, "divorcing spouses receive ownership interests in property conveyed through divorce decrees even if the legal interest has not yet been conveyed through a deed or other recorded instrument." In re Short, 619 B.R. 655, 665 (Bankr. S.D. Ohio 2020). In this case, it is immaterial that county records still reflect that both Debtor and Former Spouse are owners of record. By the terms of the Amended Separation Agreement and the force of the Decree of Dissolution, Debtor was divested of her ownership interest in the Real Property on October 25, 2022, prior to the Petition.
"The purpose of Civil Rule 70 is to give the trial court the power to deal with parties who refuse to comply with orders to perform specific acts." Standard Oil Co. v. Vales, 8th Dist. Cuyahoga Nos. 38972, 38344, 1979 Ohio App. LEXIS 10046, at *10 (Apr. 26, 1979). This rule provides an effective method of carrying out the court's order for, among other things, conveyance of land or property. More specifically, if the real property is within the county, "the court's judgment may operate as a conveyance." See Ohio Civ. R. 70 staff notes to rule amendments received through November 3, 2023. Additionally, Section 17 of the Amended Separation Agreement authorizes the County Auditor and Recorder to accept the parties' agreement in lieu of the deed transferring title under Civil Rule 70.
D. Debtor holds a Contingent Right to Payment.
The caselaw in the Sixth Circuit is well-settled that bankruptcy courts should "avoid [incursions] into family law matters out of consideration of court economy, judicial restraint, and deference to our state court brethren and their established expertise in such matters." In re White, 851 F.2d 170, 173 (6th Cir. 1988) (citation and internal quotation marks omitted). A critical component of the dissolution process is the separation agreement agreed to by both spouses. Quesinberry v. Quesinberry, 2022-Ohio-635, 185 N.E.3d 1163, ¶ 22 (2nd Dist.) (citations omitted). The separation agreement is a binding contract between the parties that provides for a division of all property. Quesinberry, at ¶ 22. More specifically, when a state domestic relations court accepts and incorporates a separation agreement into a dissolution decree, it becomes a legally binding contract between the parties. Morris v. Morris, 148 Ohio St. 3d 138, 2016-Ohio-5002, 69 N.E.3d 664, ¶ 18 (2016) (citation and quotation omitted).
Here, the Amended Separation Agreement was incorporated into the Decree of Dissolution and was entered on August 8, 2022, by the Domestic Court. Pursuant to the Amended Separation Agreement, Debtor effectively agreed to convey title to the Real Property to Former Spouse in exchange for a future payment from "the determined equity portion" of the Real Property when it is sold. Importantly, Former Spouse has not sold the Real Property. With no ownership interest remaining, Debtor retains a contractual future right to payment of $33,067.50, conditioned upon the sale of the Real Property. Accordingly, this Court will respect the Domestic Court, Ohio law, and the nature of the Amended Separation Agreement as a contract binding the respective parties to the Contingent Right to Payment.
E. The Exemption Statute
In considering whether the Homestead Exemption is proper, the Court must first look to the statute itself. Ohio has 'opted-out' of the federal exemptions and enacted its own statute when it comes to homestead exemptions. In re Lewis, 327 B.R. 645, 648 (Bankr. S.D. Ohio 2005) (citation omitted). The Exemption Statute provides in pertinent part:
(A) Every person who is domiciled in this state may hold property exempt from execution, garnishment, attachment, or sale to satisfy a judgment or order, as follows:
(1) . . .
(b) In the case of all other judgments and orders, the person's interest , not to exceed one hundred twenty-five thousand dollars, in one parcel or item of real or personal property that the person or a dependent of the person uses as a residence.
