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2nd Cir. Holds Debtor Entitled to Bankruptcy Homestead Exemption for Non-Primary Residence

homestead exemptionThe U.S. Court of Appeals for the Second Circuit recently held that property in which a debtor’s dependent son lived part-time with his father qualified for the so-called homestead exemption contained in section 522(d)(1) of the Bankruptcy Code, regardless of state law.

A copy of the opinion in Donovan v. Maresca is available at:  Link to Opinion.

The debtor and her former husband jointly owned a home that the former husband used as his primary residence. The debtor lived in an apartment in a nearby town with their son, who spent several days a week with the former husband at the subject property pursuant to the parties’ parenting plan.

The attorney who represented the debtor in her divorce case sued her for unpaid fees and obtained a judgment for $70,943.40 plus interest and recorded the judgment as a lien against the property.

The debtor filed bankruptcy, listed her interest in the property as exempt under 11 U.S.C. § 522(d)(1) and moved to avoid the judgment lien on the property. As you may recall, under § 522(b)(1), “[w]hen a debtor files for bankruptcy, she may ‘exempt’ certain interests from her ‘estate,’ thus removing them from the pool of assets available to satisfy her creditors.”

Although the debtor admitted she did not reside at the property, she argued that she was still entitled to the homestead exemption because her dependent son lived there part-time. The attorney creditor argued in opposition that “the term ‘residence’ in § 522(d)(1) should be read to mean ‘primary residence.’”

The bankruptcy court granted the debtor’s motion to avoid the judgment lien because her dependent son used the property as a “residence.”

In so ruling, “the bankruptcy court rejected what it called the ‘majority state law approach,’ … [under which] courts interpret the word ‘residence’ in § 522(d)(1) by looking to the definition of ‘homestead’ under the relevant state’s law, a definition which, in turn, often equates ‘homestead’ with ‘primary residence.’ … Instead, the bankruptcy court adopted what it called the ‘minority plain meaning approach,’ under which the term ‘residence’ is interpreted, using traditional canons of construction, to include primary and non-primary residences.”

The attorney creditor appealed to the district court, which “adopted the plain-meaning approach” and held that the debtor’s interest in the property was exempt under § 522(d)(1) and the judgment lien was thus avoidable under § 522(f)(1)(A).

The creditor appealed to the Second Circuit, which affirmed the district court’s judgment, concluding “that the term ‘residence’ in § 522(d)(1) covers both primary and non-primary residences.”

The Second Circuit reasoned that the language of § 522(d)(1) “is unambiguous and the statutory scheme is coherent and consistent[,]” such that there was no need to engage in any further statutory construction by looking to how state law defined homestead.

“First and foremost, the ordinary meaning of the word ‘residence’ does not exclude non-primary residences. Unlike the concept of domicile, residence requires only ‘bodily presence as an inhabitant in a given place,’ and not a permanent intention to remain. … ‘A person thus may have more than one residence at a time….’ Congress’s use of the standalone term ‘residence’ — as opposed to ‘primary residence’ or ‘principal residence’ — thus suggests that the homestead exemption is not limited to primary residences.”

Because “[t]he text of the statute … militates quite clearly in favor of interpreting the term ‘residence’ in § 522(d)(1) to include both primary and non-primary residences[,]” and “Congress could have used the term ‘homestead’ or … ‘principal residence’ in § 522(d)(1), but it did not”, the Second Circuit affirmed the judgment of the district court in favor of the debtor.

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Hector Lora has substantial experience in all phases of complex commercial litigation, including motion practice, written discovery, depositions, mediations, bench and jury trials, and appellate practice. For more than a decade, his practice has focused extensively on the defense of civil enforcement actions filed by the FTC, as well as real estate litigation, and contested mortgage and condominium lien foreclosures and foreclosure of security interests under UCC Article 9. Hector also has substantial experience in advising a variety of types of businesses regarding their compliance with applicable federal and state laws, including the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telemarketing Sales Rule, the Controlling the Assault of Nonsolicited Pornography and Marketing Act of 2003, and Florida laws governing telephone solicitation and communication. Hector received his Juris Doctor from the Georgetown University Law Center, and his undergraduate degree with honors from the University of Florida. For more information, see https://mauricewutscher.com/attorneys/hector-e-lora/

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