O'Brien v. Johnson

• Decision Date: 03 February 1967
• Docket Number: No. 39911,39911
• Citation: 275 Minn. 305,148 N.W.2d 357
• Parties: Sadie O'BRIEN, Respondent, v. Wilford JOHNSON and Patricia Johnson, Appellants.
• Court: Minnesota Supreme Court

Page 357

148 N.W.2d 357

275 Minn. 305

Sadie O'BRIEN, Respondent, v. Wilford JOHNSON and Patricia Johnson, Appellants.

No. 39911.

Supreme Court of Minnesota.

Feb. 3, 1967.

Syllabus by the Court

1. A tortfeasor who takes possession of real estate he then owns and claims it as his homestead at a time when the entry of a judgment against him has been stayed upon an inadequate bond does not thereby commit a fraud on his creditors which deprives the property of its exempt status.

2. A tortfeasor who sells his homestead and, in order to preserve his assets and remove them from the reach of creditors, occupies as his dwelling other property which he then owns having substantially greater value does not thereby commit a fraud which deprives the second homestead of its exempt status.

3. The fact that a large part of the real estate claimed by a debtor as his homestead consists of valuable income-producing commercial property does not affect its exempt status if it does not exceed in area what is permitted by statute.

4. A double exemption is lawful under existing statutes where a new homestead is acquired concurrently with the sale of a previous homestead, notwithstanding the fact the proceeds of the sale are neither applied to the purchase or improvement of the second homestead nor applied on the obligations owed creditors.

Carl E. Erickson, Brainerd, for appellants.

Ryan, Ryan & Ebert, Brainerd, for respondent.

OPINION

OTIS, Justice.

Plaintiff O'Brien has brought this action againt defendants Johnson to secure an adjudication that property she owns in the city of Brainerd is her homestead and as such exempt from the claims of defendants who are judgment creditors. Defendants have counterclaimed, praying for a determination that their judgments are liens on plaintiff's property and seeking the right to levy execution on it. Defendants appeal from a judgment declaring the property to be the homestead of the plaintiff and exempt from execution. ¹

On October 3, 1955, Mrs. Johnson sustained personal injuries while a guest on premises owned by Mrs. O'Brien and her husband, Cornelius O'Brien. On October 22, 1955, the Johnsons sued the O'Briens for damages. During the next 2 months the O'Briens conveyed to their children real estate they owned in Brainerd, including the subject of this litigation (for convenience called the Juel Block), as well as real estate in Ironton, Deerwood, and Baxter. They retained, as their homestead, property referred to as 'the Stiles Addition.'

The Johnsons' tort actions resulted in verdicts on January 16, 1958, amounting to $96,300, of which only.$11,021.35 has been paid in satisfaction of their claims.

A motion for judgment n.o.v. or a new trial was denied on February 9, 1959, and on March 5 the court ordered judgments in favor of the Johnsons, subject to a 10-day stay. On March 10 the O'Briens appealed from the order and the court further stayed the entry of judgment on bonds of $250 each. The following day the O'Brien children reconveyed the Juel Block to Cornelius O'Brien and Sadie O'Brien as joint tenants, and on March 14 the elder O'Briens occupied an apartment in the Juel Block as their residence. Meanwhile, on March 13 they had contracted to sell the homestead they formerly occupied in the Stiles Addition.

Although on the Johnsons' first application we refused to require appeal bonds in excess of $500 as a condition to further staying the entry of judgment (counsel having assured the court there was ample security), ultimately that relief was granted. ² No supersedeas bond was ever furnished, however. The orders were affirmed by a divided court in Johnson v. O'Brien, 258 Minn. 502, 105 N.W.2d 244, 88 A.L.R.2d. 577. Thereafter, following the death of her husband, Mrs. O'Brien commenced these proceedings as surviving joint tenant.

The defendants assert that the conveyances from the elder O'Briens to their children were in fraud of creditors; that the O'Briens were not entitled to a double exemption in both the Juel Block and the proceeds of the sale of the Stiles Addition; that the stay of judmgent and failure to require a supersedeas bond in the tort action constituted prejudicial error; that Mrs. O'Brien is estopped from asserting any homestead rights in the Juel Block; that the property is subject to a constructive trust or equitable lien; and that the notice of lis pendens which they failed on February 27, 1956, is tantamount to an attachment.

