In re Kester

Decision Date13 March 2006
Docket NumberBankruptcy No. 02-24689-7.,BAP No. KS-05-095.,BAP No. KS-05-107.
Citation339 B.R. 749
PartiesIn re Donald Kenton KESTER and Charlotte Yvonne Kester, Debtors. Christopher J. Redmond, Trustee, Appellant, v. Donald Kenton Kester and Charlotte Yvonne Kester, Appellees.
CourtU.S. Bankruptcy Appellate Panel, Tenth Circuit

Christopher J. Redmond, Eric J. Howe, Husch & Eppenberger, LLC., Leawood, Kansas, for Appellant.

Before BOHANON, MICHAEL, and McNIFF, Bankruptcy Judges.


MICHAEL, Bankruptcy Judge.

Christopher J. Redmond ("Trustee"), the Chapter 7 trustee in the above-captioned case, appeals two orders of the Bankruptcy Court for the District of Kansas: 1) overruling the Trustee's objection to a claim of homestead exemption (the "Exemption Order") and 2) granting a motion for dismissal of one joint debtor (the "Dismissal Order"). After review, we affirm the bankruptcy court in all respects.

I. Background

Several years prior to filing their bankruptcy petition in this case, Donald K. Kester and Charlotte Y. Kester (the "Kesters" or "Debtors") transferred legal title to certain property, including their principal residence (the "Real Property"), into self-settled living revocable trusts (collectively, the "Trust").1 Each of the Debtors is a beneficiary of the Trust. On December 13, 2002, the Debtors filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. After several amendments to their bankruptcy schedules, the Debtors eventually claimed various exemptions under Kansas law, including a homestead exemption on the Real Property pursuant to Kansas Statutes Annotated § 60-2301.2 The Trustee objected on the ground that the Debtors, as beneficiaries of the Trust, could not claim an exemption in the Real Property held by the Trust.3

The Trustee subsequently filed an adversary proceeding to compel the turnover of the Trust assets. Debtor Charlotte Kester later filed a motion to dismiss herself from the bankruptcy case, to which the Trustee objected. On September 16, 2005, the bankruptcy court issued a "Memorandum Opinion and Order Denying in Part and Granting in Part the Trustee's Motion for Summary Judgment" (the "Memorandum Opinion") in addition to the Exemption Order and the Dismissal Order. Both the Dismissal Order and the Exemption Order, which are the subjects of the present appeal, incorporate the legal analysis of the Memorandum Opinion by reference. The summary judgment order that is incorporated into the Memorandum Opinion is the subject of a separate appeal that is currently before the District Court for the District of Kansas.

II. Appellate Jurisdiction and Standard of Review

This Court has jurisdiction to hear timely-filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.4 "A bankruptcy court's order denying a claimed exemption is a final order."5 Neither party elected to have this appeal heard by the United States District Court for the District of Kansas, thus consenting to review by this Court.

A bankruptcy court's interpretation of a state statute is subject to de novo review.6 "The decision of whether to grant a motion to voluntarily dismiss a bankruptcy petition lies within the discretion of the bankruptcy court and is reviewed only for an abuse of discretion."7 "Under the abuse of discretion standard: a trial court's decision will not be disturbed unless the appellate court has a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances."8 "An abuse of discretion may occur if a court bases its ruling on a view of the law that is erroneous."9

III. Discussion

The facts in this case are not in dispute. Kansas prohibits its citizens from electing to use federal exemptions provided in § 522(d).10 Therefore, whether a debtor as beneficiary may claim exemptions in property held in trust is governed by Kansas law.

Subject to certain exceptions that are not applicable in this case, upon commencement of a case under the Bankruptcy Code, property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case."11 Under Kansas law, a trust beneficiary holds equitable title and the trustee holds legal title to property held by a trust.12 Therefore, the Debtors hold an equitable interest in the Real Property that is sufficient to make it property of the estate.

