In re Lafferty

469 B.R. 235

In re Lisa Ann LAFFERTY, Debtor. In re William Raymond Lafferty, Debtor.

C/A Nos. 11–04523–DD, 11–04524–DD.

United States Bankruptcy Court, D. South Carolina.

April 3, 2012.

Rose Marie Cooper, Cooper Law Firm, Myrtle Beach, SC, for Debtors.

U.S. Trustees Office, Columbia, SC.

Michelle L Vieira, Myrtle Beach, SC, Trustee.

ORDER

DAVID R. DUNCAN, Bankruptcy Judge.

This matter is before the Court on Motions to Avoid Judicial Lien (“Motions”) filed by Lisa Ann Lafferty and William Raymond Lafferty (“Debtors”) on September 4, 2011 and Objections to Exemption (“Objections”) filed by Michelle L. Vieira, the chapter 7 trustee (“Trustee”) on September 30, 2011. SCBT, N.A. f/k/a South Carolina Bank and Trust, N.A. (“SCBT”) filed Objections to Debtors' Motions on October 3, 2011 and joined in Trustee's Objections on October 17, 2011. Following the close of discovery, a hearing was held on the matters on February 21, 2012. Debtors are former husband and wife, and the exemption at issue is claimed in residential real property owned jointly by Debtors; as a result, because the issues in Debtors' cases were identical, the matters were tried together. At the conclusion of the hearing, the Court took the matters under advisement. The Court now issues the Following Findings of Fact and Conclusions of Law, applicable in both cases.

FINDINGS OF FACT

Debtors filed their chapter 7 cases on July 19, 2011. At the time they filed their bankruptcy petitions, Debtors were divorced.¹ Testimony established that the divorce proceedings were extremely contentious, lasted three and a half years, and cost the parties over $100,000 in attorney fees. However, at some point after the divorce proceedings had concluded, or perhaps during the divorce proceedings,² the parties developed a more friendly relationship. At the time of this hearing, Debtors claimed to live together and maintained a non-exclusive sexual relationship.

Ms. Lafferty's bankruptcy schedules reflect that she earns $1,400 per month as a substitute carrier for a local newspaper and $650 per month in rental income from a condominium. Her Schedule I also indicates that she receives family assistance from time to time, although it does not list an amount. Her Schedule J shows expenses of $2,054.00 per month, leaving her with negative monthly disposable income of $4.00. Mr. Lafferty's Schedule I reflects that he is unemployed but that he receives $1,500 per month in financial assistance from relatives. His Schedule J reflects monthly expenses of $1,560.00, leaving him with negative monthly disposable income of $60.00. The financial income and expense information submitted to the Court by Debtors is relevant to Debtors' living arrangements and credibility.

The current controversy centers around the former marital home, which is jointly owned by Debtors. The property at issue is a four bedroom, two and a half bath home located on Fallen Timber Drive in Myrtle Beach, South Carolina (“Fallen Timber”). The Horry County Tax Office values the home at $393,400.00. There are no mortgages on the property. However, SCBT holds a judgment lien which attached to the property when it was recorded in Horry County in August 2010. The judgment lien arises from a deficiency following the foreclosure of a mortgage lien on commercial property which Debtors formerly owned; the underlying obligation was guarantied by Debtors. The amount of the judgment on the date the bankruptcy petitions were filed was $422,031.08. Debtors do not maintain homeowners' insurance on the property, and Debtors testified that they believed the property had not been insured since 2008. Further, the property was sold at a county ad valorem tax sale in November 2010 for unpaid property taxes. SCBT, as a lienholder, protected its interest and paid the $5,137.87 tax bill.

The house at Fallen Timber was built in 2000 by Debtors, and Debtors apparently lived in the home until the commencement of their divorce proceedings in 2007. What transpired as to the property after that time is somewhat unclear; however, it is undisputed that both parties moved out of and remained away from the house during the divorce proceedings. After Debtors' separation, both parties became romantically involved with other parties; Ms. Lafferty became involved with Derek Rippy and Mr. Lafferty became involved with Regina Land. In January 2010, Debtors signed a quitclaim deed transferring their interests in the Fallen Timber property to Mr. Rippy and Ms. Land; however, this deed was not recorded until December 2010. In August 2010, on the same date that SCBT obtained its judgment against Debtors, Debtors signed a listing agreement for the property with a real estate agency. No one was living in the property at the time the listing agreement was signed.

