In Rey v. Urquijo (In re Rey), BAP No. CC-23-1120-SGC (March 29, 2024), the United States Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) affirmed the bankruptcy court’s decision and held that two separate residential structures on a single plot of land, one being the debtor’s residence and the other a rental property, does not count as a single unit for homestead exemption application purposes.
In this case, the debtor (“Debtor”) filed for bankruptcy in July 2022. Included in her listed property was a parcel of land with two residential structures on the parcel (“Property”). Debtor resided in the front residence and the Debtor leased out the back duplex. Debtor claimed the maximum statutory amount of $626,400 for a homestead exemption of the Property. A creditor objected to the homestead exemption, asserting that the homestead exemption did not cover the rented duplex. In response, Debtor asserted that because the two structures were on a single parcel of land with a single parcel number, the two residential structures should be covered by her homestead exemption.
The two residential structures were separated by a fence and had separate addresses, driveways, entrances, mailboxes, parking, and utilities. The only similarities between the two structures were ownership, a mortgage encompassing the Property, and a single assessor’s parcel number. It was undisputed that Debtor only resided at front resident. Debtor argued that the Property was exempt as her homestead and indivisible.
Pursuant to Section 704.710(c) of the California Code of Civil Procedure, a “homestead” is statutorily defined as “the principal dwelling (1) in which the judgement debtor … resided on the date the judgement creditor’s lien attached to the dwelling, and (2) in which the judgment debtor … resided continuously thereafter until the date of the court determination that the dwelling is a homestead.” Section 704.710(a)(1) of the California Code of Civil Procedure defines a “dwelling” as “a place where a person resides and may include but is not limited to … [a] house together with the outbuildings and the land upon which they are situated.”
In reaching its ruling, the BAP explained that homestead exemptions are limited by use and value, and thus even though the definition of “dwelling” states that it “may include” the land and outbuildings on which it sits, it is not explicitly inclusive of those items and the debtor’s entire property is not automatically applied to the exemption.
The BAP distinguished this case from In re Jarrell, where the court held that an entire parcel, containing four houses straddling several different lots, was indivisible because the parcel contained pagodas, gardens, and lawns that were part of the debtor’s residence. This case was different because the facts clearly established that Debtor rented out the distinct and separate duplex, that Debtor needed to give written notice to even enter the duplex, and that the duplex was not any part of Debtor’s residence.
The BAP found that Debtor’s most clever argument was that because the duplex was located on the same legal lot as her residence it must be included in her dwelling when determining her homestead. However, the BAP disagreed and stated that is it not supported by precedent and courts have been following the uniform rule to focus on the debtor’s use of property when deciding if it is a single dwelling.
The general rule in California continues to be that the homestead character of multiple dwellings is assessed on the claimed homestead separately absent unusual circumstances, which the BAP deemed were not present here. Debtor also argued that the duplex was an economic necessity for her family and without it she would not be able to pay her mortgage or live in her residence. The BAP reasoned that Debtor depending on the rental income generated by the other structure to pay creditors does not convert the other structure into a dwelling for purposes of the exemption.
The BAP also found that the bankruptcy court’s ruling does not undermine public policy in California encouraging owners to build “Accessory Dwelling Units” on their property. It reasoned that Debtor’s concerns over this issue were speculative and did not provide a reason for the BAP to interpret or rewrite California’s homestead laws, as interpreted, over the past 150 years.