In re Ronald G. Stewart And Debra A. Stewart

• Decision Date: 12 May 2011
• Docket Number: No. 10–81979.,10–81979.
• Citation: 452 B.R. 726
• Parties: In re Ronald G. STEWART and Debra A. Stewart, Debtors.
• Court: U.S. Bankruptcy Court — Central District of Illinois

452 B.R. 726

In re Ronald G. STEWART and Debra A. Stewart, Debtors.

No. 10–81979.

United States Bankruptcy Court, C.D. Illinois.

May 12, 2011.

Sumner Bourne, Peoria, IL, Peoria, IL, for Debtors.

OPINION

THOMAS L. PERKINS, Chief Judge.

Like many states, Illinois provides its citizens an exemption in proceeds from the sale of a homestead. It is an “expiring” exemption good for one year after receipt of the proceeds the purpose of which is to permit the proceeds to be reinvested in a new home. One question presented is whether a debtor who claims the exemption in homestead proceeds must intend to reinvest the proceeds in another home. The Court holds that he does not have to prove such an intent to assert the exemption. The second question presented is whether a debtor who files bankruptcy during the one-year period has an unconditional entitlement to exempt segregated homestead proceeds notwithstanding a subsequent failure to reinvest the proceeds in a new homestead.

This second issue, although a narrow one, is an example of the broader and important question of incorporating and applying state law in bankruptcy cases. In opt-out states where property exemptions are controlled by state law, the bankruptcy court is to apply each exemption and all of its terms and conditions exactly as state law provides. Based on this principle, the Court holds that the reinvestment condition remains operative in bankruptcy so that the exemption is properly denied if the proceeds are not reinvested in a homestead within the one-year period dictated by the state statute.

FACTUAL BACKGROUND

Ronald and Debra Stewart (DEBTORS) jointly owned and lived in a home in Edwards, Illinois, as their marital homestead for eighteen years. In early 2010, they agreed to sell the home to a church for a gross price of $285,595. The sale closed on March 1, 2010.

After payment of their mortgage balances and closing costs, the DEBTORS were due the sums of $53,636.62 in net sale proceeds and $3,437.59 as an escrow account refund on their first mortgage. After a short delay for processing, the DEBTORS received an escrow refund check dated March 25, 2010, in the expected amount of $3,437.59. The DEBTORS held the check and never cashed or deposited it.

At the DEBTORS' request, the net sale proceeds were not disbursed at closing but continued to be held by the disbursing bank pending instructions from the DEBTORS. Over the next few weeks, a portion of the proceeds was released for the payment of certain debts of the DEBTORS, including a substantial tax liability to the IRS. Finally, on May 22, 2010, the bank issued a check in the amount of $22,081.89, the full remaining balance of the sale proceeds. Like the escrow refund check, the DEBTORS neither cashed nor deposited it.

The DEBTORS moved into a rented apartment on a one-year lease. On June 21, 2010, they filed a Chapter 7 petition, properly disclosing the prepetition sale of the house and the two uncashed checks. They also scheduled a certificate of deposit in the amount of $50,000 describing it as “proceeds of sale of home, which Debtors intend to reinvest in a new homestead,” claiming $30,000 of it exempt under the Illinois statute that exempts homestead sale proceeds. The escrow refund check was claimed partially exempt under the Illinois “wild card” exemption provision. No exemption was claimed in the $22,081.89 sales proceeds check.

The Chapter 7 Trustee, Charles E. Covey (TRUSTEE), objected to certain exemption claims and moved for an extension of the deadline for him to object to the DEBTORS' discharge. Without objection, an order was entered granting the TRUSTEE an indefinite extension. The claimed exemption in the certificate of deposit was denied after the DEBTORS conceded it could not be traced to the proceeds from sale of the house.

On November 12, 2010, the DEBTORS filed an amended schedule C claiming both the escrow refund check and the sale proceeds check as exempt under the homestead proceeds exemption. The TRUSTEE objected on the basis of the expiring nature of the exemption, contending that he is entitled to both checks unless the DEBTORS reinvest the proceeds in a new homestead by March 1, 2011, the anniversary of the closing. The issue was tried on February 15, 2011.

Ronald Stewart (RONALD), the only witness, testified that he and his wife hoped to use the sale proceeds to purchase another home. They have not done so to date because their discharge has not yet been granted and he is concerned about trying to obtain a loan while in bankruptcy. He testified to having that same intent ever since the sale. RONALD admitted to neither retaining a realtor nor taking any other steps toward a purchase. The one-year period for reinvestment has now expired without the funds having been reinvested in a new homestead.

