Insurer can’t invade debtor’s homestead to recoup $290K overpayment

A U.S. Bankruptcy Court judge has held that an insurance company could not invade a Chapter 13 debtor’s homestead to recoup a $290,000 overpayment that the debtor then spent on home repairs.

In late 2015, debtor Eric Beard received a $362,000 payment from his father’s life insurance policy with the Metropolitan Life Insurance Co. He and his wife subsequently spent nearly $200,000 renovating their Natick home while also paying an outstanding obligation to the wife’s father.

Construction was underway in March 2016 when MetLife informed Beard of the mistake. On the apparent advice of his attorney at the time, he continued with the renovations, which were completed in the fall.

MetLife eventually secured a $217,000 judgment in federal District Court for unjust enrichment.

Beard then filed for Chapter 13 protection and claimed a $292,000 homestead exemption. MetLife objected under §522(o) of the U.S. Bankruptcy Code, arguing that Beard used nonexempt cash to make improvements that increased the value of the homestead and did so with intent to delay or defraud.

But Judge Janet E. Bostwick denied the motion, finding that MetLife failed to meet its burden of proof.

“There is no showing that the Debtor was evading MetLife,” Bostwick wrote. “At the time of these payments, the Debtor was aware that MetLife was asserting that it had made an overpayment and that it had asked him to return the overpayment. But there is no evidence that MetLife was pursuing collection efforts against the Debtor until the Fall of 2016, after the payments were made.”

Additionally, the judge said MetLife has offered no evidence on the fair market value of the property before or after the improvements.

“Instead, it offered only changes in assessed value from one unknown time period to another period,” she said.

The 23-page decision is In Re: Beard, Eric A., Lawyers Weekly No. 04-015-24.

‘Important vindication’

Debtor’s counsel Matthew J. Hamel of Natick said the ruling demonstrates the importance of the Massachusetts homestead statute and the willingness of courts to construe it broadly.

“Above all, it vindicates our client, who never intended to defraud the insurer,” Hamel said.

Hamel’s co-counsel, Richard S. Ravosa Jr., said the case is significant from an evidentiary standpoint.

“When the creditor is making the claim, it still has to prove its claim and meet the burden of proof,” he said.

MetLife’s attorney, Kevin C. Cain of Boston, did not respond to a request for comment.

I’m not sure the objecting party put in the timing evidence needed, because the judge could conclude that by the time the debtor knew there was really a problem, they’d already done demolition work. The judge can say, ‘Hey, they spent the money not to defraud the creditor but because they wanted their first floor back.’

But Needham bankruptcy lawyer Adam J. Ruttenberg said the case shows that creditors need to do more than say, “Hey, somebody did something wrong.”

“It has to fit into some very specific parameters of specific Bankruptcy Code provisions,” he said.

Here, Ruttenberg said, MetLife pointed out that the debtor received money from the insurer, the debtor was told there was an overpayment, and the debtor spent the money.

“I’m not sure the objecting party put in the timing evidence needed, because the judge could conclude that by the time the debtor knew there was really a problem, they’d already done demolition work,” Ruttenberg said. “The judge can say, ‘Hey, they spent the money not to defraud the creditor but because they wanted their first floor back.’”

Boston attorney Richard N. Gottlieb said the case shows that the biggest challenge for a creditor trying to invade a homestead using §522(o) is proving fraudulent intent.

When the debtor received the overpayment, he was already living in a ramshackle house in desperate need of substantial renovation and had started renovating the property by the time MetLife started asking to be paid back — and doing so without threatening litigation, Gottlieb said.

When MetLife did obtain a judgment, it was based not on fraud but on unjust enrichment, which did not help in the bankruptcy proceeding, Gottlieb added.

“This gave debtor’s counsel a way to legitimately argue that the debtor was not using these funds in a way intended to defraud MetLife,” he said. “This all points out just how fact-intensive and tactically difficult these cases are from an objecting attorney’s point of view. And it reinforces that, at least in Massachusetts, there’s a general presumption in favor of the validity of homestead exemptions.”

