In re Ellis, Case No. 08-60230-7 (Bankr.Mont. 8/21/2008)

• Court: U.S. Bankruptcy Court — District of Montana
• Writing for the Court: Ralph Kirscher
• Decision Date: 21 August 2008
• Docket Number: Case No. 08-60230-7.
• Citation: In re Ellis, Case No. 08-60230-7 (Bankr.Mont. 8/21/2008), Case No. 08-60230-7. (Bankr. Mont. Aug 21, 2008)
• Parties: In re TAMI MARIE ELLIS, Debtor.

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In re TAMI MARIE ELLIS, Debtor.

Case No. 08-60230-7.

United States Bankruptcy Court, D. Montana.

August 21, 2008.

MEMORANDUM of DECISION

RALPH KIRSCHER, Bankruptcy Judge.

In this Chapter 7 bankruptcy, the Trustee filed an Objection to Claim of Exemption on April 30, 2008, objecting to Debtor's claim of exemption in "Equity of Redemption from foreclosure sale of residence." Debtor filed a two sentence reply on May 13, 2008, arguing that the "right of redemption after a foreclosure sale is a personal privilege and not a property rights [sic] that can be taken by a bankruptcy trustee and sold. Parcells v. Nelson, 103 Mont. 412, 16, 63 P.2d 131 (1936); Brown v. Timmons, 79 Mont. 246, 250, 256 Pac. 176 (1927)." A hearing on the matter was scheduled for June 10, 2008, but the Trustee appeared at the hearing and requested that the parties be allowed to submit the matter to the Court on stipulated facts and simultaneous briefs. A Stipulation of Facts was filed on June 20, 2008, and both parties filed their respective, timely briefs on July 10, 2008. The matter is thus ready for decision. This Memorandum of Decision sets forth the Court's findings of fact and conclusions of law.

The Stipulation of Facts filed June 20, 2008, sets forth the following:

1. Prior to February 21, 2008, Tami Ellis, together with her spouse Dirk Ellis owned a residence at 7041 Iron Siding Drive in Helena, Montana.

2. On February 21, 2008, the residence was sold together with other property in a sheriff's sale by the Lewis and Clark County sheriff to satisfy a judgment entered in favor of Mountain West Bank against Dirk and Tami Ellis and entities owned by them. [See Exhibit A, a copy of the Certificate of Sale]

3. The sale price at the sale was $209,405.00. A Notice of Satisfaction of Judgment was filed on March 14, 2008. [See Exhibit B, a copy of the satisfaction]

4. There are divorce proceedings pending between Dirk and Tami Ellis, however, presently Dirk Ellis and the minor children of Dirk and Tami Ellis are residing on the premises.

5. Tami Ellis filed a petition for relief on March 11, 2008, and claimed the property as a homestead.

6. The instrument granting the security interest was either a Deed of Trust or Trust Indenture that was foreclosed judicially, consequently there is a right of redemption. The security interest was not a purchase money security interest.

In addition to the stipulated facts, the record shows that Debtor filed her bankruptcy petition on March 11, 2008. Debtor maintains in her Statement of Financial Affairs ("SOFA") filed April 10, 2008, that the home located at 7041 Iron Siding Drive in Helena, Montana was valued at $225,000.00. Debtor further discloses in her SOFA that she lived in the home at 7041 Iron Siding Drive "up to June 2006." Thus, the Court concludes that Debtor has not lived in the home for over 2 years. Finally, the Court would note that Debtor failed to disclose to this Court the date and place where any declaration of homestead may have been recorded.¹

As noted in the Trustee's Objection, Debtor claims an exemption under §§ 70-32-104 and 25-13-615, MCA, in "Equity of Redemption from foreclosure sale of residence." Prior to deciding the issue before the Court of whether Debtor can claim a homestead exemption in her statutory right of redemption, the Court must consider what is and is not property of Debtor's bankruptcy estate.

The Bankruptcy Code does not define what interests held by Debtor are included in property of the estate. Pursuant to 11 U.S.C. § 541(a)(1), property of Debtor's bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." In Segal v. Rochelle, 382 U.S. 375, 379, 86 S.Ct. 511, 515 (1966), the U.S. Supreme Court stated, "The term `property' has been construed most generously and an interest is not outside [the reach of § 541] because it is novel or contingent or enjoyment must be postponed." The Montana Supreme Court in citing Segal stated, "[T]he courts have consistently said that options or contingent interests are property of the bankruptcy estate under section 541." Mont. Ranch Properties, Inc., v. Eastep (1993), 257 Mont. 43, 45, 847 P.2d 304, 306. The U.S. Supreme Court, in Bd. of Trade of City of Chicago, 264 U.S. 1, 10, 44 S.Ct. 232, 234 (1924), concluded that even though property rights may be regulated by state law, if the federal law indicates a broader construction of the term `property,' then state law or decisions will not limit such construction. The court in Board of Trade stated:

Congress derives its power to enact a bankrupt law from the federal Constitution and the construction of it is a federal question. Of course, where the Bankrupt Law deals with property rights which are regulated by the state law, the federal courts in the bankruptcy will follow the state courts; but when the language of Congress indicates a policy requiring a broader construction of the statute than the state decisions would give it, federal courts cannot be concluded by them.

