A "rogues' paradise"? A review of South Dakota's property exemptions and a call for change.

• Author: Craig, James A.
• Position: II. Living Under Nineteenth Century Standards in the Twenty-First Century C. Review of South Dakota Bankruptcy Court Decisions 7. Exemptions - Head of Household g. In re Wilsey through IV. Conclusion, with footnotes, p. 284-311

7. In re Wilsey (148)

   Debtor, living with an adult female with whom he was not related by blood or marriage, was held not to be a "head of family" under S.D.C.L. section 43-45-4. (149) The adult female who lived with Debtor may have been a member of Debtor's household, but she was not a member of his family. Consequently, Debtor was not the "head of a family," and was denied the $6,000 head of family exemption under S.D.C.L. section 43-45-4.

   8. Exemptions--Homestead

1. Aguirre v. Fullerton Lumber (In re Aguirre) (150)

   Following conversion of debtor's case from Chapter 13 to Chapter 7, debtor filed an adversary action to void the mechanic's lien of Fullerton Lumber which had been filed against his homestead. Fullerton's lien was based on events taking place after the Chapter 13 case was filed, but before the case was converted to Chapter 7. The court rejected debtor's attempt to avoid Fullerton's lien under section 547 of the bankruptcy code, as that provision applied only to pre-petition transfers. Likewise, it rejected the attempt to void under sections 502 and 506, as they applied only to property of the estate. Because the claim of homestead exemption became final before Fullerton's contributions, the homestead was no longer property of the estate. For the same reason, the court found section 549 inapplicable. Finally, as section 522(f) only permits avoidance of a judgment lien, or a nonpurchase money, non-possessory security interest in personalty (not realty), it could not be used as the basis for Debtor's

   requested relief. Consequently, the bankruptcy court entered judgment for Fullerton. It said the state court would have to determine whether Fullerton's claim was protected by S.D.C.L. section 43-45-8's disallowance of homestead for labor or material used in the original erection and construction of the building. (151)

2. In re Bohn (152)

   Debtor's divorce decree awarded Debtor up to $10,000 in proceeds from the sale of her former homestead, when sold by her ex-husband. The court held this to be nothing more than a personal property right which could not be claimed exempt under S.D.C.L. section 45-45-3. (153) Her right to payment is a personal right under S.D.C.L. section 2-14-2(19), and may only be claimed exempt under S.D.C.L. section 43-45-4. (154)

3. In re Buxcel (155)

   In South Dakota, the homestead must be "'owned' by the debtor to be declared exempt." (156) The Court stated that "[t]hough a debtor may possess a legal right to buy back a homestead after foreclosure, that right does not constitute an ownership interest that can be declared a homestead." (157) The debtors were in discussion with the Small Business Administration ("SBA") to repurchase their home plus ten acres, and the debtors had already tendered $15,000 for that purpose before their petition date. (158) Following those discussions, a purchase agreement between the debtors and the SBA was drafted, but not signed by the debtors or the SBA until late January, after the debtors had already filed for bankruptcy. (159) Therefore, because the debtors did not have title to the real property at the time the petition was filed and the debtors' redemption rights had expired, the SBA purchase agreement was unenforceable. (160) The court concluded that "[t]he debtors were in possession of the home[,] but that interest does not constitute an ownership interest that can be declared a homestead." (161)

4. In re Gebur (162)

   In October of 1995, the court ordered the non-debtor to pay the debtor $11,000 as recognition for his share in the equity of the marital home. To comply, she executed a promissory note to pay over a ten year period with interest at seven percent. The debtor conveyed his interest by a quitclaim deed to the non-debtor spouse, thereby retaining a lien to satisfy the judgment. First, the debtor's lien was not the product of a voluntary sale or a forced sale under Chapter 21-19 of South Dakota Codified Laws; but it was the product of a divorce decree. (163) Second, the proceeds of the sale were not used in the purchase of a new homestead within one year of the date of sale. (164) Consequently, the court denied the homestead claim. (165)

5. In re Davis (166)

   Debtor was 75 years of age and living in her home when she filed her bankruptcy petition. Her home was valued at $90,000.00, which she claimed exempt under S.D.C.L. sections 43-31-1, 43-31-2, and 43-45-3.

