Delvin A Hale and Roxanne R Hale

OCR transcription for search; preserved printed pages are authoritative

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U.S, Bankruptcy Court
District of Idaho

Filed: 8/26/2004

At: 11:00 a.m,

By: Dana Hoylc

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF IDAHO

In Re:
, Bankruptcy Case
DELVIN A. HALE and No. 04-40076
ROXANNE R. HALE, dba
DELVIN HALE LIVESTOCK,
dba HALE RANCHES, dba
HALE LIVESTOCK,

Debtors.

MEMORANDUM OF DECISION

Appearances:

Stephen A. Mcikle, ADVANTAGE LEGAL SERVICES, Idaho
Falls, Idaho, Attorney for Debtors.

Monte Gray, SERVICE, SPINNER & GRAY, Pocatello, Idaho,
Attorney for R. Sam Hopkins, Trustee.

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U.S. GOVERNMENT
INFORMATION
GPO

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Backeround

Chapter 7 Debtors Delvin and Roxanne Hale lease and live in a
house owned by a limited partnership in which they are gencral partners. Debtors
claim a homestead exemption in both thcir interest in ihe limited partnership and
in their rights under the lease. Docket Nos. 1, 55. The Chapter 7 Trustee, R. Sam
Hopkins, objected, arguing that neither Idaho’s partnership law nor homestead
statutes allow Debtors to claim a homestcad exemption in partnership property or
m a residential leasc. Docket Nas. 19, 60.

The Court conducted a hearing on July 15, 2004, at which both
partics appeared and presented evidence and testimony. Minute Entry, Docket
No. 54. After considering the record and the parties’ submissions, the Court
concludes that neither Debtors’ partnership interest nor thcir lcasehold interest is
exempt as a homestead. The Court’s findings of fact and conclusions of law
follow, See Fed. R. Bankr. P, 7052; 9014.

Facts

Debtors purchased a home and forty acres of farm land located in

Butte County, Idaho in 1994 (the “Property”). On April 7, 1997, Debtors and

their six children formed a limited partnership known as the Lost River Cattle

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Company (the “Partnership”) for estate planning purposes and as a vehicle to
manage Debtors’ real estate and other family hcirlooms for the benefit of the
children. Ex, 1, Limited P’ship Agreement, Docket No. 53.' Debtors were the
General Partners of the partnership; the children became Limited Partners, Ex. 1
at 18, 20; Ex. 2, Minutes of Organizational Meeting. Debtors executed a
quitclaim deed transferring title to the Property to the Partnership. Ex. 1 at 19; Ex.
3, Quitclaim Deed. The Partnership also became the owner of certain personal
property, including wagons, trailers, a grandfather clock, curio tables, artwork,
and a boat. Schedule A, Ex. A.1, Docket No. 1.

Debtors continucd to live in the home on the Property under the
terms of a lease with the Partnership, executed on April 10, 1997. Ex. 4, Lease
Agreement. Under the lease, Debtors were granted a ycar-to-year tenancy that the
Partnership could terminate at any time. Ex. 4 at 1. The yearly lease payment, due

April 10" cach year, was $15,000. Ex. 4 at 1. As part of the lease agrecment,

' All of Debtors’ exhibits are attached to Debtors’ Brief, Docket No. 53.
However, a mistake may have been madc when labeling these exhibits when compared to
those admitted at the hearing. This is of no real concern to the Court, however, since
“all” of Debtors’ exhibits were admitted via stipulation at the hearing, To prevent any
confusion, the Court will refer to the exhibits by the title of the document as well as the
exhibit number.

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Debtors agrecd to pay for all utilities, maintenance, insurance, and taxes, and
agreed that they would not mortgage or sublet the property without the prior
written consent of the Partnership, Ex, 4 at 2-3, [9 2, 4-6. The lease designated a
bankruptcy filing by Debtors as an incident of default that would allow the
Partnership to terminate the leasc and re-let the Property. Ex. 4 at 3-4, 49.

Debtors paid the $15,000 yearly lease payments until December 1,
2003, when Debtors, in their capacity as Gencral Partners, directed the Partnership
to lease with the partners’ approval “all real estate and interests” of the Partnership
to the Caspers, Debtors’ daughter and son-in-law. Ex. A, Docket No. 54. The
terms of the lease required the Caspers to pay all property payments, maintenance,
and insurance, and its term expired in December 2007,

While the actual lease document was not introduced, Mrs. Hale
stated that the Icase to the Caspers did not include the house. Debtors planned to
continue residing in the house and pay an annual rent to the Partnership of $3,000,

while the Caspers leased the corrals, grass, and acreage for an annual payment of

$12,000. Mrs. Hale testified that the Caspers paid their annual payment in

* Despite Debtors’ bankruptcy filing, the Partnership has not sought relief from
the automatic slay to allow it to terminate Debtors’ rights under the lease and to reclaim
possession of the Property.