OHIO REV. CODE ANN. § 2329.66(A)(1)(b) (LEXIS through 2023-2024 legislation) (emphasis added). For an exemption to be properly claimed, the Exemption Statute contains two prongs that must be satisfied. The first prong requires that the person have an "interest" in one parcel or item of real property. The second prong requires that the property is used by the person or their dependent as a residence. The second prong is not contested by the parties in this case. See Hearing, ECRO at 2:36:28 p.m. The parties agree that Debtor's dependents use the Real Property as their residence. See Stipulation of Facts 2: ¶ 5, ECF. No 32. "Residential use by a dependent satisfies the second prong of the exemption." In re Street, 395 B.R. 637, 647 (Bankr. S.D. Ohio 2008) (citation omitted). But, the first prong, whether Debtor's Contingent Right to Payment is a valid interest in the Real Property as contemplated by the Exemption Statute, is disputed.
Ohio Revised Code § 2329.66(B) provides the following:
On April 1, 2010, and on the first day of April in each third calendar year after 2010, the Ohio judicial conference shall adjust each dollar amount set forth in this section to reflect any increase in the consumer price index for all urban consumers, as published by the United States department of labor, or, if that index is no longer published, a generally available comparable index, for the three-year period ending on the thirty-first day of December of the preceding year. Any adjustments required by this division shall be rounded to the nearest twenty-five dollars. The Ohio judicial conference shall prepare a memorandum specifying the adjusted dollar amounts. The judicial conference shall transmit the memorandum to the director of the legislative service commission, and the director shall publish the memorandum in the register of Ohio. (Publication of the memorandum in the register of Ohio shall continue until the next memorandum specifying an adjustment is so published.) The judicial conference also may publish the memorandum in any other manner it concludes will be reasonably likely to inform persons who are affected by its adjustment of the dollar amounts.OHIO REV. CODE ANN. § 2329.66(B) (LEXIS through 2023-2024 legislation). The revised amount (from April 1, 2022, through March 31, 2025) is $161,375. Ohio Judicial Conference, Exemptions from Execution, Garnishment, Attachment, or Sale: Ohio Revised Code Section 2329 .66 (last visited December 7, 2023), http://www.ohiojudges.org/Document.ashx?DocGuid=a8c5d23b-ad29-43cd-af91-a198354c9012 (document located under Resources / Publications).
1. There is no controlling authority that interprets "interest" in the Exemption Statute.
Bankruptcy courts in this state have struggled to identify guidance on how to construe "interest" under the Exemption Statute. The United States Bankruptcy Court for the Northern District of Ohio has noted:
There is no controlling Ohio Supreme Court authority that interprets the term interest in § 2329.66(A)(1)(b). In the absence of controlling state case law, the federal court's role is to ascertain how the Ohio Supreme Court would rule if it were faced with the issue.
In re Pugh, No. 15-30102, 2015 WL 5145030, at *3, 2015 Bankr. LEXIS 2911, at *7 (Bankr. N.D. Ohio Aug. 31, 2015) (citation and internal quotation marks omitted). The Supreme Court of Ohio has stated that, when interpreting statutes, "the court's principal concern is the legislative intent in enacting the statute." Carnes v. Kemp, 104 Ohio St. 3d 629, 2004-Ohio-7107, 821 N.E.2d 180, ¶ 16 (citation omitted). A court must first look at the language of the statute to determine intent. Id. (citation omitted). More specifically, "the court may look to analogous cases and relevant dicta in the decisional law of the State's highest court, opinions of the State's intermediate appellate courts to the extent that they are persuasive indicia of State Supreme Court direction, and persuasive opinions from other jurisdictions, including the majority rule." In re Vess, No. 17-31092, 2018 WL 722408, at *3, 2018 Bankr. LEXIS 298, at *6 (Bankr. N.D. Ohio Feb. 5, 2018) (citations omitted).
Because the Ohio Supreme Court has not addressed whether a Contingent Right to Payment is an "interest" contemplated by the Exemption Statute, this Court must predict what the Ohio Supreme Court would do if confronted with the question. Owensby v. City of Cincinnati, 385 F. Supp. 2d 626, 631 (S.D. Ohio 2004) (quotation and citation omitted).