At the apparent insistence of the real estate agent Debtors had engaged to sell the property, Mr. Rippy and Ms. Land signed a second listing agreement on January 7, 2011 for the period from that date until June 2011. A buyer was found for the property at a sales price of $315,000 and a sales contract was signed by Ms. Land and Mr. Rippy on January 13 and January 19, respectively. The sale fell through when an attorney for the buyer discovered SCBT's judgment lien. On January 31, 2011, Mr. Rippy and Ms. Land signed a quitclaim deed transferring the Fallen Timber property to Debtors; however, this deed was not recorded until May 2011.

Debtors filed chapter 7 bankruptcy petitions in July 2011. Each debtor claimed a homestead exemption in the Fallen Timber property. Trustee and SCBT timely objected to the claimed exemptions, alleging that Fallen Timber is not Debtors' residence and does not qualify for a homestead exemption under state law. The objecting parties alternatively claim that Debtors cannot exempt the property under 11 U.S.C. § 522( o ). Finally, the objecting parties allege that Debtors have unclean hands as a result of their actions.³ Both Debtors testified in their depositions and at the hearing that they had been residing together at the Fallen Timber residence for several months prior to the bankruptcy filings.

Ms. Lafferty testified that she moved to Fallen Timber in April 2011, although she had spent a significant amount of time prior to and after that date in New York caring for her sick mother. Prior to April 2011, when she was not in New York, Ms. Lafferty lived with Mr. Rippy at his home. After moving into the Fallen Timber property in April 2011, Ms. Lafferty continued to travel to New York often, but testified that it was always her intent to return to the Fallen Timber property. Mr. Lafferty testified that he moved into the Fallen Timber residence in January 2011. He testified at his deposition and at the hearing that he wanted to move in sooner but was prevented from doing so because of the divorce proceedings.

Testimony from the witnesses deposed in the case differed regarding the dates Debtors allegedly moved into Fallen Timber. At some point in spring 2011,⁴ Amanda Gladish and Jeff Bryan moved into the Fallen Timber property with their two children. Ms. Gladish and Mr. Bryan had an agreement with Debtors that they could live in the home rent free in return for paying all of the utility bills. Ms. Gladish testified in her deposition that she and Mr. Bryan moved into the Fallen Timber property in April 2011 and that Debtors were living there at the time they moved in.⁵ However, Mr. Bryan testified that when Ms. Gladish and he moved into the Fallen Timber property, no one else lived there. Mr. Bryan indicated that at the time Ms. Gladish and he moved into the home, Debtors were “talking about ... possibly going to have to live there,” but stated that other than a bed, there was no furniture in the home and no one was living there. Mr. Rippy testified that when he helped Ms. Lafferty move some furniture into the home, Ms. Gladish and Mr. Bryan were already living there, although later in his deposition he made a statement that Ms. Lafferty was “there by herself at the time.” Debtors both testified that Mr. Lafferty moved into the home in January and that the others moved in during late March or early April.

Mr. Lafferty testified that when he moved into the house in January 2011, there was no furniture in the home and that he slept in a sleeping bag on the floor. However, Ms. Lafferty testified that when she visited the home in February, there was a bed in one of the bedrooms which appeared to have been used. In addition to confusion over the presence of furniture in the house, there was confusion about utility service to the house during the period Mr. Lafferty allegedly lived there by himself. The sales contract signed by Ms. Land and Mr. Rippy states, “Seller to turn utilities on prior to inspection.” When questioned about this, Mr. Lafferty appeared confused as to whether the utilities were on when he moved in, but ultimately said that he had a space heater which provided him with heat and light while he lived in the home in January. His testimony at his deposition is as follows:

Q: [The offer] says, “Offer to purchase will be contingent upon buyer's review and approval of inspection. Seller to turn utilities on prior to inspection.” So at least as of January the 19th there were no utilities on at Fallen Timber, correct?

A: I believe utilities were on. I believe they were shut off—the water was shut off at the road.

Q: So there wasn't any water at Fallen Timber at least as of January the 19th?

A: I'm not sure exactly what utilities were there now. I think the water was turned off. Basically, they needed to have the utilities on so that they could come through and check the electrical, check the air conditioning, all of that type of stuff.

Q: And at that point Fallen Timber was vacant?

A: No. Not at that time, no.

Q: What do you mean?

A: I was already living back there.

Q: Without any utilities?

A: In January.

Q: Without utilities?

A: No, there were...