In re: Monae Breece v.
COUNSEL
ARGUED: Michael V. Demczyk, McNAMARA, DEMCZYK CO., LPA, Uniontown, Ohio, for Appellant. Todd A. Mazzola, RODERICK LINTON BELFANCE, LLP, Akron, Ohio, for Appellee. ON BRIEF: Michael V. Demczyk, McNAMARA, DEMCZYK CO., LPA, Uniontown, Ohio, for Appellant. Todd A. Mazzola, Brian T. Angeloni, RODERICK LINTON BELFANCE, LLP, Akron, Ohio, for Appellee.
OPINION
C. KATHRYN PRESTON, Bankruptcy Appellate Panel Judge. In this appeal, Monae Breece (“Debtor”) appeals the bankruptcy court’s ruling that she may not claim a homestead exemption in real property pursuant to
I. ISSUES ON APPEAL
The issue presented in this appeal is whether the bankruptcy court erred in determining that Debtor does not hold an interest in residential real property in which she can claim a homestead exemption pursuant to
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the Panel, and no party has timely elected to have this appeal heard by the district court.
The bankruptcy court‘s legal determinations are reviewed de novo. Darrohn v. Hildebrand (In re Darrohn), 615 F.3d 470, 474 (6th Cir. 2010) (citing Shaw v. Aurgroup Fin. Credit Union, 552 F.3d 447, 449 (6th Cir. 2009)). A bankruptcy court‘s decision involving application or interpretation of state law is a conclusion of law reviewed de novo. In re Zingale, 451 B.R. at 414 (citing Menninger v. Schramm (In re Schramm), 431 B.R. 397, 399 (B.A.P. 6th Cir. 2010)). “Interpretation of a state‘s exemption statute involves a question of law and is reviewed de novo.” Menninger v. Schramm (In re Schramm), 431 B.R. 397, 399 (B.A.P. 6th Cir. 2010) (citing Hamo v. Wilson (In re Hamo), 233 B.R. 718, 721 (B.A.P. 6th Cir. 1999)). De novo
III. FACTS
On January 13, 2004, Debtor and her grandmother, Gladys Brown, jointly obtained legal title to the real property known as 2124 Greencrest Drive, Union Town, Ohio (the “Real Property”). On April 1, 2004, articles of organization for Gardinia Breeze, L.L.C.1 (“Gardinia”) were filed; Debtor and Ms. Brown initially held the membership interests. On July 2, 2004, Debtor and Ms. Brown transferred the Real Property to Gardinia; Gardinia continues to hold legal title to the Real Property.
Ms. Brown passed away, leaving Debtor as the sole remaining member of Gardinia. Gardinia has no debt and the Real Property is its only asset. The Real Property is subject to a mortgage; Debtor is personally liable for the debt secured by the mortgage.
On July 5, 2011, Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Debtor has used the Real Property as her residence since 2004, and still resided on the Real Property at the time of commencement of the Chapter 7 case.
The Real Property is listed on Debtor’s Schedule A with no indication of the nature of Debtor’s interest in the property. On Schedule C, Debtor claimed a homestead exemption in the Real Property pursuant to
The Chapter 7 Trustee (“Trustee”) filed an objection to Debtor’s claim of exemption in the Real Property, in part on the basis that the Real Property is titled in the name of and owned by Gardinia and not Debtor. Debtor filed a Response to Trustee’s objection to exemption, and Trustee filed a reply to Debtor’s response.
IV. DISCUSSION
The filing of a petition for relief under the Bankruptcy Code creates a bankruptcy estate consisting of “all legal or equitable interests of the debtor in property as of the commencement of the case.”
In this case, Debtor claimed a homestead exemption in the Real Property owned by Gardinia pursuant to
(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) [T]he person‘s interest, not to exceed [$21,625]2, in one parcel or item of real or personal property that the person or a dependent of the person uses as a residence.
