In re Moran

105 F. 901, 1900 U.S. Dist. LEXIS 50

Opinion

PAUL, District Judge.

In this matter the referee certifies to the judge of this court the question of the right of the bankrupt to amend his schedules so as to enlarge the exemptions beyond those claimed in the schedules made in pursuance of an order of adjudication in involuntary bankruptcy. On the 24th day of November, 1899, the said W. G. Moran executed a deed of trust on certain property, wherein he made one J. D. Smith, to whom he owed $900, a preferred creditor. On the 3d day of February, 1900, he executed another deed of trust, in which he gave a preference to the People’s National Bank of Charlottesville, Va., for a debt of $400 due from said Moran to said bank. On the ground that these preferences had been given to the creditors named, a number of other creditors filed a petition, praying that said Moran be adjudged an involuntary bankrupt. An order adjudicating the said W. G. Moran an involuntary bankrupt was entered March 16, 1900. In compliance with the requirements of section 7, subsec. 8, of the bankrupt law, the bankrupt, within 10 days, the time prescribed, made out and filed a schedule of his property, a list of his creditors, and a clairc under the homestead exemption law of Virginia of certain articles designated in detail, with the value of each, the whole amounting to the sum of $60.

The constitution of the state of Virginia (section 1, art. 11, Code 1887) provides that “every householder or head of a family shall be entitled * * * to hold exempt from levy, seizure, garnisheeing or sale under any execution, order or other process * * * bis real or personal property, or either, including money and debts due him, * * * to the value not exceeding two thousand dollars. * * *» gection 3647 of the Code of Virginia 1887 provides that the debtor may waive the benefit of the homestead exemption given by section 1, art. 11, of the state constitution. The statute says:

“If any person shall declare in a bond, bill, note or other instrument * * * that he waives, as to such obligation, the exemption from liability, of the property * * * which he may be entitled to claim and hold exempt, * * * the said property shall be liable to be subjected for said obligation, under legal process, in like manner and to the same extent as other property or estate of such person.”

On the 8th of April, 1900, at the first meeting of creditors, the bankrupt notified the referee of his intention “to claim his homestead exemption to the extent of $2,000 out of the property involved in the bankrupt proceeding, such exemption to be paid in money from the proceeds of such portion of said property as said Moran is entitled to have exempt under the law, whether such proceeds be from sales or collections.” At the first meeting of creditors the hearing of the application for leave to amend the schedules in bankruptcy, enlarging the claim of homestead, was continued to May 8, 1900, at which time the petitioning creditors filed exceptions to the petition of the bankrupt, for leave to amend bis schedules. The substance of these exceptions is — First, that the bankrupt having claimed in his original schedule an exemption, under the homestead law of Virginia, of certain articles of the value of $00, the title to the additional property which he sought to have set apart under the homestead exemption had vested in the trustee, and the bankrupt, having no title thereto, could not claim a homestead exemption therein, and that the schedule of the bankrupt was a waiver- or abandonment of any further claim of homestead; second, that the claim of homestead exemption is not pretended i.o be made for the benefit of the householder and his family, but as a means of giving a preference to the waiver of homestead creditors, including the People’s National Bank, the attempted preference of which was an act of bankruptcy, because if is obvious that all of the assets, including the property claimed as exempt, will have to go to pay the debts.

The referee refused to allow the schedule claiming a homestead exemption to be amended, ami the bankrupt filed his petition for an appeal to the judge of this court.

