Garber v. BANKERS'MORTGAGE CO.

• Decision Date: 17 July 1928
• Docket Number: No. 834-N.,834-N.
• Citation: 27 F.2d 609
• Parties: GARBER v. BANKERS' MORTGAGE CO. et al.
• Court: U.S. District Court — Panama Canal Zone

27 F.2d 609 (1928)

GARBER v. BANKERS' MORTGAGE CO. et al.

No. 834-N.

District Court, D. Kansas, First Division.

July 17, 1928.

McClintock, Quant & Logan, of Topeka, Kan., and Turner, Stanley & Turner, of Mankato, Kan., for plaintiff.

Burch, Litowich & Royce, of Salina, Kan., for defendants.

R. C. Postlethwaite, of Mankato, Kan., for Glen Pearcy, the bankrupt.

McDERMOTT, District Judge.

This action presents a question of far-flung importance in the business affairs of this state. That question is: Does an equity of redemption in otherwise nonexempt real estate pass to the trustee in bankruptcy for the benefit of his creditors? Or, may a man, equipped with the right to redeem, go into bankruptcy, be discharged from all his debts, and, having exercised the right after the petition in bankruptcy was filed, possess himself of property of unlimited value, while his creditors take nothing?

The bankrupt herein owned a business property of very large value; temporarily embarrassed, mechanics' liens were foreclosed, and the property sold by the sheriff for the amount of the liens and costs, a little less than $50,000. A few days later bankruptcy proceedings were filed. Then the bankrupt, through a transferee, exercised the right to redeem. This action is to set aside certain conveyances, and for general relief. The object of the litigation is to vest the trustee with the value of the equity of redemption; that is, the value of the property above the sheriff's sale price, plus the rental value of the property during the redemption period. The rental value was from $600 to $800 a month. The other assets of the trustee are less than $100.

To understand the importance of the question, it is necessary to refer to the redemption laws of Kansas. The owner may redeem the property from sheriff's sale at any time within 18 months from the day of the sale, and in the meantime is entitled to the possession of the property. Section 60 — 3439, Rev. St. Kan. 1923. Between the twelfth and fifteenth month, any creditor, whose claim is a lien on the land, has a concurrent right to redeem. Section 60-3440, Rev. St. Kan. 1923. A practical result of the liberal period of redemption is that ordinarily properties are bought in at the sale for the amount of the liens and costs. A disinterested investor would be foolish to bid anything approaching the actual value of the property, for not only is his right of possession deferred for 18 months, but the owner has an option for that period; if the then fair value was bid, the investor takes all risk of fluctuation in value; if values increase, the owner redeems; if they shrink, the investor is left with his bad bargain. Naturally, therefore, there is generally a considerable value in the redemption right, as well as the right of occupancy.

The statute also provides that this right of redemption may be "assigned or transferred." Section 60-3455, Rev. St. Kan. 1923. It is therefore a valuable property right, which, unless exempt by virtue of section 6 of the National Bankruptcy Act (11 USCA § 24), passes to the trustee in bankruptcy under section 70 of the same act (11 USCA § 110). It is not only "property which prior to the filing of the petition he could by any means have transferred," as provided by subsection 5 (11 USCA § 110 a 5); it is also a power "which he might have exercised for his own benefit" as provided by subsection 3 of section 70 (11 USCA § 110 a 3). If the property is exempt, it does not pass, for exempt property is excepted from the operation of section 70, not only by section 6, but also by the provisions of section 70 itself, which says, "except in so far as it is to property which is exempt."

Is this property "exempt," within the meaning of sections 6 and 70 of the bankruptcy law? Section 6 allows a bankrupt those exemptions "which are prescribed by the state laws." The Kansas statutes provide for certain exemptions generally to debtors; like most statutes, these exemptions are limited, either in amount or value, and are designed to keep avaricious creditors from stripping a debtor to the skin. A homestead of limited acreage is exempt; his wearing apparel, his cooking utensils, and household furniture up to $500; two cows, ten hogs, and a team of horses; enough food for a year and his tools of trade; a family Bible, a pew in the church, and finally a niche in the cemetery. These, the statutes place beyond the reach of creditors. Sections 60-3501, 60-3504, Rev. St. Kan. 1923. Did the Kansas Legislature intend, in addition to these, to equip each citizen with an unlimited amount of property which his creditors could not reach?