Donald R. Lassman of Needham said MetLife had two jobs: to prove intent to defraud and to prove the transfers increased the value of the property.

Regarding the transfers, all MetLife had was a letter from a town assessor regarding the assessed value, which Lassman described as completely useless when the operative issue was market value.

Meanwhile, Lassman noted, MetLife produced none of the correspondence it claims it sent and was shockingly slow to initiate litigation, which undercut any claim of fraudulent intent.

“You pay someone $300,000 too much and you don’t do anything from February to October? Why weren’t you in court the next day with a preliminary injunction?” he said. “Maybe MetLife is too big to act nimbly; who knows? But the judge must have been like, ‘If you guys don’t care, I don’t care. I’m not going to do your work for you.’ I have no idea, but that may have been lurking.”

Mistaken overpayment

Beard and his wife, Samantha, purchased her childhood home from her father in 2005 for $250,000 with an oral promise to pay him $70,000 at a future time.

On Nov. 12, 2015, Beard’s father passed away, and Beard, his sole beneficiary, filed a claim with MetLife for benefits under the Federal Employees’ Group Life Insurance Policy.

A month later, MetLife paid Beard $362,123 on the claim, but due to an error by his father’s employer, it was a $290,000 overpayment. Beard was not aware of the mistake.

At the time, the 115-year-old house was in dire need of repairs to the plumbing, structural support, flooring, wiring and roofing. Water leaks caused mold and mildew, and before the renovations, the leaks allegedly caused the Beards’ daughter to suffer pneumonia.

The Beards began renovations in December 2015 and started paying contractors immediately. They also made the $70,000 payment to Samantha’s father.

Beard, grieving the passing of his father, apparently was in no state to take an active role in the renovations, which were largely managed by his wife.

MetLife discovered the overpayment in February 2016 and, in early March, left Beard a voicemail. On March 7, MetLife sent a letter requesting reimbursement but overstated the amount of the overpayment by $10,000.

The letter apparently did not state a basis for a legal obligation to repay nor did it state that it would sue to enforce an obligation; it just referenced a “possible referral to our law department.” An attorney whom Beard consulted allegedly told him not to worry about the notices.

By March 11, 2016, when Beard was deemed to have notice of the overpayment, he and his wife had made $47,000 in payments to contractors and subcontractors. They made another $128,000 in payments by the time renovations were completed in September 2016.

In October 2016, MetLife sued Beard for unjust enrichment in U.S. District Court. There is no evidence of any letters, calls or collection activities from March 2016 until the filing of the complaint.

The District Court found that Beard was initially an innocent recipient who reasonably relied on the insurance payment in starting renovations but could not rely on it for post-notice renovations. It entered a $217,000 judgment.

Beard subsequently filed for Chapter 13 protection and claimed a $292,000 homestead exemption. MetLife objected under §522(o) and asked the Bankruptcy Court to reduce the homestead’s value by the amount attributable to transfers it claimed Beard made in order to hinder, delay or defraud.

Unmet burden

Bostwick found that MetLife failed to meet its burden under §522(o).

First, Bostwick said there was no showing that Beard intended to evade MetLife, especially since MetLife apparently did not commence collection efforts until after the renovations were finished and paid for.

“After [MetLife’s] last voicemail message was left, there is no evidence of any collection activity by MetLife until it commenced litigation more than six months later,” Bostwick said. “Given the tenor of the letter, the attorney advice, and the lack of any follow up collection activity, the Debtor may have assumed that MetLife had chosen not to pursue the matter.”

Additionally, Bostwick emphasized that MetLife offered no evidence on the fair market value of the home before or after the improvements, instead offering only changes in assessed value from one unknown time period to another period.

“The evidence fails to distinguish how much of the assessed value increase was a result of the improvements made or undertaken prior to the notification, including the roof and second floor improvement, and how much was attributable to the improvements after the notification,” Bostwick said. “Given the lack of evidence, the Court is unable to make any finding as to the amount of any change in the fair market value of the Property as a result of the improvements.”