In re Carpenter
DECISION AND ORDER ON DEBTOR’S MOTION TO AVOID JUDI-CIAL LIEN AND CREDITOR’S OBJECTION TO LIEN AVOIDANCE AND HOMESTEAD EX-EMPTION
This contested matter is one of first impression in this district as it involves application of the Rhode Island homestead exemption under R.I. Gen. Laws § 9-26-4.1 (“Homestead Exemption”) to the mixed-use residential/commercial property of the debtor Richard F. Carpenter located at 298 Montgomery Avenue, Cranston, Rhode Island (“Property”). Mr. Carpenter filed a motion to avoid the judicial lien held by Citizens Bank, N.A. (“Citizens Bank”)
The Court held evidentiary hearings on June 20, 2016, and June 30, 2016, and the parties filed post-trial briefs (Doc. #39, “Citizens Bank’s Trial Brief,” and Doc. #43, “Mr. Carpenter’s Trial Brief’). The matter was taken under advisement on October 5, 2016. This decision constitutes the Court’s findings of fact and conclusions of law in accordance with Bankruptcy Rules 7052(a), made applicable by Rule 9014(c). After consideration of the testimo-ny and exhibits submitted at the hearing and the parties’ arguments, the Court finds that Mr. Carpenter is entitled to the full exemption of $500,000 for the Property under the Homestead Exemption, and Cit-izens Bank’s lien impairs that exemption and is avoidable in its entirety.
I. Jurisdiction and Venue
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and DRI LR Gen 109(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O).
II. Relevant Procedural History
Mr. Carpenter filed his voluntary petition under Chapter 7 of the Bankruptcy Code on January 28, 2016. Upon filing, he claimed the Property exempt under the Homestead Exemption for the full $500,000 amount available, and no formal objections were filed. On March 28, 2016, relying on Bankruptcy Code § 522(f)(1)(A), Mr. Carpenter filed the Motion now under consideration to avoid Citizens Bank’s judgment lien against the Property in the approximate amount of $79,889. The Prop-erty is valued at $175,000 and is subject to no other encumbrances. On April 14, 2016, Citizens Bank filed its Objection, and Mr. Carpenter filed a memorandum of law re-sponding to the Objection (Doc. # 23). Citi-zens Bank then filed its response (Doc. # 27).
III. Stipulated Facts
The parties have stipulated to the fol-lowing pertinent facts (Doc. #34, “Joint Pre-Trial”). Mr. Carpenter purchased the Property on May 1, 1986, with his then-wife. Since then he has operated his auto repair business, Columbus Services, Inc., from the Property.
Mr. Carpenter made some improve-ments to the Property after the Variance was granted to enable him to live there and has continuously resided there as his sole residence since 2004 or- 2005.
IV. Applicable Law
A. Section 522(f) and the Burden of Proof
Section 522(f)(1) authorizes a debtor to avoid a judicial lien “to the extent that such a lien impairs an exemption to which the debtor would have been entitled” under federal or state law. See In re Derocha,
Here, Citizens Bank filed its Objection challenging Mr. Carpenter’s Homestead Exemption 13 days before the dead-
B. The Rhode Island Homestead Ex-emption
Unlike in a number of other states, a debtor need not record a declaration of homestéad to claim the Rhode Island Homestead Exemption; it applies automatically up to $500,000 “in the land and buildings ... by an owner of a home or an individual who rightfully possesses the premises ... and who occupies or intends to occupy the home as his or her principal residence.” R.I. Gen. Laws § 9-26-4.1(a) (2016). The statute extends to “a sole owner, lessee ... joint tenant, tenant by the entirety, or tenant in common ..,” R.I. Gen. Laws § 9-26-4.1(b) (2016).
