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MARITAL RESIDENCE AND THE HOMESTEAD EXEMPTION WHEN THE DEBTOR LEAVES THE HOME PENDING RESOLUTION OF THE PENDING DIVORCE ACTION / BANKRUPTCY LONG ISLAND CASES

For a debtor to assert a homestead exemption two(2) elements need to be present: (1) the debtor needs to own the house as his main residence; and (2) the debtor needs to actually reside at the home in question.

However, where a debtor, filing for Chapter 7 relief, is in a pending divorce action,  and jointly owns the marital residence with his non-debtor spouse, but has moved out of and does not presently living in the marital residence, can the debtor-spouse, nonetheless claim the homestead exemption with regard to the marital residence?

The case law in the Eastern District demonstrates that yes, the debtor spouse who no longer resides in the home can claim the homestead exemption as against the marital home under certain circumstances.  The court in In Re Moulterie, 398 B.R. 501 (Bankr. E.D.N.Y 2008), where the debtor had moved out of the marital residence one year prior to the commencement of his Chapter 7 case he was found to be able to claim the homestead exemption with regard to that property, having continued to hold title to the property coupled with the constructive possession of the home through his spouse and children.

Section 522(b) of the Bankruptcy Code provides that a debtor may exempt certain property from the bankruptcy estate.  Exemption statutes are to be construed liberally in the favor of a debtor.  Moulterie at 504, citing, In Re Kell, 88F2d 7,8 (2d Cir, 1937); In Re Hunt, 250 B.R. 482, 485 (Bankr. E.D.N.Y. 2000); In Re McNeill, 193 B.R. 654, 659 (Bankr.E.D.N.Y. 1996); In Re Moore, 177 B.R. 437,441 (Bankr. N.D.Y. 1994); In Re Miller, 167 B.R. 782, 783 (Bankr. S.D.N.Y. 1994); In Re Rundlett, 153 B.R. 126, 130 (S.D.N.Y. 1993.

With regard to the homestead exemption, courts have held that the requirement that a property be “owned and occupied as a principal residence” by the debtor is satisfied when a debtor spouse leaves the principal residence, pending final resolution by the state courts of the spouses’ respective property rights in the residence, while the debtor’s family remains living there.  Moulterie, citing, In re Smith, 57 B.R. 81, 81 (Bankr. N.D.N.Y. 1985).

The homestead exemption has historically “been intended to protect the family of a judgment debtor by exempting his home from execution on an outstanding money judgment.” In Re Warren 38 B.R. 290, 292 (citing Michaels v. Chem. Bank, 110 Misc. 2d 74, 441 N.Y.S. 2d. 638, 640 (N.Y.Sup.Ct. 1981)).   The Moulterie court found that “[b]ased on this purpose, and ‘to prevent an inequitable injury to the {d}ebtor and his family,’ the court allowed the debtor’s homestead exemption, notwithstanding the debtor’s non-occupancy, because the residence was occupied by the debtor’s immediate family.” (citing Warren at 293.)  Moulterie at 506-507.

The Southern District in In Re Pearlman, 54 B.R, 455, where the debtor had vacated the house, the court found that “there was marital stress enough to prompt a physical separation.” Id. At 457.  The court found that the debtor’s actions “did not rise to the level of a voluntary abandonment of the residence,” Id.  The court, in Pearlman, allowed the debtor’s homestead exemption because the debtor’s family lived in the residence.  Id.

The court in Moulterie held the following:

“from these cases, the following rule emerges: for the reasons articulated in Smith, where a married couple has separated,  pending final resolution of their rights in the marital residence by state court, the spouse who has vacated the marital residence is entitled to claim a homestead exemption in the residence, so long as it is occupied by the other spouse.  This rule is consistent with the rationale of the exemption statute.  The purpose of recognizing the constructive occupancy of the premises by the non-resident spouse pending final determination of their rights therein is to insure that the separating spouses can obtain an orderly determination of those rights, and live separately in the interim, without forfeiting those rights, and to avoid the potential harm that would result from requiring “the often hostile parties to a matrimonial dispute to continue to share the marital bode on penalty of loss of those rights,” Smith, 57 B.R. at 82.  Under this rule, the parties’ reasons for separating are not relevant, nor is it relevant whether the nonresident spouse intends to return. Mouterie at 507.

Therefore, in the Eastern District, where a debtor spouse has vacated the marital residence during the pendency of a matrimonial action in state court, that spouse may claim the exemption against that residence even though he or she is not residing there.