Thurgood Marshall U.S. Courthouse at 40 Foley Square
Thurgood Marshall U.S. Courthouse at 40 Foley Square (Bjoertvedt/Wikimedia)

A 2005 law increasing the homestead exemption for New York debtors can be retroactively applied to a lien incurred before the reform took effect and, critically, does not violate the takings clause of the Fifth Amendment, a federal appellate court has held.

On Friday, the U.S. Court of Appeals for the Second Circuit decided for the first time whether a judgment lien against real property is protected by the Fifth Amendment. It agreed with the Western District Bankruptcy Court that “under New York law a judgment lien against a debtor’s real property is not a constitutionally protected property interest.”

The case, 1256 Hertel Avenue Associates v. Calloway, 12-1603-bk, required the court to determine whether a 2005 amendment increasing the homestead exemption applied to a judgment lien perfected before the amendment took effect.

Here, the creditor in 2003 obtained a judgment lien against the debtor’s home in Buffalo, and another creditor obtained another lien in 2008. Together, the liens amounted to $10,655. The debtor had about $25,000 in equity in her home.

By the time the debtor filed for bankruptcy in 2009, the state had increased its homestead exemption—which shields at least part of a home’s value from creditors—from $10,000 to $50,000. At issue was whether the debtor was entitled to the $50,000 exemption, which would make the judgment liens worthless, and if so, whether limiting the creditor’s ability to collect on its judgment lien would amount to an unconstitutional taking.

Writing for the unanimous court, Circuit Judge Richard Wesley (See Profile) said that while retroactive application of laws is usually disfavored, it was clear the revision that increased the homestead exemption “reflects a clear sense of urgency that the homestead exemption limit be immediately adjusted to bring it in line with modern home values.”

Wesley noted that the homestead exemption stood at $10,000 from 1977 until 2005 before the Legislature increased it. It has since been generally increased to $75,000, with an even greater exemption in some counties where real property is particularly expensive.

After concluding that the statute applies to pre-enactment judgment liens, the circuit then had to confront the constitutional takings question.

“The court has never previously addressed whether a judgment lien against a judgment debtor’s real property constitutes a property interest protected by the Fifth Amendment,” Wesley wrote in an opinion shared by Circuit Judge Christopher Droney (See Profile) and Southern District Judge Vincent Briccetti (See Profile), sitting by designation. “The crucial question in this case … is not whether [the creditor's] judgment lien is categorized as a property interest by New York law, but whether it constitutes a property interest for purposes of the Fifth and Fourteenth Amendments.”

Wesley explained that the U.S. Supreme Court has recognized two forms of “takings,” those in which there is a physical appropriation of property and those where a government regulation “goes too far” and is “tantamount” to an appropriation.

Here, the creditor argued that the 2005 increase in the homestead exemption deprived it of any economic use of its judgment lien. But the court rejected its argument.

“The government has not physically invaded or appropriated [the creditor's] judgment lien for its own use; it has merely adjusted its long-standing statutory protection of debtors’ homesteads to account for modern home values,” Wesley wrote. “Legislative tinkering of this sort inevitably creates individual winners and losers, for one man’s defense is another’s obstacle.”

Wesley said the “2005 amendment’s interference with judgment lienholders’ property rights is of the sort that inevitably follows when the Legislature adjusts the benefits and burdens of economic life to promote the common good.”

The appeal from Western District Chief Bankruptcy Judge Carl Bucki was submitted by Edward Crossmore of Ithaca for the creditor and Joshua Liston, a litigation partner at Beys Stein Mobargha & Berland in Manhattan, for the debtor, on April 29.

Crossmore said the ruling makes it “very difficult for a creditor to establish that within the regulatory takings test they should be compensated under the Fifth and Fourteenth amendments.”

Liston said the ruling “conclusively resolves” what had been an open question in the circuit on whether a judgment lien is a constitutionally protected interest for bankruptcy purposes.

In a footnote, Wesley observed that, in light of the case’s significance, the court appointed Liston pro bono counsel and thanked him for his efforts.