Opinion
Bankruptcy Case No. 698-62148-fra13; Adversary Proceeding No. 699-6349-fra
July 12, 2000
MEMORANDUM OPINION
This unfortunate case arises out of a three year struggle, in three courts, over the fate of the homestead of a divorcing couple. The disposition of the property, and the proceeds, have been the subject of a judgment and decree of dissolution of marriage entered by the Circuit Court for Lane County, and plan of reorganization confirmed by this Court. The Court, for the reasons set out below, now concludes that the proposed sale is consistent with the decree and the plan, and should go forward without further delay.
I. BACKGROUND
1. The Parties and Property
The property in question is a 12 acre parcel of agricultural property in rural Lane County. A permanent dwelling on the property is occupied by Susan Hansen, the Debtor's former wife, and their two children. The older child, a daughter, is severely handicapped, and requires around the clock care at the residence.
Also situated on the property is a manufactured home occupied by George and Betty Hansen, Susan Hansen's parents. Ordinarily the property, which is in an exclusive farm land use district, would be limited to a single farm-related dwelling. The manufactured home was placed under a permit from Lane County issued in accordance with ORS 215.283(k), which provides for temporary use of an additional dwelling "for the term of a hardship suffered by the existing resident or a relative of the resident." Both Betty and George have significant health problems. In addition, George is active in the care of Debtor's and Susan Hansen's disabled daughter.
Susan, Betty and George Hansen have all objected to the sale of the property which is the subject matter of this opinion.
2. History
Some time in 1997 Debtor Bradley Rethwill commenced proceedings to dissolve his marriage with Susan Rethwill, now Susan Hansen. This Chapter 13 case was commenced by a petition filed on April 17, 1998. At that time Debtor's Schedule A disclosed a one-half interest in the subject property. The existence of the dissolution proceeding was noted, without elaboration, in the Debtor's statement of affairs.
Lane County Circuit Court Case No. 15-97-04455.
A plan filed on May 4, 1998 proposed to sell the subject property within six months. The Hansens did not object directly to confirmation: instead, they wrote to the presiding Judge of the Circuit Court objecting to Debtor's efforts to sell the property through the bankruptcy. A copy of the letter was sent to this Court. The Bankruptcy Court wrote to counsel for the Debtor and the Trustee advising that, in light of the continuing property dispute, the Court would postpone a scheduled confirmation hearing and consider, at the postponed hearing, whether the automatic stay should be modified to allow for completion of the dissolution proceeding. This hearing took place on September 23, 1998. The Court concluded that reorganization would not be possible until the parties' property rights were settled by the Circuit Court. On September 25, 1998 an order was entered modifying the automatic stay to allow the dissolution case to proceed. Specifically:
The Circuit Court is authorized:
1. [To] enter a decree of dissolution of marriage under ORS 107.105 distributing the assets of the parties, and granting any other relief allowable under ORS 107; and
2. In doing so, determine any legal issue arising between the parties, or either party and the Trustee, concerning the parties' respective property rights.
The dissolution case was heard by the Circuit Court on January 7, 1999. The Court issued a letter opinion on March 19, 1999, and on or about June 16, 1999 entered a judgment of dissolution of marriage. The decree contains the following provision regarding the subject property:
The judgment may be found in this Court's record as Exhibit 1 to Document No. 48, and is subject to judicial notice in any event. The Circuit Court's letter opinion has not been made part of the record of this case.
3. REAL PROPERTY
The real property shall be immediately placed for sale with petitioner [the Debtor here] in charge of said sale.
Petitioner shall endeavor to sell said property within ten months of the listing. Respondent [Susan Hansen] shall cooperate in all reasonable ways to facilitate the listing, showing and sale of said property. Petitioner shall designate a realtor who shall handle all "on site" matters due to the existence of a restraining order against petitioner. If petitioner's presence is required on the property, arrangements shall be made with respondent, through the realtor in such manner as to not run askew of the requirements of any impending restraining order.
The net proceeds of this sale of property will be distributed as follows:
A. Not to exceed $20,000 to be paid to respondent's parents for the removal of the manufactured home on said property to the extent that the Bankruptcy Court will allow it. The respondent's parents, George R. and Betty Hansen, seek any appropriate redress through the Bankruptcy Court in keeping with their interest in the property and their identifiable investment in their own home.