The trial court found, among other things, that the conveyances from the elder O'Briens to their children were made with the grantees' knowledge that the grantors intended to defraud defendants; that the Juel Block had a market value of $80,000; that the O'Briens occupied it as their homestead on March 14, 1959; and that except for the availability of other property previously referred to, having little value, the establishment of the Juel Block as plaintiff's homestead rendered her insolvent. The court concluded that Mrs. O'Brien was entitled to retain the juel Block free from the claims asserted by the Johnsons.

1. Much of defendants' argument is devoted to the sequence of events which frustrated their imposing liens on the Juel Block. While it is true that in spite of the diligent and persistent efforts of counsel to satisfy the just claims of his clients the O'Briens succeeded in establishing their homestead during the period when the stay of judgment without an adequate bond prevented the liens from attaching, nevertheless we find no fraud in their availing themselves of the order which the trial court had jurisdiction to grant as a routine discretionary matter.

In our opinion the failure to provide a supersedeas bond and the assurances by counsel that the O'Briens had ample security are circumstances which could not result in prejudice to the Johnsons since they did not occur until after the O'Briens had occupied the Juel Block.

2. The defendants have argued with justification that the transfer of the Juel Block from Cornelius O'Brien to his children was an attempt to defraud creditors. However, it does not follow that the ultimate vesting of title in Mr. and Mrs. O'Brien, Sr., was also fraudulent. The reconveyance from the children to their parents rendered that issue moot since it accomplished the very and which the defendants sought. In any event, the Johnsons were not prejudiced by the transfers since they would have had no greater rights against the elder O'Briens had title remained in their names. No lien could have attached to the Juel Block under any circumstances until the Johnsons' right to enter judgment ripened on March 5, 1959. The basic question then is whether judgment debtors can lawfully surrender an existing homestead and establish a new one in property which they then own and which has substantially greater value, with intent thereby to put their assets out of the reach of creditors and render themselves insolvent.

Under Minn.Const. art. 1, § 12, '(a) reasonable amount of property shall be exempt from seizure or sale for the payment of any debt or liability. The amount of such exemption shall be determined by law.' Minn.St. c. 510 as it applies to this case provides that a house occupied by a debtor as his dwelling and the land on which it is situated, up to one-third of an acre, constitute his homestead and that of his family, exempt from seizure or sale for any of his debts. ³

It has long been the law of this state that a judgment debtor may assert an exemption for the express purpose of evading his creditors. This we have held is not fraud, regardless of the debtor's motive. ⁴ The rule was applied and followed as early as Jacoby v. Parkland Distilling Co., 41 Minn. 227, 43 N.W. 52, where the debtor's wife sought a judgment declaring the claims of creditors not to be a lien on their homestead. The court rejected evidence offered by creditors to prove that the property in question was occupied in contemplation of insolvency and with intent to defraud them. Speaking through Mr. Justice Mitchell, this court held that 'by moving into a house which he already owns, (the debtor) takes nothing from his creditors which the law secures to them, or in which they have any vested right. * * * (F)raud can never be predicated on an act which the law permits.' 41 Minn. 229, 43 N.W. 52.

Defendants rely on Kangas v. Robie (8 Cir.) 264 F. 92, where the Federal court distinguished the Jacoby case. In Kangas the debtor secreted assets received from the sale of goods furnished by his creditors and with the proceeds purchased a homestead. The court found that the debtor was guilty of fraud which, it held, distinguished the case from Jacoby, since there the debtor already owned the property and did not acquire a homestead with assets realized from his willful failure to pay his just obligations.

Defendants cite two other cases as controlling; Small v. Anderson, 139 Minn. 292, 166 N.W. 340, and Nash v. Bengtson, 179 Minn. 7, 228 N.W. 177. Both cases, however, involve transfers of title in fraud of creditors, whereas in the instant case, as we have previously indicated, no prejudice resulted and whatever transfers occurred resulted in reconveyances restoring substantially the status quo. We therefore conclude that under well-established principles the O'Briens had a right to sell their existing homestead, occupy instead the more valuable Juel Block, and thereafter enjoy an exemption in it, notwithstanding their purpose was to prevent the Johnsons' judgments from attaching as liens.

3. Because the Juel Block is commercial property consisting of stores and apartments and has a value in excess of $100,000, yielding a gross income of $1,600 a month (which is also exempt), the defendants urge us to follow the rule adopted in Anderson v. Shannon, 146 Kan. 704, 73 P.2d 5, 114 A.L.R. 200. There the Kansas court refused to recognize a homestead exemption in a commercial...