Similar to other homestead exemption statutes, “The Homestead exemption is a longstanding precept of property law formulated to protect the family and the home from the reach of creditors.” In re Ryan,
V. Analysis
A. Scope of the Homestead Exemption
Resolution of this contested matter hinges on whether Mr. Carpenter can invoke the Homestead Exemption for his Property in which he both resides and conducts a commercial enterprise. It is a question that has not been addressed by the Rhode Island Supreme Court (or for that matter the lower state courts). Citizens Bank contends that Mr. Carpenter is
In the first instance, the Court must look to the language of the Homestead Exemption statute itself. “When a debtor has claimed a homestead exemption under state law, his entitlement to the exemption must be determined by examining the applicable state law, rather than relying upon decisions from other jurisdictions.” In re Shell,
Analyzing the statute necessarily starts with the rules of statutory construction under Rhode Island law. A guiding principle is “establishing and effectuating the intent of the Legislature. ... accomplished [by examining] the language, nature, and object of the statute. ... [and giving] to the words in a statute their plain and ordinary meaning, unless a contrary interpretation is apparent.” Howard Union of Teachers v. State,
The Homestead Exemption applies to the “land and buildings ... by an owner of a home ... who occupies or intends to occupy the home as his or her principal residence.” (emphasis added). The term “home” is not expressly defined in the statute. Bearing in mind the rules of statutory construction discussed above, the primary issue is whether the Property qualifies as a “home” under the statute. The term itself is quite commonplace and unambiguous. It should therefore be given its plain and ordinary meaning prescribed to it when the Homestead Exemption was enacted in 1998.
Citizens Bank maintains that the Rhode Island legislature intentionally used “home” in the Homestead Exemption rather than a broader property term because the “practical meaning of ‘homestead’ or ‘home’ does not encompass a commercial structure.” Citizens Bank’s Trial Brief, at 6. It cites to the definition for “homestead” in the Rhode Island tax exemption statute that refers to a “multi-dwelling or multi-purpose building,” arguing that this defini-tional omission from the Homestead Ex-emption supports its contention. See R.I. Gen. Laws § 44-38-3(4) (2016).
The Court does not find this particularly persuasive. Nothing in the ordinary definition of “home” as used in the Homestead Exemption leads to the conclusion that a multi-purpose building cannot serve as an individual’s principal residence to which the exemption applies. Indeed, in his Trial Brief, Mr. Carpenter cites several cases holding that homestead exemptions do in fact encompass multi-purpose buildings. See In re Rommer,
There is no language in the Homestead Exemption that limits its application to purely residential structures. All that it requires is that the individual must be an “owner” or “rightfully possesses the premises” ... and “occupies or intends to occupy the home as his or her principal residence.” This interpretation is just as consistent with the Rhode Island tax exemption statute that Citizens Bank highlights. Section 44-33-3(4) of the tax exemption provisions defines “homestead” to mean the dwelling structure, “whether owned or rented, and so much of the land surrounding it, not exceeding one acre, as is reasonably necessary for use of the dwelling as a home, and may consist of a part of the multi-dwelling or multi-pur-pose building and a part of the land upon which it is built_” (emphasis added).
Significantly, the Court’s conclusion that a mixed-use property falls within the scope of the Homestead Exemption fully embraces the legislative intent and purpose of the statute: to protect homes from creditors, promote stability and welfare for the homeowner, and secure the homeowner from living in “financial misfortune.” See In re Tetreault,
B. Citizens Bank’s Predominant-Use Ar-gument
Citizens Bank raises an alternative argument under the so-called predominant-use test adopted by some courts when applying homestead exemption statutes to mixed-use properties. In its Objection, it originally raised an additional apportionment argument pursuant to which it contended that only 34.6% of the Property is used residentially based on Cran-ston’s zoning records, and that only this percentage of the exemption amount should apply to the Property. If this calcu-lation applied, the lien of Citizens Bank would not be avoidable. But it appears to have abandoned this alternative position, relying instead in its Trial Brief, on the predominant-use test as one of the grounds for denial of any amount of the Homestead Exemption.
To buttress its argument, it relies on the Massachusetts bankruptcy court’s de-cision in In re. Cotton that addressed whether the Massachusetts homestead ex-emption applied to the debtor’s two-family residence where the debtor resided in one of the units and used the other unit as office space from which he conducted his insurance business. No. 14-41468-MSH,
Turning to its zoning, Citizens Bank as-serts that the larger square footage of the Property is zoned commercial, and Mr. Carpenter’s residential use should be limit-ed to that area granted in the Variance. Therefore, it maintains, the Property is predominantly commercial property which, despite also being Mr. Carpenter’s sole residence, does not qualify for the Home-stead Exemption. It takes this argument to the extreme. Upon inquiry at the hear-ing, counsel for Citizens Bank stated that even if all commercial activity at a mixed-use property had ceased as of the petition date (the operative date), a debtor still would not be entitled to invoke the exemption. Neither the language of the Home-stead Exemption nor case law supports this proposition. See In re Kasha, No. 07-12568,
It is far from clear whether the provi-sions of the Homestead Exemption leave room for application of a predominant-use test. Mr. Carpenter asserts it does not, highlighting the only two conditions for a property. to qualify for the exemption: ownership or lawful possession and occu-pation or intent to occupy the property as a principal residence. The Court need not dwell on the issue further because based on the testimony and evidence adduced at the hearing, the Court finds that the Prop-erty’s use is predominantly residential and qualifies jbr the full exemption of $500,000.