B. Wife's homestead exemption of $25,000.
C. Husband's homestead exemption of $8,000.
D. The IRS and State Department of Revenue back tax debts in the approximate amount of $161,900.
E. Any other nondischargeable debts of the parties.
F. The Court will retain jurisdiction over this sale of the real property and will monitor any problems concerning price, terms, possession, or any other problems with the sale.
Respondent shall be entitled to live with the children on the family property until it is sold and shall allow no waste to be committed on the property. Respondent shall maintain the property in its current condition and cooperate fully with the realtor for showing of the property.
A timely appeal was filed raising property and support issues, and the matter is presently before the Oregon Court of Appeals.
On November 16 Debtor filed a motion, pursuant to 11 U.S.C. § 363(f), to sell the property free and clear of the interests of the other parties, and of lien holders. The matter was heard on December 8, 1999. The Court held that the sale was actually pursuant to 11 U.S.C. § 363(h), and could be authorized only by way of an adversary proceeding. See Fed.R.Bankr.P. 7001(3). An adversary proceeding seeking a sale was commenced on December 8, 1999.
In the meantime, on December 3, 1999, an amended plan providing for the sale of the property was filed. An order confirming the amended plan was entered on January 25, 2000, over the Hansens' objection.
Paragraph 11 of the order provides that:
Within six months of confirmation, Debtor is to sell residence owned by Debtor and Susan Hansen, fka Rethwill. Up to $20,000 of sale proceeds to be used to move manufactured home off of property, if required by terms of sale agreement. Sale proceeds then used to pay costs of sale and liens against property including Mellon Bank, Pacific Continental Bank, IRS and Lane County. Next, sale proceeds shall be used to pay Susan Hansen's homestead exemption. Finally, any remaining net sale proceeds shall be paid to the Trustee.
There has been no appeal from the order of confirmation. The sale contemplated by the December 1999 motion fell through. The Debtor has found a new purchaser, and again seeks authority to sell the property. Inexplicably, the Debtor filed his motion seeking that authority in the main case, rather than in the adversary proceeding. Nevertheless, a hearing on the proposed sale, including testimony and evidence from proponents and opponents, was conducted on July 6, 2000.
II. DISCUSSION
1. Procedure
As noted, the sale of property free of the interest of a co-owner requires an adversary proceeding. Fed.R.Bankr.P. 7001(3). An adversary proceeding was commenced. However, the matter actually came before the Court by way of a motion filed in the administrative case. The Hansens did not object to proceeding in this manner, other than to suggest that they were denied due process afforded under the Part VII rules, after the Court broached the issue at the hearing.
"An adversary proceeding is governed by the rules of this Part VII. It is a proceeding: . . . (3) to obtain approval pursuant to § 363(h) for the sale of both the interest of the estate and of a co-owner in a property; . . . ." Fed.R.Bankr.P. 7001.
Strictly speaking, this matter should have been raised by way of a motion for summary judgment, or an expedited trial in the adversary proceeding. In his defense, the Debtor argues that he was employing a local form mandated by this Court. In addition, and more importantly, he presented evidence to the effect that the sale was conditioned on closure prior to July 27, and that the sale would likely be lost if not closed on time.
Whatever the technical posture of the case, it is clear that a full, fair and complete hearing was accorded to all parties. Both the Debtor and the objecting parties presented detailed evidence, including a written appraisal and the testimony of the appraisal's author. The dispute has been ongoing, in one form or another, for over two years. (Note, for example, the arguments raised in Susan Hansen's letter to the Circuit Court in 1998, raising essentially the same issues as were raised here.) The objecting parties have not been deprived of any opportunities for discovery or presentation of their case, and cannot be said to be prejudiced by the fact that the Debtor proceeds under the wrong caption. Failure to proceed at this juncture would merely exalt form over substance, at undue cost to the Debtor and creditors. See e.g. In re Sutton, 1990 WL 25050 (D.N.J. 1990).
2. Merits of the Motion
A. Effect of Decree and Plan of Reorganization:
The Hansens object on the grounds that the proposed sale is inconsistent with the decree of dissolution. Specifically, they complain that the proposal to pay all debts secured by the subject property before the funds payable to them is inconsistent with the decree.
Debtor proposes to sell the property for $220,000. It is subject to a mortgage, property tax lien, and federal tax lien. After payment of the debts secured by these liens and the costs of sale approximately $25,000 will remain, of which $20,000 is payable to Betty and George Hansen. This will leave only $5,000 to apply toward Susan Hansen's "homestead exemption."