A. The Exemption Order
1. Debtors have sufficient interest in the property to support a homestead exemption.

The Trustee's primary argument is that under the plain language of the Kansas statute, the Debtors' equitable interest in the Real Property is insufficient to support a claim of homestead exemption. The Kansas homestead exemption is provided for in Kansas Statutes Annotated § 60-2301, which reads:

A homestead to the extent of 160 acres of farming land, or of one acre within the limits of an incorporated town or city, or a manufactured home or mobile home, occupied as a residence by the owner or by the family of the owner, or by both the owner and family thereof, together with all the improvements on the same, shall be exempted from forced sale under any process of law, and shall not be alienated without the joint consent of husband and wife, when that relation exists; but no property shall be exempt from sale for taxes, or for the payment of obligations contracted for the purchase of said premises, or for the erection of improvements thereon. The provisions of this section shall not apply to any process of law obtained by virtue of a lien given by the consent of both husband and wife, when that relation exists.13

Although the Kansas Supreme Court has published several cases that have interpreted the homestead statute, none relates specifically to whether the beneficiary of a self-settled trust may exempt property under that statute. "When the federal courts are called upon to interpret state law, the federal court must look to the rulings of the highest state court, and, if no such rulings exist, must endeavor to predict how that high court would rule."14 It is therefore this Court's task to predict how the Kansas Supreme Court would rule under the facts of this case.

It is settled law in Kansas that equitable title can support a claim of homestead exemption.15 The Kansas Supreme Court has held that "[a] homestead right of occupancy may be established upon a cotenancy title, an equitable title, or an executory contract to purchase, a leasehold estate, or an estate for life, as against almost any class of claimants except cotenants."16 Likewise,

[a]n equitable owner of real estate may occupy and hold the same as his homestead, subject to all the rights, privileges, immunities and disabilities given and imposed by the homestead exemption laws. (Following Tarrant v. Swain, [15 Kan. 146 (1875)].) And being in the actual occupancy of the land, all persons must take notice of his homestead interests.17

Absent some authority or sound policy to the contrary, we conclude that the same rationale would be applied to the facts of this case.

The bankruptcy court cited six decisions in which the Kansas Supreme Court determined that an equitable interest in real property is sufficient to claim a homestead interest.18 Three of those cases, Southern v. Linville, Walz v. Keller, and Moore v. Reaves, held that a contract for the sale of land gave the purchaser an equitable interest in the land, and that the homestead statute protected the wife of the purchaser from transfer of that interest without her consent.19 In Stowell v. Kerr, a relative lent money to the debtor for the purchase of a homestead, but kept the legal title to the property in his own name.20 The court found that the debtor's equitable interest in the property was sufficient to claim a homestead interest.21 In In re Dahn, the court held that a widow's equitable interest under a conditional sales contract was sufficient to claim a homestead interest in a mobile home.22 And in Tarrant v. Swain, the court held that an undivided one-half interest in real property gave a debtor an equitable interest in said property that would uphold a homestead claim.23 Based on those cases, the bankruptcy court concluded that the Debtors' equitable interest in the Real Property was sufficient to support a homestead exemption.

The Trustee argues that the Kansas cases cited by the bankruptcy court are factually distinguishable from the case sub judice because they did not involve the interests of a beneficiary of a trust. While the Trustee is correct in that regard, this Court believes this case does not warrant a different outcome.

Because these Kansas Supreme Court cases do not adequately address the availability of a homestead exemption to a beneficiary of a self-settled revocable trust, we are charged with predicting how it would rule under the facts of this case. To that end, we look to that court's expressed policy of liberal construction of the state's homestead provisions.24 The Kansas Supreme Court has noted that the homestead was established "for the benefit of the family and of society — to protect the family from destitution, and society from the danger of her citizens becoming paupers."25 The interest in a self-settled trust is not sufficiently different from the equitable interest in the cases cited supra to justify a different result. Given the statements by the Kansas Supreme Court that an equitable title will support a homestead exemption under Kansas law and the liberal policy supporting such a finding, we conclude the bankruptcy court correctly held that the Debtors have a properly claimed homestead exemption in their interest in the Real Property.

The Trustee cites a number of cases in support of a contrary result. To the extent those cases ...

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