In re Takes

• Decision Date: 05 December 2005
• Docket Number: No. 05-CV-71-LRR.,05-CV-71-LRR.
• Citation: 334 B.R. 642
• Parties: In re Francis P. TAKES and Mary L. Takes, Debtors. LaSalle Bank, N.A. and Valley Bank, Appellants, v. Frances P. Takes and Mary L. Takes, Appellees.
• Court: U.S. District Court — Northern District of Iowa

334 B.R. 642

In re Francis P. TAKES and Mary L. Takes, Debtors LaSalle Bank, N.A. and Valley Bank, Appellants, v. Frances P. Takes and Mary L. Takes, Appellees.

No. 05-CV-71-LRR.

United States District Court, N.D. Iowa, Cedar Rapids Division.

December 5, 2005.

Richard A. Davidson, Lane & Waterman, Davenport, IA, for Appellants.

Janet K. Hong, Lynch, Dallas, PC, Joseph A. Peiffer, Day, Rettig, Peiffer, PC, Cedar Rapids, IA, for Appellees.

ORDER

TO BE PUBLISHED

LINDA R. READE, Judge.

                TABLE OF CONTENTS
                I.  INTRODUCTION ...................................................... ____
                

                II.  PRINCIPLES OF REVIEW .............................................. ____
                III.  THE FACTS ......................................................... ____
                      A.  Residency Agreement ........................................... ____
                      B.  Debt .......................................................... ____
                      C.  Purchase Agreement ............................................ ____
                      D.  Bankruptcy .................................................... ____
                 IV.  THE ISSUE ......................................................... ____
                  V.  THE MERITS ........................................................ ____
                      A.  Federal Bankruptcy Law ........................................ ____
                      B.  Iowa Homestead Law ............................................ ____
                          1.  Iowa Code § 561.16 ................................... ____
                          2.  Iowa Code § 561.21(1) ................................ ____
                          3.  Iowa Code § 561.20 ................................... ____
                 VI.  CONCLUSION ........................................................ ____
                

I. INTRODUCTION

This is an appeal from final judgment of the United States Bankruptcy Court for the Northern District of Iowa. The Bankruptcy Court ruled Frank and Mary Lu Takes, two debtors, properly claimed a homestead exemption for their townhome. LaSalle Bank, N.A. and Valley Bank, the Takes' creditors, appeal. Because the Takes purchased the townhome with nonexempt funds after they incurred their debts to the creditors, the Bankruptcy Court's ruling shall be reversed and the case shall be remanded for further proceedings consistent with this order.

II. PRINCIPLES OF REVIEW

A district court has jurisdiction to hear appeals from final judgments, orders and decrees of bankruptcy judges. 28 U.S.C. § 158(a). The district court must review a bankruptcy court's factual findings for clear error and its legal conclusions de novo. In re Apex Oil Co., 406 F.3d 538, 541 (8th Cir.2005).

III. THE FACTS¹

A. Residency Agreement

In 1994, Frank and Mary Lu Takes signed a "Residency Agreement" with Garnett Place Townhomes, L.C. ("GPT"). GPT operated Garnett Place, an independent-living retirement community in Cedar Rapids, Iowa. In exchange for the right to live in a townhome at Garnett Place,² the Takes agreed to pay GPT a monthly fee and a sizeable entrance fee.

The monthly fee was initially $300 per month. The monthly fee was due on the first of the month and was not refundable. GPT reserved the right to change the monthly fee with thirty days notice.

The entrance fee was $110,000.³ The entrance fee was refundable but subject to a set of mandatory deductions. When the Residency Agreement terminated, GPT would refund to the Takes the entrance fee it was able to negotiate with the new resident of the townhome minus a marketing fee and a remodel fee. The Residency Agreement set the marketing fee at 5% of the amount of the new resident's entrance fee. The remodel fee depended on how long the Takes lived in the townhome but could not exceed 20% of the new resident's entrance fee.⁴

The term of the Residency Agreement was "for the life of the last living Resident unless otherwise terminated as provided...." The Takes could terminate the Residency Agreement for any reason with thirty days notice. GPT could terminate the Residency Agreement if the Takes did not pay their monthly fee, engaged in improper conduct or became physically or mentally disabled.

When the Residency Agreement terminated, GPT agreed to use "its best efforts" to find a new resident. GPT retained "sole discretion" to determine who the new resident would be and the amount of the new entrance fee. If GPT could not find a new resident within two years, it agreed to "execute a note payable to [the Takes] in an amount equal to seventy-five percent ... of the [Takes' entrance fee]." GPT agreed to pay the principal of the note to the resident when it found a new resident or in fifteen years, whichever occurred first.⁵

B. Debt

In 1999, the Takes personally guaranteed a loan to Clover Ridge Place, L.C. [hereinafter "Clover Ridge"]. Clover Ridge eventually defaulted on the loan. On January 21, 2004, two banks, Valley Bank and LaSalle Bank, N.A. [hereinafter "the Banks"], obtained a deficiency judgment against the Takes in state district court. The amount of the judgment was almost $1 million.

