In re McDonald
Decision Date | 29 March 2016 |
Docket Number | Bankruptcy No. 15-00739 |
Parties | IN RE: ALEC MCDONALD and DANELLE MCDONALD, Debtors. |
Court | U.S. Bankruptcy Court — Northern District of Iowa |
This matter comes before the Court on the objection of Trustee Charles Smith and Creditor Siouxland National Bank to the homestead exemption claim of Debtors Alec and Danelle McDonald. Wil Forker appeared for Debtors. Charles Smith appeared for himself as Chapter 7 Trustee. Donald Molstad appeared for Siouxland National Bank. The parties stipulated to the relevant facts. Trustee and Debtors filed briefs. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
Debtors lived in a home in Sioux City. While living there, Debtors incurred a business debt to Siouxland National Bank ("Siouxland"). Before selling their home, Debtors purchased a new home. Debtors then sold the old home, but because they were underwater on the home, did not receive any proceeds from the sale. Later, Debtors filed this bankruptcy.
Debtors argue that under Iowa law the homestead exemption on their old home automatically extends to their new home and prevents Siouxland from enforcing its debt against the new home. Trustee and Siouxland disagree. They argue that Iowa law requires Debtors to purchase the new home with proceeds from the old home to get the benefits of the homestead exemption.
The Court concludes that the homestead exemption does not apply because Debtors did not use the proceeds from the sale of their old homestead to purchase their current home. The Court sustains the Trustee and Siouxland's objection to Debtors' homestead exemption.
The parties agree on the facts, but disagree about how the law applies to those facts. Debtors purchased a home at 1724 S. Clinton, Sioux City, IA ("first home") in 1999. Siouxland had a first mortgage on that home. Sometime after buying the first home, Debtors got a business loan from Siouxland. The business loan was unsecured and was not related to the mortgage.
On August 29, 2014, Debtors bought a home at 110 38th St. Sioux City, IA ("second home") for $180,000. Debtors financed the purchase of the second home with a $151,000 mortgage from Primebank. Debtors paid the remainder of the purchase price by withdrawing about $15,000 from a 401k and by selling a car they owned.
On October 6, 2014, Debtors sold the first home. Because Debtors were underwater on the first home, they received no net proceeds from the sale. In fact, Debtors had to pay an additional $1,133 to close the sale.
On May 19, 2015, Debtors filed bankruptcy. Siouxland is a creditor with an unsecured claim of $517,273.54. This claim is based on the business loan Debtors received after buying the first home, but before buying the second home.
The Bankruptcy Code gives debtors the choice between the federal exemptions provided in § 522(d) and state law exemptions, unless the state opts out of the federal exemptions. 11 U.S.C. § 522(b)(3)(A) (2014); Hanrahan v. Roberts (In re Roberts), 450 B.R. 159, 164 (Bankr. N.D. Iowa 2011). Iowa has opted out of the federal exemptions. Iowa Code § 627.10 (2015) (). Thus, Iowa law governs this issue.
Iowa Code § 561.20 (2015). Thus, a person is entitled to continuing homestead protection if they sell their first homestead and use any proceeds from that homestead to purchase a new homestead. See Richards v. Orr, 92 N.W. 655, 656 (Iowa 1902); John Deere Cmty. Credit Union v. Miller, 810 N.W.2d 896 (Iowa Ct. App. 2012) (); see also LaSalle Bank v. Takes (In re Takes), 334 B.R. 642, 652 (N.D. Iowa 2005) aff'd, 478 F.3d 902 (8th Cir. 2007) (citing numerous Iowa cases). If so purchased, these later-acquired homesteads are exempt up to the full value of the previous homestead, regardless of the amount of proceeds from the old homestead that a person uses to acquire the new homestead. Am. Sav. Bank of Marengo v. Willenbrock, 228 N.W. 295, 298 (Iowa 1929). If, however, the homestead exemption does not carryover from the previous residence, the new homestead will be liable for all of the debts incurred before its purchase. Id.
Debtors here argue that the second home is exempt from Siouxland's claim because the homestead exemption carried over from the first home to the second home. Debtors argue that courts apply the homestead exemption liberally and should do so here. Debtors also argue that this Court has held that the proceeds from the first house do not necessarily need to be applied to the second house for the second house to continue the first home's homestead protection.
Trustee and Siouxland disagree. Trustee and Siouxland argue that the second home is not exempt from Siouxland's claim because Debtors did not purchase the second home with proceeds from the first home. Trustee and Siouxland rely on Eighth Circuit caselaw. Trustee and Siouxland conclude that Siouxland's unsecured debt—which was incurred between the purchase of the first and second home—is enforceable against the second home.
Debtor correctly notes that Iowa courts have consistently maintained that the homestead statute should be broadly and liberally construed in favor of exemption. See, e.g., In re Estate of Waterman, 847 N.W.2d 560, 567 (Iowa 2014) (); In re Bly, 456 N.W.2d 195, 199 (Iowa 1990) (); Willenbrock, 228 N.W. at 297 ().Along the same lines, the Iowa homestead exemption is intended not only to benefit the debtor, but also is "a matter of public policy." Willenbrock, 228 N.W. at 297.
Debtor is also correct that this Court has ruled that the homestead exemption can continue into a new homestead even if it is not purchased with proceeds from the old...
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