2. The Exemption Statute includes interests amounting to less than titled ownership.
Beginning with the words of the statute itself, the Ohio legislature has provided limited direction on the term "interest." Ohio Revised Code § 2329.66 provides, in pertinent part:
For purposes of this section, "interest" shall be determined as follows:OHIO REV. CODE ANN. § 2329.66(D)(1) (LEXIS through 2023-2024 legislation). Unfortunately, this Court has not found any guidance that "illuminates the intended scope by the Ohio legislature when it employed the word [interest] in the statute." In re Goodin, 26 B.R. 160, 161 (Bankr. S.D. Ohio 1983) (emphasis added). But at least one court in Ohio has held that the Ohio legislature did not intend "to allow an exemption out of money and debts due the said debtor." In re Hicks, 3 B.R. 459, 461-62 (Bankr. N.D. Ohio 1980).
(1) In bankruptcy proceedings, as of the date a petition is filed with the bankruptcy court commencing a case under Title 11 of the United States Code;
Judge White opined the following:
It is true that the exemption statute is to be liberally construed. The Court must inquire as to the object for which the law was framed and the construction must be adopted that will promote its purpose. The Ohio legislature was aware when it amended the exemption statutes in September 1979 that some persons would not have an interest in real estate and would be unable to claim the $5,000 exemption set forth in ORC 2329.66(a)(1) and they did provide that the debtor could claim an additional exemption of $500.00 interest in personal property as provided for under ORC 2329.61(4)(b)(c) when the bankrupt was unable to claim the exemption under 2329.66(a)(1). Certainly had the Ohio legislature intended to allow a $5,000.00 interest in other property when the said debtor could not claim an exemption in real estate, they could have provided for that provision as was done in the State of Virginia under Title 34, Chapter 22, subsection 34-4 where the debtor was allowed to claim $5,000 out of the money and debts due him where he did not have real estate. Therefore, this Court concludes that it was not the intention of the Ohio Legislature to allow an exemption out of money and debts due the said debtor in a bankruptcy proceeding when he does not have an interest in real property or personal property used as a residence.In re Hicks, 3 B.R. 459, 461-62 (Bankr. N.D. Ohio 1980) (emphasis added).
The Ohio Supreme Court has not weighed in on the definition of "interest." Various bankruptcy courts, however, have construed the meaning of it when deciding the propriety of a debtor's claimed exemption and allowed the exemption even when the "interest" amounted to less than titled ownership. See In re Pugh, No. 15-30102, 2015 WL 5145030, at *3-4, 2015 Bankr. LEXIS 2911, at *8-10 (Bankr. N.D. Ohio Aug. 31, 2015) (homestead exemption allowed because of debtor-wife's right to inherit property from mother who died intestate prepetition and debtor-husband's dower rights); see also In re Vess, No. 17-31092, 2018 WL 722408, at *5, 2018 Bankr. LEXIS 298, at *13-14 (Bankr. N.D. Ohio Feb. 5, 2018) (homestead exemption allowed because debtor was settlor and beneficiary of trust with beneficial interest in property held by the trust); see also In re Starr, 485 B.R. 835, 839 (Bankr. N.D. Ohio 2012) (homestead exemption allowed because debtor was donee, trustee, and beneficiary of trust and had legal and beneficial interest in trust); see also In re Kimble, 344 B.R. 546, 552-55 (Bankr. S.D. Ohio 2006) (homestead exemption allowed because debtors had remainder interest in real estate subject to debtor-husband's mother's life estate exemption); see also In re Wycuff, 332 B.R. 297, 302-03 (Bankr. N.D. Ohio 2005) (homestead exemption allowed because debtor-husband's dower interest); see also In re Billerman, 88 B.R. 133, 135 (Bankr. N.D. Ohio 1988) (homestead exemption allowed because debtors' equity of redemption rights).