The same attorney who prepared the schedules of the bankrupt, under the order adjudicating him an involuntary bankrupt, in which articles of the value of $60 are claimed under the homestead exemption of Virginia, which allows a householder or head of a family a homestead exemption of $2,000, prepared the petition for an additioual allowance under the homestead exemption. No statement is made in the petition for an amendment of the schedule for addi tional claim of homestead as to the cause of error, or of mistake, inadvertence, or want of full information as to his rights, when the bankrupt filed bis schedule in which he claimed articles of the value of $60. Order 11, General Orders in Bankruptcy (32 C. C. A. xiv., 89 Fed. vii.); Loveland, Bankr. 140, 141. The reason for this failure of the bankrupt to allege error or mistake on his part, in not claiming moi‘e than $60 in his original schedule under the homestead exemption law, will plainly appear in the further examination of the case. The right of the bankrupt to amend his schedules, where he shows an honest purpose to claim ihe benefit of the homestead exemption for the benefit of himself or of his family, cannot he seriously questioned. This amendment can be made at any time before bis discharge, or, at least, before the distribution of the fund arising from a sale of the property surrendered. Loveland, Bankr. 342. In re Kean, 2 Hughes, 322, Fed. Cas. No. 7,630. But this must be a real, a substantial, elaim to property that can be set apart under tüe-provisions of the homestead law, and which the bafikrupt, ás .a ■'hbnseholder' Or' head - of a family, is entitled to hold exempt from '•levy, seizure, or sale, under any execution, order, or other process. ■.It must appear to the bankrupt court that the property claimed by ! the bankrupt as a homestead exemption, for the benefit of himself or his family, is such that it can be set aside for this purpose. It is ' hot claimed by the bankrupt in this case that there is a dollar’s , worth of the property surrendered by him that can be set apart and vested in him as a homestead exemption or as any part of such exemption. The record shows that the homestead waiver debts proved •by 'creditors are largely in excess of the property surrendered, and that there is nothing out of which a homestead exemption can be assigned. This fact explains the failure of the bankrupt, in his ' petitioh for additional claim of homestead, to state the cause of error in his original schedule, in which he claimed, under the homestead exemption, certain articles of the value of $60. The real object of the bankrupt in filing his additional claim of homestead exemption ' is shown in his petition for review of the decision of the referee. ■ His purpose is to give to creditors holding notes waiving the kome- " stead exemption a preference to those whose debts are not evidenced •by waiver notes. He abandons the idea that the homestead he claims is for the benefit of himself or of his' family. He insists that the homestead waiver notes he has given to certain creditors constitute liens on the property which he in his petition claims as a homestead exemption. The homestead waiver notes held by creditors of a bankrupt do not constitute liens on the property surrendered by him. The only superiority they have over creditors holding nonwaiver claims is that, where the bankrupt is entitled to claim property under the homestead-exemption laws, he cannot hold the • same against the debts as to which he has waived the benefit of his homéstead exemption. No decision construing the statute (section 3647, Code Va. 1887), allowing a debtor to waive the benefit of his homestead exemption, holds that such waiver creates a lien on the ' property a debtor may claim for his homestead. The creditor having a waiver note has'no hold or claim upon the property of the debtor as a security for the debt. 13 Enc. Pl. & Prac. 123. When a debtor ' gives a waiver note to- his creditor as between himself and such cred- ' itór, he incumbers his right to claim the benefit of a homestead ex-emptíon. In re Solomon, 2 Hughes, 164, Fed. Cas. No. 13,166. This ' is as far as the effect of a waiver note on the right of a debtor to Claim a homestead exemption has ever been carried by any court in Virginia, state or federal.

It is not, as contended by counsel for the bankrupt, such a lien ' as that preserved under section 67, cl. “d,” Bankr. Act 1898. Likewise, erroneous is the contentibn that the title to the property claimed '.as a homestead did not vest in the trustee on the adjudication of 1 bankruptcy. This assumption is based on section 6a and on section 70a of the bankrupt act of 1898:

" “Sec. 6.'Exemptions of Bankrupts, (a) This act shall not affect the allowance id bankrupts of the exemptions which áre prescribed by the state laws ■'tit- forcé at the time -of the filing of the petition in the state wherein they have had tlieir domicile for the six months or the greater, portion thereof im-, mediately preceding the filing of the petition.” •

“See. 70. Title to Property, (a) The trustee of the estate of a. bankrupt, upon liis appointment and qualification, and his successor or successors if he; shall have one or more, upon his or their appointment and qualification, shall in turn be rested by operation of law with the title of the bankrupt, as,of. the date he was adjudged a bankrupt, except in so far as it Is to property, which is exempt.” ‘ . ',

This court in Re Sisler, 2 Am. Bankr. R. 760, 96 Fed. 402, com strued sections Ca and 70a in their application to property claimed by a bankrupt in Virginia as a homestead, and it cannot more clearly state its views in this case than by repeating what it said in that:

