Attorney Andrew Walker recently won a victory in the Stepp case. In that case, Mr. Walker successfully argued that Minnesota law allows a person who recently sold a house to keep the money from selling that house AND also to keep another house that the Debtor owned and is using for his retirement.
The bankruptcy trustee in that case decided to challenge a MN Supreme Court case from 1967 saying that someone who recently sold a house and moved into another house may keep the sale proceeds of the house they sold and also keep the new house into which they moved. That case is called O’Brien v. Johnson 148 N.W.2d 357 (1967). The modern bankruptcy judge confirmed that rule of law in the In Re Stepp ruling 22-41617. This is not an official court opinion, so I have copied the order below.
MEMORANDUM DECISION AND ORDER
This matter came before the Court on a Motion and Amended Motion Objecting to Claimed Exemption and for Turnover (collectively, the “Motion”) [ECF Nos. 14, 181, filed by the chapter 7 trustee (the “Trustee”). Debtor filed a response to the Motion (the “Response”) [ECF No. 221 and Trustee filed a reply (the “Reply”) [ECF No. 241. The Court held a hearing on January 5, 2023, with appearances as noted on the record. This is a core proceeding under 28 U.S.C. § 157(b)(2), and this Court has jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334. Venue is proper pursuant to 28 U.S.C. § 1408(1). This memorandum decision is based on all the information available to the Court and constitutes the Court’s findings of fact and conclusions of law under Fed. R. Bankr. P. 7052, made applicable to this contested matter by Fed. R. Bankr. P. 9014(c). The Motion is denied in part, as explained hereinafter.
The facts in this case are straightforward. For several years prior to this case, Debtor owned a primary residence in Coon Rapids, Minnesota (the “Minnesota House”) and a second home in Grantsburg, Wisconsin (the “Wisconsin House”). [ECF No. 14, ¶¶ 7, 9; ECF No. 22, at 3.] Debtor opted to sell the Minnesota House and keep the Wisconsin House. [ECF No. 22, at 3.] He signed a purchase agreement for the Minnesota House in July 2022 and the transaction closed on September 20, 2022 (such date is the “Closing Date”, and the period between signing the purchase agreement and the Closing Date is referred to as the “Interim Period”). [ECF No. 14, ¶¶ 7, 9; ECF No. 22, at 3.] Debtor received a cashier’s check for $15,892.34 on the Closing Date, representing proceeds of the sale of the Minnesota House (the “Sale Proceeds Check”). [ECF No. 14, ¶ 10; ECF No. 22, at 3.]
On September 28, 2022 (the “Petition Date”), Debtor filed a voluntary petition and indicated the Wisconsin House is his current residence. [ECF No. 1.] In his amended schedules, Debtor claimed the Wisconsin House as an exempt homestead property pursuant to Minn. Stat. §§ 510.01, 510.02. [ECF No. 21, at 11.] He also claimed the Sale Proceeds Check as exempt homestead proceeds pursuant to Minn. Stat. § 510.07. [ECF No. 21, at 12.]1 The Trustee objected to the second exemption and demanded turnover of the Sale Proceeds Check.
The dispute centers on two questions. First, the Trustee argues that “double exemptions” under are prohibited under Minn. Stat. §§ 510.01 and 510.07. In the alternative, the Trustee argues that Debtor “abandoned” the Minnesota House before the Closing Date and thus forfeited an exemption under Minn. Stat. § 510.07 for the Sale Proceeds Check. The first question is clearly matter of law. In the interest of economy, and at the request of the parties, the Court agreed to decide this issue promptly after the hearing. The second issue is potentially a mixed question of law and fact, and the Court will issue a separate order to set it on for an evidentiary hearing.
I. Minnesota Law does not Prohibit “Double Exemptions” for a New
Homestead and Sale Proceeds of a Prior Homestead.
Debtors are permitted to exempt certain property from the bankruptcy estate. 11 U.S.C. § 522(b). “Generally, a debtor is permitted to choose between the scheme of federal exemptions prescribed in section 522(d) of the bankruptcy code or the exemptions available under other federal law and the law of the state in which the debtor is domiciled.” In re Sawyers, 2 F.4th 1133, 1137 (8th Cir. 2021) (internal quotations omitted). If, however, a debtor moves to a new state before filing for bankruptcy, he must utilize the state law exemptions of his prior state of residency. 11 U.S.C. § 522(b)(3)(A). Debtor moved from Minnesota to Wisconsin less than 100 days before the Petition Date, so Minnesota law applies.
