Answering a certified question, the Connecticut Supreme Court ruled that the state’s enlarged homestead exemption applies to creditors whose unsecured claims arose before the exemption was increased.
The opinion is important for debtors nationwide, though, because the Connecticut court’s analysis embraces the choice of law most unfavorable to debtors, but debtors still come out on top.
Connecticut’s legislature first enacted a state homestead exemption in 1993, but it was only $75,000. The statute said it would not be applicable to debts incurred before enactment.
Connecticut repealed the 1993 statute in 2021 and enacted a new statute with a $250,000 homestead exemption. Unlike the 1993 law, the new statute did not say whether the larger exemption applied to debts incurred before the amendment was enacted.
The debtor filed a chapter 7 petition one month after the effective date of the $250,000 exemption. Her house was under contract at a price that created $350,000 in equity, according to the July 14 opinion for the Connecticut Supreme Court by Justice Andrew J. McDonald.
The debtor claimed a $250,000 exemption in the homestead sale proceeds under Connecticut law. The chapter 7 trustee objected, contending that the exemption should only be $75,000, because all of the debtor’s debts arose before the larger exemption became effective. According to the trustee, a $250,000 exemption would be impermissibly retroactive.
Bankruptcy Judge James J. Tancredi sided with the debtor and allowed the $250,000 exemption, reasoning that the amendment was intended to apply to existing debts. On appeal, the district court was inclined to agree with Judge Tancredi but decided to certify the question to the state Supreme Court. The state’s high court agreed to rule on whether the larger exemption applies to debts that accrued prior to the effective date.
Citing Sections 522(b)(1) and (b)(3)(A), Justice McDonald first confronted the question of whether the answer is controlled by state or federal law. Section (b)(3)(A) provides, in pertinent part, that “an individual debtor may exempt from property of the estate . . . any property that is exempt under . . . State or local law that is applicable on the date of the filing of the petition.” [Emphasis added.]
Were federal law in Section 522 to apply, the debtor would be entitled to the larger exemption, because it was the state law applicable “on the date of the filing of the petition.” But since Section 522 allows exemptions under state law, does eligibility for the $250,000 exemption turn on state law, where the larger exemption might be impermissibly retroactive and thus inapplicable to the debtor?
There is a split of authority, Justice McDonald said. He cited the First Circuit Bankruptcy Appellate Panel and other lower courts for holding that the Supremacy Clause pivots the answer to Section 522’s invocation of state law on the filing date, giving the debtor the $250,000 exemption.
However, the Second Circuit reached a different conclusion on the choice of law, Justice McDonald said. The New York-based appeals court held that state law governs applicability of state exemptions. See CFCU Community Credit Union v. Hayward, 552 F.3d 253 (2d Cir. 2009).
Consequently, Judge McDonald “proceed[ed] under the presumption” that state law controls.
The new state law, Judge McDonald said, is silent about existing debts, nor is there language indicating “that the legislature intended to carve out preexisting (or any other) debts from the reach of the exemption.”
On the other hand, Connecticut has a statute providing that substantive changes in law have prospective effect only, unless the statute expressly authorizes retrospective application. The rule only applies to substantive changes, not procedural changes. If the new exemption were substantive and retroactive, it could not be applied retroactively because the amendment did not expressly authorize retroactive application.
Justice McDonald wasn’t required to decide whether the amendment was procedural or substantive, because he went on to hold that the enlarged exemption was not retroactive.
The Connecticut statute does not define what’s retroactive. Justice McDonald drew on authority from the U.S. Supreme Court to say that the amended statute involved “secondary retroactivity,” meaning that the statute only alters future legal consequences of past acts or transactions.
Justice McDonald said that the new exemption statute didn’t impose new duties or obligations on creditors. He said that creditors who don’t want changes in the debtor’s assets to affect their recoveries must have secured claims. He rejected the trustee’s idea that it would be “fundamentally unfair” to raise the homestead exemption, saying there was no evidence that creditors either relied on or even considered the equity in the debtor’s house when deciding to grant unsecured credit.
Judge McDonald therefore held that the exemption amendment was not retroactive. He answered the certified question by holding that the $250,000 exemption applies “in bankruptcy proceedings filed on or after the effective date of the act to debts that accrued prior to that date.”
Answering a certified question, the Connecticut Supreme Court ruled that the state’s enlarged homestead exemption applies to creditors whose unsecured claims arose before the exemption was increased.
The opinion is important for debtors nationwide, though, because the Connecticut court’s analysis embraces the choice of law most unfavorable to debtors, but debtors still come out on top.
Connecticut’s legislature first enacted a state homestead exemption in 1993, but it was only $75,000. The statute said it would not be applicable to debts incurred before enactment.
Connecticut repealed the 1993 statute in 2021 and enacted a new statute with a $250,000 homestead exemption. Unlike the 1993 law, the new statute did not say whether the larger exemption applied to debts incurred before the amendment was enacted.