Debtor argues that her status as sole member of Gardinia vests in her a sufficient interest in the Real Property to entitle her to claim a homestead exemption as contemplated by
The bankruptcy court determined that Debtor is not entitled to claim a homestead exemption in the Real Property pursuant to
A. Ohio Limited Liability Company Law
In this appeal, Debtor has not clearly defined her interest in the Real Property; however, she does not assert an interest in the Real Property unrelated to her status as sole member in Gardinia. Debtor submits that her interest in the Real Property is derivative of her membership interest in Gardinia because Debtor would otherwise be entitled to a distribution upon liquidation of Gardinia absent an intervening bankruptcy filing.
In determining whether a person’s membership interest in an LLC confers upon him an exemptible interest in LLC property, a court must attempt to predict how the Ohio Supreme Court would rule if presented with the same issue. “In construing questions of state law, the federal court must apply state law in accordance with the controlling decisions of the highest court of the state.” Meridian Mut. Ins. Co. v. Kellman, 197 F.3d 1178, 1181 (6th Cir. 1999) (citation omitted). “If the state‘s highest court has not addressed the issue, the federal court must attempt to ascertain how that court would rule if it were faced with the issue.” Meridian, 197 F.3d at 1181. “[T]he Court may rely upon 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.” Owensby v. City of Cincinnati, 385 F. Supp. 2d 626, 631 (S.D. Ohio 2004) (internal quotation marks and citation omitted).
There is no Sixth Circuit caselaw on the issue before this Panel. However, an unpublished decision from Northern District of Ohio is closely on point and held that the Supreme Court of Ohio would hold that members of an LLC do not have an exemptible “interest” in real property owned by the LLC within the meaning of the Ohio homestead statute as a result of their membership interest in the LLC. In re Stewart, Ch. 7 Case No. 09-37257, ECF No. 207, Mem. Decision Regarding Objection to Homestead Exemption (Bankr. N.D. Ohio Oct. 1, 2010).
The debtors in Stewart argued three theories to support their claim of homestead exemption in the LLC’s real property: (1) as the sole members of the LLC they had an interest in the real property; (2) they had an oral lease with the LLC which qualifies as an exemptible interest under
In addressing the debtors’ first theory, the Stewart court examined both Ohio and Delaware law relating to an LLC and determined that under the law of both states, “an individual’s status as a member of a limited liability company does not result in an ownership interest in property owned by the entity[,]” and therefore, the debtors did not have an exemptible interest in the real property as a result of their membership interests in the LLC. In re Stewart, Ch. 7 Case No. 09-37257, ECF No. 207, Mem. Decision Regarding Objection to Homestead Exemption at 5 (Bankr. N.D. Ohio Oct. 1, 2010). In addressing the second theory advanced by the debtors, the court determined they did not have an oral lease with the LLC but instead had nothing more than a tenancy at will. The court ultimately determined that a tenancy at will did not rise to the level of tenancy that qualifies for the homestead exemption under
At least one other bankruptcy court has declined to allow debtors to claim a homestead exemption in real property owned by an LLC of which they were the sole members. In re Kane, No. 10-18898-JNF, 2011 Bankr. LEXIS 2007 (Bankr. D. Mass. May 23, 2011). Aligning itself with the Stewart court, the court in Kane declined to permit debtors to pierce the veil to regain title to the real property owned by the LLC, and determined that the real property is not exemptible because it was not property of the bankruptcy estate.
Debtor urges that Stewart is distinguishable and argues that the bankruptcy court’s reliance on Gaylord, Son & Co. v. M. Imhoff & Co., 26 Ohio St. 317 (1875), was misplaced. Debtor points out that the Gaylord court applied an earlier version of Ohio’s exemption statute that did not include the term “interest.” While this is true, it is a distinction without a difference. In Gaylord, the issue before the Supreme Court of Ohio was whether the partners of an insolvent partnership were entitled to statutory exemptions out of partnership property when the same had been seized in execution by the partnership creditors. Gaylord, 26 Ohio St. at 320. The partnership creditors obtained a judgment against the partners and levied upon a leasehold and machinery held by the partners as partnership property. The partners collectively agreed to claim statutory exemptions in the property. At that time, the exemption statute at issue provided as follows:
Sec. 3. That it shall be lawful for any resident of Ohio, being the head of a family and not the owner of a homestead, to hold exempt from levy and sale as aforesaid, personal property to be selected by such person, his agent or attorney, at any time before sale, not exceeding five hundred dollars in value, in addition to the amount of chattel property now by law exempted. The value of said property to be estimated and appraised by two disinterested householders of the county, to be selected by the officer, etc.
