SO ORDERED.

SIGNED this 02 day of October, 2007.

________________________________________

ROBERT E. NUGENT

UNITED STATES CHIEF BANKRUPTCY JUDGE

____________________________________________________________

PUBLISHED

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

MEMORANDUM OPINION

The chapter 7 trustee, Linda S. Parks, objects to debtor's claim of homestead exemption

under 11 U.S.C. § 522(p)(1), arguing that debtor acquired an interest in a homestead in excess of

$125,000 during the 1,215 day period prior to filing bankruptcy.1 The trustee moves for summary

1 The trustee appears by Scott M. Hill of Hite, Fanning & Honeyman, Wichita, Kansas. The debtor appears by J. Michael Morris of Klenda, Mitchell, Austerman & Zuercher, Wichita, Kansas.

1

judgment on her objection.2 The debtor opposes the trustee's motion and has filed an untimely

cross-motion for summary judgment.3 The trustee has filed a combined reply and response to the

debtor's cross-motion for summary judgment.4 The Court has also received responses from Central

Plains Steel Co. and Salina Steel Supply, Inc. in opposition to the debtor's cross-motion for

summary judgment.5

Nature of Case

This is the first occasion the Court has had to consider the limits placed on state law

homestead exemptions by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.6

New § 522(p)(1) states:

2 Dkt. 249 and 250. The trustee also objected to debtor's homestead exemption on the basis of § 522(o). See Dkt. 21. Because the trustee's summary judgment motion addresses only one of her grounds for objection to the exemption, the Court construes the trustee's motion as one for partial summary judgment. Two creditors, Salina Steel Supply, Inc. and Central Plains Steel Co., have joined in the trustee's objections to debtor's homestead exemption. See Dkt. 66 and 70.

3 Dkt. 259. Debtor's combined response and cross-motion were filed August 27, 2007. The deadline for filing dispositive motions was July 27, 2007. See Dkt. 245. Debtor's response and cross-motion drew a motion to dismiss/strike from the trustee. She complains of the untimeliness of the cross-motion and the debtor's raising of new matters in defense of summary judgment that were not presented by debtor in the final pretrial order. See Dkt. 263. The Court will address the trustee's motion later in this opinion.

4 Dkt. 269.

5 Dkt. 270 and 271.

6 11 U.S.C. § 522(p)(1) (Thomson/West 2005). The Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005 (BAPCPA) was signed into law on April 20, 2005. Most of BAPCPA's provisions carried an effective date of October 17, 2005. 11 U.S.C. § 522(p), however, is one of the few provisions that became effective upon its enactment, April 20, 2005. See Pub. L. 109-8, Title XV, § 1501(b)(2), Apr. 20, 2005, 119 Stat. 216. The parties do not dispute that § 522(p) went into effect upon its enactment and applies to bankruptcy cases commenced on or after April 20, 2005.

2

Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,00007 in value in – . . . (D) real or personal property that the debtor or a dependent of the debtor claims as a homestead.8

The issue presented by these motions is whether § 522(p)(1) applies to the situation where a debtor

purchases his homestead well outside the 1,215 day period preceding the bankruptcy filing but pays

down the mortgage in excess of $125,000 during the 1,215 day period. For the reasons set forth

below, the Court concludes that it does not.

Jurisdiction

The allowance or disallowance of an exemption from property of the estate is a core

proceeding over which this Court has subject matter jurisdiction.9

Summary Judgment Standards

Rule 56 of the Federal Rules of Civil Procedure governs summary judgment and is made

applicable to contested matters by Rule 9014 of the Federal Rules of Bankruptcy Procedure. Rule

56, in articulating the standard of review for summary judgment motions, provides that judgment

shall be rendered if all pleadings, depositions, answers to interrogatories, and admissions and

affidavits on file show that there are no genuine issues of any material fact and the moving party is

7 Effective April 1, 2007, the cap was raised from $125,000 to $136,875. SEE ALAN N. RESNICK AND HENRY J. SOMMER, EDITORS-IN-CHIEF, 4 COLLIER ON BANKRUPTCY, ¶ 522.13 [1], 
n. 1 (15th ed Rev. 2007) (hereafter Collier or Collier on Bankruptcy).