Hansens argue that the proceeds of the sale must be distributed according to the divorce decree, which means that their $45,000 would be paid before any debt owed to the IRS. This, in my view, misconstrues the decree. In providing for payment of "net" sale proceeds, the Circuit Court necessarily meant proceeds after payment of any liens, since the Court is without jurisdiction to act in derogation of the interests of any lien creditor. The decree must be construed as consistent with applicable law.
ORS 105.285 provides for the order of distribution of proceeds from the sale of real property in which there are co-owners and partition is found to be impracticable. It provides that any liens be paid in the order of their priority prior to a distribution of the residue to the owners of the property sold.
Susan Hansen claims that her "homestead exemption" must be satisfied. However, a homestead exemption is inferior to the pre-existing mortgage, ORS 23.260, property tax lien, ORS 311.405(2), and federal tax lien, In re Raihl, 152 B.R. 615 (BAP 9th Cir. 1993). The only claim being paid in derogation of her homestead right is the $20,000 the Circuit Court directed to be paid to the parents to defray the costs of moving the manufactured home.
This Court has previously held in this case that the parties and the Court are bound by the property distribution made by the Circuit Court. It follows that the plan of reorganization must be construed in light of the decree, and as being consistent with the decree. I hold that the plan has the effect of carrying out the decree of the Circuit Court, and that the proposed sale is consistent with both the plan and the decree.
The Hansens further object that this Court is without authority to approve the sale price over their objection, because jurisdiction to do so was reserved by the Circuit Court. While the Circuit Court may reserve jurisdiction, it may not deprive this Court of jurisdiction over the sale of estate property. The jurisdiction of the Courts is concurrent. Review of the adequacy of the sale price is not, moreover, in derogation of the Circuit Court's decree, but in support of it.
B. The Effect of Code § 363(h)
Hansens argue that the sale is governed by Code § 363(h), and that the Debtor has not sustained his burden of proving that the sale qualifies under that section: Code § 363(h) provides for the sale of property in which the Debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety. Since the divorce petition had been filed by the time this case commenced, the parties' interest was a "species of joint property." ORS 107.105. For a sale to qualify under § 363(h) the proponent must demonstrate that "the benefit to the estate of a sale of such property free of the interests co-owners outweighs the detriment, if any, to such co-owners."
To be sure, the Hansens will be subjected to a considerable hardship if the property is sold and they are forced to relocate. Susan Hansen is required to provide full time care to a seriously impaired child, and does not have the resources to acquire a new residence if she only receives $5,000 from the sale. George and Betty are in ill health, and also would be adversely affected by the move. Moreover, the elder Hansens are at risk financially because ORS 215.283(k), and the terms of their placement permit, require that the manufactured home be removed from the property within 90 days of the time they move away. (Presumably, this is the reason the Circuit Court made the unusual award to them in the decree of dissolution.)
Assuming, without deciding, that the detriment to the co-owners outweighs the benefit to the estate, I find that the circumstances of this case require that the property be sold.
First, the parties are bound by the terms of the judgment of dissolution. The judgment fashions the property rights of the parties, by requiring its sale and providing for the distribution of proceeds. Admittedly, the property, if sold pursuant to the present motion, will not yield as much money as the Circuit Court evidently contemplated. However, a lower than anticipated value is a common aspect of both bankruptcy and divorce cases, and there is no reason to suppose that the Circuit Court did not take that prospect into account. In other words, the decree must be construed as establishing a priority, rather than an absolute right to payment.
To suggest otherwise would be to argue that the Circuit Court mandated a value which, as shall be seen, does not exist.
Code § 363 provides for use, sale or lease of property of the estate. In this case the property is being sold not under the auspices of Code § 363, but of the decree and plan. Where § 363(h) and a decree of dissolution of marriage conflict, the decree of dissolution must prevail. Section 363 is largely procedural in nature, and takes into account the property interests of the parties as they exist at the time of the sale. On the other hand, Oregon law and the dissolution process actually shape the interests of the parties. The decree of dissolution reduced the Hansens' interest in the property to a right to a priority of payment when the property is sold. They cannot employ Code § 363 to revisit the Circuit Court's decision. This is particularly so in light of the fact that the Circuit Court itself must be deemed to have taken the relative hardship of the parties into account. See ORS 107.105(1)(f). See also Matter of the Marriage of Sheumaker, 98 Or. App. 350, 779 P.2d 194, 195 n. 1 (1989); Matter of the Marriage of Kilpatrick, 38 Or. App. 159, 162, 589 P.2d 1153,1155 (1979).