Gaylord, 26 Ohio St. at 320 (quoting 66 Ohio L. 50). After examining the language of the exemption statute, the Supreme Court of Ohio stated:
Looking alone to the language of the section above quoted, we find nothing to justify the inference that the legislature in passing it was intending to provide for other than individual debtors, and for the exemption of their individual property from sale on execution; and when construed in connection with the law relating to partnerships, as it had always stood and still stands, we are convinced that it could not have been
the intention of the law-maker to bring partners or partnership property within the operation or provisions of the section in any respect.
Gaylord, 26 Ohio St. at 321. Accordingly, the court determined that the partners were not entitled to an exemption in the partnership property. Clearly, the Supreme Court of Ohio in Gaylord was unwilling to extend Ohio’s exemptions to partners or partnership property because it interpreted the statute to encompass only individual debtors and their individual property. This decision is instructive of how the Supreme Court of Ohio would rule if faced with the facts of the instant case: it is unlikely that the Supreme Court of Ohio would allow a member of an LLC to claim an exemption in property owned by an LLC pursuant to Ohio’s homestead exemption given the fact the Gaylord court did not extend the Ohio exemption statute to the partners in that case. Based on Ohio law, this Panel concludes that the bankruptcy court correctly held that Debtor’s membership interest in Gardinia does not bestow on her an interest in the Real Property.
B. Use of the Real Property and Liberal Construction of Homestead Exemption
Debtor argues that a liberal construction of Ohio’s homestead exemption statute does not require the person claiming it to hold an ownership interest in the property, and therefore, the primary focus for determining whether the homestead exemption applies should be whether the Debtor possesses and uses the Real Property as her residence. Debtor asserts that the most important statutory element of the Ohio homestead exemption is the term “uses,” and it should trump all other statutory elements including the term “interest.”3
Debtor relies upon a recent Sixth Circuit Bankruptcy Appellate Panel opinion involving Ohio’s homestead exemption, In re Wengerd, 453 B.R. 243 (B.A.P. 6th Cir. 2011), for the proposition that the debtor’s use of the property is crucial to determining the claim for homestead exemption. In Wengerd, the debtors entered into a contract to sell their home prior to filing bankruptcy. On the day the debtors filed their bankruptcy petition, they were using their property
Exemptions are determined on the date a bankruptcy petition is filed. The Debtors were using their property as their principal residence on the date they filed their petition. Therefore, the Debtors’ intention to leave their property post-petition is irrelevant and does not defeat their claim to the homestead exemption provided by
Ohio Rev. Code § 2329.66(A)(1) .
Debtor’s reliance on Wengerd is not well-taken. The Panel in Wengerd did not have to determine whether the debtors in that case had an interest in the property as the debtors owned the property and the parties clearly were not disputing that fact. The only issue before that Panel was whether the homestead statute required that debtors intend to remain in the homestead in order to properly claim a homestead exemption. Naturally, the Panel focused on that element because it was the only issue in dispute. Debtor overemphasizes this fact and seems to suggest that the usage of the property as a residence is paramount to any other statutory elements in
Debtor also relies upon several opinions from the Supreme Court of Ohio for support of the proposition that possession and physical occupancy, and not ownership of real property are the focus for claiming a homestead exemption. Morgridge v. Converse, 150 Ohio St. 239, 81 N.E.2d 112 (1948); McComb v. Thompson, 42 Ohio St. 139 (1884); Jackson v. Reid, 32 Ohio St. 443 (1877); Gibson v. Mundell, 29 Ohio St. 523 (1876). Debtor’s reliance on these cases is misplaced. Though the courts in rendering these opinions discuss the fact that a debtor must possess or use the real property as a residence before he can claim a homestead exemption therein, the courts did not have to determine whether or if the debtor in each case held a sufficient interest in the real property before examining the homestead exemption issues. While the cases support the proposition that a debtor must use or possess real property as a residence before claiming an exemption, the cases do not support the proposition that residing in the property is sufficient to prove an ownership or other
Debtor argues that she held an “interest” in her residential real estate within the meaning of the Ohio homestead exemption, but she fails to provide any citation of authority for that proposition other than
“Ohio courts follow the rule that exemption statutes are to be construed liberally in favor of the debtor and any doubt in interpretation should be in favor of granting the exemption.” Baumgart v. Alam (In re Alam), 359 B.R. 142, 147-148 (B.A.P. 6th Cir. 2006) (citing Daugherty v. Cent. Trust Co. of Northeastern Ohio, N.A., 28 Ohio St. 3d 441, 445, 504 N.E.2d 1100, 1103 (1986)). Use 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.” Dennis v. Smith, 125 Ohio St. 120, 124, 180 N.E. 638, 640 (1932).
