Kretzinger, In re

• Decision Date: 31 December 1996
• Docket Number: No. 95-6185,95-6185
• Citation: 103 F.3d 943
• Parties: In re: Edwin D. KRETZINGER, also known as Edwin Kreitzinger, and Rena J. Kretzinger, Debtors. Edwin D. KRETZINGER; Rena J. Kretzinger, Appellants, v. FIRST STATE BANK OF WAYNOKA, an Oklahoma Banking corporation, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 943

103 F.3d 943

In re: Edwin D. KRETZINGER, also known as Edwin

Kreitzinger, and Rena J. Kretzinger, Debtors.

Edwin D. KRETZINGER; Rena J. Kretzinger, Appellants, v. FIRST STATE BANK OF WAYNOKA, an Oklahoma Banking

corporation, Appellee.

No. 95-6185.

United States Court of Appeals, Tenth Circuit.

Dec. 31, 1996.

Kenneth L. Spears of Kenneth L. Spears, P.C., Oklahoma City, OK, for Appellants.

Max M. Berry of Max M. Berry, P.C., Ponca City, OK, for Appellee.

Before BALDOCK and BRISCOE, Circuit Judges, and LUNGSTRUM, ^* District Judge.

BALDOCK, Circuit Judge.

Debtors Edwin D. and Rena J. Kretzinger appeal from a district court order affirming the decision of the bankruptcy court denying a homestead exemption for all but two of the eighty acres surrounding their rural home. ¹ The dispositive question presented is whether, as a matter of Oklahoma law, an express declaration of rural homestead is vitiated by lease of the designated property for agricultural activities which, if conducted by the resident owners themselves, would be consistent with homestead status. We conclude that it is not and, accordingly, reverse with directions to grant debtors the exemption claimed as to all eighty acres.

I

Because Oklahoma has opted out of the federal bankruptcy exemption scheme, see Okla. Stat. tit. 31, § 1(B); 11 U.S.C. § 522(b), the existence and extent of debtors' homestead is governed by state law. See In re Jones, 107 B.R. 350, 351 (Bankr.E.D.Okla.1989). See generally David Dorsey Distrib., Inc. v. Sanders (In re Sanders), 39 F.3d 258, 260 (10th Cir.1994). In Oklahoma, homesteads are categorized as either urban or rural. The pertinent exemption for the rural homestead is established by the following constitutional and statutory provisions:

The homestead of any family in this State, not within any city, town, or village, shall consist of not more than one hundred and sixty acres of land, which may be in one or more parcels, to be selected by the owner.... [A]ny temporary renting of the homestead shall not change the character of the same when no other homestead has been acquired.

The homestead of the family shall be, and is hereby protected from forced sale for the payment of debts [with certain specified exceptions]; nor shall the owner, if married, sell the homestead without the consent of his or her spouse, given in such manner as may be prescribed by law....

Okla. Const. art. XII, §§ 1, 2;

[T]he following property shall be reserved to every person residing in the state, exempt from attachment or execution and every other species of forced sale for the payment of debts, except as herein provided: ... The home of such person, provided that such home is the principal residence of such person.

The homestead of any family in this state ... not within any city, town, or village, shall consist of not more than one hundred sixty acres (160) of land, which may be in one or more parcels, to be selected by the owner.... [A]ny temporary renting of the homestead shall not change the character of the same, when no other homestead has been acquired.

Okla. Stat. tit. 31, §§ 1, 2.

The Oklahoma Supreme Court set out the basic principles governing establishment of the rural homestead many years ago in Kerns v. Warden, 88 Okla. 297, 213 P. 70, 72 (1923), stating that "in order to constitute any portion of [a] tract a homestead, two requisites must concur as to such portion: (1) The owner must intend the property as a part of his homestead; and (2) he must in some way use it as such." See In re Shields, 85 B.R. 582, 585 (Bankr.N.D.Okla.1988)(for assessing homestead claims, "[t]he leading case is [still] Kerns v. Warden "). The Kerns court went on to clarify, however, that "[t]he word 'homestead' does not include merely the dwelling house, but it also embraces everything connected therewith which may be used and is used for the more perfect enjoyment of the home, such as outhouses for servants, for stock, or property, gardens, yard, and farming land to the extent of 160 acres." Kerns, 213 P. at 72 (quotation omitted). Further, the supreme court "has repeatedly held that [the homestead] provisions are to be liberally construed in the interest of the family home." First Nat'l Bank of Sentinel v. Anderson, 206 Okla. 54, 240 P.2d 1066, 1068 (1952); see Burrows v. Burrows, 886 P.2d 984, 988 (Okla.1994).

