Trustee Can Recover the Money!The Oregon Homestead Exemption has been interpreted broadly by state and federal courts.  Even a mandatory security deposit has been found to qualify for exemption under ORS 18.395 and 18.402.  In a memorandum opinion by Judge Albert Radcliffe entered February 9, 2011, the court rejected the prepayment of $3,900 in rent as exempt under ORS 18.395.  In an unfortunate sidenote, Judge Radcliffe passed away just 10 days later at the age of 63.

This appears to have been a particularly aggressive exemption planning attempt by the debtors.  The debtors in this case have executed a month-to-month residential rental agreement that required monthly payments in the amount of $650.  The rental agreement required a security deposit but made no mention of the $3,900 in prepaid rent.  The security deposit was only $350 plus the last month’s rent for a total of $1,000.  At some point, prior to the filing of the petition for bankruptcy under Chapter 7, the debtors paid an additional $3,900 to the landlord as “prepaid rent.”  Since the rental agreement was a “month-to-month” agreement entitling either the landlord or the debtors to terminate tenancy upon 30 days’ notice, the prepaid rent could easily be recovered and used for other purposes.  Judge Radcliffe further pointed out that the landlord would have no right to demand additional deposits from the tenant if forced to turn over the “prepaid rent” to the trustee in the bankruptcy case.

Judge Radcliffe took some pains to point out that the Oregon Homestead Exemption normally involves equity in a debtor’s home.  The prior case of Sticka v. Casserino, 379 F.3d 1069 (9th Cir. 2004) was referred to as a limited exemption in which a security deposit was so closely intertwined with the interest in the real estate that it could not be severed.

In a footnote to his opinion Judge Radcliffe mentions that ORS 90.300(16)(a) and ORS 18.618(1)(a)(E) designate residential “security deposits” and “prepaid rent” as exempt from garnishment.  Clearly, the mechanism used by the debtors in this case did not impress the court.  Since the debtors claimed only the homestead exemption and did not claim either of these other exemptions, Judge Radcliffe’s comment was not part of his ruling.  However, it is a good place to start for tenants wishing to protect these types of deposits from claims of a trustee in bankruptcy.