In re Hughes

• Decision Date: 18 October 1999
• Docket Number: Bankruptcy No. 99-40302.
• Citation: 244 BR 805
• Parties: In re Jessie Joyce HUGHES, and Carroll Lee Hughes, Debtors.
• Court: U.S. Bankruptcy Court — District of South Dakota

244 B.R. 805 (1999)

In re Jessie Joyce HUGHES, and Carroll Lee Hughes, Debtors.

Bankruptcy No. 99-40302.

United States Bankruptcy Court, D. South Dakota, Southern Division.

October 18, 1999.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Douglas P. Cummings, Jr., East River Legal Services, Sioux Falls, SD, for Debtors.

Bruce J. Gering, Office of the U.S. Trustee, Sioux Falls, SD, for Trustee.

MEMORANDUM OF DECISION RE: TRUSTEE'S OBJECTION TO DEBTORS' HOMESTEAD EXEMPTION CLAIM

IRVIN N. HOYT, Chief Judge.

The matter before the Court is the Trustee's June 3, 1999 objection to Debtors' claimed homestead exemption and Debtors' response. This is a core proceeding under 28 U.S.C. § 157(b)(2). This Memorandum of Decision and accompanying Order shall constitute the Court's findings and conclusions under F.R.Bankr.P. 7052(a). As set forth below, the Court will sustain the Trustee's objection. Debtors have failed to meet their burden of proving that any reliance on S.D.C.L. § 21-19-2 by the Trustee to sell their homestead is unconstitutional.

I.

Jessie J. and Carroll L. Hughes (Debtors) filed a Chapter 7. In their schedules, Debtors stated they owned a home valued at $30,000. The home did not have any encumbrances against it. Debtors declared this home exempt under S.D.C.L. §§ 43-31-1, -2, -3, and -4 and 43-45-3. They valued this homestead exemption at $30,000.

Chapter 7 Trustee John S. Lovald objected to Debtors' claimed homestead exemption. He argued that Debtors' home was worth $40,000 and that Debtors thus exceeded their allowed homestead exemption by $10,000. Debtors responded that their home is absolutely exempt because it still maintains the character of a homestead and because they have no present intent to discontinue its occupancy as a homestead.

Before the scheduled hearing on the Trustee's objection, the Court requested from counsel cites of the statutes and case law on which each party intended to rely. Debtors stated that they intended to argue that S.D.C.L. § 21-19-2

violates the South Dakota and U.S. Constitutions in that it allows the sale of absolutely exempt property without due process (pre-judgment) and, in the alternative, it violates the equal protection clause of both Constitutions by allowing a forced sale of absolutely exempt homestead property while not allowing the sale of other exempt property.

. . . . .

Since homesteads are not subject to judicial liens or judicial sales, and sale of a homestead can only be made upon execution and levy after receiving a judgment or after receiving a judgment of foreclosure, SDCL 21-19-2 cannot be used to forcibly sell a homestead for purposes of collecting a judgment. If SDCL 21-19-2 is interpreted to allow forced sales of a homestead without execution or judgment, then it should be viewed as a pre-judgment taking in violation of the Debtors\' right to due process. Therefore, SDCL 21-19-2 cannot be used to invoke the trustee\'s rights to claim the debtor\'s homestead as part of the bankruptcy estate as it is absolutely exempt property under South Dakota law.

Debtors cited Aisenbrey v. Hensley, 70 S.D. 294, 17 N.W.2d 267 (1945), In re Schneider's Estate, 72 S.D. 174, 31 N.W.2d 261 (1948), and Speck v. Anderson, 318 N.W.2d 339 (S.D.1982). Trustee Lovald cited Hansen v. Hansen, 40 S.D. 114, 166 N.W. 427 (1918), and First National Bank of Beresford v. Anderson, 332 N.W.2d 723 (S.D.1983). For applicable statutes, Debtors cited S.D.C.L. §§ 15-16-7, 15-18-1 and -5, and 43-31-1. Trustee Lovald cited 11 U.S.C. § 544, Article XXI, § 4 of the South Dakota Constitution, and S.D.C.L. §§ 21-19-2 through -30 and 43-45-3.

At the July 13, 1999 hearing on the objection, Trustee Lovald and counsel for Debtors stipulated that the value of Debtors' home, plus sale costs, would exceed $30,000 and that no judgments had been entered pre-petition against Debtors in the county where the home is located. Both parties briefly restated the arguments raised in their pleadings. No formal briefs were filed.

After the hearing, Debtors filed an amended schedule of exempt property to claim $4,865 exempt as the unused portion of their additional personal property exemptions under S.D.C.L. § 43-45-4. The $4,865 is to come from proceeds if their homestead is sold by the Trustee. At the Court's request, Debtors clarified that they had not abandoned their original argument that their entire homestead is exempt. Instead, they stated that the amended schedule of exemptions is to be considered an alternative theory for protecting more of their homestead if they lose the constitutional challenge to S.D.C.L. § 21-19-2. Trustee Lovald objected to the amended schedule. The amended schedule and Trustee Lovald's objection to it are addressed by the Court in a separate memorandum and order.

