In Re Hughes
MEMORANDUM OF DECISION RE: TRUSTEE’S OBJECTION TO DEBTORS’ HOMESTEAD EXEMPTION CLAIM
The matter before the Court is the Trustee’s June 3, 1999 objection to Debt *809 ors’ claimed homestead exemption and Debtors’ response. This is a core proceeding under 28 U.S.C. § 157(b)(2). This Memorandum of Decision and accompanying Order shall constitute the Court’s findings and conclusions under F.R.Bankr.P. 7052(a). As set forth below, the Court will sustain the Trustee’s objection. Debtors have failed to meet their burden of proving that any reliance on S.D.C.L. § 21-19-2 by the Trustee to sell their homestead is unconstitutional.
I.
Jessie J. and Carroll L. Hughes (Debtors) filed a Chapter 7. In their schedules, Debtors stated they owned a home valued at $80,000. The home did not have any encumbrances against it. Debtors declared this home exempt under S.D.C.L. §§ 48-31-1, -2, -3, and -4 and 43-45-3. They valued this homestead exemption at $30,000.
Chapter 7 Trustee John S. Lovald objected to Debtors’ claimed homestead exemption. He argued that Debtors’ home was worth $40,000 and that Debtors thus exceeded their allowed homestead exemption by $10,000. Debtors responded that their home is absolutely exempt because it still maintains the character of a homestead and because they have no present intent to discontinue its occupancy as a homestead.
Before the scheduled hearing on the Trustee’s objection, the Court requested from counsel cites of the statutes and case law on which each party intended to rely. Debtors stated that they intended to argue that S.D.C.L. § 21-19-2
violates the South Dakota and U.S. Constitutions in that it allows the sale of absolutely exempt property without due process (pre-judgment) and, in the alternative, it violates the equal protection clause of both Constitutions by allowing a forced sale of absolutely exempt homestead property while not allowing the sale of other exempt property.
[Sjince homesteads are not subject to judicial liens or judicial sales, and sale of a homestead can only be made upon execution and levy after receiving a judgment or after receiving a judgment of foreclosure, SDCL 21-19-2 cannot be used to forcibly sell a homestead for purposes of collecting a judgment. If SDCL 21-19-2 is interpreted to allow forced sales of a homestead without execution or judgment, then it should be viewed as a pre-judgment taking in violation of the Debtorfs’] right to due process. Therefore, SDCL 21-19-2 cannot be used to invoke the trustee’s rights to claim the debtor’s homestead as part of the bankruptcy estate as it is absolutely exempt property under South Dakota law.
Debtors cited
Aisenbrey v. Hensley,
At the July 13, 1999 hearing on the objection, Trustee Lovald and counsel for Debtors stipulated that the value of Debtors’ home, plus sale costs, would exceed $30,000 and that no judgments had been entered pre-petition against Debtors in the county where the home is located. Both parties briefly restated the arguments raised in their pleadings. No formal briefs were filed.
After the hearing, Debtors filed an amended schedule of exempt property to claim $4,865 exempt as the unused portion *810 of their additional personal property exemptions under S.D.C.L. § 43-45-4. The $4,865 is to come from proceeds if their homestead is sold by the Trustee. At the Court’s request, Debtors clarified that they had not abandoned their original argument that their entire homestead is exempt. Instead, they stated that the amended schedule of exemptions is to be considered an alternative theory for protecting more of their homestead if they lose the constitutional challenge to S.D.C.L. § 21-19-2. Trustee Lovald objected to the amended schedule. The amended schedule and Trustee Lovald’s objection to it are addressed by the Court in a separate memorandum and order.
Pursuant to 28 U.S.C. § 2403(b), the Court notified the Attorney General of the State of South Dakota of Debtors’ constitutional challenge to S.D.C.L. § 21-19-2. The Attorney General did not formally intervene, but he did set forth his conclusion that Debtors’ arguments of unconstitutionality are without merit.
Debtors’ constitutional arguments are essentially that the Trustee cannot use § 21-19-2 to force a sale of the homestead because it would be a pre-judgment taking and that § 21-19-2 impermissibly allows the forced sale of a homestead while not allowing the sale of other absolutely exempt property. Debtors’ arguments are premised on the conclusions that a homestead in South Dakota is always absolutely exempt and is not subject to a judicial lien or sale.
As discussed below, the Trustee’s authority to sell the property is not an exclusive product of S.D.C.L. § 21-19-2. However, to the extent that Trustee Lovald may need to rely on § 21-19-2 to obtain court approval to sell the homestead under either 11 U.S.C. § 363(f)(1) or (5), each of which could incorporate S.D.C.L. § 21-19-2, the Court will consider Debtors’ constitutional challenges to § 21-19-2.
II.
Debtors’ constitutional challenge of S.D.C.L. § 21-19-2 fails to consider the statute in the whole context of chapter 21-19.
