Todd Crabtree v. Daniel McDermott, 16-6028

Background

Debtors Todd and Terryl Crabtree made substantial improvements to their homestead from 2012–2013 and claimed a $66,275 homestead exemption in their Chapter 7 petition filed December 16, 2013.
Improvements were paid from multiple sources: checks from a Wells Fargo account opened by their daughter ("farm account") into which Debtors deposited most funds, a $19,990 wire from Debtor Todd Crabtree’s sister to a contractor, a $6,000 check from Todd’s personal account, and proceeds from sale of silver coins his son-in-law converted.
Trustee objected under 11 U.S.C. § 522(o), alleging $70,000–$90,000 of nonexempt property had been transferred into the homestead within ten years with intent to hinder, delay, or defraud creditors, and sought to reduce the claimed exemption by the amount spent on improvements.
The bankruptcy court sustained the objection, reduced the exemption by $74,249.68 (the identified improvement costs), and denied the Debtors’ discharge; Debtors appealed only the § 522(o) reduction.
The Eighth Circuit reviewed statutory interpretation de novo and factual findings for clear error, and reversed and remanded because the bankruptcy court failed to determine how much of the homestead’s value was attributable to the fraudulent transfers and failed to explain inclusion of the $19,990 wire.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Proper measure under 11 U.S.C. § 522(o) for reducing a claimed homestead exemption	Trustee: Reduce exemption by the full value of nonexempt assets converted into the homestead (i.e., amount spent on improvements).	Debtors: § 522(o) requires reduction only to the extent the debtor's interest in the homestead increased — i.e., value attributable to the fraudulent transfers.	Held: § 522(o) requires reduction by the increase in the debtor's homestead interest "attributable" to the nonexempt property, not simply the dollar amount spent on improvements; reverse and remand for valuation of attributable increase.
Burden of proof for attribution	Trustee: Measuring attributable value is unnecessary or overly burdensome; courts can rely on amount spent.	Debtors: Objector must prove by what amount the improvements increased homestead value.	Held: Objecting party must show the extent the homestead’s value is attributable to the fraudulent transfers; trustees must present evidence of attributable increase.
Treatment of payments that directly reduce mortgage or liens (vs improvements)	Trustee: Argues reduction by spent amount applies generally.	Debtors: Distinguish payments that directly increase equity (mortgage reduction) from expenditures that may not increase value dollar-for-dollar.	Held: Court noted direct lien reduction increases equity dollar-for-dollar and is treated differently; § 522(o) still focuses on equity attributable to disposed nonexempt property.
Inclusion of $19,990 wired by Debtor’s sister	Trustee: The wire was effectively controlled by Debtor and thus constitutes a disposition by Debtor under § 522(o).	Debtors: The $19,990 was a gift over which they exercised no control and should not count as their disposition.	Held: Remanded — bankruptcy court failed to make necessary findings on control/disposition and must explain whether and why it included the $19,990 in the § 522(o) reduction.

Key Cases Cited

Ferrell v. West Bend Mut. Ins. Co., 393 F.3d 786 (8th Cir.) (standard of review for statutory interpretation)
United States v. Smith, 756 F.3d 1070 (8th Cir.) (statutory interpretation canon — words given ordinary meaning)
In re Presto, 376 B.R. 554 (Bankr. S.D. Tex.) (section 522(o) requires showing attributable increase in homestead value)
In re Willcut, 472 B.R. 88 (B.A.P. 10th Cir.) (purpose of § 522(o) is to prevent fraudulent build-up of homestead equity)
Union Bank v. Wolas, 502 U.S. 151 (1991) (plain meaning of statutes should be applied even if consequences were not foreseen)
King v. Burwell, 135 S. Ct. 2480 (2015) (courts should avoid absurd results when interpreting statutory language)