1. The Property’s Commercial Versus Residential Use
The Váriance issued to Mr. Carpenter upon review of his application, to which an interior diagram of the Property depicting the proposed residential area was at-tached, authorized an area of 676 square feet for residential use. The balance of 1,276 square feet remained zoned for com-mercial use. By virtue of these designa-tions alone, Citizens Bank argues that the Property’s commercial square footage out-weighs the residential, rendering it pre-dominantly commercial property ineligible for any exemption. The Court disagrees. Mr. Carpenter testified that he physically measured the interior areas and he actually uses 1,280 square feet of the Property as his residence,
Citizens Bank would have the Court ig-nore the realities of the actual usage here. Zoning does not equate to use. The fact remains that the areas Mr. Carpenter uses residentially, even if outside the Variance, are simply not being used for commercial purposes of any kind. Adopting Citizens Bank’s viewpoint “would leave unprotected every home in which an owner operates a business, no matter how insubstantial.” In re Cotton,
The limited and insubstantial nature of the business operations is underscored by its dwindling annual revenues. The federal tax returns of Columbus Services admitted into evidence for the years 2013 to 2015 list gross income of $6,637, $5,288 and $4,944, respectively. See Exs. H-J. Mr. Carpenter testified that Columbus Ser-vices does not pay any rent for the use of the Property, and he receives minimal and fluctuating income from the business. He relies heavily on his social security income of approximately $13,500 for his support. His personal federal income tax returns for the years 2013 to 2015 identify his occupation as “retired.” See Exs. K-M. He also projected that the 2016 gross revenue of Columbus Services will be between $2,000 and $3,000 because the business is “sinking.” He does not anticipate such rev-enues to increase in future years. Given the downward revenue spiral, his age, and his health issues, the Court finds Mr. Car-penter’s projections reasonable.
2. Expansion of Residential Use
Citizens Bank’s last salvo is that Mr. Carpenter’s unauthorized expansion of his residential use of the Property beyond the Variance, which it asserts is a zoning violation, should preclude him from receiving the benefit of the Homestead Exemption. Without doubt, and the Court so finds, Mr. Carpenter’s residential use of the Property goes beyond the square footage granted by the Variance. To put things in perspective, however, Mr. Rioles of the Cranston Zon-ing Board of Review/Planning Commission testified that three sides of the Property
In the end, the encroachment of the residential use of the Property is an issue between Mr. Carpenter and the zoning officials of the City of Cranston. It is not a basis on which to deny Mr. Carpenter his Homestead Exemption. See In re Pich,
The Court finds that In re Kellogg, the primary case Citizens Bank relies upon, is inapposite.
Additionally, the-Kellogg court conclud-ed that the debtor would not be entitled to exempt the entire property because it ex-ceeded the acreage limits under the Flori-da homestead exemption. 197 F,3d at 1122. A key factor in the Court’s denial of the exemption was that the property could not be subdivided into a parcel consisting of the allowable acreage and a parcel contain-ing the remaining acreage without zoning approval. Id. at 1120-21. Most troubling to the court was its concern that the debtor’s maneuvering would prevent the case trus-tee from seeking zoning approval to subdi-vide the remaining acreage for the benefit of the estate. See id.
But here, Mr, Carpenter’s entire Prop-erty falls within the bounds of the Home-stead Exemption. Unlike the Florida stat-ute, the Rhode Island statute contains no acreage limitation to its application or leg-islative history regarding mixed-use prop-erty. The Court finds that Mr. Carpenter
C. Lien Avoidance under Bankruptcy Code § 522(f)
Having determined that the Property qualifies under the Homestead Exemption for the full amount of $500,000, the requisite calculation under § 522(f)(2)(A) has been satisfied and Mr. Carpenter has established that Citizens Bank’s lien impairs his exemption and it is avoidable in its entirety.