8 None of the exceptions described: § 522(p)(2), § 544, and § 548, are implicated by this summary judgment motion.

9 28 U.S.C. § 157(a) and (b)(2)(B) and § 1334.

3

entitled to judgment as a matter of law.10 The mere existence of some alleged factual dispute

between the parties will not defeat an otherwise properly supported motion for summary judgment,

the requirement is that there be no genuine issue of material fact.11 In determining whether any

genuine issues of material fact exist, the Court must construe the record in a light most favorable to

the party opposing the summary judgment.12 However, the opposing party's conclusive allegations

are not sufficient to establish an issue of fact and defeat the motion.13

As noted below, the facts in this case are uncontroverted except for the source of some

payments made on the mortgage against the homestead. Because the source of payment is not a

genuine issue of material fact necessary to the Court's determination of the applicability of §

522(p)(1), this factual dispute is disregarded.

Findings of Fact

The facts set forth below are uncontroverted. They are gleaned from the trustee's statement

of uncontroverted facts and the debtor's responses thereto.

1.      On December 7, 1998, debtor and his non-debtor wife purchased the property at

   1220 Burning Tree, Wichita, Kansas (the Property) for $350,000. Debtor and his

   wife granted a mortgage on the Property in favor of Midland National Bank in the

   amount of $375,000. Debtor and his wife hold title to the Property as joint tenants

   with right of survivorship.

10 Fed. R. Civ. P. 56(c).

11 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986).

12 McKibben v. Chubb, 840 F.2d 1525, 1528 (10th Cir. 1988) (citation omitted).

13 Id.

4

2.      On or about November 22, 2000, debtor and his wife refinanced the Property,

   executing a $500,000 note and mortgage in favor of Capitol Federal Savings. The

   Midland mortgage was released. An appraisal obtained in conjunction with the

   Capitol Federal Savings mortgage reflects a market value of $650,000 for the

   Property.

3.      Between June 16, 2002 and October 14, 2005, payments totaling $161,480.02 were

   made to Capitol Federal Savings on the mortgage, reducing the principal on the

   mortgage by $74,989.79.14

4.      On July 18, 2005, debtor paid $240,000 to Capitol Federal Savings on the mortgage.

   This payment reduced the principal amount of the mortgage by $239,025 and left an

   ending daily balance on the mortgage of $172,380.15

5.      Debtor filed his voluntary chapter 7 petition on October 14, 2005.

6.      The 1,215-day period preceding the date of filing is June 17, 2002 to October 14,

   2005.16

7.      On Schedule C, debtor claims the Property exempt as his homestead pursuant to state

14 The source of these payments is disputed by debtor. Debtor contends that these

payments were made by his wife from her own funds. The total amount of the payments and the amount of principal reduction, however, is not controverted.

15 The source of this payment is also disputed. Although debtor admits that he paid the $240,000 pursuant to a check drawn on his account and that the funds in the account derive from the sale of property in Newton and liquidation of two certificates of deposit, he contends that his wife was a joint owner of the two certificates of deposit.

16 The trustee states that the 1,215-day period began on June 16, 2002. In his response, debtor states that the year 2004 was a leap year, and therefore the start of the 1,215-day period is June 17, 2002. For purposes of this summary judgment motion, the Court accepts the debtor's calculation. The Court's conclusion is not altered by the differing start dates of the 1,215-day period.

5

law, KAN. STAT. ANN. § 60-2301 (2005). Debtor lists the value of the claimed

exemption as $241,546 and the current market value of the Property as $411,800.

Debtor's market value is based upon the 2005 county tax appraisal for ad valorem

taxes.

8.      On Schedule D, debtor lists Capitol Federal Savings as a secured creditor having a

   claim of $170,253 by virtue of its mortgage on the Property.

9.      The trustee requested and obtained an independent appraisal of the Property.

   According to this appraisal, the fair market value of the Property as of the date of

   debtor's bankruptcy filing is $625,000.

Analysis

One of the real or perceived abuses that BAPCPA set out to remedy was debtors' use of

unlimited state homestead exemptions.17 Kansas is one of a very few states that place no dollar limit

on the amount or value of the homestead exemption.18 BAPCPA's answer to unlimited state

homestead exemptions was the enactment of § 522(p)(1). It purports to narrow the so-called

mansion loophole.19 Section 522(p) caps the amount of interest in the homestead that can be

17 Kansas is an opt-out state and bankruptcy debtors may not avail themselves of the federal exemptions allowed by 11 U.S.C. § 522(b)(2) and (d). See KAN. STAT. ANN. § 60-2312 (2005).