Additionally, Black's Law Dictionary supports this contention that an "interest" can amount to less than titled ownership. It defines an "interest" in property as:
The most general term that can be employed to denote a property in lands or chattels. In its application to lands or things real, it is frequently used in connection with the terms 'estate,' 'right,' and 'title,' . . . it properly includes them all. More particularly it means a right to have the advantage accruing from anything; any right in the nature of property, but less than title; a partial or undivided right; a title to a share. The terms 'interest' and 'title' are not synonymous. A mortgagor in possession, and a purchaser holding under a deed defectively executed, have, both of them, absolute as well as insurable interests in the property, though neither of them has the legal title.Interest, BLACK'S LAW DICTIONARY (2d ed. 2019) (emphasis added). Looking collectively at all these sources and caselaw, this Court agrees that the Ohio legislature did not intend to allow an exemption out of money and debts due the debtor, even though the Exemption Statute includes interests amounting to less than titled ownership.
3. Ohio jurisprudence emphasizes debtor's legal interest in the real property at the time of the filing of their bankruptcy petition.
In making a determination of whether a homestead exemption is properly claimed by a debtor, many courts focus on whether the debtor had a legal interest in the real property at the time of the filing of the bankruptcy petition. "Implicit in the statute is the fact that 'interest' means some type of individual ownership interest." In re Billerman, 88 B.R. 133, 135 (Bankr. N.D. Ohio 1988) (citation omitted) (emphasis added); see also In re Goodin, 26 B.R. 160, 161 (Bankr. S.D. Ohio 1983) (holding that to qualify for a homestead exemption, debtor would have to demonstrate an ownership interest). Notably, the Ohio Supreme Court has highlighted ownership interest when dealing with the statutory right of exemption:
The statute when applied does not affect the ownership of property in any way; it neither confers, takes away, nor changes the debtor's title by partitioning into severalty that in which there was a joint ownership or otherwise; but when properly invoked, it simply exempts the designated property from execution and leaves the ownership as it was. The language of the section points unmistakably to property owned individually.Gaylord, Son & Co. v. M. Imhoff & Co., 26 Ohio St. 317, 321-22 (1875). Similarly, Ohio bankruptcy courts have emphasized debtor's legal interest in the property at the time of the filing of the petition, even if it is less than titled ownership, as outlined in the cases above. Importantly, the common denominator in these cases reflects that the courts apply the exemption when the debtor, at the time the bankruptcy petition is filed, has some form of recognized legal interest in the property, under state law, that allows them to own, use, enjoy, or possess the property either now or in the future. Here, the Debtor's interest, the Contingent Right to Payment, allows for none of these things.
At least one court emphasized the importance of the timing of the ownership interest, in relation to the filing of the petition, when claiming an exemption. In re Street, 395 B.R. 637 (Bankr. S.D. Ohio 2008). In Street, the debtor's divorce proceedings commenced prior to the time the debtor filed her bankruptcy petition; however, the divorce decree did not issue until after the petition was filed. Id. The Court overruled trustee's objection to the debtor's claimed exemptions because the debtor had not conveyed her interest in the property prior to the petition date, and the debtor's dependent children used the residence. More specifically, in response to the Trustee's argument that a debtor may not claim an exemption in the proceeds of an asset, the court explained:
[T]he Trustee argues, a debtor who sells an automobile prior to filing for bankruptcy cannot utilize the vehicle exemption to exempt the sale proceeds. That may well be true, but this type of fact pattern--a prepetition transformation of property from one form to another--is not before the Court. Here, Chrystal did not become entitled to the Payments until after the Petition Date when the State Court approved the Decree.In re Street, 395 B.R. 637, 645 (Bankr. S.D. Ohio 2008) (emphasis added). In other words, at the time of filing her petition, the debtor still had an ownership interest in the property because the decree had not been approved by the domestic relations court. Id., at 647. Thus, debtor was not yet divested of the property interest. Id.
