In Re: Nealon

U.S. Bankruptcy Appellate Panel, 1st Circuit, BAP NO. MW 15-035, Bankruptcy Case No. 14-40719-HJB, January 20, 2016: Homestead protection in Massachusetts depends on actual use of property when homestead arises, not owner’s intentions or the property’s subdivision.

This case is about whether the Massachusetts Homestead Act provides protection in bankruptcy for a debtor’s land adjacent to, but as separate parcels subdivided from, the parcel on which the debtor’s house is located. In a very fact specific conclusion, the unpublished opinion of the Panel was that the adjacent land is entitled to homestead protection. This case is reported here because, although there was no conservation easement or historic preservation easement on the adjacent land, the decision in this case is cautionary regarding the need to determine homestead status of real estate proposed to be subject to a conservation easement or historic preservation easement even if the grantor’s principal residence building isn’t on easement land.

The debtors, the Nealons, were deed 13 acres of land and a 240-year old house (the “House”) identified in the deed by a street address (the “Street Address”) and as Lot 2 on a certain recorded plan.  Subsequently, as part of an intention to build a new house and sell off the existing House, the Nealons recorded a subdivision plan, approved by the municipality, showing two buildable lots (including the House lot) and two non-buildable lots. An agreement required as a condition of subdivision approval and signed by the Nealons required that the non-buildable lots be subject to a conservation easement or donated to a conservation organization. The Nealons did not grant a conservation easement or donate those lots (reportedly because their mortgage holder would not subordinate to a conservation easement and the Nealons would not pay for the release of those lots from his mortgage).  The Nealons did record a Declaration of Restrictive Covenants regarding wetlands on the non-buildable lots in order to qualify for water quality certification permits. According to the Nealons, they then discontinued efforts to develop the subdivision.

Two years later, the Nealons recorded a Declaration of Homestead on property identified only by the Street Address and the deed into them (which conveyed all 13 acres). The Nealons filed for chapter 7 bankruptcy protection less than five months later. They claimed a homestead exemption for all 13 acres. A creditor objected and asserted that no homestead protection applied to the three vacant lots, only the House lot.

The bankruptcy trial court considered whether the vacant lots were part of the Nealons’ principal residence for purposes of the Massachusetts homestead statute, MGL c. 188. It concluded as a finding of fact that the Nealons maintained an intention to subdivide the property, donate the non-buildable lots, and sell the other vacant lot, and therefore that court held that the three vacant lots were not entitled to homestead protection.

On appeal, the Panel reversed the lower court. They said that the subdivision of the property is irrelevant to the analysis of the homestead and the debtor’s past or future intention regarding the property is not controlling. The key factor, the Panel said, should be the debtor’s actual use of the Property at the time of the homestead declaration. The Panel found that the Nealons had met their burden of proof to show that they “actually used and occupied the vacant lots as part of and in connection with his principal residence at the time of the declaration.”

Decision available at http://media.bap1.uscourts.gov/bap.pdf.opinions/15-035u.pdf.

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