BEWARE THE VANISHING MASSACHUSETTS HOMESTEAD EXEMPTION

On August 6, 2014, Judge William Hillman issued a decision in In re Marybeth Bauer Williams, 14-10559-WCH, addressing an issue of great importance to consumer bankruptcy lawyers. Judge HIllman was presented with an issue of first impression in Massachusetts that required him to interpret Section 11 of the Massachusetts Homestead Law which provides protection for proceeds generated by the sale of homestead property. That Section provides in relevant part that if a home is sold, the proceeds received on account of the sale are entitled to the protection of the Homestead statue “for a period ending on the date on which the person benefited by the homestead either acquires another home the person intends to occupy as a principal residence or 1 year after the date on which the sale or taking occurred, whichever first occurs”. In Williams, the Chapter 7 Trustee asserted that the protection afforded homestead proceeds terminated because the proceeds were not reinvested within one year and Judge Hillman agreed with the Trustee.

The Facts – The Debtor owned a home with her spouse. The parties separated and agreed to sell their home and split the proceeds, which they did on March 29, 2013, each receiving $31,640.49. The Debtor filed Chapter 7 on February 13, 2014, within one year of the sale of the home, listing $29,000.00 in a bank account on Schedule B and claiming the funds as exempt proceeds from the sale of her home on Schedule C pursuant to the Massachusetts Homestead Statute. The one year period provided under Section 11 of the Homestead statute expired post-petition on March 29, 2014 and the Debtor had not yet re-invested the proceeds in a new home. The Chapter 7 Trustee filed an objection to the homestead exemption, asserting that the Debtor’s exemption claim had vanished by operation of law and that all the proceeds in the bank account were property of the estate available for distribution to the Debtor’s creditors.

The Ruling – The Debtor argued that her exemption was fixed on the petition date – the proceeds were exempt on the date the petition was filed and that could not change with the passage of time. The Court acknowledged the general rule that exemptions are determined when a petition is filed but noted that the scope of the exemption must be determined by state law. The Court first explored the nature and extent of the protection afforded proceeds generated by the sale of homestead property by the Massachusetts statute, stating that the “protection afforded sale proceeds is not absolute”.   The Court noted that the effect of the one year limitation in Section 11 was not to terminate the homestead exemption but rather to limit its term. The Court also found that the time limit in Section 11 did not conflict with the Bankruptcy Code. Therefore, the Court concluded that the temporal limitation in Section 11 of the Homestead Statute was enforceable and ruled that the protection afforded the Debtor’s proceeds by Section 11 had expired. However, because the Debtor’s divorce proceeding was not yet concluded, the Court continued the Trustee’s objection generally, finding that the proceeds were exempt under Section 6 of the Massachusetts Homestead Statute until the Probate proceedings were concluded and the parties rights to marital property were fixed.

Takeaway – The one year time limit in Section 11 of the homestead statute is enforceable post-petition. Proceeds generated by the sale of homestead property that are not invested in a new homestead within one year after the sale date, even if the expiry of the one year period occurs post-petition, are not exempt from creditor claims.