Pursuant to 28 U.S.C. § 2403(b), the Court notified the Attorney General of the State of South Dakota of Debtors' constitutional challenge to S.D.C.L. § 21-19-2. The Attorney General did not formally intervene, but he did set forth his conclusion that Debtors' arguments of unconstitutionality are without merit.

Debtors' constitutional arguments are essentially that the Trustee cannot use § 21-19-2 to force a sale of the homestead because it would be a pre-judgment taking and that § 21-19-2 impermissibly allows the forced sale of a homestead while not allowing the sale of other absolutely exempt property. Debtors' arguments are premised on the conclusions that a homestead in South Dakota is always absolutely exempt and is not subject to a judicial lien or sale.

As discussed below, the Trustee's authority to sell the property is not an exclusive product of S.D.C.L. § 21-19-2. However, to the extent that Trustee Lovald may need to rely on § 21-19-2 to obtain court approval to sell the homestead under either 11 U.S.C. § 363(f)(1) or (5), each of which could incorporate S.D.C.L. § 21-19-2, the Court will consider Debtors' constitutional challenges to § 21-19-2.

II.

Debtors' constitutional challenge of S.D.C.L. § 21-19-2 fails to consider the statute in the whole context of chapter 21-19. Debtors' arguments surrounding the constitutionality of S.D.C.L. § 21-19-2 isolate the statue from other sections of ch. 21-19 and yield distorted conclusions. Section § 21-19-2 is just an initial step in the process a judgment creditor must follow to obtain a sale of a homestead to recover on a debt. All provisions of ch. 21-19 must be considered part of the homestead sale process. Linquist v. Bowen, 813 F.2d 884, 888-89 (8th Cir.1987); Nielson v. AT & T Corp., 597 N.W.2d 434, 439 (S.D.1999). For example, § 21-19-24 provides for a valuation hearing and § 21-19-29 requires an execution before the sale is conducted.

Debtors' constitutional challenge of S.D.C.L. § 21-19-2 incorrectly presumes that a homestead is always absolutely exempt. While Debtors recite that homesteads are always absolutely exempt, the state constitution and applicable state statutes provide for the contrary. Article XXI, § 4 of the South Dakota Constitution directs the legislature to limit the value and define by law that homestead which shall be exempt from forced sale.¹ Section 43-31-1 of the state code, which creates the homestead exemption, recognizes that directive by providing that the homestead exemption exists "to the extent and as provided in this code." Section 43-45-3(2) then sets forth a $30,000 value limitation when the homestead is voluntarily sold or is sold pursuant to S.D.C.L. ch. 21-19.²

The homestead is a privilege granted by law, not an estate in land. In re Wood, 8 B.R. 882, 887 (Bankr.D.S.D. 1981) (citing Botsford Lumber Co. v. Clouse, 63 S.D. 147, 257 N.W. 106, 108 (1934) (cited in Schutterle v. Schutterle, 260 N.W.2d 341 (S.D.1977))); Speck, 318 N.W.2d at 344 (quoting Clouse, 257 N.W. at 108). A defined homestead has significance in areas of law other than debtor-creditor matters, see, e.g., S.D.C.L. § 25-2-7 and § 29A-2-402, and is distinct from the homestead exemption. See S.D.C.L. § 21-19-2 (both terms used), and Hansen, 166 N.W. at 428. Compare S.D.C.L. §§ 43-31-1 and 43-45-3 (homestead exemption statutes) to S.D.C.L. §§ 43-31-2, -3, and -4 (homestead definition statutes).

The value limitation on a homestead exemption has significance only when the homestead is the subject of litigation between the homestead owner and a judgment creditor. O'Neill v. Bennett, 49 S.D. 524, 207 N.W. 543, 546 (1926); see also Rohl v. McCullough (In re Rohl), 34 F.2d 268, 270 (8th Cir.1929) (under the Bankruptcy Act, the case trustee could avoid pre-petition homestead sale by the debtor; the debtor's wife was entitled to $5,000 in homestead sale proceeds as her homestead exemption). Once the value of a homestead exceeds the protected exemption amount, a creditor may seek recovery of the excess to pay his claim. S.D.C.L. ch. 21-19. As explained in an early decision entered shortly after a value limitation was first adopted,

the result is that, where the owner of a homestead is free from debts, his homestead, may consist of 160 acres of land, with improvements thereon, free from all limitation as to value. . . . But where the owner of such homestead is in debt, then such homestead, to the extent that it exceeds $5,000 in value, is subject to the payment of the owner\'s debt.

Hansen, 166 N.W. at 429; see also Peck v. Peck, 51 S.D. 157, 212 N.W. 872, 875-76 (1927) once the homestead character of property is established, the next question is whether it is exempt against creditors, which is really a question of value³. Since 1918 when Hansen was decided, the value limitation has been broadened to include voluntary transfers of a homestead, as well as sales obtained by a judgment creditor. S.D.C.L. § 43-45-3(2). The value limit also has been increased to $30,000. Id. Though the statutes that define and limit the value of a homestead exemption have changed somewhat in form over the years, the interpretative case law has remained...