Distinguishable from the present case, Debtor was divested of the Real Property, because Debtor's interest was conveyed on October 25, 2022, by the Domestic Court several months before the bankruptcy Petition. Therefore, at the time of the Petition, Debtor did not have an ownership interest in the Real Property; instead, she retained only the Contingent Right to Payment.
4. Debtor does not meet her burden of demonstrating that the exemption is proper.
In this case, Trustee satisfied his initial burden by introducing sufficient evidence to rebut the presumed validity of the Homestead Exemption. More specifically, Trustee produced the Amended Separation Agreement and supporting authority to prove that Debtor had conveyed title to the Real Property, in which she claimed to have an exemptible interest, to Former Spouse prior to the filing of the Petition. As a result, the burden of production shifted to Debtor to demonstrate that the Homestead Exemption is properly claimed.
Debtor asserts that the Homestead Exemption is proper because she has satisfied the requisite two prongs of the Exemption Statute. Since the residential prong is not disputed by the parties, Debtor raises four arguments to support the contention that she has a valid interest under the Exemption Statute. Despite Debtor's arguments, for the reasons stated below, Debtor does not meet her burden of demonstrating that the Homestead Exemption is proper. a. The Exemption Statute is to be construed liberally and in favor of the debtor; however, the Court cannot create an interest in the Real Property for Debtor when one does not exist.
Debtor correctly notes that the Exemption Statute is liberally construed in favor of the debtor; however, "[u]se of the term 'liberal construction' does not mean 'words and phrases shall be given an unnatural meaning, or that the meaning shall be enlarged or expanded to meet a particular state of facts.' " In re Breece, No. 12-8018, 2013 WL 197399, at *7, 2013 Bankr. LEXIS 203, at *21 (B.A.P. 6th Cir. Jan. 18, 2013) (citation omitted). Simply put, Debtor has failed to identify, under Ohio law, any type of interest she holds in the Real Property or provided any citation of Ohio authority for it. Based on these facts, even under the most liberal interpretation, this Court finds it difficult to extend the definition of interest for purposes of the Exemption Statute to include the Contingent Right to Payment. b. In Ohio, homestead exemptions have been allowed in cases where a debtor holds less than fee simple ownership; however, Debtor fails to identify what interest she has under Ohio law or provide authority to support her purported interest.
Debtor correctly asserts that the homestead exemptions have been allowed in cases where a debtor holds less than fee simple ownership. Nonetheless, as a dovetail to the previous argument, Debtor, again, does not identify a legal interest she holds in the Real Property. Debtor instead argues that she holds the Future Interest in the Real Property and it "falls well within Ohio's homestead exemption even though it falls short of 'fee simple." Debtor's Response 4, ECF No. 27. She asserts that the Future Interest is from the determined equity portion of the Real Property and "is contingent on the sale of the property." Id. Importantly, the Restatement (Third) of Property defines future interest as "an ownership interest in property that does not currently entitle the owner to possession or enjoyment of the property. The owner's right to possession or enjoyment is postponed until some time in the future and may be contingent or vested." RESTATEMENT (THIRD) OF PROPERTY (Wills & Don. Trans.) § 25.1 (Am. L. Inst. 2011) (emphasis added). By the plain language of the Amended Separation Agreement, Debtor's interest in the Real Property involves "no ownership, use or possession," presently or in the future. Accordingly, this Court is not convinced that Debtor has any future interest in the Real Property, other than a contingent right to a sum of money upon the sale of the Real Property in the future. c. The fact that Debtor's name remains on the deed to the Real Property is immaterial because she was divested of title prepetition.
Next, Debtor argues that her name remains on the deed, which strengthens her position that she has a valid interest in the Real Property. As stated above, the Ohio Supreme Court has clearly stated that a deed does not need to be recorded to pass title. Ownership interests in property are conveyed through decrees even if the legal interest has not yet been conveyed via a recorded deed. By the terms of the Amended Separation Agreement, Debtor was divested of her ownership interest in the Real Property on October 25, 2022, prior to the Petition. For the purposes of this analysis, the fact that her name remains on the deed is immaterial. d. The Exemption Statute is materially different from the New Hampshire Homestead Exemption Statute, and Debtor has no equitable interest in the Real Property through constructive possession.