Debtors’ arguments surrounding the constitutionality of S.D.C.L. § 21-19-2 isolate the statue from other sections of ch. 21-19 and yield distorted conclusions. Section § 21-19-2 is just an initial step in the process a judgment creditor must follow to obtain a sale of a homestead to recover on a debt. All provisions of ch. 21-19 must be considered part of the homestead sale process.
Linguist v. Bowen,
Debtors’ constitutional challenge of S.D.C.L. § 21-19-2 incorrectly presumes that a homestead is always absolutely exempt. While Debtors recite that homesteads are always absolutely exempt, the state constitution and applicable state statutes provide for the contrary. Article XXI, § 4 of the South Dakota Constitution directs the legislature to limit the value and define by law that homestead which shall be exempt from forced sale. 1 Section 43-31-1 of the state code, which creates the homestead exemption, recognizes that directive by providing that the homestead exemption exists “to the extent and as provided in this code[.]” Section 43-45-3(2) then sets forth a $30,000 value limitation when the homestead is voluntarily sold or is sold pursuant to S.D.C.L. ch. 21-19. 2
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The homestead is a privilege granted by law, not an estate in land.
In re Wood,
The value limitation on a homestead exemption has significance only when the homestead is the subject of litigation between the homestead owner and a judgment creditor.
O’Neill v. Bennett,
[t]he result is that, where the owner of a homestead is free from debts, his homestead, may consist of 160 acres of land, with improvements thereon, free from all limitation as to value.... [B]ut where the owner of such homestead is in debt, then such homestead, to the extent that it exceeds $5,000 in value, is subject to the payment of the owner’s debt.
Hansen,
Once a creditor obtains a judgment 4 , chapter 21-19 of the South Dakota *812 Code sets forth the procedure for creditors under state law to procure a sale of a homestead that exceeds the allowed exemption in § 43-45-3(2) but it does not define the exemption itself. The sale process begins in S.D.C.L. § 21-19-2:
No levy shall be made on any homestead to reach the valuation thereof in excess of the homestead exemption set by subdivision (2) of § 43-45-3, whether on attachment, execution, or other process, except as provided in this section. In the event the creditor claims such valuation exceeds such exemption he shall deliver to the officer holding the process, an affidavit, by himself or his attorney, setting forth the legal description of such homestead if real property ..., the claim as to valuation thereof, and all encumbrances according to the affiant’s best knowledge, information, and belief. If it appears from such affidavit that the value of debtor’s equity exceeds such homestead exemption, the officer must file in the office of the register of deed of the county where the homestead is situated, a notice of levy on such homestead with the said affidavit attached thereto, which notice and affidavit shall be duly recorded and shall be forthwith served upon the debtor in the same manner as provided by this code as to other notices. From the time of such filing and such service, such notice shall be effective as a levy only on the excess over and above the homestead exemption.
Other sections in the chapter detail how the homestead is valued and how and when a sale is conducted.
That Debtors are exercising their homestead exemption after filing bankruptcy does not change the application of South Dakota’s homestead exemption. When a person files a Chapter 7 petition,
all
his property, as defined by 11 U.S.C. § 541(a) becomes property of the bankruptcy estate. It includes even that property which the debtor may later exempt. 11 U.S.C. § 522(b) (a debtor may exempt certain property “from property of the estate”);
Owen v. Owen,
A debtor’s entitlement to an exemption is determined on the day he files his bankruptcy petition. 11 U.S.C. § 522(b)(2)(A);
Mueller v. Buckley (In re Mueller),
When applying state exemption statutes, bankruptcy courts often place the trustee in his fiduciary role of the collector and liquidator of estate property.
Herman,
[T]he automatic stay prohibits unsecured creditors from proceeding to obtain judicial liens against estate property [and] the quid pro quo for the stay is that all of the debtors’ nonexempt property will be distributed to those unsecured creditors who hold claims which could have been satisfied from that property but for the commencement of the case. The commencement of the case actually accelerates what would have happened in the absence of a filing, i.e., the unsecured creditors would have proceeded to judgment and liquidated the property for their benefit!.]
Duda,
Section 43-45-3(2) of the state code provides the same value limitation if the judgment debtor sells his homestead voluntarily. Accordingly, if Debtors’ transfer
of
their house to the bankruptcy estate is deemed a voluntary sale by virtue of their petition,
Karcher v. Gans,
A consideration of Debtors’ homestead exemption under either context— that the Trustee equals a judgment creditor or that Debtors voluntarily transferred their home to the bankruptcy estate upon filing their petition — produces the same result. Debtors’ entire homestead is not absolutely exempt. Their exemptible homestead interest is limited to $30,000.
The Trustee’s sale of the homestead does not constitute an impermissible judicial sale under S.D.C.L. § 21-19-2. Once the property of the estate has been determined and the exempt property has been removed, the trustee must liquidate the estate property to pay creditors. 11 U.S.C. § 704(1). If the bankruptcy estate and another entity both hold an interest in some estate property, the trustee may seek court approval to sell the property if one of several circumstances exist. 11 U.S.C. § 363(f).
