Summary of a Recent
Judicial Development in
Bankruptcy

Eighth Circuit Remands
Homestead Exemption Case

Jay Kiiha
National AgLaw Center Graduate Fellow

The United States Court of Appeals for the Eighth Circuit has ruled that under Minnesota law a determination of whether a debtor-farmer was allowed to claim a homestead exemption in a 155-acre parcel of land, in addition to a five-acre parcel of land that the farmer owned and occupied as his residence, involved a fact-based determination of whether the farmer-debtor used the 155-acre parcel for farming purposes in such a manner that both parcels were occupied or cultivated as one parcel of land. In re Stenzel, 301 F.3d 945, 946-47 (8th Cir. 2002). The Eighth Circuit remanded the matter to the bankruptcy court so that the bankruptcy court could make this determination. See id. at 950.

Quentin B. Stenzel, the debtor, was a Minnesota farmer who farmed tillable crops until 1989 and conducted a hog farming operation until he sold his livestock shortly before filing a Chapter 7 bankruptcy petition. See id. at 946-47. When he filed his bankruptcy petition, Stenzel claimed a homestead exemption in a five-acre parcel of land that he owned and occupied as his residence. See id. The Peoples' State Bank of Wells ("Bank"), a creditor, subsequently discovered that Stenzel owned an undivided one-third remainder interest in a nearby 155-acre parcel where his mother resided. See id. at 947. Without his knowledge, Stenzel's parents had previously conveyed "undivided one-third remainder interests in the 155-acre parcel to Stenzel and his two sisters in 1990, with their mother retaining a life estate in the property." Id.

The five-acre parcel of land that Stenzel claimed as exempt was located directly across the highway from the 155-acre parcel of land. See id. Stenzel had been using both parcels of land for his hog farming operation. See id. After learning of his undivided one-third interest in the 155-acre parcel, Stenzel amended his bankruptcy schedules by claiming an additional homestead exemption in the 155-acre parcel. See id. The Bank objected to Stenzel's amended claim. See id.

acres for purposes of the homestead exemption under Minnesota law." Id. The Bankruptcy Appellate Panel reversed the bankruptcy court's determination. See id. Stenzel appealed the appellate panel's decision to the Eighth Circuit. See id. The parties agreed that Stenzel could properly claim a homestead exemption in the five-acre parcel. See id. Thus, the only issue before the Eighth Circuit was whether Stenzel was allowed under Minnesota law to claim a homestead exemption in his one-third interest in the 155-acre parcel. Id.

Under the Bankruptcy Code, "[a] debtor may exempt from his bankruptcy estate property that is exempt under state law on the date the petition is filed." Id. (quoting 11 U.S.C. § 522(b)(2)(A)). The burden of proving that a debtor is not entitled to an exemption is on the objecting party. See id. (citing Bankr. R. 4003(c)). Under Minnesota law, a debtor is allowed to exempt "'[t]he house owned and occupied by a debtor as the debtor's dwelling place, together with the land upon which it is situated [from] seizure or sale under legal process on account of any debt.'" Id. (quoting Minn. Stat. § 510.01). With respect to agricultural property, the Minnesota homestead exemption is limited to 160 acres. Id. (citing Minn. Stat. § 510.02). Under Minnesota law, "'[a]ny interest in the land, whether legal or equitable, shall constitute ownership, within the meaning of this chapter.'" Id. at 948 (quoting Minn. Stat. § 510.04).

The court noted that the parties agreed that Stenzel's interest in the 155 acres constituted a present ownership interest in the parcel. See id. The court stated, however, that the dispute was "whether Stenzel occupied the 155-acre parcel within the meaning of Minn. Stat. § 510.01 when he petitioned for Chapter 7 relief." Id. (emphasis supplied).

The Bank argued that Stenzel "did not occupy the 155-acre parcel as a matter of law because his remainder interest conferred no present right of possession, and the homestead exemption requires 'a concurrence of ownership and occupancy, the former sustaining the latter.'" Id. (quoting Kaser v. Haas, 7 N.W. 824, 825 (Minn. 1881)). Stenzel responded that "any agricultural property in which the debtor has an ownership interest and actual possession qualifies for the homestead exemption." See id.

The Eighth Circuit rejected the Bank's argument, noting that the Kaser standard had been rejected and that the court's focus should rest on "whether the ownership and occupancy affords a community connection of such significance as to give reason to believe that the preservation of that connection will in the long run make the debtor and his family better able to fulfill their social obligation to be self-sustaining." Id. (quoting Denzer v. Prendergast, 126 N.W. 2d 440, 444 (Minn. 1964)).

