Opinion
No. 29854
Decided June 7, 1944.
Homestead exemption — Action to set aside fraudulent transfer of realty, not defeated, when — Homestead not immune from levy and execution, when — Precedence between creditor's judgment and allowance in lieu of homestead — Cannot arise until costs and mortgage lien satisfied — Inchoant right to allowance in lieu of homestead, not exempt property — Section 11737, General Code — Application and award necessary.
1. Where real estate is transferred in fraud of creditors the fact that the value thereof was not in excess of a mortgage lien, which precluded the allowance of a homestead, plus $500 which might be allowed in lieu of homestead, will not defeat an action to set aside such fraudulent transfer. ( Bills v. Bills, 41 Ohio St. 206; Roig v. Schultz, 42 Ohio St. 165, approved and followed.)
2. A homestead does not become immune to levy and execution until after application and assignment, and retains such immunity only so long as it is used as a homestead. ( McComb v. Thompson, 42 Ohio St. 139; Roig v. Schultz, 42 Ohio St. 165, approved and followed.)
3. Until the costs and mortgage lien which precluded the allowance of a homestead are fully satisfied no question as to the right of precedence between a creditor's judgment and the right of a debtor to an allowance in lieu of homestead can arise. (Section 11737, General Code. Roig v. Schultz, 42 Ohio St. 165, approved and followed.)
4. An inchoant right to an allowance in lieu of homestead does not constitute exempt property. The property awarded in lieu of homestead under Section 11737, General Code, becomes exempt only after it has been awarded to the head of the family or the wife, as the case may be, upon his or her application in person, by agent or attorney.
APPEAL from the Court of Appeals of Crawford county.
This was an action to set aside a transfer of the title to real estate as a fraud upon creditors. On or about December 6, 1933, John L. Walker purchased a home, concurrently executing and delivering a mortgage to Home Owners' Loan Corporation for the sum of $2,416.06; on the fifteenth day of February, 1935, being indebted, he executed to Gledhill Kime Lumber Company his promissory note for $618.76 due ninety days after date; on July 22, 1935, and again on January 28, 1936, appellants wrote Walker demanding payment; on September 25, 1936, Walker transferred the property in question to his wife, Carrie M. Walker, for a consideration of $1; on April 18, 1941, appellants took Judgment on the note for $848.01; and on April 20, 1942, appellants filed their petition against appellees seeking to have the deed from husband to wife set aside because it was made for the purpose of defrauding creditors.
The trial court found the transfer was made with intent to defraud appellants and ordered the deed cancelled. The Walkers appealed on questions of law and fact and the Court of Appeals, two judges concurring, entered a decree for the defendants, appellees, here.
The evidence before the Court of Appeals disclosed "that at the time of the transfer of the real estate in question the defendant John L. Walker owned no other property whatsoever and that the defendant Carrie M. Walker knew this fact. The real estate in question was purchased by the defendant John L. Walker on or about December 26, 1933, for a price of three thousand dollars, and at said time the sum of seven hundred and seventy-five dollars, being the proceeds from the adjusted service certificate of John L. Walker, was paid to the grantor in cash and a note and mortgage executed to The Home Owners' Loan Corporation for $2,416.06 for the balance. That the loan contract with The Home Owners' Loan Corporation provided for monthly payments of approximately $22; that from the date of the purchase of said property, to the last of July, 1936, not one of said monthly payments was paid in full and that at said time, said payments were in default. That at the time said property was purchased the defendants had two children, a daughter who was then about sixteen years of age and a son who was then about thirteen years of age, both of whom regularly attended school. The defendant Carrie M. Walker had no income, save and except such income as she received from the earnings of her husband, the defendant John L. Walker, and she paid no consideration for said conveyance. That by reason of the close relationship existing between the two defendants the defendant Carrie M. Walker had knowledge of the execution and delivery of said promissory note. That at the time of such conveyance by John L. Walker to Carrie M. Walker, John L. Walker was living with his wife and two minor children, on the premises conveyed, and was supporting them out of his earnings, and was the head of the family. There has been no change in such status since the transfer was made except that one of said children has reached the age of majority. That as of the date of such transfer there was an unpaid balance of $2,429.89 owing on the note secured by the mortgage on said premises to The Home Owners' Loan Corporation. The real estate conveyed, at the time of conveyance, was reasonably worth the sum of $2,500.
"At the time of the trial of this case the value of the premises conveyed was $3,000, and the amount owing The Home Owners' Loan Corporation on its mortgage indebtedness which is a lien on said premises, has been reduced so that it now amounts to approximately $1,500.
"The greater part or all the money used to reduce said mortgage indebtedness has been derived from the earnings of the defendant John L. Walker."
