Maresca v. Donovan (In re Maresca), Case No.: 16-30755 (AMN)

In re: MELISSA A. MARESCA. Debtor.

MELISSA A. MARESCA, Movant v. TERRY DONOVAN, Respondent

Case No.: 16-30755 (AMN)

UNITED STATES BANKRUPTCY COURT DISTRICT OF CONNECTICUT NEW HAVEN DIVISION

June 28, 2018

Chapter 7

Re: ECF Nos. 57, 59, 61, 62, 64, 65, 66, 67, 69, 71

MEMORANDUM OF DECISION AND ORDER GRANTING MOTION TO AVOID LIEN IMPAIRING EXEMPTION IN PROPERTY USED AS A RESIDENCE BY A DEPENDENT OF THE DEBTOR PURSUANT TO 11 U.S.C. §§ 522(d)(1) AND 522(f)(1)

Melissa A. Maresca ("Debtor"), filed a Chapter 7 petition on May 12, 2016 (the "Petition Date"). ECF No. 1. On November 4, 2017, the Debtor filed a motion to avoid the judicial liens of Attorney Terry Donovan and another creditor (the "Motion") because they allegedly impaired Ms. Maresca's exemption in real property used by her dependent child, periodically, pursuant to 11 U.S.C. § 522(f).¹ ECF No. 57. The real property in issue is known as 33 Laurel Road, Essex, Connecticut (the "Property"). ECF No. 57.Terry Donovan ("Creditor"), the holder of the larger judicial lien² (the "Judicial Lien"), objected to the Motion.³ ECF No. 59.

While the parties agree on many of the underlying facts relevant to this dispute, they do not agree as to the value of the Property on the Petition Date. The Debtor contends the value was $465,000.00, while the Creditor thinks a higher value of $560,000.00 should be found. Compare, ECF Nos. 66, 71. Because the court concludes that the Debtor may assert an exemption pursuant to 11 U.S.C. § 522(d)(1) in her interest in the Property premised on her dependent child's use of the Property as a residence, and in light of the undisputed outstanding mortgage debt that was senior in priority to the Judgment Lien on the Petition Date, the court need not resolve the parties' differences of opinion as to value.

Jurisdiction

This court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 1334(b) and 157(b), and the United States District Court for the District of Connecticut's General Order of Reference dated September 21, 1984. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), and the bankruptcy court has the power to enter a final judgment, subject to traditional rights of appeal. Venue is proper in this District. 28 U.S.C. § 1409.

Relevant Facts

The parties - formerly attorney and client - agree on many of the material facts. ECF No. 61. Undoubtedly, the parties' former attorney-client relationship has deteriorated and the court is mindful that the state court has determined the attorney provided legal services to the client/Debtor in connection with her divorce for which compensation was due. The bankruptcy court's task here, however, is to determine the extent of the exemption provided by Congress to bankruptcy debtors having dependents who live in real property owned by the debtor but where the debtor may not reside, pursuant to 11 U.S.C. § 522(d)(1). It is with this focus that the court has considered the parties' argument and stipulation of facts.

The Debtor and her ex-husband jointly purchased the Property in 2005, incurring mortgage debt in the original amount of $436,000. ECF No. 61, ¶ 1-3. The ex-husband (who was then married to the Debtor) was the borrower on the mortgage loan note and both the Debtor and the ex-husband executed the mortgage. ECF No. 61, ¶ 4. At some point, a second mortgage was recorded against the Property and it appears undisputed that as of the Petition Date the total mortgage debt recorded against the Property - all being prior in interest to the Judgment Lien - was approximately $525,899.26. ECF No. 57, ¶ 3(a) and 3(b). Pursuant to the Debtor's bankruptcy schedules, she owned a two-thirds interest in the Property on the Petition Date.⁴ ECF No. 1, p.10.

In 2011, the Debtor retained the Creditor as her attorney in a divorce action that resulted in the entry of a divorce decree in 2013. ECF No. 61, ¶ 11, 14. On the Petition Date, the Debtor's child ("Child") was a minor and a dependent of the Debtor. The divorce decree awarded "joint legal custody" of the Child to the Debtor and her ex-husband, "withthe primary residence of [the Child] to be with" the Debtor. ECF No. 61, ¶ 15. Although the divorce decree contemplated the Property would be sold shortly after the divorce decree entered, the Debtor and the ex-husband agreed to modify the decree to delay the sale of the Property and those agreements were approved by the state court. ECF No. 61, ¶¶ 22, 25. On the Petition Date, the ex-husband resided at the Property while the Debtor resided in a rental apartment in another town. ECF No. 61, ¶¶ 22-27. Despite those modifications, the Child "spends time with both parents," and attends school in the town where the Property is located. ECF No. 61, ¶ 26, 28.

