In re Owen, Bankruptcy No. 89-1112.
| Decision Date | 01 September 1989 |
| Docket Number | Bankruptcy No. 89-1112. |
| Citation | 104 BR 929 |
| Court | U.S. District Court — Central District of Illinois |
| Parties | In re Donald R. OWEN, Debtor. Charles E. COVEY, Trustee, Plaintiff-Appellant, v. UNITED FEDERAL SAVINGS AND LOAN ASSOCIATION OF ILLINOIS, Defendant-Appellee. |
Mr. James S. Brannon, Peoria, Ill., for plaintiff.
Mr. John M. Hanlon, Galesburg, Ill., for defendant.
In this bankruptcy appeal, the Court is asked to resolve two issues:
(1) Was either the sale of the Debtor's residence, or the payment of a creditor's previously unsecured claim, within 90 days of the filing of the bankruptcy petition, a transfer for the benefit of that creditor?
(2) Can the transfer of exempt property be a voidable preference under Bankruptcy Code § 547(b)?
Although the Bankruptcy Court answered each of these questions in the negative, this Court finds that the Bankruptcy Court erred on both grounds and reverses the Bankruptcy Court's decision.
This case was filed by the Plaintiff-Trustee pursuant to Bankruptcy Code § 547. This Court's jurisdiction is conferred by 28 U.S.C. § 158(a). The case was submitted to the Bankruptcy Court upon stipulated facts. The stipulated facts are set out in full below.
By virtue of a Memorandum of Judgment filed December 4, 1986 in the office of the Henry County Recorder, Defendant-Appellee United Federal Savings and Loan Association (hereinafter "United"), has a judgment lien against all Henry County real estate owned by the Debtor, Donald R. Owen. On March 7, 1987, Owen sold his home in Kewanee, Illinois, which is in Henry County. The home was sold at an auction for $11,000.
At the time of the sale of Owen's home, he was a widower and the sole owner of the real estate. Prior to his wife's death, he and his wife owned the property in joint tenancy with rights of survivorship. Owen continued to reside in the property after his wife's death and his residence there lasted until the March 7, 1987 auction sale.
In order to clear his title on the home, Owen paid United $5,454.09 from the auction proceeds. United then released its lien against the real estate. Owen's payment to United in this manner was voluntary. At the time of that payment, Owen was insolvent.
On May 6, 1987, Owen filed a petition for bankruptcy under Chapter 7 of the Bankruptcy Code. The bankruptcy trustee filed this case in order to avoid the transfer to United as a preference under Bankruptcy Code § 547. The preference claim was the only asset in the bankruptcy estate.
In an Opinion and Order entered February 1, 1989, 96 B.R. 168, the Bankruptcy Court entered judgment against the trustee and in favor of United. After analyzing the applicable Illinois Homestead Exemption statutes, Ill.Rev.Stat. ch. 110, ¶¶ 12-901, 12-902, 12-906 (1987), the Bankruptcy Court concluded that, prior to the auction sale, Owen was entitled to a double homestead exemption as long as he continued to occupy the homestead. Thus, Owen was entitled to a $7,500 homestead exemption of his own, as well as a $7,500 exemption for his deceased wife's interest, for a total homestead exemption interest of $15,000. The Bankruptcy Court further found that when Owen sold the property, he was entitled to a single exemption of $7,500 in the proceeds, pursuant to Ill.Rev.Stat. ch. 110, ¶ 12-906. Applying the above analysis to the facts of this case, the Court below then stated:
Therefore, the debtor was limited to a single homestead exemption of $7,500.00, $3,500.00 of the proceeds was not exempt and was subject to the defendant\'s judgment lien, and $7,500.00 of the proceeds was exempt and not subject to the defendant\'s judgment lien.
Bankruptcy Court Opinion and Order of February 1, 1989 at 9.
Having made the above findings, the Bankruptcy Court then addressed the question of whether the trustee could avoid as a preference the $1,954 portion of the payment to United attributable to the exempt property. The Bankruptcy Court found that the trustee could not do so. Following an extensive analysis of case law and commentary on the issue, the Bankruptcy Court concluded that exempt property could not be the subject of a preference action. Because the $1,954 moiety of the proceeds was obtained through the sale of exempt property, the Bankruptcy Court found that its transfer to United could not be considered as the payment of a preference. The Bankruptcy Court reasoned that, under Illinois law, that portion of the proceeds was exempt, so that Owen's creditors could not have reached it. The Bankruptcy Court concluded, "As far as the trustee is concerned, there was no diminution of the debtor's estate." Bankruptcy Court Opinion and Order of February 1, 1989 at 16.
Following the entry of the Bankruptcy Court's Opinion and Order, the Trustee-Appellant filed a Motion to Reconsider, which was denied. Thereafter, the trustee filed this appeal, challenging the findings of the Bankruptcy Court that the payment to United was not a preference that could be avoided under Bankruptcy Code § 547.
In order for the Court to rule in this case, the text of Bankruptcy Code § 547(b) must be considered. That subsection states as follows:
This Court is uncertain that the sale of the residence itself satisfies the requirements of § 547(b). The Court has particular difficulty in finding that the sale of the homestead may be considered to have been "for or on account of an antecedent debt owed by" Owen prior to the sale. Even if the sale of the homestead itself does not satisfy the second requirement of § 547(b), this Court believes that the trustee should prevail on this appeal. The Court so finds because the payment to United of $5,454.90 constituted a preference which the trustee could avoid.
Without question, the payment of the $5,454.90 was made to United. Thus, the requirements of Code § 547(b)(1) are satisfied. Similarly, because the payment was made on account of Owen's antecedent debt owed to United prior to the payment, the requirements of Code § 547(b)(2) are satisfied. The record indicates that Owen was insolvent at the time of his payment to United, and that the payment to United was made within 90 days of the date that Owen filed his Chapter 7 petition, so that the requisites of § 547(b)(3) and (b)(4)(A) have been met. Finally, because the preference claim in question was the only asset in the bankruptcy estate, United received more than it would have received had the payment to it not been made, so that § 547(b)(5) has been satisfied.
The Bankruptcy Court failed to explain why Owen's payment of $3,500 from the auction proceeds was not a preference within the meaning of § 547(b). That Court devoted no discussion to this question in its original Order, but that failure may be due to the fact that the parties did not specifically raise it at that point. However, the trustee did raise that issue in his Motion to Reconsider. On March 22, 1989, the Bankruptcy Court denied that Motion without discussion of its merits. As a result, this Court has no way of knowing why the Bankruptcy Court rejected the trustee's position; nevertheless, this Court believes that rejection of the trustee's argument was erroneous.
The Bankruptcy Court devoted much of its discussion in its February 1, 1989 Order to the question of whether or not the trustee can avoid a transfer involving exempt property. Because the Bankruptcy Court did not discuss the issue of whether or not the $3,500 constituted a preference, that Court's discussion of the avoidability of a payment from the proceeds of a sale of exempt property was limited to consideration of the $1,954.90 portion of the payment attributable to exempt property. After considering this question, the Bankruptcy Court concluded that the trustee could not avoid such payment. This Court...
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