Minnesota has an exemption for a homestead, defined as: “the house owned and occupied by a debtor as the debtor’s dwelling place, together with the land upon which it is situated . . .” Minn. Stat. § 510.01; see also Minn. Stat. § 510.02 (setting statutory limits on the acreage and value of the exemption). Minnesota also permits the sale of a homestead, and it has an exemption for sale proceeds:
The owner may sell and convey the homestead without subjecting it, or the proceeds of such sale for the period of one year after sale, to any judgment or debt from which it was exempt in the owner’s hands, except that the proceeds of the sale are not exempt from a judgment or debt for a court ordered child support or maintenance obligation in arrears.
Minn. Stat. § 510.07. Minnesota’s exemptions are rooted in its constitution and liberally construed by its courts. Vickery v. First Bank of LaCrosse, 368 N.W.2d 758, 762 (Minn. App. 1985) (citing Minn. Const., art. 1, § 12; Denzer v. Prendergast, 126 N.W.2d 440, 443 (Minn. 1964); Jensen v. Christensen, 11 N.W.2d 798, 799 (Minn. 1943)). In bankruptcy, courts also construe exemptions in favor of debtors. In re Hardy, 787 F.3d 1189, 1192 (8th Cir. 2015); accord Law v. Siegel, 571 U.S. 415, 424 (2014)( “[T]he court may not refuse to honor the exemption absent a valid statutory basis for doing so.”) The parties agree the Wisconsin House is exempt pursuant to Minn. Stat. § 510.01. But they dispute Debtor’s entitlement to an exemption pursuant to Minn. Stat. § 510.07. Trustee argues Debtor cannot claim an exemption in both the Sale Proceeds Check and the Wisconsin House as of the Petition Date for the same reason he could not have homestead status for two houses as of the Petition Date. [ECF No. 18, at 2.] This argument may have an initial intuitive appeal, but it is a false analogue. Debtor is not claiming a homestead exemption for two houses. Minnesota law creates two different exemptions for a homestead property vs. proceeds from the sale of a prior homestead.
“[W]hen a debtor claims a state-created exemption, the exemption’s scope is determined by state law.” Id. at 1196–97 (emphasis extant); accord In re Sholdan, 217 F.3d 1006, 1008 (8th Cir. 2000); Mueller, 215 B.R. at 1022. The Minnesota Supreme Court has considered and rejected the Trustee’s position that concurrent exemptions under Minn. Stat. §§ 510.01 and 510.07 are prohibited under Minnesota law. O’Brien v. Johnson, 148 N.W.2d 357 (Minn. 1967). In both the Debtor’s case and O’Brien, a debtor sold his prior homestead and established a new homestead in a second property he already owned. In both cases, debtors did not use sale proceeds from a prior homestead to purchase or improve a new homestead. Id. at 361. The Minnesota Supreme Court acknowledged exempting sale proceeds without requiring them to be used for a new homestead might subvert the legislative intent of Minn. Stat. § 510.07. Id. at 360-61; see also Donaldson v. Lamprey, 11 N.W. 119, 121 (Minn. 1881). But ultimately, the O’Brien court found for no prohibition on concurrent or “double” exemptions in the text of Minn. Stat. §§ 510.01 or 510.07. Id., at 361. Despite the Court’s express concerns in Donaldson v. Lamprey and again in O’Brien v. Johnson, the Minnesota legislature has not amended the homestead statutes. Compare Minn. Stat. §§ 510.01–510.09 (2022) with 1905 Minn. Laws ch. 66.2 Therefore, to the extent the Motion is predicated upon a legal theory that concurrent exemptions under Minn. Stat. §§ 510.01 and 510.07 are prohibited by Minnesota law, the Motion is denied.
IT IS ORDERED, the Motion is denied in part: there is no prohibition against the use of concurrent exemptions under Minn. Stat. §§ 510.01 and 510.07 under Minnesota law. The Court will issue a separate order to set the issue of abandonment on for evidentiary hearing. United States Bankruptcy Judge Kesha L. Tanabe. January 6, 2023.
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