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December, 2003, but that Debtors did not pay their annual payment due in April,
2004. The Caspers’ next payment is due in December, 2004.

Debtors filed a petition under Chapter 7 of the Bankruptcy Code on
January 20, 2004. Docket No, 1, In their Amended Schedule C, Debtors claimed
a homestead cxemption under Idaho Code § 55-1003 in “40,000 units of 160,600
total units in Lost River Cattle Company Limited Partnership owning and
leasehold on: Home and Real Property located at 2745 US Hwy 93 North.” Am.
Schedule C, Docket No. 55. Debtors assert their intcrest in the Partnership is
worth $33,127. The Trustee objected to Debtors’ claim of exemption. Docket

Nos, 19, 59.

* Debtors’ original Schedule C, Docket No. 1, only claimed an exemption in
Debtors’ partnership interest. At the hearing, however, Debtors asserted they intended to
claim a homestead exemption in their leaschold interest as well. The Court allowed the
partics additional time to submit writtcn arguments addressing the issuc, and both partics
élected to do so. Dacket Nos. 56, 60. Debtors also amended their Schedule C to reflect
their claim of exemption in the leasehold interest. Docket No. 55. The Bankruptcy Rules
liberally allow debtors to amend their schedules “as a matter of course at any time before
the case is closed,” Fed, R. Bankr. P. 1009(a), without court approval, unless there is a
showing that the amendment has been made in bad faith or prejudices third parties.
Martinson v. Michael (in re Michael), 163 F.3d 526, 529 (9" Cir. 1998); In re Bowden,
254 B.R. 907, 909 (Bankr. D, Idaho 2000), ‘Trustec has not contested Debtors’ right io
amend their exemption schedules.

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Disposition
Idaho has “opted-out” of the federal bankruptcy exemptions, and its
citizens are limited to the exemptions allowed under state law. 11 U.S.C. § 522(b);
Idaho Code § 11-609, Under Idaho law, debtors are permitted to claim a
homestead exemption. Idaho Code §§ 55-1001—1011; én re Koopal, 226 B.R. 888,
890, 98.4 L.B.C.R. 98, 99 (Bankr. D. Idaho 1998); Jn re Millsap, 122 B.R. 577,

579, 91 I.B.C.R. 5, 7 (Bankr, D, Idaho 1991). The Court liberally construcs the

homestead statutes in favor of the debtor. Jn re Steinmetz, 261 B.R. 32, 32, 01.1

LB.C.R, 28, 28 (Bankr. D. Idaho 2001); Koopal, 226 B.R. at 890: In re Peters,
168 B.R. 710, 711, 94 LB.C.R. 44, 44 (Bankr. D. Idaho 1994), The relevant date
for determining the status of a claim of homestead exemption is the date of filing.
11 U.S.C. § 522(b)(2)(A); Culver, L.L.C. v. Chiu Un re Chiu), 266 B.R. 743, 751
(B.A.P. 9" Cir, 2001). As the objecting party, Trustec bears the burden of proving
an exemption is not proper. Fed, R. Bankr. P. 4003(c); Steinmetz, 26] B.R. at 32.

A. Can Debtors Claim a Homestead Exemption in Their
Share of the Partnership?

Only property of Debtors’ bankruptcy estate may be claimed as

exempt, and thereby excluded from the bankruptcy estate. 11 U.S.C. §§ 541(a),

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522(b); In re Mingo, 95 I.B.C.R. 4, 4 (Bankr. D. Idaho 1995) (“property . . .
deemed exempt. . . is not property of the bankruptcy estate.”). A partnership is
considered a distinct legal entity, separate from the partners who form it. Ji re
Myers Fin. Group, Inc., 94 1.B.C.R, 173, 176 (Bankr. D. Idaho 1994); 7n re Fisher,
94 1.B.C.R. 130, 131 (Bankr. D. Idaho 1994); Jn re Wallen, 43 B.R. 408, 410
(Bankr. D. Idaho 1984). A partner’s interest in a limited partnership is defined as
the “partner’s share of the profits and losses of a limited partnership and the right
to receive distributions of partnership assets.” Idaho Code § 53-201(10). See also
Reed v. Reed, 44 P.3d 1108, 1114 (Idaho 2002) (citing Idaho Code § 53-201{10)).
And, a partner’s interest in a partnership is considered “personal property.” Idaho
Code § 53-239; Fisher, 94 LB.C.R. at 131. So it is a debtor’s partnership interest,
not the assets of the partnership, that becomes property of the bankruptcy estate
when an individual partner files for bankruptcy. 11 U.S.C. § 541{a); Fisher, 94
LB.C.R. at 131.