II

Debtors own a fee simple interest in an eighty-acre tract in rural Woods County Oklahoma. They formally and publicly claimed the entire tract as their homestead by filing a declaration with the county assessor after debtor Edwin Kretzinger inherited the bulk of his interest therein in 1984. The land is fenced and has pastured livestock over the years, allegedly including several butcher calves for Mr. Kretzinger, who proposes to raise cattle after his impending retirement. In the meantime, however, debtors reside in a home on just two of the eighty acres (where Edwin has lived for nearly sixty years) and derive income from the rest of the tract through a property lease, recently renewed until April 2000 at $750 per year, and an oil and gas lease, which pays a $200 monthly royalty.

In the late 1980's, appellee First National Bank of Waynoka financed debtors' ill-fated purchase of a bar, on which it also held a mortgage from the seller. Although the bank had requested that the Woods County property serve as collateral, it went ahead with the loan despite debtors' refusal to pledge the property. When debtors' business failed, the bank foreclosed, bought the bar for $2,100 at foreclosure, and then obtained a judgment against debtors for an additional $20,000 deficiency. That deficiency judgment is debtors' primary debt, while the Woods County property, also valued at $20,000, is their largest asset in this proceeding.

When debtors listed the Woods County property as their rural homestead, the bank objected to any exemption regarding the seventy-eight acres under lease. The bankruptcy court sustained the objection, stating:

Based on the evidence that has been presented, the Court feels that it has the obligation to find that the property in question, the 78 acres of the 80, was not part of the homestead, that the two acres resided on by the debtors is part of their homestead and is exempt. It's unfortunate that the debtors, by application of the law, will lose their ownership, or will eventually lose their ownership in the remaining 78 acres merely because they have leased it out for a small amount.

But this is what the law dictates. And this is what the ruling of the Court must be. So, the Court finds that the 78 acres is [sic] not exempt, and two acres is [sic] exempt.

R. I doc. 1, attached "Transcript of Proceedings Had on the 2nd Day of November, 1993," at 23. The district court affirmed, likewise reasoning that debtors' lease of the property precluded the requisite finding that it was being used to support the family in its residence on the rural homestead. Id. doc. 10.

III

"We review legal determinations by the bankruptcy court de novo, while we review its factual findings under the clearly erroneous standard." Osborn v. Durant Bank & Trust Co. (In re Osborn), 24 F.3d 1199, 1203 (10th Cir.1994)(footnote and citation omitted). Oklahoma courts have characterized the existence/extent of the homestead as a factual question. See, e.g., Burrows, 886 P.2d at 987 n. 9 (citing cases). "However, when a lower court's factual findings are premised on improper legal standards or on proper ones improperly applied, they are not entitled to the protection of the clearly erroneous standard, but are subject to de novo review." Osborn, 24 F.3d at 1203; see also Williams v. Watkins, 93 Okla. 112, 219 P. 643, 644 (1923)(when historical facts regarding homestead are undisputed, "the question involved is a question of law"). Further, the bankruptcy court's interpretation of the forum state's homestead law is reviewed de novo as well. Osborn, 24 F.3d at 1203 n. 5 (citing Salve Regina College v. Russell, 499 U.S. 225, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991)).

Our determination of the relevant Oklahoma law is governed by a decision of the state supreme court which is materially indistinguishable from this case. In Exchange National Bank v. Rose, 187 Okla. 481, 103 P.2d 496 (1940), the defendant husband and wife sought to discharge, on homestead exemption grounds, a levy made on a tract of rural property associated (though, unlike here, not even continuous) with a nearby parcel on which they resided. The court noted that, like debtors in this case, the defendants had earlier filed in the office of the county clerk .... an instrument wherein they declared that they had selected both of the ... tracts as their homestead; that the defendants had not cultivated either of said tracts themselves but had rented all of both of said tracts except a parcel of about 300x600 feet on which the dwelling, out buildings and gardens were located, for agricultural purposes under a written lease for a term of years which provided for cash rental and that the rental thus received had been used for the sustenance and benefit of the defendants....

Id. 103 P.2d at 497. The levying creditor argued, much as the bank does here, that the nonresidential parcel could not be claimed as part of the homestead because the defendants "had never resided upon or cultivated [that] tract themselves but had continuously rented said tract for cash." Id. The court flatly rejected this argument, stating:

[B]oth the tract upon which the defendants in error resided and the tract upon which the levy had been made were used in the interest and for the benefit of the family of the defendants in error although both were cultivated by a tenant.... We know of no law which prevents the owner of a rural homestead from cultivating or operating the same through the medium of a tenant and accepting a cash rental in lieu of a portion of the products of the soil. Any other construction we...