“It is insisted that by these provisions of the bankrupt act no title to the property claimed by the bankrupt to be exempt under the Virginia homestead, law passes to the trustee. That the title to property exempt by state laws, does not pass to the trustee in bankruptcy cannot be questioned. Similaii provisions to those just quoted from the bankrupt act of 1898 are found in the. bankrupt law of 1867. Yet it was held in Ee Solomon, supra, that, where, there was a waiver of the homestead exemption, the property claimed to be exempt as a homestead did pass to the assignee. The error in the argument, which insists that the title to the property claimed by the bankrupt a.s; a homestead does not pass to the trustee lies in the fact that such property is not, by the constitution and. laws of Virginia, absolutely exempt from the payment of debts. The argument of counsel for the bankrupt ap-j plies to such specific property as is exempt under section 3850, Code Va., on which any deed of trust, mortgage, or other writing or pledge made by a householder to give a lien on such property is void as to such property. Sec-' tion 3055, Id. The distinction between the character of exemption of prop-, erty given by section 3850 and that of the homestead exemption allowed' by^ the constitution is very clearly stated by the court of appeals of Virginia in Reed v. Bank, 29 Grat. 719. Christian, .T., delivering the opinion of the court,'! says: ‘The privilege given by the constitution is a personal privilege, to be exercised by him or not, as he may choose. The constitution does not declare,, as does the poo:- debtors’ law, that certain property “shall be exempt” from levy, etc., but that the householder or head of a family shall be oniitled to, hold property, to he selected by him, to the value of $2,000. In the former’ case the law executes itself. It is a part of the public policy of the govern-:' ment to exempt that particular property absolutely from forced Sale, and its’ provisions cannot be waived. But there is no such constitutional declaration that property to the amount of $2,000 “shall be exempt.” On the contrary, the very language used plainly shows that it may be exempt only when the" privilege given to the householder or head of a family has been exercised, and the property selected and set apart by him.’ ”

In Linkenhoker’s Heirs v. Detrick, 81 Va. 44, the court followed the decision in Reed v. Bank; and in Re Solomon, supra, Waite,' C. J., drew the same distinction.

The position taken by counsel for the bankrupt, that in claiming a homestead exemption, where no benefit can result to him or his family, he is simply trying to uphold a contract, and if he did otherwise he would be depriving some creditors of vested rights, and placing others where they ought not to stand, is without merit. It is no part of the bankrupt’s duty to aid some of his creditors in securing the payment of their debts, to the exclusion of others equally meritorious. The duty of the bankrupt, if he is entitled to a homestead exemption, is" to claim it for the benefit of himself or of his family. The policy of the law in making provision for a homestead exemption is to provide shelter, food, and raiment for the family when it is overtaken by the calamity of an indebtedness that cannot be liquidated without depriving the family of its home and the necessaries of life. The doctrine is thus stated in Wap. Homest. 4:

“The conservation of family homes is the purpose of homestead legislation. The policy of the state is to foster family homes as the factors of society, and thus promote the general good. To save them from disintegration, and secure their permanency, the legislator seeks to protect their homes from forced sales, so far as it can he done without injustice to others.”

In Shipe v. Repass, 28 Grat. 716, Judge Staples says:

“But no one can look into the provision of our constitution and the adjudicated eases of other states and fail to see that the primary object is to provide for the family. As was said by the supreme court of Ohio in Sears v. Hanks, 14 Ohio St 298: ‘The humane policy of the homestead act seeks not the protection of the debtor, but its object is to protect his family from the inhumanity which would deprive its dependent members of a home; and, in aid of this wise and humane policy, the whole act should receive as liberal a construction as can be fairly given to it. We think its provisions protect the debtor’s family as against his creditor in the actual enjoyment of a homestead, irrespective of the title or tenure by which it is held.’ See Smyth, Homest. § 532. In the constitution and laws of all the states, and in the decisions of all the courts, the idea is kept prominently in view that the great purpose of the homestead exemption is not merely the benefit of the husband or parent, but the maintenance and security of the family against the imprudence, mismanagement, and neglect of the former.” .

It being the purpose of the homestead law to provide an exemption for the benefit of the insolvent debtor and his family, the bankrupt will not be permitted, under the guise of claiming a homestead exemption, to so pervert the law as to secure a preference to one or any number of his creditors. A court of bankruptcy will not lend its sanction to a scheme so palpably unjust, and that so flagrantly violates the primary object of the bankrupt act, which is that equality shall obtain in the administration, of a bankrupt’s estate, and that Ms creditors shall share pro rata in its distribution. To permit the bankrupt, under the color of claiming a homestead, to enable o'ne class of his creditors — -those holding homestead waives notes — to collect their debts, to the exclusion of creditors holding nonwaiver claims, would practically annul the order adjudicating him an involuntary bankrupt. It would enable him, in great part, to carry into effect the preferences he aimed to give some of his creditors when he executed the deeds of trust of November 24, 1899, and of February 3,1900. . The creditors of this estate, unless they are lien-holders, will share ratably in its distribution.

For the reasons stated, the holding of the referee is sustained.