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CFCU Community Credit Union v. Hayward

January 9, 2009

CFCU COMMUNITY CREDIT UNION, APPELLANT,
v.
JERALD JOHN HAYWARD, II, LOIS EVELYN HAYWARD, APPELLEES,
STATE OF NEW YORK, OFFICE OF THE ATTORNEY GENERAL, INTERVENOR,
PETER SCRIBNER, TRUSTEE.



SYLLABUS BY THE COURT

Appeal from a judgment of the United States District Court for the Western District of New York (Siragusa, J.), entered on September 19, 2007, affirming an order of the Bankruptcy Court (Ninfo, J.), entered on May 25, 2006, holding that the 2005 amendment to N.Y. C.P.L.R. 5206, increasing New York's homestead exemption from $10,000 to $50,000, applied to debts contracted prior to the effective date of the amendment.

The opinion of the court was delivered by: Wesley, Circuit Judge

Argued: September 24, 2008

Before: WESLEY, HALL, and GIBSON, Circuit Judges.*fn1

In August 2005, the New York State Legislature amended N.Y. C.P.L.R. 5206 to increase the state's homestead exemption from $10,000 to $50,000. See 2005 N.Y. Laws Ch. 623. In addition to exempting a judgment debtor's home "from application to the satisfaction of a money judgment," N.Y. C.P.L.R. 5206(a), New York debtors are entitled to claim this exemption in bankruptcy proceedings. See N.Y. Debt. & Cred. Law § 282; see also 11 U.S.C. § 522(b)(3)(A). This appeal requires us to determine whether the 2005 Amendment's increased homestead exemption amount applies retroactively to debts incurred prior to the Amendment's effective date. We hold that it does. Neither the statutory language nor its legislative history requires limiting the scope of the Amendment to debts incurred after the Amendment's effective date. The Contract Clause of the Constitution is likewise not offended by a retroactive application of the Amendment to pre-existing debts. Accordingly, New York debtors who file a bankruptcy petition after the Amendment's effective date are entitled to invoke the greater homestead exemption amount of $50,000.

FACTS

On October 14, 2005, Jerald John Hayward, II and Lois Evelyn Hayward (collectively, "Debtors") filed a Chapter 7 bankruptcy petition. Debtors alleged that (1) Jerald owned real property with a market value of $95,294 encumbered by a $49,775.98 mortgage; (2) the property was exempt under N.Y. C.P.L.R. 5206; and (3) Appellant CFCU Community Credit Union ("CFCU") held a claim for $11,291.63 (a May 2003 car loan), secured by an automobile valued at $7,185, leaving CFCU a general unsecured creditor for the balance ($4,106.63).

CFCU objected to the homestead exemption to the extent it exceeded the pre-2005 Amendment amount. CFCU argued that (1) the 2005 Amendment does not specifically provide that it applies to obligations or debts incurred prior to August 30, 2005 -- the effective date of the Amendment; (2) in the absence of such a provision, the 2005 Amendment does not apply retroactively to any obligation or debt incurred prior to that date; and (3) even if the 2005 Amendment applied to pre-August 30, 2005 debts, that construction would impair the contract between Debtors and CFCU, thus violating the Contract Clause of the United States Constitution. See U.S. Const. art. I, § 10, cl. 1. In opposition, Debtors contended that the State Legislature clearly intended the $50,000 homestead exemption to apply because the law specifically provided that it "shall take effect immediately." 2005 N.Y. Laws Ch. 623, § 2. Debtors also argued that, under 11 U.S.C. § 522(b)(3)(A), they may exempt "any property that is exempt under . . . State or local law that is applicable on the date of the filing of the petition . . . ." Thus, because their petition was filed on October 14, 2005, after the effective date of the Amendment, the increased exemption amount applies.

The bankruptcy court (Ninfo, J.) denied CFCU's motion, holding that Debtors were entitled to the $50,000 exemption even though they incurred their CFCU debt prior to the 2005 Amendment. See In re Hayward, 343 B.R. 41, 47 (Bankr. W.D.N.Y. 2006). The court principally relied on, and adopted the reasoning of, In re Little, No. 05-68281, 2006 WL 1524594, at *12-13 (Bankr. N.D.N.Y. Apr. 24, 2006), which held that the Amendment was remedial and therefore should be applied retroactively, and that retroactive application did not violate the Contract Clause. Discussing the remedial nature of the Amendment, Judge Ninfo concluded that the "mischief" and "imperfection" the Legislature sought to remedy was a homestead exemption not indexed for inflation that had become "tantamount to having no exemption at all." Hayward, 343 B.R. at 45 (quoting N.Y. Spons. Memo., 2005 S.B. S4582). The remedy was to adjust the exemption to "make it realistic in today's economy." Id. at 46 (quoting N.Y. Spons. Memo., 2005 S.B. S4582).