The court also rejected Stenzel's argument, stating that is was too broad "because it disregard[ed] the homestead basis for the exemption." Id. The court stated that "the statute exempts '[t]he house owned and occupied by a debtor . . . together with the land upon which it is situated." Id. (quoting Minn. Stat. § 510.01) (emphasis supplied). The Eighth Circuit explained that "[t]he italicized language precludes the exemption of land that is not contiguous with the land on which the debtor's home is located, whether or not the debtor has an ownership interest in the non-contiguous parcel and occupies it for farming." Id.

The Eighth Circuit also discussed several Minnesota cases that have been used to determine the extent to which contiguous farmland qualifies for the homestead exemption. See id. The court took special note of Brixius v. Reimringer, 112 N.W. 273, 273 (Minn. 1907), that stated that although a debtor is only allowed to claim one homestead, land claimed under the exemption may "consist of two or more separate descriptions, or tracts, or land, provided the same are so situated that they may be occupied and cultivated as one body of land." Id. (quoting Brixius, 112 N.W. at 273). Because the 155-acre parcel and the five-acre parcels were contiguous, the court noted that the Stenzel's parcels were "eligible for a combined homestead exemption under Brixius." Id. at 949.

The court also examined whether the parcels were occupied "in such a manner that [the parcels] became, in the words of the statute, 'land upon which [his dwelling place] is situated." Id. (emphasis supplied). The Eighth Circuit stated that "Minnesota cases require a fact based determination of whether Stenzel used the 155-acre parcel for farming purposes in such a way that the two parcels were 'occupied and cultivated as one piece or parcel of land, on some part of which is located the [debtor's] residence." Id. (quoting Brixius, 112 N.W. at 273).

The Eighth Circuit stated that the bankruptcy court failed to find, as a matter of fact, the answer to whether the parcels were occupied and cultivated singularly. See id. The court stated that:

The Bankruptcy Court looked at many of the relevant factors in finding that Stenzel occupied the 155-acre parcel with the life tenant's permission. But the court did not make the crucial finding that his limited occupancy and his future ownership interest were enough to make the 155-acre parcel part of the 'land upon which [his house] is situated.'"

Id. at 950.

The court also stated that the bankruptcy court had "erroneously concluded that Stenzel's ignorance of his ownership interest is irrelevant." Id. The court added that "[w]hile this fact is hardly dispositive, a debtor's intent is relevant in determining whether he has occupied two contiguous parcels as a single farm." Id. (citation omitted).

The Eighth Circuit reversed the judgment of the Eighth Circuit Bankruptcy Panel and remanded the case to the bankruptcy court to determine whether the 155-acre parcel was "occupied and cultivated as one piece or parcel of land" with Stenzel's five-acre parcel. See id.

The concurring opinion agreed that the issue of Stenzel's occupancy was an important issue. See id. However, the concurrence questioned the sufficiency of the legal description used to determine the exact size of the 155-acre parcel. See id. Therefore, the concurrence stated that "on remand the exact size of [the 155 acre] parcel should be determined." Id.

The concurrence also stated that "we should not state that Stenzel 'uses a portion' of the 155-acre parcel for farming." Id. The concurrence noted that:

[p]rior to and at the time of the bankruptcy filing, Mr. Stenzel was using no portion of the 155-acre parcel for anything. The 148 tillable acres had been leased by Stenzel's mother to a third party; certainly Stenzel had no right to be interfering with the tillable acres and leasehold rights. As a remainderman, Mr. Stenzel would have had no right to interfere with the use by the life tenant as well . . . . Mr. Stenzel had not farmed the tillable acres or used them for anything else since the late 1980's. Stenzel had ceased using, prior to filing for bankruptcy, even the small area (part of the 155-acre parcel) on which sheds had been used by Stenzel earlier to raise hogs.

Id. (emphasis supplied).

The concurrence also noted that it was confused as to how Stenzel's mother could legally grant Stenzel permission to "occupy or use any of the tillable acres after she had leased that land to a third party who was paying the rent to her and after she had conveyed a remainder interest to three people." Id. It concluded, however, that the matter should be remanded "since the bankruptcy court should determine in the first instance exactly what Stenzel's intentions were and the factual basis for any such intentions." Id. at 952. To this end, the concurrence stated that it would be "surprised if a person may legally claim a homestead interest based upon some aspiration (however unrealistic it may be) to later (on some unknown date) occupy and use [it as] a parcel." Id.

The case was decided on February 14, 2002; this summary was posted January 2003