In re Rich
| Decision Date | 16 April 2013 |
| Docket Number | Case No. 12-10357 |
| Parties | In re: DANNY MARTIN RICH MARY BETH RICH Debtors. |
| Court | U.S. Bankruptcy Court — District of Kansas |
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Robert E. Nugent
United States Chief Bankruptcy Judge
DESIGNATED FOR ON-LINE PUBLICATION BUT NOT PRINT PUBLICATION
Married Kansas debtors are entitled to exempt their homestead from execution by general creditors.1 The extent of the permitted exemption is measured in acres, not dollars, and a debtor's homestead may have unlimited value . . . until that debtor seeks bankruptcy protection. Then federal law caps the "amount of interest" that the debtor has "acquired" in the homestead within the 1,215days preceding the filing at $146,450.2 But federal law also provides that § 522 "shall apply separately" to each debtor in a joint case, subject to certain limitations.3 Dan and Mary Beth Rich acquired their homestead within the 1,215 days before they filed their joint bankruptcy case. To do so, they allegedly used sale proceeds from their previous homestead, along with funds from Dan's IRA, savings, and the proceeds of construction loans.4 At the petition date, they considered the home to be worth $509,500 and it was encumbered by $205,868 in secured debt, leaving "equity" of $303,632. The trustee objects to their exemption because their equity exceeds the $146,450 cap. Because the debtors are each entitled to "apply separately" the provisions of § 522 under subsection (m), each debtor's homestead interest is capped at $146,450, meaning their total exemption is capped at $292,900. As there is nothing in the record to help me determine how much (if any) of the remaining $10,732 equity was acquired with the proceeds of the debtors' former homestead as § 522(p)(2)(B) provides, the Trustee's objection to their homestead exemption must be overruled.5
Objections to claimed exemptions are contested, core proceedings under 28 U.S.C. § 157(b)(2)(B) and this Court may exercise subject matter jurisdiction per 28 U.S.C. § 1334 and § 157(a) and (b)(1).
Dan and Mary Beth Rich filed this joint bankruptcy case on February 24, 2012; October 27, 2008 is 1,215 days prior to filing. They sold their former homestead on Lakeview Road in Hutchinson, Kansas, in October of 2008. In late June of 2009, they purchased land on East 69th Avenue in Hutchinson and built a home there, completing construction in 2010, well within the 1,215 day period. The stipulations state that there remains "a factual issue" about the source of the funds to purchase the land and build the house and the amount of funds from each source.7 But as this matter was submitted on stipulations and no one requested an evidentiary hearing, the record is now closed, leaving us with no record concerning how much, if any, of what the debtors realized on their old house went into the new one.8 When they filed this case, they scheduled the home as having a value of $509,500 and as being encumbered by two mortgages with an aggregate balance of $205,868. The parties stipulate that the debtors' equity in the home was $303,632 at the date of filing.
In bankruptcy, a properly-claimed exemption is presumed valid unless a party in interestobjects.9 As the party objecting to the exemption here, the Trustee bears the "burden of proving that the exemption was not properly claimed."10 Kansas exemption laws are construed liberally in favor of exemption.11 Because the parties agreed with each other to submit this matter on stipulations, I regard them as the only facts proven in the case and disregard the additional facts alleged by the Trustee and the debtors in their memoranda.12
The statute plainly speaks of there being one homestead ("a homestead," "a residence," etc.). By comparison, other Kansas exemption statutes confer an exemption upon "every" debtor. For example personal property exemptions permit - "Every person residing in this state shall have exempt . . . the following articles of personal property . . . ."18
The Kansas state courts have long recognized that families are only entitled to one homestead, first doing so in 1878.19 More recently, the Kansas Court of Appeals held that joint tenants in a 240 acre tract can not each claim one-half of the tract exempt.20 Relying on the words"to the extent of 160 acres" as contained in the statute, that court concluded that only each cotenant's interest in the 160 acres (or one acre in town) could be claimed exempt.21
To be sure, not all judges sitting in Kansas have reached this conclusion. In In re Hall, Judge Karlin of this court overruled a chapter 7 trustee's objection to joint debtors' claiming as exempt separate dwellings on a 1.33 acre tract in an incorporated town.22 She concluded that the Halls had each "legitimately established a separate homestead pursuant to Kansas law because both dwellings qualified as homesteads."23 The facts in Hall differ from the facts in this case: Dan and Mary Beth Rich only inhabit one dwelling and, at Kansas law, even under the Hall rule, they are only entitled to claim one homestead.
Bankruptcy law likewise provides for debtors to claim assets exempt from their bankruptcy estates. Section 522 outlines the scope of those exemptions. Section 522(b)(1) provides that "an individual debtor" can exempt either property listed in subsection (b)(2) or (b)(3). Subsection (b)(2) allows an individual debtor to claim exemptions under a comprehensive scheme of so-called "federal exemptions" as listed in § 522(d) while subsection (b)(3) permits the debtor to elect the state law exemptions in his or her state of domicile. Subsection (b)(1) adds the limitation that debtors in jointcases must both elect either the state or federal exemptions; one debtor cannot elect state exemptions while the other debtor chooses federal ones.
Section 522(b)(2) allows states to opt out of the federal scheme by not specifically authorizing its citizens to choose it. By enacting KAN. STAT. ANN. § 60-2312(a) (2005), the Kansas legislature has opted out, meaning that Kansans filing bankruptcy cases must use the state law exemptions.24
The "limitation in subsection (b)" likely refers to the requirement that joint debtors elect either federal or state exemptions, although some courts and commentators have concluded that this provision is without meaning in cases involving debtors who hail from opt out states. Norton's bankruptcy treatise categorically states that joint debtors claiming state exemptions can't double them where state law does not provide separate exemptions.25 Collier's treatise counters that joint debtors can each "stack" their exemptions, noting a Circuit split. It references an Eighth Circuit Court of Appeals case, In re Stevens, as authority holding that the "limitation in subsection (b)" language was added by Congress to refer to the limitation on spouses claiming different exemptionschemes in joint cases.26 That limitation was added to § 522(b) in 1984.27
In 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act, Congress added § 522(p), ostensibly to stem perceived abuses of state law unlimited homestead exemptions.28 That provision provides that any "amount of interest" a debtor "acquires" in a homestead in the 1,215 days preceding filing is capped at $146,450.29 Not counted in this "amount of interest" is any equity that the debtor received from the sale of a prior homestead and transferred into the debtor's current homestead.30 In the present case, the debtors argue that their homestead cap should be $292,900 because § 522(m) applies the entire section separately to each debtor in a joint case. The Trustee counters that because Kansas state law limits debtors to one homestead, the debtors' argument must fail.
The debtors have the better argument here. While the Kansas Constitution and statute limit married debtors to a single homestead, the only state law limitation is on quantity of land. The debtors don't seek to exempt more than 160 acres, nor do they ask to be permitted to each retain a separate, non-contiguous tract like the debtors in Sauer. Instead, they ask to stack the caps imposed upon each of them by § 522(p)(1). This is what § 522(m) contemplates. While § 522(b)(3) avails thedebtors of an unlimited value Kansas homestead exemption, subsection (p) limits the value of that exemption in bankruptcy.31 Subsection (m) applies that cap to each of them, meaning that each debtor's share of the homestead is value-capped at $146,450.
The Bankruptcy Appellate Panel for the Tenth Circuit...
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