Wednesday, June 12, 2013

NH Supremes: OK For Debtor To Shelter Cash From Creditor Claims By Purchasing Primary Residence, Then Invoking State Homestead Protection Against Forced Sale To Intentionally Stiff Judgment Creditor

From a recent Opinion Summary:

  • Petitioner Christina Deyeso appealed a superior court order that denied her petition for a declaratory judgment and injunctive relief, and awarded summary judgment in favor of respondent Jules Cavadi, permitting the forced sale of Deyeso's home.

    Deyeso and Stephen Barnes have three children together but never married. Deyeso is currently married to Keith Walsh, with whom she lives in Stratham[, New Hampshire] at a home that she purchased in 1997.

    Cavadi held a 1991 judgment against Barnes. In September 2004, in a common-law "reach and apply" action, he sued Barnes and Deyeso in a Massachusetts trial court, alleging that Barnes paid for certain real estate held in Deyeso's name in Massachusetts and New Hampshire, including the Stratham property.

    A Massachusetts superior court found that Barnes had an equitable interest in the Property valued at $94,854, thus entitling Cavadi to an equitable lien on the Property in that amount. After accounting for mortgages on the property, the equity value remaining in the Property was $72,373.41.

    Deyeso appealed the Massachusetts trial court's decision to the Massachusetts Supreme Court, which upheld the portion of the trial court's order declaring Barnes's interest in the Property to be $94,854.

    Cavadi then obtained an order in Massachusetts allowing a public auction of the Property to recover the amount of Barnes's interest. Deyeso claimed that both she and her husband were entitled to homestead protection under RSA 480:1 (Supp. 2012), which, given the prior mortgages, would leave no equity for Cavadi in the event of a forced sale.

    The trial court then ruled in favor of Deyeso, concluding that, although her husband could claim the homestead protection due to his lack of ownership, her homestead interest prevailed over Cavadi's equitable lien. Cavadi then moved for reconsideration, and the the trial court eventually granted Cavadi's motion, concluding that, Deyeso's "conduct in this case amounts to fraudulent behavior" and, therefore, permitted the court to use "its equitable powers to negate [her] homestead exemption."

    Upon review, the New Hampshire Supreme Court reversed: "[Even] assuming, however, that Deyeso accepted the money from Barnes with the knowledge that he sought to avoid satisfying his debt to Cavadi, RSA 480:1 protects her homestead interest in the Property. . . . We therefore agree with Deyeso that, in the absence of a showing of fraud, deception, or other misconduct in the procurement of the funds used to purchase, invest in, or improve a homestead, the statutory homestead exemption applies - even when a judgment debtor's funds are so used with the intent of hindering or avoiding a creditor's legitimate claims."(1)
Source: Opinion Summary: Deyeso v. Cavadi.

For the ruling, see Deyeso v. Cavadi, No. 2012-315 (N.H. May 14, 2013).

(1) From the New Hampshire Supreme Court ruling on the protections afforded by state law to homeowners in the state, and the application of the law in this case:
  • RSA 480:1 provides that "[e]very person is entitled to $100,000 worth of his or her homestead, or of his or her interest therein, as a homestead."

    RSA 480:4 (2001) lists four exceptions to the operation of the homestead right: (1) "the collection of taxes"; (2) "the enforcement of liens of mechanics and others for debts created in the construction, repair or improvement of the homestead"; (3) "the enforcement of mortgages which are made a charge thereon according to law"; and (4) "the levy of executions as provided in this chapter."

    The purpose of the homestead exemption is to secure to debtors and their families the shelter of the homestead roofStewart v. Bader, 154 N.H. 75, 88 (2006). The exemption "protect[s] the family from destitution, and . . . protect[s] society from the danger of its citizens becoming paupers." 40 Am. Jur. 2d Homestead § 1, at 381-82 (2008).

    It also "promote[s] the stability and welfare of the state by encouraging property ownership and independence on the part of the citizen." Id. § 4, at 385 (footnotes omitted); see Comment, State Homestead Exemption Laws, 46 Yale L.J. 1023, 1030-31 (1937) ("Another aim of these laws was undoubtedly to protect and encourage home ownership, not only as a stimulus to diligence and high morals, but also as a means of enlisting the individual's self-interest in the preservation of established rights and in the promotion of general prosperity.").

    Statutory homestead protections are remedial in nature, and to effectuate their public policy objective are "universally held . . . to be liberally construed[;] . . . everything is to be done in advancement of the remedy that can be given consistently with any construction that can be put upon it." Barney v. Leeds, 51 N.H. 253, 276 (1871); see Buxton v. Dearborn, 46 N.H. 43, 44 (1865) ("[T]he statute should have a liberal interpretation to accomplish the object of the law, which was to leave, for the upholding and support of a debtor's family, a property where they lived not exceeding [the specified amount] in value, that should be exempted from levy and attachment for his debts.").

    Cavadi does not contend that any of the RSA 480:4 exceptions applies to defeat Deyeso's homestead claim. Rather, he relies upon our decision in Chase to assert a "general rule that where the statutory exemptions to the homestead act do not apply, a court may apply equity principles to defeat the homestead if circumstances warrant." The trial court, for its part, reasoned that "the equitable issues raised" in this case are, although not factually analogous, as compelling as those raised in Chase.

