In re Hodes

• Decision Date: 25 March 2005
• Docket Number: No. 03-3309.,03-3309.
• Citation: 402 F.3d 1005
• Parties: In re Barbara E. HODES and Phillip Hodes, Debtors. Lawrence S. Jenkins; Roger W. Hood, MD; and Eric C. Rajala, Trustee, Appellant, v. Barbara E. Hodes and Phillip Hodes, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

402 F.3d 1005

In re Barbara E. HODES and Phillip Hodes, Debtors Lawrence S. Jenkins; Roger W. Hood, MD; and Eric C. Rajala, Trustee, Appellant, v. Barbara E. Hodes and Phillip Hodes, Appellees.

No. 03-3309.

United States Court of Appeals, Tenth Circuit.

March 25, 2005.

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Mark S. Carder of Stinson, Morrison, Hecker, LLP, Kansas City, MO, (Michael L. Kahn of Stinson, Morrison, Hecker, LLP, Kansas City, MO, with him on the briefs) for Appellants Lawrence S. Jenkins and Roger W. Hood, M.D.

Eric C. Rajala of the Law Office of Eric C. Rajala, Overland Park, KS, on the brief for Appellant Eric C. Rajala, Trustee.

Cynthia F. Grimes of Grimes and Rebein, L.C., Lenexa, KS, for Appellees Barbara E. Hodes and Phillip Hodes.

Before KELLY, HENRY, and HARTZ, Circuit Judges.

HENRY, Circuit Judge.

This appeal raises the novel issue of whether and to what extent debtors in an involuntary bankruptcy may claim under the Kansas homestead exemption a contractually-binding deposit with a builder for improvements to an already existing homestead. The bankruptcy court overruled creditors' objections to the exemption, and the district court affirmed the bankruptcy court. Exercising jurisdiction pursuant to 28 U.S.C. § 158(a) and (d), we affirm the district court.

I. STANDARD OF REVIEW

In reviewing a bankruptcy court decision under 28 U.S.C. § 158(a) and (d), the district court and the court of appeals apply the same standards of review that govern appellate review in other cases. McKowen v. I.R.S., 370 F.3d 1023, 1025 (10th Cir.2004) (quotation omitted). We therefore review the bankruptcy court's legal determinations de novo and its factual findings for clear error. In re Country World Casinos, Inc., 181 F.3d 1146, 1149 (10th Cir.1999) (quotation omitted).

II. BACKGROUND

The parties do not dispute the bankruptcy court's findings of fact. In 1993, Lawrence Jenkins and Roger Hood commenced a civil action against Phillip and Barbara Hodes seeking damages from a breach of a contract concerning the Hodeses' sale of their interest in certain corporate stock to Mr. Jenkins and Mr. Hood. On November 10, 1997, a jury returned a verdict against the Hodeses and other codefendants and in favor of Mr. Jenkins and Mr. Hood for $4 million. On November 17, 1997, the court entered a judgment in accordance with the verdict.

Soon thereafter, the Hodeses began liquidating approximately $514,000 in nonexempt securities and acquiring exempt assets with the funds. The Hodeses used part of this money to prepay a home builder for an addition to their home in Leawood, Kansas. There is no allegation that any of the funds paid to the builder were fraudulently obtained. The Hodeses contend that they began discussions with the builder in the summer of 1997, when they decided to enlarge their home in anticipation of the birth of their daughter's twins. The twins were not going to live with them, but the Hodeses wanted more space so they could babysit the twins. On December 7, 1997, the Hodeses entered into a contract with the builder and gave him a $225,000 cash deposit.¹ The contract estimated that the addition would cost $190,000 plus the builder's 15% fee, but no more than a total of $225,000. The contract called for a 1,056 square-foot addition to the Hodeses' 3,700 square-foot home. The addition included an office, an enlarged family room, and modifications to the master bedroom. The Hodeses purchased this home in 1989 for $545,000.

On January 6, 1998, Mr. Jenkins and Mr. Hood filed involuntary Chapter 7 bankruptcy petitions against Mr. and Mrs. Hodes. As of January 6, the builder had not commenced construction of the addition and was in possession of the $225,000 deposit.

The construction commenced sometime after January 6. On February 23, 1998, Mr. Jenkins and Mr. Hood filed a motion under 11 U.S.C. § 303(f) to stop the construction and to restrict the Hodeses' use of the deposited funds prior to entry of the orders for relief. Under that section, the court may prevent a debtor from controlling an asset during the "gap period" between the filing of the involuntary petition and the entry of an order for relief. See 11 U.S.C. § 303(f) ("[E]xcept to the extent that the court orders otherwise, and until an order for relief in the case, any business of the debtor may continue to operate, and the debtor may continue to use, acquire, or dispose of property as if an involuntary case concerning the debtor had not been commenced.").