Finally, Debtor relies on In re Eckols, 63 B.R. 523, 524 (Bankr. D.N.H. 1986) and Bower v. Deickler (In re Deickler), 1999 BNH 26, 1999 Bankr. LEXIS 1877 (Bankr. D.N.H. July 22, 1999), two cases from the bankruptcy courts for the District of New Hampshire, to argue that courts have allowed debtors to claim a homestead exemption in a residence released pursuant to separation agreement. Importantly, these cases interpret the New Hampshire homestead exemption statute (the "NH Homestead Exemption Statute"), not the Exemption Statute, which are substantively different.
The NH Homestead Exemption Statute provides in relevant part: "Every person is entitled to $120,000 worth of his or her homestead, or of his or her interest therein, as a homestead." N.H. REV. STAT. ANN. § 480:1 (LEXIS through 2023 legislation). New Hampshire has a homestead requirement in its statute. Importantly, under New Hampshire law, actual and physical occupancy is essential to establish a claim of homestead. In re Eckols, 63 B.R. 523, 524 (Bankr. D.N.H. 1986). However, New Hampshire courts have recognized that "once a homestead is validly established, it may be continued in some circumstances by constructive possession or temporary absence with no intent to abandon the homestead permanently." Id. (citations omitted). Additionally, "the New Hampshire Supreme Court has indicated flexibility in the application of the occupancy requirement." Id., at 527. Based on this, and in light of family policy considerations, a string of New Hampshire bankruptcy decisions emerged in the context of a divorce, where the courts allowed exemptions when debtor no longer occupied the property. See In re Eckols, 63 B.R. 523, 524 (Bankr. D.N.H. 1986) (holding that once homestead is established, temporary absence, with the intent to return or incident to a pending divorce, does not result in a loss of homestead); see also Bower v. Deickler (In re Deickler), 1999 BNH 26, 1999 Bankr. LEXIS 1877 (Bankr. D.N.H. July 22, 1999) (allowed debtor's homestead exemption in her share of the equity in the marital home because she was involuntarily separated from occupancy of the homestead by a court order). However, Judge Yacos, in Eckols, acknowledged that a claim of homestead when there was an involuntary absence of debtor who had no intent to reoccupy the property in view of the agreement to split the equity, is "weak under these circumstances." Eckols, 63 B.R. at 527. Nonetheless, he allowed the exemption because he was persuaded by family policy considerations. Id.
The Exemption Statute is materially different from the NH Homestead Exemption Statute, as it does not require a homestead to be established. Instead, the residency prong of the Exemption Statute requires that the property be used by the person or their dependent as a residence. Importantly, the cases relied on by Debtor are rooted in New Hampshire jurisprudence that allows constructive possession in the context of divorce when trying to satisfy the occupancy component of the homestead requirement. In our case, the residency prong has already been satisfied and is not disputed. Therefore, the Court finds the New Hampshire cases to be distinguishable and not applicable here.
Here, Debtor has not provided sufficient evidence to show that she maintains "interest" in the Real Property as contemplated by the Exemption Statute. As such, Debtor did not meet her burden of production. That failure to produce appropriate countervailing evidence permits the Trustee to prevail on the Objection. This Court finds that Debtor's interest is a contingent right to payment, incidental to the Real Property. Further, echoing Judge White in In re Hicks, the Ohio legislature "did not intend to allow an exemption out of money and debts" due to the debtor. Therefore, Debtor's Contingent Right to Payment does not fall within the scope of "interest" in Real Property contemplated by the Exemption Statute.
V. Conclusion
Based on the foregoing, the Court finds that the Contingent Right to Payment does not grant Debtor an interest in the Real Property for purposes of the Exemption Statute. As such, the Objection is hereby sustained, and the Homestead Exemption is disallowed.