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Can a Bankruptcy Debtor in Rochester Exempt Property that is Both Residential and Commercial?

A colleague of mine reports that Rochester Bankruptcy Judge Paul R. Warren appears to be of the opinion that property can qualify for the homestead exemption even if it is used in part for non-residential purposes. The issue came up in a recent hearing before the judge; no formal decision was delivered, but Judge Warren, according to this source, said from the bench that the debtor could exempt mixed-use property.

If so, this will be a change from current practice, at least in Rochester NY. The issue comes up all the time: a debtor owns a double house, living in one side and renting the other, or a debtor has a home-office, using a part of the house for commercial purposes. Until now, most local attorneys would have assumed that the property would have to be separated into a residential portion, where the debtor actually lives, and a non-residential area, where the rental unit or the home office is located.

Judges in Buffalo and Syracuse, as well as New York City, have concluded that if a debtor has a residence on a plot of land, the whole property - not just the residential portion - qualifies for the homestead exemption. And the Syracuse case was upheld by a District Court judge, contrary to earlier decisions by district courts in Syracuse and Rochester.

For many years the homestead exemption in New York State was only $10,000, but that was bumped up to $50,000 in 2005 and $75,000 a few years later (even more for debtors outside of Metro NY and the Hudson Valley). With more money at stake, the scope of the exemption is more important that it use to be.

The first reported decisions on this issue were the Hager cases. Mr. Hager operated a chiropractor office in the lower level of his house in Oswego County when he filed a chapter 13 case in 1980. Six years later, he moved to avoid the judicial lien of a creditor as impairing the equity in his home. The bankruptcy judge ruled that Hager could avoid a lien against the portion of the house that he used as his residence, but not the part used as the chiropractor office. In re Hager, 74 BR 198 (Bankr. NDNY 1987).

The creditor appealed (due to other aspects of the decision), and the United States District Court affirmed. In re Hagen 90 BR 584 (NDNY 1988).

The issue came up in Rochester soon afterward in a case where a debtor out of Geneva NY attempted to exempt his homestead equity in a property with four units, only one of which was his residence. District Court Judge Michael Telesca, overruling the bankruptcy court, determined that the debtor could only exempt equity in his one unit, not the whole parcel. The decision was written and distributed locally in Rochester (Randall v. Mastowski; 92-CV-6049T; WDNY decision April 17, 1992), but it was not formally 'published'; that is, it was not submitted to the Bankruptcy Reporter for publication nationwide.

A few years after that, a bankruptcy judge in New York City came to the exact opposite conclusion. A debtor in Astoria, Queens, attempted to exempt equity in a four unit apartment building. The judge concluded that the property met the statutory definition of a homestead - a lot with the debtor's dwelling on it - and so the entire property was exempt. In re Vizentinis, 175 BR 824 (Bankr. EDNY 1994). The Vizentinis court specifically disagreed with District Court decision in

The next case on this issue came fourteen years later, after the homestead exemption was increased to $50,000. Bankruptcy judge Michael Kaplan in Buffalo allowed a debtor who owned a double house to exempt the whole property, even though the debtor only lived in half of it. In re Rupp 415 BR 72 (Bankr. WDNY 2008)

Judge Kaplan questioned whether the debtor in Hagen actually opposed the court determination that only the residential portion of the property should be included in the homestead exemption and, in any case, that decision was from a different court.

Judge Kaplan also explained why he was not required to follow Judge Telesca's 1992 Mastowski decision. There is a tradition within the bankruptcy court in Rochester and Buffalo to follow the published opinions of any District Court judge in the Western District of New York, but since Mastowski was never published, it did not have to be followed.

A year later, Bankruptcy Judge Cangilos-Ruiz of Syracuse reached a similar conclusion. The debtor in that case owned two parcels of land with various buildings, sheds and trailers on them, including the debtor's living quarters. In re Ford 415 BR 51 (Bankr. NDNY 2009).

The bankruptcy judge concluded that the debtor could treat the parcels and all their structures asthe debtor's homestead, and that she was not obligated to follow the Hagen district court decision from twenty one years earlier.

The Ford decision was itself appealed to District Court, where it was affirmed.

Community Bank v. Ford Case #09-CV-633 (NDNY decision of Judge Sharpe, dated Dec. 8, 2009). The District Court rejected the Hagen holding: "Significantly, like the bankruptcy court here, other bankruptcy courts in this Circuit that have considered the apportionment question since Hager have rejected the apportionment approach as unworkable and inconsistent with the statutory language. See In re Vizentinis, 175 B.R. at 826 & nn.4 & 6;In re Rupp, 415 B.R. 72, 74-77 (Bankr. W.D.N.Y. 2008). For the same reasons, this court agrees with the bankruptcy court and joins the other bankruptcy courts in this Circuit in finding that non-apportionment is the preferable approach." Ford at pg. 3.

Based on all this, it is not surprising that Rochester's Judge Warren appears to be following the positions of the bankruptcy judges in Buffalo and Syracuse, as well as the District Court in Syracuse.

Exemptions in bankruptcy are often complicated, and the legal situation changes over time. As an experienced bankruptcy attorney I track new developments in exemption law, locally and nationally. If you are considering a bankruptcy filing, and have assets you are concerned about, please feel free to contact me for a free phone analysis of your situation.

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Peter R. Scribner, Esq.
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