Prior to the Petition Date, the Creditor, Ms. Donovan, obtained a state court judgment against the Debtor for unpaid legal fees relating to the divorce proceeding in the amount of $70,943.00, which forms the basis for the pre-petition Judicial Lien in dispute here. ECF No. 61, ¶ 21.

Discussion

Section 522(d)(1) of the Bankruptcy Code provides, in pertinent part, that a debtor may claim an exemption in, "[t]he debtor's aggregate interest, not to exceed $23,675.00 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence . . ." 11 U.S.C. § 522(d)(1). Debtors filing bankruptcy may elect to exempt certain property under either a state law exemption scheme, or the exemptions provided in the Bankruptcy Code in § 522. Here, the Debtor elected to use the federal exemption scheme provided by the Bankruptcy Code, rather than the (perhaps) more generous State of Connecticut homestead exemption that may apply for up to $75,000 of value in a debtor's primary residence. See, Conn. Gen. Stat. § 52-352a.

The exemption available in § 522(d)(1), is commonly referred to as the "homestead" exemption, although the term "homestead" does not appear in § 522. See, 4 Collier on Bankruptcy ¶ 522.09 (16th ed. 2018). It is generally understood that § 522 is intended to protect a debtor's interest in her home from creditors, in order to "assist a debtor in keeping a roof over [her] head, and facilitate a Debtor's 'fresh start.'" In re Brown, 299 B.R. 425, 428 (Bankr. N.D.Tex. 2003). This understanding is consistent with the liberal construction of bankruptcy exemptions in favor of a debtor. In re Wegrzyn, 291 B.R. 2, 8-9 (Bankr. D. Mass. 2003). The text of § 522(d)(1) does not refer to a debtor's homestead; instead, it refers to a debtor's or a dependent of a debtor's "residence." The place where one "lives," or "resides" or is "domiciled," can be difficult to define. In re Frame, 120 B.R. 718, 723 (Bankr. S.D.N.Y. 1990) ("Residence, when used in a sense other than domicile, is one of the most nebulous terms in the legal dictionary and can have many different meanings depending on the context in which it is used."). Because the term "residence" is not defined under the Bankruptcy Code, courts have used two methods to interpret the term as used in § 522(d)(1): the majority "state law" approach, and the minority "plain meaning" approach. In re Stoner, 487 B.R. 410, 415-16 (Bankr. D.N.J. 2013).

Under the state law approach, courts have equated the term "residence" in § 522(d)(1), with the term "homestead," and looked to state law for the contours of the Debtor's right to exempt an interest in a homestead because "a homestead, as a property interest, is defined by state law." Brown, 299 B.R. at 428 (citing Nobelman v. Am. Sav. Bank, 508 U.S. 324, 329 (1991)). As applicable here, Connecticut law provides for a homestead exemption, and defines a "homestead" as "owner-occupied real property . . .used as a primary residence." Conn Gen. Stat § 52-352a. Courts have articulated a three factor test debtors must satisfy in order to be entitled to the Connecticut homestead exemption. "First, the individual must 'own' the subject real property within the meaning of [Conn. Gen. Stat.] § 52-352a as of the relevant time. Second, the individual must 'occup[y]' the subject real property within the meaning of [Conn. Gen. Stat. §] 52-352a as of the relevant time. Third, the subject real property must be 'used as a primary residence' within the meaning of [Conn. Gen. Stat.] 52-352a as of the relevant time." In re Kujan, 286 B.R. 216, 220-21 (Bankr. D. Conn. 2002).

But, Connecticut state law is not helpful to answer the question of whether an exemption may be asserted by a debtor when only the debtor's dependent (and not the debtor) uses the property as a residence. Connecticut's homestead exemption statute is similar to that of other states in the Second Circuit, in that, none of the exemption statutes in Connecticut, New York or Vermont addresses the right of a debtor to claim an exemption in property that a dependent of the debtor uses as a residence. See, N.Y.C.P.L.R. § 5206(a) (McKinney 2018); Vt. Stat. Ann. Tit. 27 § 101 (West 2018). Some states, including for example, Ohio, have exemption statutes that provide a debtor may claim an exemption in property that a dependent of the debtor uses as a residence. Ohio Rev. Code Ann. § 2329.66(a)(1)(b) (West 2017) (exempting a "person's interest, . . . in one parcel or item of real or personal property that the person or a dependent of the person uses as a residence."); see also In re Miller, 157 B.R. 621 (Bankr. N.D. Ohio 1993) (concluding a debtor was entitled to claim an exemption under Ohio law in property that his dependents resided in, but that he did not).

While federal courts look to state law to determine property rights, here, it appears the federal statute may afford coverage that is unaddressed in the applicable state statute, rendering state law inapplicable. See generally, Butner v. United States, 440 U.S. 48 (1979). The court's review of Connecticut law reveals nothing construing language similar to the Bankruptcy Code's exemption for property the dependent of a debtor uses as a...