It also appears that the provisions of the confirmed plan may trump § 363(h). Section 1303 provides that a debtor has, exclusive of the trustee, the rights and powers of a trustee under §§ 363(b), (d), (e), (f), and (l). Exclusion of § 363(h) suggests that, once the property is revested upon confirmation of a plan, the plan, rather than § 363(h), controls the sale and distribution of property.
The Hansens maintain that they are not bound by the plan, since they are not, strictly speaking, creditors. I disagree. Susan Hansen is unquestionably a judgment creditor under the judgment of dissolution. The actual, if not stated, effect of the decree is to place the Hansens in the position of lien creditors. The plan and order confirming the plan recognizes reality, and makes appropriate provisions.
C. Adequacy of Price
Susan Hansen objects because she was not consulted about, and does not consent to, the terms of the sale. However, conduct of the sale was clearly left in the Debtor's hands by the Circuit Court, subject to the judicial review of the adequacy of the price. Once that judicial approval is in hand, her consent to the sale is immaterial.
Adequacy of price: Finally, the Hansens assert that the $220,000 sale price is inadequate. In support of their claim they present the report and testimony of an appraiser who claims that the property is worth $300,000. They further argue that the property should be sold with the manufactured home in place, thereby recapturing its value and avoiding the expenditure of $20,000 to move it. The appraisal is premised on that proposal.
The proposal and the appraisal are flawed, because applicable land use law requires that the manufactured home be removed if and when the basis for the installation permit-the health problems of George and Betty Hansen-no long exist. In other words, unless the property is sold to someone else eligible for a permit, the manufactured home must be removed upon sale of the property. The appraiser testified that the manufactured home enhances the value by $45,000. It follows that his view of the value of the property without the manufactured home would be $255,000.
The proposed sale here in fact requires the manufactured home's removal.
As is often the case, the marketplace has spoken with greater authority than the appraiser. The subject property was listed for $298,000 in June 1999. The listing realtor testified that there was no interest for the ensuing 45 days. Thereafter the price was reduced to $249,500, which reduction elicited "mild interest," but no offers. The property was ultimately reduced to $239,000. Ultimately the existing sale proposal was negotiated.
Neither the decree nor the plan of reorganization require that the subject property be sold for a minimum price. It is sufficient that the price bear a reasonable relationship to the property's fair market value, after reasonable and customary efforts to market the property have been made. I find that such efforts have been made here. The Hansens' evidence of one perspective purchaser having been overlooked is insufficient to establish that good faith efforts to market the property have not been made. This is particularly so in light of the difficulty the marketing professionals have had in showing the property.
Finally, the Hansens object to a provision in the sale agreement requiring removal of the manufactured home within 21 days, and imposing a $100 per day penalty for every day thereafter. While these requirements are rigorous, it must be viewed in light of the fact that the Hansens have had ample notice of the prospect of the move, both by virtue of the requirement that the property be sold, and state law requirements that the manufactured home be removed.
D. Pendency of Appeal
Finally, the Hansens argue that sale of the property should await the decision of the Oregon Court of Appeals, which is reviewing the decree of dissolution. There is no evidence that the judgment of the State Court has been stayed pending appeal. The Debtor and lien creditors are entitled to the relief fashioned by the Circuit Court, and provided for in the plan of reorganization. The pendency of the appeal does not, in and of itself, provide grounds for delaying the sale.
III. CONCLUSION
A judgment and order shall be entered authorizing and directing the sale of the subject property pursuant to the terms of the Debtor's agreement with the purchaser. The proceeds of the sale shall be paid first to the immediate and customary costs of the sale, including real estate commissions previously authorized by the Court; then to any valid and subsisting lien against the property in order of priority. Of the balance, not more than $20,000 shall be paid to George and Betty Hansen for their actual costs incurred in removing the manufactured home. Such costs shall not include the costs of acquiring a new site. The balance remaining thereafter shall be paid to Susan Hansen.
Counsel for the Debtor shall prepare a judgment and order consistent with the foregoing. This opinion constitutes the Court's findings of fact and conclusions of law, which will not be separately stated.