VI. Conclusion
The Objection of Citizens Bank is OVERRULED, the Motion is GRANTED, and the lien of Citizens Bank is avoided in its entirety.
Notes
. On April 16, 2014, RBS Citizens, N.A. changed its name to Citizens Bank, N.A. as evidenced by a copy of the Certification of
. Unless otherwise indicated, the terms “Bankruptcy Code,” "Chapter,” “section” and “§” refer to Title 11 of the United States Code, 11 U.S.C. §§ 101, eí seq., as amended by the Bankruptcy Abuse Prevention and Con-sumer Protection Act of 2005, Pub L. No. 109-8, 119 Stat. 37 (“BAPCPA”). References to the “Bankruptcy Rules” or “Rules” shall mean the Federal Rules of Bankruptcy Proce-dure.
. The parties refer the company as "Colum-bus Service, Inc.,” but its corporate tax filings list the actual entity name as "Columbus
. Photographs of the interior of the Property taken on April 25, 2016, reflect its use as of the petition date. See Ex. G. It is evident from these photographs that the term "improve-ments” is an overstatement; any alterations were modest at best simply to allow Mr. Car-penter to use the premises as his home.
. The 2015 assessment lists these measure-ments as “BAS” and "APT.” At the hearing, the City of Cranston’s Tax Assessor, Salvatore Saccoccio, testified that "BAS” is the shortcut designation for the first floor/commercial portion, and "APT” for the residential portion granted under the Variance. The Property is taxed as mixed-use, requiring Mr. Carpenter to pay the commercial property rate. The Tax Assessor’s 2008-2014 assessments introduced into evidence do not account for the change to residential use for the area granted under the Variance.
.Bankruptcy Rule 4003(c) provides, in part, "In any hearing under this rule, the objecting party has the burden of proving that the ex-emptions are not properly claimed.” (empha-sis added).
. As relevant here, the statute provides, “In addition to the property exempt from attachment as set forth in § 9-26-4, an estate of homestead to the extent of five hundred thou-sand dollars ($500,000) in the land and build-ings may be acquired pursuant to this section by an owner of a home or an individual who rightfully possesses the premises by lease, as a life tenant, as a beneficiary of a revocable or irrevocable trust or otherwise, and who occu-pies or intends to occupy the home as his or her principal residence.” R.I. Gen. Laws § 9-264.1(a) (2016).
. See Property Exempt From Attachment— Homestead Exemption, 1998 Rhode Island Laws Ch. 98-270 (98-§ 2999). To ascertain the meaning of undefined terms in a Rhode Island statute, "reference to contemporaneous dictionaries is appropriate and often helpful.” Chambers v. Ormiston,
. A court may consider other " 'statutes relat-ing to the sanie subject matter ... so that they will harmonize with each other and be consis-tent’ with their general objective scope.”
. As applied, two schools of thought under the predominant-use analysis have emerged “driven primarily by the language of the par-ticular exemption statutes and in part by the practicalities of the situation.” In re Turner, No. 04-40267DRD,
. This figure is consistent, with the square footage provided on Mr. Carpenter’s Exhibit C-2. Citizens Bank asserts that the residential use consists of 884 square feet, deducting the
. Mr. Carpenter’s photographs of the Prop-erty’s interior show each of these areas with the exception of the small bedroom and the storage areas. See Ex. G. The basement area is not shown on any of the City of Cranston’s zoning sketches of the interior of the Property, and Citizens Bank maintains that it is not approved for residential use.
. While ultimately the court in Pick denied the debtor’s claimed exemption, it was on grounds of judicial estoppel based on the debtor having obtained a zone change from commercial to industrial,
. Mr. Carpenter’s Motion describes a second Citizens Bank lien on the Property in the same amount recorded on consecutive pages. At the hearing, Citizens Bank admitted to erroneously filing the same lien against Co-lumbus Services and voluntarily released that lien on the record. While the Motion included this lien in the calculation, adjusting for this duplication, Citizens Bank’s lien is avoidable because the sum of (1) the lien to be avoided ($79,889.86), (2) the total of all other liens against the Property ($0), and (3) the total amount of the Homestead Exemption that Mr. Carpenter is entitled to claim ($500,000), mi-nus the value of his interest in the Property ($175,000), impairs his exemption by $404,888.86. See In re Derocha,