618 B.R. 13
Bankr. D.N.M.2020Background
- Debtor purchased and lived in a house at 13445 Panorama Loop NE, Albuquerque, NM, then conveyed it to BHA’s Property 13445 LLC (BHA 13445), of which he is the sole member; he reconveyed to himself in 2016 to refinance and returned title to BHA 13445 in July 2018.
- On the petition date (Aug. 21, 2019) title to the house was held by BHA 13445; Debtor owned 100% of that LLC and listed the LLC on his schedules but checked that he did not own any residence personally.
- Debtor claimed a $53,452 homestead exemption in the house under N.M. Stat. § 42-10-9; the chapter 7 trustee objected, arguing the house is not Debtor’s property.
- Debtor testified he occupies the house under an oral month-to-month lease with the LLC, pays the mortgage, taxes, insurance, and upkeep, and contended this possessory interest supports a homestead exemption.
- The court found the LLC-owned house was not property of Debtor’s estate; only Debtor’s membership interest and his month-to-month tenant interest were estate property, and held a tenant’s oral month-to-month lease has little value because the owner (now controlled by the trustee) may terminate on 30 days’ notice.
- The court rejected Debtor’s alternative request to "reverse pierce" the LLC veil (inside reverse piercing) to treat the house as his property, finding New Mexico law unlikely to permit such extraordinary relief on these facts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the house is property of Debtor’s bankruptcy estate | Trustee: House titled in BHA 13445, so not estate property | Debtor: Sole-member LLC, occupies and pays for house, so effectively his property | House is LLC property; only Debtor’s LLC membership and leasehold interest are estate property |
| Whether Debtor may exempt the house under N.M. homestead statute | Debtor: His occupancy and oral month-to-month lease qualify to claim homestead | Trustee: Only estate interests can be exempted; leasehold is minimal and terminable | Exemption limited to estate’s interest (the lease); that interest has little/no value, so cannot exempt the house |
| Whether court should disregard corporate form (inside reverse piercing) to treat LLC assets as Debtor’s for exemption | Debtor: Form over substance; equity favors treating house as his home | Trustee: Reverse/inside piercing inappropriate; Debtor knowingly sheltered assets behind LLCs | Court declines inside reverse piercing; New Mexico would likely not permit it under these circumstances |
| Final disposition of trustee’s objection | Trustee: Objection should be sustained because Debtor does not own the house | Debtor: Exemption should be allowed based on occupancy, payments, and lease | Trustee’s objection sustained; homestead exemption disallowed as to the house |
Key Cases Cited
- Fowler v. Shadel, 400 F.3d 1016 (7th Cir. 2005) (corporate assets are not property of individual debtor’s bankruptcy estate)
- Owen v. Owen, 500 U.S. 305 (1991) (property must be part of the estate before it can be exempted)
- In re Rogers, 513 F.3d 212 (5th Cir. 2008) (homestead right cannot exceed debtor’s interest in the property)
- In re Casserino, 290 B.R. 735 (9th Cir. BAP 2003) (possessory leasehold interest may be exempted only to the extent of the estate’s interest)
- Scott v. AZL Resources, Inc., 107 N.M. 118 (N.M. 1988) (corporate veil principles; veil piercing disfavored except in special circumstances)
- Floyd v. I.R.S., 151 F.3d 1295 (10th Cir. 1998) (discussion of reverse-piercing doctrines and distinctions)
- United States v. Badger, 818 F.3d 563 (10th Cir. 2016) (federal courts must predict state law but should not require a state high court to have adopted a doctrine explicitly)