The defendants so contend, and rely upon section 60-3455, Rev. St. Kan. 1923, which reads in part: "But the right of redemption shall not be subject to levy or sale on execution." Reference is also made to section 60-3460, which shortly provides that real property, once sold on execution, shall not again be liable for sale for any balance due on the judgment, or for any lien inferior thereto. This section has been construed to only bar creditors who were parties to the suit. Stacey v. Tucker, 123 Kan. 137, 254 P. 339.

Is section 60-3455, supra, a statute of exemption? Its wording is similar to that of ordinary exemption statutes, and the question is not free from doubt. If the matter were one of first impression, I should hold that it is not an exemption statute, referred to by section 6 of the Bankruptcy Act. My reasoning is this: The purpose of the exemption statute is to leave a debtor, no matter how hopeless his condition, a place to live, something to eat and wear, and something to work with. It is not the purpose of an exemption statute to enable a debtor, in addition, to withhold an entirely unlimited amount of valuable property from his honest creditors. Yet, if that section is an exemption statute, that is what it does. What was the intent of the section? Its purpose is to protect the right of redemption itself. The section is found in that part of the statutes devoted to redemptions, and not exemptions.

The purpose of the redemption statute is to give a solvent debtor a chance to turn around and save his property from a ruinous sale. It is designed primarily for the solvent debtor who is temporarily embarrassed; a farmer has lost his crop; a home owner has lost his job; sickness or some other misfortune has given him a set-back; he cannot meet his interest, and foreclosure results. His property is bid in at a price far below its value. The right to redeem gives him the chance to raise another crop, get another job, or make a turn and save the equity in his property. The right would be a barren one, if a creditor could levy upon it before he had a chance to exercise it; and hence the statute. It holds this right of redemption away from creditors, until he has a chance to exercise it. If he does redeem the property, the property itself is not exempt from his creditors; if he sells the equity, the purchase price is not exempt. The right to redeem, and this statute protecting that right, is for debtors who are striving to save their property. "The purpose of the redemption law is to prevent the sacrifice of the debtor's land, make it discharge his debt to the extent of its value, and to give other creditors a chance to bid its full value so as to secure something on their claims." Kueker v. Murphy, 86 Kan. 332, 120 P. 362.

But, when bankruptcy intervenes, the whole situation is changed. The honest bankrupt is making no effort to save his property; he turns all his nonexempt property over, in return for a cancellation of his debts. The bankrupt seeks not to save property, but seeks a new start in life. Bankruptcy makes another great difference: The statute in question may postpone the day when the creditor may look to the value in the equity of redemption; but as soon as the equity is sold, or the right of redemption exercised, the creditor may then look to the proceeds of the sale, or to the property redeemed. But let bankruptcy intervene, and then the creditor's claims are discharged, and the bankrupt walks off with a property right, or its proceeds, which is unlimited in value. In fact, a dishonest man, within the pale of the law, might easily suffer a business block to be sold on execution for a $1000 judgment, go into bankruptcy the next day, and redeem the next, and have a fortune, while his creditors walk the streets. The matter is further complicated by a train of queries. Nearly all bankrupts have mortgaged their real estate; probably no one would say that a sale of mortgaged real estate by a trustee in bankruptcy gave the bankrupt a right to possession and redemption for 18 months, a right which would make mortgaged real estate of little or no value to bankrupt estates; yet, if the right of redemption is an exemption, such result might well follow.

The case is not, however, one of first impression. Without going back to the earlier cases, the Supreme Court of Kansas has held that a receiver could not appropriate the rents or the right (Howard v. Tourbier, 98 Kan. 624, 160 P. 1144; Smith v. Shaver, 112 Kan. 790, 212 P. 666; ...