A homestead is defined as a “dwelling house or... mobile home...
and the land” upon which it sits. Idaho Code § 55-1001(2). To constitute a
homestead, the statutes contemplate that the debtor will own an interest in the land,

home, or both. Idaho Code § 55-1001(2), (4). Debtors’ partnership interest,

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however, is an intangible personal property right that does not give them an
interest in either the housc they live in or the land upon which it sits. Their
partnership interest is therefore excluded from the scope of Idaho’s homestead
exemption,

Partnership law also expressly prohibits the ability of a partner to

claim a homestead exemption in partnership property.’ Although the UPL, Idaho

* At the hearing, the parties disagrecd whether the Uniform Partnership Law (the
“UPL”), Idaho Code §§ 55-301-343C, or the Uniform Partnership Act (commonly
referred to as “RUPA”), Idaho Code §§ 53-3-101-1205, would apply when the Limited
Partnership Act, (the “LPA”), Idaho Code §§ 53-201—268, was silent. At the time
Debtors formed the Partnership, the UPT. was in effect. However, the Idaho Legislature
repealed the UPL on July 1, 2001, and adopted RUPA in its place. RUPA expressly
excludes limited partnerships from its scope, and the Idaho Legislature chose not to link it
in any other way to the LPA. See Idaho Code § 53-3-202(b) Official Cmt. 2 (explaining
that partnerships formed under another statute are excluded from RUPA, including
limited partnerships). See also Elizabeth S. Miller, Linkage and Delinkuge: A Funny
Thing Happened to Limited Partnerships When the Revised Uniform Partnership Act
Came Along, 37 Sutfolk U. L. Rev. 891 (2004) (containing a comprchensive discussion
of the linkage problem).

In contrast, the LPA and the UPL contained express provisions linking the two
statutes together. See Idaho Code § 53-224 (‘a general partner of a limited partnership
has the rights and powers and is subject to the restrictions and liabilitics of a partner in a
partnership without limited partners.”); Idaho Code § 53-266 (“In any case not provided
for in this chapter the provisions of the uniform partnership law govern.”); Idaho Code
§ 53-306(2) (“but this Chapter shall apply to limited partnerships insofar as the statutes
relating to such partnerships are inconsistent herewith.”). Idaho state courts have not yet
addressed the linkage issue between RUPA and the LPA, although it is likely that the
general refcrences to partnership law in Idaho Code § 53-224 and to “uniform partnership
law” in Idaho Code § 53-226 would be interpreted to refer to RUPA. See Miller, 37
Suffolk U. L. Rev. at 896 (theorizing that, while there may be some confusion about the
reference, in states referring only generally to the uniform parmership law it would likely

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Code § 53-325(1), treated partners as co-owners of partnership property, [daho
Code § 53-325, upon which Debtors rely, provides that:

A partner’s right in specific partnership property is not

subject to attachment or execution, except on a claim

against the partnership. When partnership property is

attached for a partnership debt the partners, or any of

them or the representatives of the deceased partner,

cannot claim any right under the homestead or

exemption laws.
Idaho Code § 53-325(2)(c) (emphasis added). [n /isher, this Court observed that a
partner’s rights in specific partnership property are extremely limited, and stated
that if “property is attached for the debt of the partnership, a partner may not claim
a homestead or other exemption in the property.” 94 1.B.C.R. at 131 (citing Idaho
Code § 53-325(2){c)).

Other bankruptcy courts considering statutory language identical to
Idaho Code § 53-325(2}(c) have also held that this provision prevents a debtor
from claiming a homestead exemption in partnership property. In /m re Russell, 80

B.R. 662 (Bankr. D. Vt. 1987), the debtor claimed a homestead exemption in his

limited partnership interest because the partnership owned the house in which he

be interpreted to refer to RUPA). Although the Court believes RUPA controls, to give
Debtors the benefiil of any doubt, it will address the issues under both statutes.