   At the time of this case, section 43-45-3 of the South Dakota Codified Laws provided:

   A homestead:(l) As defined and limited in chapter 43-31, is absolutely exempt; or (2) in the event such homestead is sold under the provisions of chapter 21-19, or is sold by the owner voluntarily, the proceeds of such sale, not exceeding the sum of thirty thousand dollars, is absolutely exempt for a period of one year after the receipt of such proceeds by the owner. Such exemption shall not be limited to thirty thousand dollars for a homestead of a person seventy years of age or older or the unremarried surviving spouse of such person as long as it continues to posses the character of a homestead. (167)

   The court in Davis noted, "The last sentence of the statute is at the heart of this decision. It contains an apparent internal inconsistency that makes it difficult to decipher." (168) Also, "The exception in S.D.C.L. section 43-45-3(2) 'Such exemption shall not be limited to thirty thousand dollars for a homestead of a person seventy years of age or older or the unremarried surviving spouse of such person so long as it continues to possess the character of a homestead'" creates confusion because "such exemption" now seems to refer to the actual homestead and not the proceeds from a sale of the homestead. (169)

   After reviewing its prior decisions and the case of Beck v. Lapsley, (170) the court rejected the trustee's attack of the homestead as a judicial lien creditor under 11 U.S.C. [section] 544. In doing so, it refused to accept the argument that the filing of the bankruptcy case triggered a "sale" of the homestead, relying on its previous decision in In re Maryott. (171) It also rejected the trustee's request to keep the case open so the trustee could recoup the equity in debtor's home should the home lose its homestead character at some time in the future. (172) The bankruptcy court referred the trustee's constitutional argument to the district court for resolution by the South Dakota Supreme Court, below.

6. In re Davis (173)

   The Honorable Lawrence L. Piersol, Chief Judge, of the United States District Court for the District of South Dakota certified two questions to the South Dakota Supreme Court as follows: "(1) Whether the last sentence of SDCL [section] 43-45-3(2) violates Article VI [section] 18 of the South Dakota Constitution. (2) Whether the last sentence of SDCL [section] 43-45-3(2) violates Article XXI [section] 4 of the South Dakota Constitution." (174) As to the first question, the Court ruled in the negative. As to the second question, however, the Court held "that because the last sentence of SDCL [section] 43-45-3(2) fails to set a limit on the amount of a homestead exemption that may be claimed by persons seventy or older, it violates Article XXI [section] 4 of [the South Dakota] Constitution." (175) The following year, in response to this case, the South Dakota legislature established a monetary limit of $170,000 for a person seventy years of age or older, or the un-remarried surviving spouse of such person. (176)

7. In re Dice (177)

   In re Dice noted that real property may not be claimed exempt under section 43-45-4 because that statute is limited to personal property. Further to qualify for exemption, the intention to occupy an alleged homestead must be evidenced by actual occupancy within a reasonable time. (178)

8. In re Feucht (179)

   Though the debtor in In re Feucht testified "there were certain circumstances under which she would return to the [claimed homestead], none of those circumstances existed on the petition date, and none appeared on the horizon. Further, [the] [d]ebtor's removal from the [claimed homestead] was not due to temporary circumstances related to her employment or health." (180) Rather, the court noted that:

   [a]ctual removal without intention to return is a forfeiture of the homestead right. If one removes from homestead property without any present intention of returning, but with a mere possible, or at most probable future purpose to do so, contingent upon the happening or not happening of a particular event, the homestead is abandoned. (181) The court then found the above stated circumstances to be present in In re Feucht. The debtor "abandoned her homestead interest in the [claimed homestead] and on the petition date had no present, non contingent intention to return." (182) Thus, the debtor in In re Feucht abandoned her homestead along with any interest in it and the debtor was not allowed to claim any homestead e exemption in it.

9. In re Fredricks (183)

   The debtor did not intend to abandon homestead when the debtor had the intent to return, and there is no evidence to the contrary. (184) Her work in another town and her financial problems contributed to her absence from the house. (185)

10. In re Hanson (186)

    Citing In re Gebur, (187) an objection to claim of proceeds from disposition of marital property was sustained. (188) Once debtor "permanently removed himself from the family home, it was no longer his homestead, although he still had an ownership interest." (189) Language in the quitclaim deed that was given to his spouse appeared to relinquish his homestead interest. (190) Additionally, when debtor established a new homestead, he may have forfeited his homestead interest in his former marital home. (191) Ultimately, the court decided that "since there was no evidence of when he left the marital home without a present intent to return or when he established his new homestead, the Court [could] not rely on either his departure or the...