The court concluded that limiting the reach of the law to prospective application only would "defeat the clearly evident intention of the New York State Legislature." Id. The court also noted that CFCU had not reduced the Haywards' debt to judgment before August 30, 2005. The court concluded that such "creditors do not have the kind of vested rights that require a detailed constitutional analysis beyond that set forth in Little." Id. The court concluded that "the Trustee-in-bankruptcy, who represents all the general unsecured creditors and is the 'perfect lien creditor' under Section 544," would only be vested with rights that "came into existence when the debtors filed their bankruptcy petitions after August 30, 2005, the date when the [Amendment] became immediately and retroactively effective." Id. at 46-47. The district court (Siragusa, J.) affirmed upon "the opinion of the court below." CFCU Cmty. Credit Union v. Hayward, No. 06-CV-6290, 2007 WL 4232721, at *3 (W.D.N.Y. Sept. 11, 2007).

On appeal to this Court, CFCU reiterates its challenge to the retroactive application of the 2005 Amendment as it relates to pre-existing debts, arguing that (1) neither the language of the Amendment nor its legislative history manifest a clear intent that the statute apply retroactively to pre-Amendment debts, and (2) retroactive application violates the Contract Clause. Debtors counter that we should employ the exemption in effect at the time of the filing of their petition because 11 U.S.C. § 522(b)(3)(A) provides that the "State or local law that is applicable on the date of the filing of the petition" governs the available state bankruptcy exemptions. New York's Attorney General has intervened pursuant to 28 U.S.C. § 2403(b) in support of the statute.*fn2

While agreeing with Debtors that they should have the benefit of the increased exemption, the Attorney General rejects their reasoning and instead urges us to adopt the rationale articulated by the courts below -- the 2005 Amendment is remedial and therefore applies to debts incurred prior to its effective date. For the reasons set forth below, we affirm the order of the district court.

DISCUSSION

I. The State Law Question: Interpreting the Scope of the 2005 Amendment

A. Governing Bankruptcy Code Provisions and New York's Homestead Exemption*fn3 Pursuant to 11 U.S.C. § 522(b), debtors may exempt certain property from the bankruptcy estate created by the petition, "allowing them to retain those assets rather than divide them among their creditors." Rousey v. Jacoway, 544 U.S. 320, 322 (2005); see also Bell v. Bell (In re Bell), 225 F.3d 203, 208 (2d Cir. 2000). New York has "opted out" of the federal exemption scheme set forth in § 522(d), choosing instead to provide its own exclusive set of permissible exemptions for debtors domiciled in the state. See 11 U.S.C. § 522(b)(1); Dubroff v. First Nat'l Bank of Glens Falls (In re Dubroff), 119 F.3d 75, 76-77 (2d Cir. 1997); In re Nudo, 147 B.R. 68, 70 (Bankr. N.D.N.Y. 1992). Debtors may exempt "any property that is exempt under . . . State or local law that is applicable on the date of the filing of the petition ." 11 U.S.C. § 522(b)(3)(A).*fn4

Thus, while federal law governs the date on which the exemption comes into play, New York law governs the nature and scope of the exemption.

New York's exemptions are set forth in Debtor & Creditor Law § 282. See In re Onyan, 163 B.R. 21, 24-25 (Bankr. N.D.N.Y. 1993). That statute explicitly incorporates N.Y. C.P.L.R. 5206, New York's homestead exemption. See N.Y. Debt & Cred. Law § 282. N.Y. C.P.L.R. 5206 exempts several categories of property as long as the property in question is "owned and occupied as a principal residence." The statute protects the residence from the satisfaction of money judgments up to "fifty thousand dollars in value above liens and encumbrances . . . unless the judgment was recovered wholly for the purchase price" of the residence. N.Y. C.P.L.R. 5206(a).

Debtors contend that 11 U.S.C. § 522(b)(3)(A) requires that all bankruptcy petitions filed in New York after the Amendment's enactment date employ the increased homestead exemption. One New York bankruptcy court has adopted this view. See Rupp v. Elmasri (In re Elmasri), 369 B.R. 96, 104 (Bankr. E.D.N.Y. 2007). It is true, as Judge Ninfo noted,*fn5 that the trustee-in-bankruptcy is the "perfect lien creditor" under Section 544 of the Bankruptcy Code on the date Debtors filed their bankruptcy petition. Hayward, 343 B.R. at 46. Thus, one might conclude from Section 544 that the filing date of the petition defines the rights of unsecured creditors; indeed it does. But the inquiry here is not merely the rights of the unsecured creditors, but also the breadth of the exemption's protection of a debtors' property in New York. Section 522(b)(3)(A) specifically notes that exemptions under the statute are limited to "any property that is exempt under . . . State or local law that is applicable on the date of the filing of the petition . . ." (emphasis added). If, under New York law, the increased exemption does not apply to contract debts incurred before the effective date of the increase, then ...


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