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NY Homestead Exemption Applies to Entire Property Even If Partially Rented Out: In re McCarthy (Syracuse case)

Syracuse bankruptcy judge Margaret Cangilos-Ruiz has ruled that a bankruptcy debtor can claim a homestead exemption on an entire parcel or residential property, even if the debtor only resides in part of the property.
In re Craig Michael McCarthy; WDNY Bk #11-31499; decision Nov. 18, 2011.

Mr. McCarthy owned property containing a two family house, both units of which were rented out, and a smaller building in the back where the debtor both worked and lived. In my review of the docket, it appears that the debtor moved to avoid the judicial lien of a creditor, and the creditor, in turn, objected to the debtor's homestead exemption claim. The creditor argued that the homestead exemption should only be allocated to that portion of the lot that is used as the debtor's residence.

The court ruled that the debtor could exempt the entire parcel.

The ruling in part relied on an earlier ruling of Judge Cangilos-Ruiz, In re Ford, 415 BR 51 (Bankr. WDNY 2009). In Ford, the debtor lived on one parcel, an the septic and well water for the homestead parcel came from an adjoining vacant parcel. The parcel with the residence also included two sheds used by the debtor for both personal and commercial purposes. The judge in that case allowed the debtor to extend the homestead exemption to the vacant land parcel as well as the property with the residence. The discussion of the exemption issue in Ford did not include any comments regarding the partial commercial use of the residential parcel.

The McCarthy decision also relied on a decision of WDNY Bankruptcy Judge Michael J. Kaplan, In re Rupp, 415 Br 72 (Bankr. WDNY 2008.) In Rupp, Judge Kaplan allowed the owner of a double house to exempt the entire parcel as a homestead. Both Rupp and McCarthy rely on an earlier New York City case, In re Vizentinis (Bankr. EDNY 1994; Judge Marvin A. Holland), where a debtor who owned a four unit apartment house, and only resided in one of the units, could, never the less, exempt the entire building under the homestead exemption.

Not cited in the McCarthy decision is an unpublished 1992 decision of the Hon. Michael A. Telesca, District Court Judge for the Western District of New York: Randall v. Mastowaki, CIV-92-6049T. Mastowski was an appeal of a decision by our former Rochester Bankruptcy Judge, Hon. Edward D. Hayes, In re Mastowski, 135 BR 1; Bankr. WDNY 1992). The debtor in that case owned two double houses, and only lived in one of the four units. Judge Telesca ruled that the debtor could only claim a homestead exemption "on that part of the property . . . that she occupies as her primary residence."

Judge Kaplan in Buffalo, in his 2008 Rupp case acknowledged the Mastowski district court case, but held that "the binding effect of the decision of a district judge of this district upon all bankruptcy judges of this district depends on whether the district judge published the decision. The rationale for that proviso, first articulated by this writer in the case of In re Phipps [217 BR 427; Bankr. WDNY 1998], was the fact that a bankruptcy judge cannot presume to know the holding of a district court judge of this district if the district judge's holding has not been published."

It has been assumed in Rochester that retiring Judge John C. Ninfo II would follow the reasoning of Mastowski, and only allow a homestead exemption on that portion of a parcel that is actually used as the debtor's residence. The Rochester bankruptcy trustees certainly follow that approach. However, with the retirement of Judge Ninfo, and the new McCarthy opinion coming out of Syracuse, which follows the Rupp decision out of Buffalo, that assumption is now in question.

This issue has not been extensively litigated in the past, probably because the homestead exemption was only $10,000 until 2005. Now that it is between $75,000 and $150,000, depending on the debtor's location in New York State, I would expect more of these homestead exemption claims for multiple-use properties.

Determining what assets owned by a bankruptcy debtor are exempt from creditors and from the bankruptcy trustee is an important part of the bankruptcy process. I believe I am second to none in the Rochester area in analyzing the exemption status of assets, including homestead properties.

If you are considering bankruptcy, and have significant or unusual real estate properties, you should consult a bankruptcy attorney with extensive experience in this area. See my website for more information about asset exemptions in New York State, and contact me for a phone analysis, at no charge, of your situation.

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