As Debtors have acknowledged, a homestead in South Dakota is subject to
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sale upon execution by a judgment creditor through S.D.C.L. ch. 21-19. It is the shoes of such a judgment creditor into which the Trustee may step to sell the homestead property under 11 U.S.C. § 363(f). The requirements of a judgment and execution under S.D.C.L. ch. 21-19 are not by passed in the bankruptcy, only accelerated by virtue of the Trustee’s judgment lien creditor status. Thus, it is §§ 363(f) and 704(1) of the Bankruptcy Code, not S.D.C.L. ch. 21-19 alone, that allow the Trustee to sell the homestead although he is not actually a judgment creditor.
See In re Wierschem,
At least two subsections of § 363(f) may incorporate S.D.C.L. ch. 21-19. Under subsection 363(f)(1), the Trustee may rely on an “applicable non bankruptcy law” that permits the sale of the property free and clear of Debtors’ interest. Under subsection 363(f)(5), the Trustee need only show that Debtors could be compelled by law or equity to accept a money satisfaction of their homestead interest. In this case, S.D.C.L. § 43-35-2(2) and ch. 21-19 are the non bankruptcy laws that allow a judgment creditor to sell a judgment debtor’s homestead to realize on any equity in excess of $30,000 while protecting the debt- or’s $30,000 homestead interest.
Debtors also presumed that S.D.C.L. § 21-19-2 allows the forced sale of absolutely exempt homestead property while not allowing the sale of other exempt property. Again, it is to § 363(f) of the Bankruptcy Code, not S.D.C.L. § 21-19-2, that we must look for the Trustee’s authority to sell property. That section allows the Court to authorize the trustee to sell any property in which both the bankruptcy estate and another entity hold an interest. For example, if a debtor could claim only $3,000 of an $8,000 boat exempt under S.D.C.L. § 43-45-4, the trustee would seek court approval to sell the boat under 11 U.S.C. § 363(f) to realize the $5,000 equity for the bankruptcy estate. The trustee’s sale of the boat, if approved, would be a product of federal bankruptcy law, not solely the product of any underlying non bankruptcy law incorporated by § 363(f).
III.
Debtors have not shown how S.D.C.L. § 21-19-2 violates the federal or South Dakota constitutions.
Much of Debtors’ constitutional challenge to § 21-19-2 was based on inaccurate presumptions, as discussed above. To the extent that any constitutional challenge remains, Debtors have failed to meet their burden of showing that the statute “clearly and unmistakably ... violates fundamental constitutional principles.”
Accounts Management, Inc. v. Williams,
*815
Debtors have claimed that a sale of their homestead by Trustee Lovald under S.D.C.L. § 21-19-2 constitutes a denial of equal protection under the law in violation of § 1 of the Fourteenth Amendment of the United States Constitution and Article VI, § 18 of the South Dakota Constitution. Debtors, however, have failed to identify how § 21-19-2 establishes any classification, arbitrary or not, of persons subject to the law.
Williams,
Debtors have also claimed that the sale of their homestead by Trustee Lovald violates due process afforded by the Fourteenth Amendment of the United States Constitution and Article VI, § 2 of the South Dakota Constitution. Under either procedural or substantive due process, Debtors must identify a property interest or liberty at stake that is constitutionally protected.
Roark v. Hazen,
As to substantive due process in particular, South Dakota’s test is whether the statute in question bears a “real and substantial relation to the objects sought to be attained.”
Katz v. Board of Medical and Osteopathic Examiners,
As to procedural due process in particular, Debtors have not shown that a sale of their house by the Trustee will be without reasonable notice and an opportunity to be heard in a meaningful time and in a meaningful manner.
Schrank v. Pennington County Board of Commissioners,
An order sustaining Trustee Lovald’s June 3, 1999 objection shall be entered.
Notes
. Article XXI, § 4 of the South Dakota Constitution provides:
The right of the debtor to enjoy the comforts and necessaries of life shall be recognized by wholesome laws exempting from forced sale a homestead, the value of which shall be limited and defined by law, to all heads of families, and a reasonable amount of personal property, the kind and value of which to be fixed by general laws.
. The South Dakota legislature has given a broader homestead exemption to a person *811 over age 70 or that person’s unremarried spouse. S.D.C.L. § 43-31-1. That provision is not material to this decision. The state code also includes some land-size limits to a homestead, S.D.C.L. §§ 43-31-3 and -4, which are also not material here.
. Other states have homestead laws of similar impact.
See, e.g., Hollar v. United States (In re Hollar),
. A judgment held by a creditor will attach as a lien to a homestead in excess of the allowed homestead exemption value, if any, from the date of docketing. S.D.C.L. § 15-16-7;
Bormes,
. Some courts rely on the trustee’s general status as the representative of the collective creditor interest in forcing a sale of any excess homestead equity.
Mulch,
. "Whether [a] sale is voluntary or forced depends, not upon the mode of its execution, but upon the presence or absence of the consent of the owner.”
Karcher,