    As Deyeso observes, however, in Chase we invoked equitable principles to reach beyond the literal language of the homestead exceptions because there had been "fraud and egregious conduct" in obtaining the funds used to refinance the homesteadChase, 155 N.H. at 26 (noting that forgery had been used to obtain mortgage loan).

    No such fraud or egregious conduct is present here: notwithstanding Cavadi's allegations, there is no evidence in the record that Barnes wrongfully obtained the funds used to invest in Deyeso's home.

    Instructive is the court's decision in Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001), a case we discussed in Chase. In that case, Havoco obtained a $15 million judgment against Hill on December 19, 1990, arising out of Hill's efforts to eliminate Havoco from a contract. Havoco, 790 So. 2d at 1019. Hill purchased a homestead property on December 30, and the judgment became enforceable on January 2. Id. Hill later filed for bankruptcy protection and claimed the property as a homestead exempt from collection by Havoco. Id. at 1019-20.

    The Eleventh Circuit Court of Appeals certified the following question to the Florida Supreme Court: "Does Article X, Section 4 of the Florida Constitution exempt a Florida homestead, where the debtor acquired the homestead using non-exempt funds with the specific intent of hindering, delaying, or defrauding creditors . . .?" Id. at 1019. After an extensive review of the precedents in which Florida courts allowed equitable liens to defeat the homestead protection, the court in Havoco answered that question in the affirmative. Id. at 1021-28.

    Notably, we opined in Chase that the Florida Supreme Court's approach to this question "str[ikes] the proper balance between" the purposes of the homestead laws, on the one hand, and established equitable principles on the otherChase, 155 N.H. at 26.

    For all relevant purposes, the facts of this case are indistinguishable from those of Havoco. Like Hill, Barnes had a judgment against him and used non-exempt funds in the purchase of exempt homestead property. He did so, in the Massachusetts trial court's view, in an effort to "defraud" Cavadi. We note here that the Massachusetts Supreme Judicial Court deemed the trial court's finding of fraud unnecessary in deciding the common-law reach and apply action before it. Cavadi v. Deyeso, 941 N.E.2d 23, 37 (Mass. 2011) ("Cavadi's nonstatutory [reach and apply] claim required no proof of a fraudulent conveyance."). Thus, the trial court in this litigation should not have relied upon the Massachusetts trial court's unnecessary factual findings relating to fraud in ruling on Cavadi's motion for summary judgment.

    Even assuming, however, that Deyeso accepted the money from Barnes with the knowledge that he sought to avoid satisfying his debt to Cavadi, RSA 480:1 protects her homestead interest in the Property.

    Cavadi does not allege that Barnes obtained the funds through fraud or misconduct. Rather, it appears that, as did Hill in Havoco, Barnes used non-exempt funds — i.e., money that would otherwise be subject to attachment by Cavadi — to pay for a homestead.

    We therefore agree with Deyeso that, in the absence of a showing of fraud, deception, or other misconduct in the procurement of the funds used to purchase, invest in, or improve a homestead, see 40 Am. Jur. 2d, supra § 89, at 472 ("When money fraudulently obtained is used to purchase a home, the homestead exemption is not a shield for the home buyer."), the statutory homestead exemption applies — even when a judgment debtor's funds are so used with the intent of hindering or avoiding a creditor's legitimate claims, see Willis v. Red Reef, Inc., 921 So. 2d 681, 684 (Fla. Dist. Ct. App. 2006) ("In essence, non-exempt assets may be converted into an exempt homestead even if this is done with an actual intent to hinder, delay, or defraud creditors."). A person who receives non-exempt funds from a debtor, and uses such funds to purchase, invest in, or improve a homestead with the knowledge that the debtor intends to avoid paying the creditor, is protected under this rule a fortiori.

    Our ruling comports with the homestead statute's historic objective of protecting the homes of debtors from the claims of unsecured creditors. As explained by the New Mexico Supreme Court: "[E]xperience has taught that in the long run obligations are more likely to be fulfilled by those whose connections with the community are stabilized by a protected interest in a relatively permanent place of abode than by those not so anchored." Coppler & Mannick, P.C., v. Wakeland, 117 P.3d 914, 917 (N.M. 2005) (quotation omitted).

    To the extent that our ruling means that the claims of otherwise deserving creditors may be defeated or delayed by those who seek to avoid their debts, RSA 480:1 expresses the legislature's intent to place the security of families in their homes before the interests of unsecured creditors. Cavadi is just such an unsecured creditor; he has made no showing that Barnes engaged in fraud or other illegality to procure the funds used to purchase Deyeso's homestead. His claim, therefore, must yield to the protection of the homestead law. Cf. 40 Am. Jur. 2d, supra § 4, at 384-86.

    Cavadi contends that the trial court's conclusion squares with the application of equitable principles in the partition of real property. He argues that the provisions of RSA chapter 547-C (2007 & Supp. 2012) (Partition of Real Estate) "empower[ ] the trial court with broad equitable power and discretion to partition property and to extinguish other existing rights in property," which is "precisely what the trial court did here."

    As explained above, however, equitable principles may be applied to reach beyond the literal language of the exceptions of RSA 480:4 only when there has been fraud, deception, or other misconduct in the procurement of funds spent on a homestead.

    For the reasons stated above, we also reject Cavadi's contention that he prevails upon theories of unjust enrichment, unclean hands, or in pari delicto.

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