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Residual inheritance interest in a house not exempt under New York law: Wisotzke (II)

This is a continuation (the dropping of the second show, if you will) of the Wisotzke case; a Rochester Chapter 13 (case #08-21178.) Last August, I posted a blog in the WDNY case notes for 2008 Category about the first decision in this case, 392 B.R. 39 (Bky.W.D.N.Y. 2008), where Rochester Judge John C. Ninfo ruled that in an In Rem tax foreclosure in New York State, the debtor's interest in the property was extinguished, at the latest, 30 days after the foreclosure order. In this new decision, the court ruled that the debtor's inheritance interest in the proiperty was never sufficient to claim it as an exempt homestead.

In 2008, Ontario County, NY, had sold the debtor's residence, worth perhaps $74,000, to satisfy $10,751 in property tax liens. As the Chapter 13 was filed too late to stop the tax sale, the debtor then attempted to avoid the tax sale as constructively fraudulent; that is, that the value of the property greatly exceeded the debt it satisfied.

For a debtor (as oppose to a bankruptcy trustee) to avoid a fraudulent transfer, the property that was transferred must have been exemptible. So the issue in this new decision waqs whether Mr. Wisotzke could have claimed a homestead exemption under NY CPLR 5206 for this property.

The deed to the property was not in the debtor's name; rather, it had been owned by his father, who died in 2006. The debtor was the residual beneficiary of his father's estate (that is, the will said something like "and the all the remainder of my property [the residual] I leave to my son". The house was not specifically bequeathed to the debtor.

Judge Ninfo, in this new decision, dated Feb. 4, 2011 (in WDNY Bk. AP #10-02026), has ruled that under New York law the debtor did not have an ownership interest in the property that could be exempted, as the Court interpreted the word "owned" in CPLR 5206. The court cited many factors, such as the failure of the debtor to pay the property taxes or oppose the tax foreclosure, and the failure of the debtor to complete the administration of his father's estate since 2006. As the father's estate would be liable for its own bills, it was possible - even likely - that the house would have to be sold by the estate to pay those debts and the debtor would never actually ever come into legal ownership of the property. But a key factor is that the debtor's inheritance rights were that of the residue of the father's estate - a residual inheritance - not a direct bequeath. The court concluded that under New York case law, a residual interest in a decedent's estate is personal property, not real property, and, therefore, cannot be exempted under CPLR 5206.

The Court disagreed with the finding of another New York bankruptcy decision, In Re Martinez, 392 BR 530 (Bankr. EDNY 2008), and distinguished its finding from Connelly v. Roach, 79 BR 159, (Bankr. WDNY 1987.) Any debtor with an inheritance interest in real estate should consult all three decisions.

Note that this case interpreted New York's homestead exemption. With the new exemption law in effect in New York, allowing use of the federal exemptions, a different result might have occurred if the debtor claimed the federal homestead exemption (the text of the federal exemption differs from CPLR 5206.)

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