Creating Thriving Communities Through Land Use And Real Estate Law

Homestead Protection in Bankruptcy for Property that Houses In-Home Occupations

Does the Homestead exemption apply in bankruptcy where the home in question is a mixed-use building where the debtor both lives and runs a business?  In a recent decision, the United States District Court for the District of Massachusetts, on an appeal from the Bankruptcy Court, concluded that the exemption applies.

In re Walter D. Catton, Jr., 15-40044 (USDC MA, Nov. 17, 2015), concerned the homestead exemption that Walter Catton claimed for his property in Lowell, which he purchased in 1981, has used as his “sole and exclusive residence” since that time; the building also houses his insurance business on the first floor.  The property is zoned Urban Single Family, and assessed by the Town as an office and listed as “‘Stores/Apt Com.’”  Mr. Catton filed a Declaration of Homestead on the property two days before filing a voluntary Chapter 7 bankruptcy petition.

The Bankruptcy Trustee objected to Mr. Catton’s claim of a homestead exemption, arguing that because the property was “mixed use” it did not qualify for the exemption.  The Bankruptcy Court overruled the Trustee’s exemption, and the Trustee appealed to the District Court.

The District Court considered the two stated bases for the Bankruptcy Court’s decision:  “First . . . the mere fact that a property is not used exclusively as a residence does not preclude such property from being a single-family dwelling for exemption purposes. Second . . . the Property’s predominant purpose was residential.”

As to the first, the Trustee argued that the presence of the insurance business on the first floor of Mr. Catton’s property meant the building could not be considered a single-family dwelling (single-family dwellings being entitled to the exemption).  The Court relied on the plain language of the Homestead Act, G.L. c. 188, § 2(a), which does not “preclude[] a mixed-use building from being a single-family dwelling,” as well as common sense, stating:

Common sense buttresses the Bankruptcy Court’s interpretation. Many people perform work from their home, some out of a so-called “study,” others at the dining room table, and still others in particular areas designed for receiving clients or patients. It belies common understanding to not consider these houses single-family dwellings, yet [the Trustee’s] construction compels that result. Many children experience their first lesson in entrepreneurship through selling lemonade in their yard during hot summer days – under [the Trustee’s] reading, such a lemonade stand would arguably strip its operators’ residence of dwelling status. And if a homeowner in Foxborough were to rent out her driveway to Patriots fans on Gillette Stadium game-days, or her teenage daughter operated a lawn mowing and shoveling service out of the home year-round, it defies intuition to think she no longer lives in a single-family dwelling, yet [the Trustee’s] interpretation would make it so.

As to the second, the Court concluded that it need not determine “how much non-residential use is required to strip a residence of its dwelling status, as long as the residential use predominates.”  The Court found that the Bankruptcy Court’s determination that the residential use of the property predominated was not clearly erroneous based on a culmination of the facts found by the Bankruptcy Court, including: the living area on the second floor was larger than the office area on the first floor; Mr. Catton received very little income from the insurance business in the previous years, both as a set number and as a percentage of his total income; Mr. Catton has resided on the property for over three decades; and, the property is in the Urban Single Family zone, which typically included only homes, while the zoning also permits an in-home occupation.  For all these reasons, the District Court upheld the Bankruptcy Court’s overruling of the Trustee’s objection.

The case does not include a discussion of whether the entire property was entitled to the exemption, or whether just the “living area” was entitled to exemption.  Perhaps this issue will arise in a later case.  Until then, debtors can rest assured that the mere presence of a home occupation does not automatically preclude them from claiming the homestead exemption in bankruptcy.