C. Purchase Agreement

On February 28, 2004, GPT agreed to sell the Takes their townhome. The terms are set forth in a written purchase agreement [hereinafter the "Purchase Agreement"].⁶ In the Purchase Agreement, GPT agreed to sell the Takes their townhome for $177,300. GPT refunded the Takes their $110,000 entrance fee and applied it to the purchase price. GPT apparently did not charge the Takes a marketing fee or a remodel fee. GPT also credited the Takes 1.5% "appreciation" per annum on the $110,000 entrance fee, for a total credit of $125,773. The Takes gave GPT a check for the balance — $51,527. GPT signed over a warranty deed on February 27, 2004,⁷ which was recorded on March 5, 2004.

D. Bankruptcy

On October 13, 2004, the Takes filed for Chapter 7 bankruptcy. The Takes listed just over $225,000 in assets and nearly $14 million in liabilities. The Takes' primary asset was their townhome, valued at $177,300. The Takes claimed their townhome was protected from their creditors (i.e., the townhome was "exempt" property) because it was their homestead.

The Banks objected. The Banks claimed the townhome was not exempt because the Takes had purchased the property after they cosigned the loan for Clover Ridge.

On March 8, 2005, the Bankruptcy Court ruled the Takes properly claimed the townhome exempt from the bankruptcy estate and denied the Banks' objection. See generally In re Takes, No. 04-04020, 2005 WL 579696 (Bankr.N.D.Iowa Mar. 8, 2005). On April 15, 2005, the Banks filed this appeal.

The court heard oral argument on the appeal on December 1, 2005. Richard Davidson represented the Banks. Janet Hong represented the Takes.

IV. THE ISSUE

The sole issue in this appeal is a legal one: whether the Bankruptcy Court erred when it denied the Banks' objection to the Takes' claimed homestead exemption.

V. THE MERITS

A. Federal Bankruptcy Law

The general rule is that "all property in which the debtor has a legal or equitable interest becomes property of the bankruptcy estate" and is therefore within the reach of creditors. In re Thompson, 884 F.2d 1100, 1101-02 (8th Cir.1989). Section 522 of the Bankruptcy Act, however, permits a debtor to claim exemptions. See 11 U.S.C. § 522(1). Title 11, United States Code, section 522(b) governs the exemption process. Section 522(b) lets debtors choose a set of federal exemptions listed in Title 11, United States Code, section 522(d) or the applicable state's exemptions, unless the state has "opted out" of the scheme and expressly limited debtors to the state law exemptions. 11 U.S.C. § 522(b); see also In re Thompson, 750 F.2d 628, 630 (8th Cir.1984). Iowa has "opted out." Iowa Code § 627.10 (2003)⁸; see also In re Eilbert, 162 F.3d 523, 525 (8th Cir.1998) (recognizing Iowa has opted out); Braunger v. Karrer, 563 N.W.2d 1, 2 (Iowa 1997) (same). Therefore, Iowa law determines what is exempt in this case. Eilbert, 162 F.3d at 525; In re Huebner, 986 F.2d 1222, 1224 (8th Cir.1993); Thompson, 750 F.2d at 630. The Banks bear the burden to prove the Takes' townhome is not exempt from the bankruptcy estate. F. Bankr.R. 4003(c); see also In re Stenzel, 301 F.3d 945, 947 (8th Cir.2002) (same); Olsen v. Lohman, 234 Iowa 580, 13 N.W.2d 332, 339-40 (Iowa 1944) (same).

B. Iowa Homestead Law

1. Iowa Code § 561.16

In Iowa, "[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. The purpose of the law is "to promote the stability and welfare of the state by encouraging property ownership and independence on the part of the citizen, and by preserving a home where the family may be sheltered and live beyond the reach of economic misfortune." In re Estate of Tolson, 690 N.W.2d 680, 682 (Iowa 2005) (citation and internal quotation marks omitted); accord In re Estate of McClain, 220 Iowa 638, 262 N.W. 666, 669 (Iowa 1935) ("The purpose is to provide a margin of safety to the family, not alone for the benefit of the family, but for the public welfare and social benefit which accrues to the state by having families secure in their homes."). The homestead exemption must be construed broadly and liberally. See Tolson, 690 N.W.2d at 682; Frudden Lumber Co. v. Clifton, 183 N.W.2d 201, 203 (Iowa 1971); Poffinbarger v. Adm'r of Poffinbarger's Estate, 206 Iowa 961, 221 N.W. 550, 551 (Iowa 1928); Charless v. Lamberson, 1 Iowa 435, 1 Clarke 435, 441 (Iowa 1855); see also Charter v. Thomas, 228 Iowa 554, 292 N.W. 842, 843 (Iowa 1940) (noting the Iowa Supreme Court's "holdings involving homesteads have strongly leaned, as they should, to the protection of the homestead estate"). That said, the homestead exemption is a creature of statute, and, therefore, a "court may not by interpretation or construction unduly extend its scope." Floyd County v. Wolfe, 138 Iowa 749, 117 N.W. 32, 33 (Iowa 1908); see also Iowa Methodist Hosp. v. Long, 234 Iowa 843, 12 N.W.2d 171, 175 (Iowa 1944) (same); Charless, 1 Iowa 435, 1 Clarke at 441 ...