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resided. The court held that Vermont’s partnership law, which contained language
identical to Idaho Code § 53-325(2)(c), barred the debtor’s claimed homestead
excmption in his limited partnership interest. /d. at 665. See also In re Brooks,
103 B.R. 123 (Bankr. 8.D. Tex. 1988) (holding that the effect of the Texas
Uniform Partnership Act, section 25(2)(c), which is identical to Idaho Code § 53-
325(2\(c), “is to prevent a partner from claiming a homestead intcrest in property
which belongs not to the individual partner, but to a separate entity—the
partnership.”).

The adoption of RUPA in 2001 signified a departure from prior
partnership law because RUPA treats a partnership as an entity rather than a group
of co-owners. Idaho Code § 53-3-201{a). See also Mark Anderson, Not Our
Grandparents’ Parinership Statute, 46 The Advocate 12 (Nov. 2003) (explaining
the changes from prior law). Idaho Code § 53-3-203 provides that property
acquired by the partnership is “property of the partnership and not of the partners
individually.” A partner may only use or possess “partnership property... on
behalf of the partnership.” Idaho Code § 53-3-401(g). And, a partner is “not a co-
owner of partnership property and has no interest in partnership property which

can be transferred, either voluntarily or involuntarily.” Idaho Code § 43-3-501.

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This section was intended to continue the result under Idaho Code § 53-325 to
protect partnership property from execution or other process by a partner’s
personal creditors. Idaho Code § 53-3-501 Official Cmt.

Neither the UPL, applicable at the time Debtors formed the
Partnership, nor RUPA allows Debtors to exempt their partnership interest as a
homestead, There is no dispute that the Partnership holds the legal title to the
Property and that Debtors’ ownership interest is defined by state law, under which
they hold a personal property interest in their share of partnership profits or other
partnership incomc. This is truc under cithcr the UPL or RUPA. Even though the
UPL treated partners as “co-owners” of partnership property, Debtors’ claim of
exemption under the homestead statutes in their share of the Partnership is
expressly prohibited under the provisions of the UPL applicable at the timc
Debtors formed the Parinership. With the adoption of the entity theory under
RUPA, and the intent to continue prohibiting partners from claiming an exemption
in partnership property, It is even more clear that Debtors cannot claim a
homestead exemption in the home through their interest in the Partnership.

Instead, Debtors’ only ownership interest is in the Partnership as an entity.

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Debtors can not claim the house exempt under the homestead statutes through their
partnership interest.

B. Can Debtors Claim a Homestead Exemption in the
Property Based Upon Their Leasehold Interest?

Debtors also argue that because they lease the Property, and
thercfore have a legal right to possession of the house, they may claim a homestead
exemption in their possessory leasehold interest.

A debtor’s homestead is defined as “the dwelling house or the
mobile home in which the owner resides or intends to reside, with appurtenant
buildings, and the land on which the same are situated and by which the same are
surrounded, or improved; ... Property included in the homestcad must be actually
intended or used as a principal home for the owner.” Idaho Code § 55-1001(2).
An owner 1s defined to include “a purchaser under a deed of trust, mortgage, or
contract, or a person who takes the subject property under a life estate.” Idaho
Code § 55-1001(4). The statute further provides that “[p]roperty described in
section 55-1001, Idaho Code, constitutes a homestead and is automatically
protected by the exemption described in section 55-1003, Idaho Code, from and

after the time the property is occupied as a principal residence by the owner... .”

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Idaho Code § 55-1004(1). Idaho Code § 55-1001 contemplates that only one
dwelling, and only one homestead exemption, may be claimed per person or per
married couple. Ja re Tiffany, 106 B.R. 213, 214, 89 L.B.C.R, 221, 222 (Bankr. D.
Tdaho 1989). The Idaho statute protects up to $50,000 in equity in the homestead
property. Idaho Code § 55-1003.

Whilc there is no doubt that Debtors’ rights under the lease became
property of the bankruptcy estate when Debtors filed for bankruptcy relief, Mingo,
95 L.B.C.R. at 4 (citing 11 U.S.C. § 541(a)(1)), Idaho courts have yet to consider
whether a debtor may claim a homestead exemption in a possessory leasehold
interest. In Ja re Tiffany, 106 B.R. at 214, this Court alluded to the prospect that a
lessee-debtor could, in theory, claim a homestead exemption in leased property.
There, the debtors claimed an exemption in property upon which three separate
dwellings were located, one of which was a mobile home owned and occupied by
someone other than the debtor. ‘The Court commented that “[t]he fact a tenant is
renting a portion of the property and living in a mobile home on the property is a
material factor in determining the extent of debtor’s homestead, smce the tenant

could conceivably also declare a homestead exemption on the property under the

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statute.” /d. In that case, the Court limited the debtor’s exemption to the single
residence occupied by the debtor and the land upon which it sat. fd.

