Another Florida Judge Joins Homestead Debate

Another judge in the Southern District of Florida has weighed in on the effect of the BAPCPA amendments' caps on homestead exemptions. In re Wayrynen, 332 B.R. 479 (Bankr. S.D. Fla. 10/14/05). In Wayrynen, the trustee objected to a debtor's claim of exemption for a homestead with a $150,000 value which had been purchased a month prior to his bankruptcy filing. 11 U.S.C. 522(p) imposes a $125,000 cap on exemptions claimed for homesteads purchased within 1,215 days of the petition date. The debtor responded by contending that the cap did not apply in Florida, an "opt out" state which does not permit an election between federal and Florida exemptions, and furthermore that the cap did not apply because the equity in the homestead was derived from the sale of a previous home in Florida which had been owned more than 1,215 days prior to the filing date. For earlier discussion of the debate over the cap's applicability in "opt out" states, see prior postings here: "Homestead Havens Still Viable?", "Florida Bankruptcy Judge Applies Homestead Cap", and "Another Court Applies Homestead Cap".

Judge Friedman noted in Wayrynen, like Judge Haines in McNabb, that the "as a result of electing" language in 522(p) could be construed as meaning that a Florida resident (who, as a result of state law, does not have the option of electing between federal and state exemptions) is not subject to the cap. However, like Judge Mark (the Chief Judge of the Southern District of Florida), Judge Friedman found that such an interpretation would be contrary to the intention of the Reform Act's drafters. He reconciled the language with the legislative intent by finding that a Florida resident who claims a homestead exemption under state law has made an election by having chosen to reside in Florida, having chosen to purchase a residence in Florida, having chosen to make it his or her permanent residence, and having availed himself or herself of bankruptcy relief.

Nonetheless, the debtor prevailed on his second argument that the equity in his current homestead in excess of the cap was still exempt because it was derived from a previously owned Florida homestead owned more than 1,215 days prior to the petition date. 522(p)(2)(B) provides a "carve-out" from the cap which excludes the amount of any "interest transferred from a debtor's previous principal residence (which was acquired prior to the beginning of such 1215-day period) into the debtor's current principal residence" if they are both in the same state.

The debtor had initially purchased a Florida residence in 1989 for slightly less than $100,000. He sold that property in August 2002 (within 1,215 days of the petition date) for $250,000, realizing a little more than $150,000 in equity. He then purchased another Florida residence the next month for about $175,000. The second homestead was then sold in March 2005 for $271,500, and a new homestead purchased for $146,000. Judge Friedman found that the "interest transferred" from the debtor's previous residence (the first property) amounts to $150,000 (the built-up equity realized upon its sale) which was reinvested in the subsequent homesteads, and that since the amount of that "interest" is excluded from the interest being claimed as exempt, the debtor was entitled to claim the entire $150,000 present value of his current homestead as exempt.

In so holding, Judge Friedman rejected the trustee's argument that the reference in the "carve-out" to the Debtor's previous principal residence" should be construed as referring only to the particular property owned by the debtor immediately prior to the own being claimed as exempt. Instead, he extended the protection of the carve-out to prior homesteads owned by the debtor as well, on the basis that the safe harbor appears to have been intended "to afford protection to individuals like the Debtor who, rather than seeking to take advantage of Florida's exemption provisions to shelter illicitly- or improperly-obtained funds, simply have benefited as a result of their ownership of Florida real property and the general appreciation of property values attributable to previous intra-state transactions."