264 U.S. at 10, 44 S.Ct at 234. Although the Illinois Supreme Court had decided that a membership at the Board of Trade was not property given the limitations imposed by the Board of Trade, the U.S. Supreme Court held a membership at the Board of Trade is property in a bankruptcy given the broader construction required by the federal statute, albeit subject to any limitations or restrictions that may be imposed by state law. Therefore, the Court broadly construes what may be property pursuant to federal law, specifically under 11 U.S.C. § 541, and then looks to state law to determine whether debtor's property interest is restricted, contingent or in some other way limited by state law. See Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 917-18, 59 L.Ed.2s 136 (1979) (as a general rule, the Code requires that property of the bankruptcy estate be determined in accordance with nonbankruptcy law since interests in property are both created and defined by state law).

[S]tate law determines the extent of [a party'] interests [in property] and when these interests expire. In re Contractors Equip. Supply Co., 861 F.2d 241, 244 (9^th Cir. 1988); In re Farmers Markets, Inc., 792 F.2d 1400, 1402 (9th Cir. 1986). "State law, however, must be applied in a manner consistent with federal bankruptcy law." In re Sierra Steel, Inc., 96 B.R. 271, 273 (9th Cir. BAP 1989) (citing In re North Am. Coin & Currency, Ltd., 767 F.2d 1573, 1575 (9th Cir. 1985), amended, 774 F.2d 1390 (9th Cir. 1985), cert. denied sub nom. Daniel A. Torres, M.D., P.C. v. Eastlick, 475 U.S. 1083 (1986)). 14 Mont. B.R. at 141-42.

Furthermore, "The bankruptcy estate succeeds to no more interest than the Debtor possessed or had, and the estate takes its interest subject to such conditions." In re Kleffner, 14 Mont. B.R. 10, 15 (Bankr. Mont. 1994) (quoting In re Baquet, 61 B.R. 495, 497-98 (Bankr. Mont. 1986)).

Womack v. Smith (In re Weatherwax), 16 Mont. B.R. 304, 308-09 (Bankr. D.Mont. 1997). See also Nobelman v. American Savings Bank, 508 U.S. 324, 329, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) ("In the absence of a controlling federal rule, we generally assume that Congress has `left the determination of property rights in the assets of a bankrupt's estate to state law,' since such `[p]roperty interests are created and defined by state law.' Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). See also Barnhill v. Johnson, 503 U.S. 393, 398, 112 S.Ct. 1386, 1389, 118 L.Ed.2d 39 (1992).").

The Court notes at the outset that Debtor's claimed exemption is at odds with itself because as explained by the Supreme Court of Montana in Brown v. Timmons, 79 Mont. 246, 250, 256 Pac. 176 (1927), a case relied upon by Debtor, "the distinction between the statutory right of redemption and that which is denominated equity of redemption at common law is fundamental. `The one is the right a judgment debtor has to regain property which he has lost by sale under process. The other is the right the mortgagor has, prior to foreclosure, to discharge the indebtedness and thus clear his property from the incumbrance of the mortgage. The former comes into existence only after the foreclosure sale, and is of purely statutory origin; the other is founded upon the mortgage contract." (Citations omitted). It is clear from the foregoing that a debtor cannot have any equity of redemption following a foreclosure sale. The right that exists following a foreclosure sale is the statutory right of redemption and thus, based upon the record before the Court, the Court concludes that Debtor is seeking to claim a homestead exemption in her statutory right of redemption, which right expires on February 21, 2009.²

As noted earlier, citing Parcels, 103 Mont. 412 and Brown, 79 Mont. 246, Debtor's original argument was that the statutory right of redemption is a personal privilege and not a property right that can be taken by a bankruptcy trustee and sold. Debtor's argument is contrary to the holding of the Supreme Court of Montana in Montana Ranch Properties, Inc. v. Eastep, 257 Mont. 43, 847 P.2d 304 (1993) and to the broad construction required by federal policy under 11 U.S. § 541 and the holding in Board of Trade. The debtor in Eastep filed for bankruptcy protection in February of 1990. The lender who held a mortgage against the debtor's property obtained a decree of foreclosure in December of 1991 and the property was sold at sheriff's sale in February of 1992 to Montana Ranch Properties, Inc. On January 17, 1992, between the date of the decree of foreclosure and the sheriff's sale, the chapter 7 trustee sold the debtor's statutory right of redemption to Eastep. When Eastep sought to exercise the statutory right of redemption, Montana Ranch Properties filed a quiet title action asserting that the chapter 7 trustee did not have the right to sell the debtor's...