However, because of the unique situation in 7i/fany, its holding and
its reference to the possibility that a debtor could exempt a Icasehold interest must
surely be limited to the facts of that case. It seems that Idaho’s homestead statutes
would allow a debtor owning a mobile home to exempt both the mobile home and
the underlying land, cven if the debtor did not own the land, Idaho Code § 55-
1001(2). Thus, the Court’s observation in Tiffany that the tenant in that case could
have claimed an exemption in the mobile home, which he owned, and the land
upon which it sat, which he rented, was correct.

Here, Debtors assert a homestcad exemption not in a mobile home
they own located on land leased from another, but in a house (which they do not
own) occupied under a year-to-year lease that can be terminated at any time. In
effect, their leasehold interest under these facts, and so, too, their exemption

claim, appears limited to a right of possession.’ The homestead statutes,

° The Court acknowledges the Ninth Circuit B.A.P.’s decision in Sticka v.
Casserino (In re Casserino), 290 B.R. 735 (B.AP. 9” Cir. 2003), aff'd, «F.3d ___,
No. 03-35257, 2004 WL1912176, (9" Cir. Aug. 16, 2004). There, in a decision not cited
by the parties, the Panel held that Oregon’s homestead law applied to a possessory
lcaschold interest held by the debtor. Under Oregon law, however, a homestead may be

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however, contemplate an ownership interest in property with a corresponding
monetary value that a debtor can claim as exempt. Debtors’ mere right of
possession under the lease, with no corresponding “ownership” interest, has no
cognizable monetary value they can claim as exempt.* Thus, Debtors can not
claim a homestead exemption when their only interest in the Property is a right to
possession under a lease terminable at any time.
Conclusion

Debtors’ claim of a homestead exemption in their interest in the
Partnership’s real estate is not allowed undcr the homestead statute or applicable
partnership law. Morcover, Debtors’ claim of a homestead exemption in their

possessory Icasehold interest, which can be terminated at any time, 1s inadequate

claimed in any interest in property that carries with it the right of possession. Casserto,
282 B.R. 490, 491 (Bankr. D. Or. 2002). Aiso, the debtor in that casc sought to cxempt
his security deposit and prepaid rent under the homestead statute, not the right to
possession ilself, as Debtors do here. 282 B.R. at 493; 290 B.R. at 737.

® Although Debtors placed a $33,127 value upon their “interest” jn their
schedules, that valuc docs not appear to be rclated to the value of their leaschold interest.
Rather, as near as the Court can tell, that figure corresponds to the value of Debtors’
interest in the Partnership. Debtors own 40,000 units, or twenty-five percent, of the
Partnership. The Partership’s assets are valued at $132,511. Schedule A, Ex. A.1,
Docket No. 1. Twenty-five percent of $132,511 is $33,127.75. Am. Schedule A, Docket
No. 55. The Court has already explained Debtors’ Partnership interest may not be
exempted under the homestead statutes. Debtors have not shown that their leasehold
interest, apart from their partnership interest, has any significant value,

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to support a homestead exemption. Trustee’s objections to Debtors homestead
exemption claim will be sustained, and the exemption disallowed, by separate
order.

DATED This 26" day of Augast, 7004.

—

a

JIM D. PAPPAS
U.S. BANKRUPTCY JUDGE

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CERTIFICATE OF SERVICE

I, the undersigned, hereby certify that I served by the method
indicated below, a true copy of the document to which this certificate is attached,
to the following named person(s) at the following address(es), on the date shown
below:

Office of the U.S. Trustec
jeff.g. howemusdo]|. gov

gary.meclendon@usdoy. 2ov

Monte Gray, Esq.
montcgray@cableone.net

Sam Hopkins
sam_hopkins@if.rmci.net

Via Email

Stephen A. Meikle, Esq.
P.O. Box 51137
Idaho Falls, Idaho 83405

Via U.S. Mail

Note re E-mail service: A "pdf" version of the above deciston/order was electronically transmitted to the
parties indicated above. Limail service is provided as a courtesy only upon request of a party. ‘lo review an
electronic image of the original of this document, or to subscribe for email service of future decisions/orders
from the Bankruptcy Judges, please access the Court's Internct web sitc, www.id.uscourts.gov.

CASE NO.: 04-40076 CAMERON §. BURKE, CLERK
U.S. BANKRUPTCY COURT

DATED: 8/26/2004 By Dana Hoyle, doe Clerk

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