The parties attempted to resolve this contested § 303(f) motion and on March 2, 1998, recited the terms of their settlement to the bankruptcy court. The settlement included the Hodeses' agreement to obtain a mortgage on their home and to use these borrowed funds to pay $290,000 to Mr. Jenkins and Mr. Hood. Later, the Hodeses failed to pay the $290,000, and Mr. Jenkins and Mr. Hood filed a motion to compel settlement. The courtroom minute sheet from a hearing on October 28, 1998, states that Mr. Jenkins and Mr. Hood agreed to withdraw this motion to compel; however, there is no journal entry withdrawing the motion and the parties did not refer to this motion to compel in their submissions on the exemption issue.

In the meantime, construction of the home addition proceeded. On April 16, 1998, the Hodeses consented to the entry of orders for relief in their cases. At the time of the entry of the orders for relief, the builder had expended $8,966.67 of the deposit. As of October 28, 1998, the date on which Mr. Jenkins and Mr. Hood filed a Supplemental Brief in Support of Objection to Exemptions, the builder had expended a total of $164,837.24.

III. APPLICABLE LAW AND BURDEN OF PROOF

When determining the validity of a claimed state law exemption, bankruptcy courts look to applicable state law. In re Lampe, 331 F.3d 750, 754 (10th Cir.2003) (quotation marks omitted). Because Kansas has opted out of the federal bankruptcy exemption scheme, the Hodeses may only claim exemptions available under Kansas law. See id; In re Douglas, 59 B.R. 836, 838 (Bankr.D.Kan.1986) ("Kansas has opted out of the federal exemption scheme thus limiting the debtor to exemptions available under Kansas law."); see also 11 U.S.C. § 522(b)(1); Kan. Stat. Ann. § 60-2312 (1994).

Kansas' homestead exemption originally derived from the state Constitution and has subsequently been codified by statute:

A homestead to the extent of ... one acre within the limits of an incorporated town or city, occupied as a residence by the family of the owner, together with all the improvements on the same, shall be exempted from forced sale under any process of law....

KAN. CONST. art. 15, § 9; KAN. STAT. ANN. § 60-2301 (1994). Unlike the vast majority of states, which impose a dollar limit on debtors' homestead exemptions, Kansas' homestead exemption is unlimited; bankrupt Kansas homeowners may protect the full value of their homes.

"Homestead" generally signifies a dwelling house with customary appurtenances and includes outbuildings that are necessary for use where the family resides. Dickens v. Snellings, 10 B.R. 949, 951 (Bankr.W.D.Va.1981). The exemption "is an interest of the debtor carved out of the bankruptcy estate for the benefit of the debtor and thereby shielded from creditors' claims." Holloway v. John Hancock Mut. Life Ins. Co., 81 F.3d 1062, 1063 (11th Cir.1996). The exemption provides a debtor with an asset he or she can remove from the prebankruptcy estate to aid in postbankruptcy rehabilitation. Wells M. Engledow, Cleaning up the Pigsty: Approaching a Consensus on Exemption Laws, 74 AM. BANKR.L.J. 275, 276 (2000).

The objecting party bears the burden of proof on an objection to a claimed exemption. Fed. R. Bankr.P. 4003(c); In re Coleman, 209 B.R. 739, 741 (Bankr.D.Colo.1997). Mr. Jenkins and Mr. Hood must therefore prove by a preponderance of the evidence that the exemption was improper. See In re Sims, 241 B.R. 467 (Bankr.N.D.Okla.1999).

IV. UNDERLYING DECISIONS IN THIS CASE

1. The Bankruptcy Court Decision Allowing the Exemption

The bankruptcy court denied Mr. Jenkins' and Mr. Hood's objections to the Hodeses' homestead exemption, permitting the Hodeses to claim as exempt all $225,000 of their deposit with the builder. See In re Hodes, 235 B.R. 104 (Bankr.D.Kan.1999). The bankruptcy court analyzed the confluence of 11 U.S.C. §§ 522 and 303(f), and determined, in accordance with the bulk of authority, that the controlling date for purposes of determining exempt assets in an involuntary bankruptcy is not the date on which the involuntary petition is filed, but the date on which the order for relief is entered. See id. at 108.

The bankruptcy court found persuasive the rationale allowing involuntary debtors to convert non-exempt assets into exempt assets during the "gap period" between the petition date and the order date because doing so puts involuntary debtors on a level playing field with voluntary debtors who can convert assets prior to filing their own voluntary petitions. See id. at 108-09. For that reason, and because construction had already commenced, the nearly $9,000 expended by the builder during the "gap period" between the petition date and the order date was exempt. See id. at 109-110. Citing the strong public policy in Kansas of protecting the homestead as well as improvements to it, the bankruptcy court confirmed that a new house under construction on the petition or order date would be exempt, "without any partition of the value of the unfinished construction at the time of the petition or order for relief." Id. at 110.

The bankruptcy court also found no reason to draw a distinction between construction of a new home and construction of improvements made to an existing home. It therefore allowed the Hodeses to "bootstrap" the remaining nearly $216,000 of the deposit onto the exempt $9,000 and thereby claim all $225,000 of the deposit as its homestead exemption. See id. The...