Debtor relies on Radford v. Kachman, 27 Ohio App. 86, 160 N.E. 875 (Ct. App., Athens County 1927) for support of the proposition that equitable title is sufficient to qualify for the homestead exemption. In Radford, a creditor filed suit against the debtor and his wife, who were owners of certain real property. The debtor and his wife conveyed what was deemed a mortgage to a lumber company, thereby conveying legal title to it and reserving equitable title in themselves. The court in determining whether the homestead exemption applied, held that “ [t]he homestead law protects a possession held under an equitable as well as one under a legal title. Under this rule a homestead may be claimed in land of which the party is in possession under a contract of purchase or any other equitable title as well as if he held the legal title.” Radford, 27 Ohio App. at 91 (citation omitted). Prior court decisions must be considered within the context of legal practices at the time. Before the Uniform Commercial Code existed, a conveyance of title was a mechanism for financing whereby the property owner did not intend for creditor to retain legal title in the property. The Radford court recognized that the title to the real estate was conveyed by the debtor solely as a means of securing debt and that debtor was the true owner of the real estate.
Debtor also argues that the bankruptcy court impermissibly inserted an ownership element into Ohio’s homestead exemption statute by in effect requiring a debtor to hold legal title to real property in order to claim a homestead exemption. Debtor argues that the plain meaning of the homestead statute does not require a person to have a title ownership interest in the property being claimed exempt.
“It is a cardinal rule that a court must first look to the language of the statute itself to determine the legislative intent. If that inquiry reveals that the statute conveys a meaning which is clear, unequivocal and definite, at that point the interpretive effort is at an end, and the statute must be applied accordingly.”
Zumwalde v. Madeira & Indian Hill Joint Fire Dist., 128 Ohio St. 3d 492, 496, 946 N.E.2d 748, 752 (2011) (quoting Provident Bank v. Wood, 36 Ohio St. 2d 101, 105-106, 304 N.E.2d 378, 381 (1973)). “In determining legislative intent it is the duty of this court to give effect to the words used, not to delete words used or to insert words not used.” Columbus-Suburban Coach Lines, Inc. v. Public Utils. Comm’n, 20 Ohio St. 2d at 127, 254 N.E.2d 8, 9 (1969). The bankruptcy court determined that Debtor’s membership interest in Gardinia did not confer upon her an “interest” in the Real Property as contemplated by
C. Property of the Estate
The definition of property of the estate pursuant to
Debtor cannot claim an interest in real or personal property owned by Gardinia pursuant to Ohio limited liability law. As previously discussed, pursuant to Ohio law, a person owning an interest in an LLC is a member of that LLC.
Additionally, Debtor cannot claim a homestead exemption in the Real Property because neither the Real Property nor any interest therein is property of the estate. Property of the estate consists of “all legal or equitable interests of the debtor in property as of the commencement of the case.”
V. CONCLUSION
For the reasons set forth herein, the Panel affirms the bankruptcy court’s opinion and order sustaining Trustee’s objection and disallowing Debtor’s claimed exemption in the Real Property.
Notes
(B) 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 the change 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.