ANALYSIS

A. Escrow refund is not exempt.

The Court agrees with the TRUSTEE that the proceeds exemption does not cover the escrow account refund. To be “proceeds,” funds must be traceable to the consideration paid by the purchaser. Only the $22,081.89 check is proceeds from the sale of the house. The smaller check for $3,437.59 represents a refund from the mortgage company or servicer for an overage in funds paid in by the DEBTORS for the payment of real estate taxes and insurance premiums. The Court holds that the escrow refund check is not “proceeds” from the sale of the house and is not eligible for the homestead proceeds exemption.

B. The state statute, in context.

Initially, it is important to recognize the context of the homestead proceeds exemption. In construing a statute, a court should look to the provisions of the whole law, and to its object and policy. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 51, 107 S.Ct. 1549, 1555, 95 L.Ed.2d 39 (1987). When interpreting a particular section of a statute, courts should look to the entire statutory scheme rather than simply examining the text at issue. Dodd v. U.S., 545 U.S. 353, 370 n. 10, 125 S.Ct. 2478, 162 L.Ed.2d 343 (2005). The relevant context of a statutory provision includes not only its language and related provisions, but also the “real-world situation” sought to be addressed. Matter of Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125, 1128 (7th Cir.1998).

Article XII of the Illinois Code of Civil Procedure, 735 ILCS 5/12–101 et seq. , dealing with judgments and their enforcement, is divided into 14 parts.¹ Part 10 addresses exemptions of personal property while the exemption of homestead is addressed in Part 9. The homestead exemption provisions of Part 9 include 13 sections. Section 12–901 states the primary exemption of homestead in value of $15,000 for a sole owner, $30,000 for joint owners, of property owned and occupied as a residence.² 735 ILCS 5/12–901. The exemption in proceeds is provided in section 12–906, as follows:

When a homestead is conveyed by the owner thereof, ... the proceeds thereof, to the extent of $15,000, shall be exempt from judgment or other process, for one year after the receipt thereof, by the person entitled to the exemption, and if reinvested in a homestead the same shall be entitled to the same exemption as the original homestead.735 ILCS 5/12–906.

A couple of preliminary observations need be made. First, even though the proceeds are personal property, the exemption provision appears in the part of the code dealing specifically with the homestead exemption, not the part that provides the general personal property exemptions. Second, though not expressly made a condition of the exemption, the homestead proceeds must remain segregated from other funds or at least identifiable. The issue is one of traceability.³ In re Snowden, 386 B.R. 730, 732 (Bankr.C.D.Ill.2008) (Gorman, J.). Tracing of commingled funds can be tricky as different accounting rules may be used, such as “first in, first out” or the “lowest intermediate balance” rule. See C.O. Funk & Sons, Inc. v. Sullivan Equipment, Inc., 89 Ill.2d 27, 31–32, 59 Ill.Dec. 85, 431 N.E.2d 370 (1982); Thrall Car Mfg. Co. v. Ward, 165 Ill.App.3d 737, 743, 117 Ill.Dec. 378, 520 N.E.2d 729 (Ill.App. 1 Dist.1987). Since the DEBTORS never deposited the proceeds check, the TRUSTEE concedes that the check represents segregated funds and tracing is not an issue.

C. Ziegler, Snowden and Lantz.

The first issue, a state law one, is whether the proceeds are exempt only if the debtor intends to reinvest the proceeds in a new homestead. The statute makes no reference to state of mind, but such a condition could be implied. If so, does the intent need to be continuous and uninterrupted or need it only be present on the petition date?

The issue is not unique to Illinois. A similar implied intent requirement has been judicially created in Florida, but not in Arizona or California. See In re White, 377 B.R. 633, 644–45 (Bankr.D.Ariz.2007), aff'd, 389 B.R. 693 (9th Cir. BAP 2008). Cf. In re Marriott, 427 B.R. 887, 893 (Bankr.D.Idaho 2010) (in Idaho, to be exempt, the debtor must intend to use the proceeds to acquire a replacement homestead, or at least keep the funds identified and segregated in order that such a possibility has not been foreclosed).

As a matter of first impression, the bankruptcy court in In re Ziegler, 239 B.R. 375 (Bankr.C.D.Ill.1999) (Altenberger, J.), held that an intent to reinvest the proceeds in a new homestead is an implicit condition of the proceeds exemption. This Court followed Ziegler in In re Sizemore, 2001 WL 34079528 (Bankr.C.D.Ill.2001). The DEBTORS invite the Court to reconsider the issue.

In Snowden, Judge Gorman questioned the intent requirement recognized in Ziegler, but declined to decide the issue since the debtor's testimony established an intent to reinvest the proceeds in a new homestead. The issue under the Illinois statute has not been addressed by the Illinois Supreme Court, the Seventh Circuit Court of Appeals or any federal district court.

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