A homestead exemption is a law that protects a certain amount of equity in an individual’s primary residence from the claims of his or her creditors or, in some states like Florida, the amount of the exemption is unlimited provided the residence is within a specified acreage. Equity is typically defined as the fair market value of the residence less the amount of any mortgage, other consensual lien, or statutory lien (such as for real estate taxes) against the residence.
An individual filing bankruptcy can utilize the homestead exemption of his or her state to protect whatever the state will allow as an exemption to its residents. 11 U.S.C. § 522(b)(3)(A). Thus, many issues relating to the applicability and scope of a state’s homestead laws are commonly decided in the context of a bankruptcy proceeding.
Most states have had homestead exemption laws on their books for many years, but up until 1993, Connecticut did not have one. The original Connecticut homestead exemption was enacted into law on June 29, 1993, with an effective date of October 1, 1993, and shielded from the claims of creditors a homeowner’s primary residence up to the value of $75,000, with value defined as the fair market value of the residence less the amount of any statutory or consensual lien (like a mortgage) which encumbers it (“Original Act”). Section 3 of the Original Act expressly provided: “This act shall take effect October 1, 1993, and shall be applicable to any lien for any obligation or claim arising on or after said date.” Even back in 1993, most other states had some form of homestead protection for their residents. See In re Duda, 182 B.R. 662, 668 (Bankr. D. Conn. 1994) (observing that the Original Act was enacted “to bring Connecticut law in line with that of other states which generally provide some homestead exemption or [other] protection”).
On July 12, 2021, Governor Ned Lamont signed into law Public Act 21-161 (the “2021 Act” or “Amendment”), which amended Connecticut's homestead exemption by repealing the prior version of the statute, renumbering its provisions, and increasing the homestead exemption from $75,000 to $250,000, effective October 1, 2021. The 2021 Act provides, in pertinent part, as follows:
The following property of any natural person shall be exempt:
(21) The homestead of the exemptioner to the value of two hundred fifty thousand dollars, provided value shall be determined as the fair market value of the real property less the amount of any statutory or consensual lien which encumbers it, except that, in the case of a money judgment arising out of a claim of sexual abuse or exploitation of a minor, sexual assault or other willful, wanton, or reckless misconduct committed by a natural person, to the value of seventy-five thousand dollars.
Unlike the Original Act, however, the 2021 Act did not come with a provision that confined the exemption to claims arising after its effective date of October 1, 2021.
In two recent decisions, Connecticut bankruptcy courts have ruled that the new $250,000 homestead exemption is applicable to any claim arising either before or after the effective date of the 2021 Act, i.e. that it has retroactive effect, principally because, as mentioned, the 2021 Act was not accompanied by a statutory provision which limited its application to claims arising after its effective date. See In re Cole, 2022 WL 1134626 (Bankr. D. Conn. Apr. 15, 2022) (Tancredi, J.); In re Faherty, 2022 WL 1191256 (Bankr. D. Conn. Apr. 20, 2022) (Nevins, C.J.). The ruling in Cole is on appeal to the Connecticut District Court. In re Cole, 3:22-cv-00587-VAB (appeal filed Apr. 25, 2022).
More recently in the Cole case, Judge Tancredi denied the chapter 7 trustee’s motion for a stay pending his appeal which, if granted, would have held up the distribution of the proceeds of the debtor’s $250,000 homestead exemption that were derived from a sale of her homestead during the chapter 7 case. See In re Cole, 2022 WL 2196737 (Bankr. D. Conn. June 17, 2022). The stay request was denied on the basis that the trustee could not establish a substantial possibility of success on the merits and, resultingly, was unable to establish irreparable harm if a stay was not granted. Id. at *7-8.
As a result of the stay ruling, the Court granted the debtor’s motion for distribution of her homestead proceeds, which was ordered to be made within 21 days of it ruling. Id. at *9. This latter ruling may imperil the trustee’s appeal based on the doctrine of equitable mootness, which can be the basis for dismissal of an appeal if actions taken under the order appealed from, such as the payment of money, cannot easily be undone or if a court considers it inequitable to unscramble those actions. See generally In re BGI, Inc., 772 F.3d 102, 107 (2d Cir. 2014) (applying equitable mootness in chapter 11 liquidation proceedings and describing it as a “pragmatic” doctrine “that is grounded in the notion that, with the passage of time after a judgment in equity and implementation of that judgment, effective relief on appeal becomes impractical, imprudent, and therefore inequitable”); ANR Co., Inc. v. Rushton, 2012 WL 1556236, at *4 (D. Utah May 2, 2012) (applying equitable mootness in chapter 7 case). But see In re Bodenheimer, Jones, Szwak, & Winchell L.L.P., 592 F.3d 664, 668-69 (5th Cir. 2009) (questioning whether equitable mootness applies in chapter 7 cases).
For the time being, the existing law in Connecticut is that its new homestead exemption protecting up to $250,000 in equity in a primary residence from the claims of the homeowner’s creditors is available to assert as against such claims whether they arise before or after October 1, 2021. This is a significant benefit for Connecticut homeowners who find themselves in troubled financial condition.
The author of this alert appeared in the appeal of the Purdue Pharma confirmation order to the District Court for the State of Connecticut and several other appealing States.