Upon the foregoing evidence a majority of the Court of Appeals came to the conclusion, in their opinion, that a transfer of homestead property (including the right to an allowance in lieu thereof) is not subject to attack even though the transferrer acted with fraudulent intention and the transferee had knowledge thereof, nor did any importance attach to the fact that any consideration for the conveyance was lacking. Judgment accordingly was rendered for defendants. The case is here following the allowance of a motion to certify the record.
Mr. Arden W. Wisman, for appellants.
Mr. Robert L. Moulton, for appellees John L. Walker and Carrie M. Walker.
Mr. Leo J. Scanlon, for appellee the Home Owners' Loan Corporation.
Section 8618, General Code, provides so far as pertinent here:
"Every gift, grant, or conveyance of lands, * * * made or obtained with intent to defraud creditors of their just and lawful debts * * * shall be utterly void and of no effect."
In the course of the opinion by the majority of the Court of Appeals it was said: "A transfer of homestead property is not subject to attack, even though the transferrer acted with fraudulent intention, and the transferee had knowledge thereof, nor does any importance attach to the fact that consideration for the conveyance was lacking."
The Court of Appeals was here following the rule that exempt property is not susceptible of fraudulent alienation and that ordinarily creditors have no right to complain of the disposition made of it since they cannot be prejudiced thereby or claim that it was a fraud upon them.
We have no criticism of the court's statement of the rule or the rule itself where exempt property is concerned. However, we are of the opinion that exempt property is not involved in the instant case. Whether, after the sale of the premises and upon an application by Walker or his wife, there results exempt property under Section 11737, General Code, was not before the Court of Appeals. As stated in their opinion: "And said premises at said time being encumbered by a mortgage lien precluding the allowance of a homestead, [he] would have been entitled under the provisions of Section 11737, General Code, in case of a sale of said premises in proceedings to enforce liens thereon, to an award of not to exceed $500 of the proceeds thereof in lieu of a homestead * * *."
The right to demand an allowance in lieu of a homestead out of the proceeds of the sale, is to be determined by the state of facts at the time the surplus arising from such sale is finally disposed of by the court. Niehaus v. Faul, 43 Ohio St. 63, 1 N.E. 87.
There is a distinction to be observed between the right to demand a homestead and the setting off of a homestead. As this court held in the case of McComb v. Thompson, 42 Ohio St. 139:
"The right to have and hold a homestead is a personal privilege which cannnot be conveyed to another, and is lost by neglect or refusal to claim it, or by abandonment of the homestead."
In the case of Roig v. Schultz, 42 Ohio St. 165, this court held:
"In an action to subject lands, alleged to have been fraudulently transferred, to the payment of a, judgment, an answer by the judgment debtor, that he is a resident of Ohio, the head of a family and entitled to hold the premises as a homestead, is no defense."
In the case of Sears v. Hanks, 14 Ohio St. 298, 84 Am. Dec., 378, this court held:
"The proper time for the assertion of the debtor's claim, under the statutes to have such homestead exempted from sale, is when the sheriff or other officer is about to execute the writ of execution or order of sale; and the claim is available as well against decretal orders of sale, as against executions founded on judgments at law."
In the case of Sears v. Hanks, supra, there had been no waiver of the right to claim a homestead.
Under Section 11734, General Code, a homestead is set off only upon application.
In the case of McComb v. Thompson, supra, this court held that a lien does not become lost or removed from that part of the real estate thereafter set off as a family homestead by the assignment and use of such homestead and that when the rights of homestead are removed, liens on such property may be enforced. This holding in the case of McComb v. Thompson, was followed in the case of Roig v. Schultz, supra, in which this court held:
"A homestead is subject to a judgment or execution lien both before and after the same is demanded and set off to the debtor."
The holding of this court in the per curiam opinion in Bills v. Bills, 41 Ohio St. 206, is in point here, to wit:
"In an action by a creditor to set aside a deed made by an insolvent debtor to his wife (through a third party), the petition averred that the conveyance was made after the debt accrued, without any valuable consideration; and that it was made with intent to hinder, delay and defraud creditors. At the trial the defendants made no claim that any valuable consideration supported the deed, but offered to prove that when it was delivered the land was the family homestead; that it was incumbered by a mortgage paramount to the homestead exemption, and was worth only $700 more than the mortgage debt. The trial court excluded this evidence as immaterial, set aside the deed and decreed a sale.
" Held: 1. Notwithstanding the decree, the $500 exemption in lieu of a homestead may be allowed out of the proceeds.
"2. As the case was, the evidence excluded was immaterial."
