By Columbia – Lexington Bankruptcy Attorney Lex Rogerson
Under South Carolina law, you may be able to exempt an equitable interest in property even if your name is not on the deed.
When spouses file bankruptcy jointly, code section 522(m) provides that each is entitled to his or her own exemptions. With jointly owned property, this means the debtors may stack their exemptions, effectively doubling the value they can protect from creditors or trustees. But a debtor can only exempt what he or she owns. So what happens if a home or car is titled solely in the name of one spouse? Can the debtors use the other spouse’s exemption?
In a decision handed down April 11, 2014, Bankruptcy Judge John Waites ruled that, under certain circumstances, the spouse who does not hold record title may have an equitable interest that would allow her to exempt some of the value of a home. In re Wicker, C/A No. 13-07546-jw, slip op. (Bankr. D.S.C. filed Apr. 11, 2014). But the decision also suggests this will not always be the case.
The Wicker place
Dale and Joyce Wicker of Newberry, SC, filed a chapter 13 bankruptcy case in December 2013. Dale had inherited the home where they live over 30 years earlier, before they were married. After the marriage, they added to the home several times, twice mortgaging the property to pay for improvements. In each case, the mortgage mistakenly described the property as having been deeded to Dale and Joyce jointly, when in fact the deed was in Dale’s name alone. Both the Wickers signed the note for each loan, and both signed the first mortgage, though only Dale signed the second. Joyce contributed some $16,000 of her own separately inherited funds for improvements the home, and her income went toward payment of the two mortgages.
At the time the Wickers filed bankruptcy, there was about $100,000 of equity in the home. Dale and Joyce each claimed just over $50,000 of homestead exemption, which if allowed would cover the entire equity.
The trustee objected to their exemption claim, contending Joyce had no ownership interest to exempt. At the ensuing hearing, Joyce testified that she and Dale both thought the property was jointly titled and pointed to the property description in the mortgages as a basis for that belief.
Exempting an equitable interest
In bankruptcy, state law determines the basic rules governing property rights, or who owns what. Laws in virtually every state distinguish between legal title — whose name the property is in — and equitable title, which is the real and beneficial ownership of the property. The classic example of this distinction is a trust, where an agreement or will gives property to one person who holds legal title but must use the property for the benefit of another. That other person, the beneficiary, is considered the beneficial or equitable owner of the property.
South Carolina law provides that a debtor may exempt his or her “aggregate interest” in a home, language that seems to include ownership interests other than full legal title. Consistent with this language, Judge Waites first held that a debtor who does not hold legal title may exempt any equitable interest he may hold in otherwise exempt property. Prior cases had suggested as much, but the Wicker decision expressly held so.
The question then became whether Joyce Wicker held such an equitable interest in the home. The court first considered whether she was an equitable owner under the theory of “resulting trust,” which arises when one person pays the purchase price of property titled to another with the understanding it will be the payer’s property. The court rejected this theory because Joyce did not pay for the initial acquisition of the home.
The court then considered whether Joyce held an equitable interest under the theory of “constructive trust.” Courts will impose a constructive trust when the circumstances make it unjust that the legal title holder should considered be the sole owner. This typically results from fraud, bad faith, or fiduciary misconduct but can also arise based on mistake of fact.
Judge Waites found the evidence in the Wickers’ case justified imposing a constructive trust. The Wickers were operating under a mistake of fact in believing the home was jointly titled. And Ms. Wicker’s funds contributed to the improvements to the property, which she believed she co-owned. These facts made it unfair that the property be regarded solely as Dale’s and thus gave Joyce an equitable interest she could exempt.
Curiously, the court did not consider the extent of Joyce’s equitable interest — what portion of the equity was her interest vs. Dale’s. The court simply allowed the exemption as the debtors claimed it, with each debtor exempting half the equity.
Because the Wickers filed chapter 13, their ability to exempt all the equity in their home meant they did not have to pay their unsecured creditors in full through their plan. The exemption can be even more important in chapter 7, as it determines whether the trustee can liquidate the property for the benefit of creditors. It can, in short, decide whether the debtors can stay in their home.
The Wickers’ favorable outcome resulted from a very specific combination of facts — their mistake as to the actual status of title, combined with Joyce’s undisputed contributions to the value of the home. Not every case will involve such evidence of mistake. It would be a mistake to assume that the non-titled spouse can routinely claim an exemption successfully. Each case will require a close look to determine whether the facts justify a finding of resulting or constructive trust.