In re Larson
| Decision Date | 30 September 2011 |
| Docket Number | Case No. 08-04668-lmj7 |
| Parties | In the Matter of: Al Dwaine Larson, Debtor |
| Court | U.S. Bankruptcy Court — Southern District of Iowa |
In the Matter of: Al Dwaine Larson, Debtor
Case No. 08-04668-lmj7
UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF IOWA
Entered: September 30, 2011
Creditors John Krusenstjerna and United Warehousing Corporation ("Creditors") object to Chapter 7 Debtor Al Dwaine Larson ("Debtor") claiming a homestead exemption as a beneficiary of a self-settled trust that includes the homestead property in the trust estate. They argue that (1) Debtor failed to disclose that the trust held legal title to the property by scheduling his interest in the homestead property as being held in fee simple rather than as a beneficiary of the trust, and (2) Iowa Code sections 633A.2303 and 633A.2304, that generally would permit creditors to reach assets in a self-settled trust, should prevail over Iowa Code section 561.1(2) that specifically permits a person, who occupies a homestead as a beneficiary of a trust that includes the homestead property, to claim the homestead exempt absent a special declaration of statute to the contrary or (3) Iowa Code section 561.21(1), a special declaration of statute to the contrary that generally allows a homestead to be sold for pre-acquisition debts, applies because Debtor was already a guarantor on his son's liability to the Creditors when Debtor transferred his interest in the homestead property to his revocable trust.
Debtor's respective counterarguments are that: (1) To the extent there was any omission of his interest in the trust in the schedules that he filed at the outset of this
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case, he cured that omission by amending his schedules; (2) The statutory definition of "owner" of a homestead shields homestead property in the corpus of a self-settled trust from the reach of creditors; and (3) The antecedent debt exception would not apply if Debtor's liability to Creditors is deemed to have been contracted at the time Debtor's son defaulted on his liability to the Creditors—a point in time after Debtor transferred his interest in the homestead property to his revocable trust, or, if Debtor's liability is deemed to have been contracted at the time he guaranteed his son's liability—a point in time after Debtor had been residing in the homestead but before he transferred his interest in that property to his trust, the transfer from one form of ownership to another form of ownership should not be equated with an actual waiver or abandonment of his homestead rights. In any event, Debtor maintains the homestead property is not subject to execution because his non-filing spouse's homestead rights cannot be separated from his rights.
Having reviewed the record and the arguments of the parties, the Court enters its decision in favor of the Debtor.
The Court has jurisdiction of this matter pursuant to 28 U.S.C. section 1134 and the standing order of reference entered by the United States District Court for the Southern District of Iowa. This is a core matter under 28 U.S.C. section 157(b)(2)(B).
In 1997 Debtor and his non-filing spouse acquired Lots 14 and 15 in Eagle Ridge Estates in Johnston, Iowa, and in 1999 they began constructing a house on Lot 15.1They have resided in that house continuously since it was completed in June 2000.
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On July 17, 2006 Chad D. Larson, Debtor's son, entered into a purchase agreement with the Creditors to buy, among other of Creditors' assets, all 500 issued and outstanding shares of United Transportation Services, Inc. On the same date, Debtor signed the agreement as guarantor. By that point in time, Debtor had loaned his son's newly purchased company $15,000.00 for start-up capital.
In August 2006 Debtor and his non-filing spouse decided to update their wills and sought the guidance of an attorney, who advised them to create revocable, inter vivos trusts for probate purposes. On February 16, 2007, after Debtor had loaned his son's company another $30,000.00, Debtor and his non-filing spouse executed their trust agreements. Under the terms of the Al Larson Revocable Trust, Debtor is the settlor, the trustee, and sole beneficiary of the trust.
At the same time they executed the trust agreements, Debtor and his non-filing spouse executed a warranty deed transferring their residence to the trusts. Specifically, they conveyed "a 1/2 interest to Al Larson, Trustee of the Al Larson Revocable Trust and 1/2 interest to Nancy Larson, Trustee of the Nancy Larson Revocable Trust." (Exhibit A at 1.) The deed contained the standard language about "relinquish[ing] all rights of dower, homestead and distributive share in and to the real estate." Id.
Despite Debtor loaning his son's company an additional $160,000.00 between February 23, 2007 and September 29, 2007, the venture failed. In a letter dated
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November 16, 2007, Debtor's son advised Creditors that United Transportation Services, Inc. had ceased operations as of that date. To collect what remained owing under the purchase agreement, Creditors commenced a breach of contract action in state court. The matter was scheduled for trial on December 1, 2008 but was stayed by Debtor filing a petition for relief under Chapter 7 of the United States Bankruptcy Code on November 26, 2008 and by his son doing the same on December 1, 2008.
Along with his petition, Debtor filed schedules and statements. On Schedule A (Real Property), Debtor listed a "Single Family Residence at 6823 River Bend Dr., Johnston, IA 50131" which he described as being held jointly with his non-filing spouse in fee simple and having an unencumbered fair market value of $789,300.00.2 (Docket No 1.) On Schedule B (Personal Property), Debtor checked "none" at line 19 that covers "[e]quitable or future interests, life estates, and rights or powers exercisable for the benefit of the debtor other than those listed in Schedule A—Real Property." Id. On Schedule C (Property Claimed as Exempt), Debtor claimed the full value of the residence exempt under Iowa Code section 561.16.3 Id. In paragraph 10(b) of the Statement of Financial Affairs, that requires a debtor to "[l]ist all property transferred by the debtor within ten years immediately preceding the commencement of this case to a self-settled trust or similar device of which the debtor is a beneficiary," Debtor reported that "Personal Residence/Estate Planning" had been transferred in February 2007 to
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the "Al Larson Trust" and to the "Nancy Larson Trust." Id. On April 28, 2009, the day before the evidentiary hearing on the exemption controversy, Debtor amended Schedule B by adding "Revocable Trust of Al Dwaine Larson" at line 19 and amended Schedule C by claiming the "Revocable Trust of Al Dwaine Larson" exempt under Iowa Code sections 561.16.4 (Docket No. 51.)
11 U.S.C. section 522(b) permits individual states to opt out of the federal exemption scheme. Iowa has done so in Iowa Code section 627.10. Accordingly, this Court must apply Iowa law in ruling on the pending exemption controversy.
Iowa Code section 561.16 provides in relevant part that "[t]he homestead of every person is exempt from judicial sale where there is no special declaration of statute to the contrary." Iowa Code § 561.16. Iowa Code section 561.1 defines the homestead concept as follows:
1. The homestead must embrace the house used as a home by the owner, and, if the owner has two or more houses thus used, the owner may select which the owner will retain. It may contain one or more contiguous lots or tracts of land, with the building and other appurtenances thereon, habitually and in good faith used as part of the same household.
2. As used in this chapter, "owner" includes but is not limited to the person, or the surviving spouse of the person, occupying the homestead as a beneficiary of a trust that includes the property in the trust estate.
Iowa Code § 561.1 (emphasis in the original). The Iowa legislature...
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