A distinction is to be observed between the right under Section 11737, General Code, to make a claim in lieu of homestead, and the property not exceeding in value $500 which may be awarded under that statute and thereafter held exempt from levy and sale. Such distinction applies also in the case of specific property exempt under other sections of the Code. The property once selected or awarded as exempt cannot be reached by creditors. This is illustrated by the case of Tracy v. Cover, 28 Ohio St. 61, wherein it was held by the Supreme Court Commission of Ohio:
"Where a debtor, being the head of a family, and having no homestead, and being possessed only of personal property, not exceeding in value the amount which the law allows to be held exempt from execution, in lieu of a homestead, makes a colorable or pretended sale of such property, for the purpose of placing the same beyond the reach of creditors, the judgment creditors of such debtor do not thereby acquire a right to levy on and sell such property, in disregard of the claim of the debtor, properly made, to hold the same exempt from execution."
By the same token the allowance which has been awarded in lieu of homestead under Section 11737, General Code, becomes the absolute property of the head of the family and the transfer of such property thereafter would not be in fraud of any creditor.
In the case of Genell v. Hirons, 70 Ohio St. 309, 71 N.E. 709, this court held:
"Real property of a judgment debtor that is exempt from levy and sale in lieu of a homestead under Section 54411, Revised Statutes, when selected and held by such judgment debtor as so exempt, becomes his absolute property with full power of disposition, and if thereafter he sells and conveys the same, such property in the hands of his grantee is not subject to the lien of a judgment obtained against the grantor prior to such sale and conveyance, nor to seizure and sale upon execution in satisfaction of such judgment." (Italics ours.)
Here is another illustration of exempt property which cannot be reached by creditors. The facts in the Genell v. Hirons case differ from our case in that there real estate in lieu of homestead was selected by the debtor, while in the instant case there was only a conditional right to an allowance, upon application, in lieu of homestead under Section 11737, General Code. As stated by Judge Crew at pages 325 and 326: "The exemption which the statute allows by way of homestead is, in a sense, but a qualified exemption, and the law protects from sale the property so exempt, only so long as it is used and occupied as a homestead. But the exemption which the law gives in lieu of a homestead is an absolute exemption and whether it be taken in personal or real property, the judgment debtor acquires, in and to the property so exempt, when selected and taken, an absolute ownership with full power of disposition. Freeman in his work on Executions, at section 218, says: 'The power of the owner of exempt property, unless limited by statute, to sell or incumber it is undoubted. The right of exemption is a privilege, but not a restriction. In fact, the owner's power to dispose of exempt property is more absolute than it is over other kinds of property. This is because of the freedom of exempt property from involuntary liens. Not being subject to execution, the owner may sell it, pledge it, or give it away, notwithstanding the existence of judgment or execution liens, and without reference to the rights of his general creditors.' "
Summarizing the law here applicable:
A. Where real estate is transferred in fraud of creditors the fact that the value thereof was not in excess of a mortgage lien, which precluded the allowance of a homestead, plus $500 which might be allowed in lieu of homestead, will not defeat an action to set aside such fraudulent transfer. Bills v. Bills, 41 Ohio St. 206; Roig v. Schultz, 42 Ohio St. 165, approved and followed.
B. A homestead does not become immune to levy and execution until after application and assignment, and retains such immunity only so long as it is used as a homestead. McComb v. Thompson, 42 Ohio St. 139; Roig v. Schultz, 42 Ohio St. 165, approved and followed.
C. Until the costs and mortgage lien which precluded the allowance of a homestead are fully satisfied no question as to the right of precedence between a creditor's judgment and the right of a debtor to an allowance in lieu of homestead can arise. Section 11737, General Code. Roig v. Schultz, 42 Ohio St. 165, approved and followed.
D. An inchoant right to an allowance in lieu of homestead does not constitute exempt property. The property awarded in lieu of homestead under Section 11737, General Code, becomes exempt only after it has been awarded to the head of the family or the wife as the case may be, upon his or her application in person, by agent or attorney.
The evidence in the instant case disclosed that the Walkers had paid off a substantial part of the mortgage indebtedness which precluded the allowance of homestead. Should this indebtedness be paid in full or should the Walkers by change of status lose the right to either homestead or an award in lieu thereof, the entire situation would be materially changed. To permit the fraudulent transfer of the property in question to preclude the full exercise of appellants' rights for the reason that at the time of the transfer the property was not worth more than the mortgage indebtedness, plus an amount which might or might not be awarded to the Walkers in lieu of homestead, would be to deny appellants due process of law.
It follows, therefore, that the decree of the Court of Appeals herein should be and hereby is reversed and this cause remanded to that court for further proceedings not inconsistent herewith.
Decree reversed.
WEYGANDT, C.J., MATTHIAS, HART, ZIMMERMAN, BELL and WILLIAMS, JJ., concur.