18 Kansas' homestead exemption statute, KAN. STAT. ANN. § 60-2301 (2005) provides: A homestead to the extent of 160 acres of farming land, or of one acre within the limits of an incorporated town or city, or a manufactured home or mobile home, occupied as a residence by the owner or by the family of the owner, or by both the owner and family thereof, together with all the improvements on the same, shall be exempted from forced sale under any process of law and shall not be alienated without the joint consent of husband and wife, when that relation exists . . . .

19 See WILLIAM L. NORTON, JR., 2 NORTON BANKRUPTCY LAW AND PRACTICE 2D, §

46:5, p.46-19 (Thomson/West 2005) (The provision [subsection (p)(1)] purports to close the so-

6

claimed exempt where that interest was acquired during the 1,215 days before filing bankruptcy.

New section 522(p) states:

(1) Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value in –

(A) real or personal property that the debtor or a dependent of the debtor uses as a residence; . . .

(D) real or personal property that the debtor or dependent of the debtor claims as a homestead. [Emphasis added].

(2)(A) The limitation under paragraph (1) shall not apply to an exemption claimed under subsection (b)(3)(A) by a family farmer for the principal residence of such

farmer;

  (B) For purposes of paragraph (1), any amount of such interest does not include any interest transferred from a debtor's previous principal residence (which was acquired prior to the beginning of such 1215-day period) into the debtor's current principal residence, if the debtor's previous and current residences are located in the same

State.20

The key inquiry in the case at bar is interpreting the interest referenced in § 522(p)(1) and

the nature of the interest debtor acquired during the 1,215-day period. The trustee argues that the

called mansion loophole, although it is evident by its terms that it only applies to mansions acquired within approximately 40 months [1,215 days] of bankruptcy.). See also, In re Kane, 336 B.R. 477 (Bankr. D. Nev. 2006) for an extensive discussion of the mansion loophole and legislative history directed at closing debtor's forum shopping for generous homestead exemptions.

20 (Emphasis added.). Section 522(p)(2)(A) excludes family farmers from the $125,000 cap in subsection (p)(1). Section 522(p)(2)(B) preserves a rollover of a debtor's residence during the 1,215 day look back by excepting this transaction from the $125,000 cap so long as the two residences are located in the same state. Section 522(p)(1) was intended to stop debtors from moving to another state to take advance of that state's generous homestead exemption; the 
(p)(2)(B) exception saves debtors from the cap who did not transfer into the current residence by moving to another state to take advantage of a more generous exemption. See WILLIAM L. 
NORTON, JR., 2 NORTON BANKRUPTCY LAW AND PRACTICE 2D, § 46:5, p.46-21-22 (Thomson/West 2005).  See also, In re Wayrynen, 332 B.R. 479 (Bankr. S.D. Fla. 2005). Neither exception in subsection (p)(2) is applicable under the facts of this case.

7

amount of interest referenced in subsection (p) is the equity in the homestead. Thus, the trustee

reasons, by affirmatively paying down the mortgage during the 1,215-day period and building the

amount of equity a debtor has in his homestead, the debtor has acquired an interest. Under the

trustee's analysis, the debtor's pay down on the principal amount of the mortgage increased the

debtor's equity in the property in an amount in excess of $125,000 during the 1,215 day period.

Under the trustee's facts, the payments on the mortgage reduced the principal amount of the

mortgage by some $314,014.21

The debtor counters with the argument that one does not acquire equity in property.

Instead, debtor submits that the interest referenced in subsection (p) means title and ownership to

the property. Debtor thus argues that where a debtor purchases the property and obtains title to the

property well outside the 1,215-day period, the debtor has not acquired an interest in the property

during the 1,215-day period and § 522(p)(1) is inapplicable. Debtor contends that the conduct of

building equity in the property by making mortgage payments during the 1,215 day period is not

subject to the $125,000 cap. The debtor cites two bankruptcy decisions and Collier's treatise in

support of his position.22

The trustee relies on a Florida bankruptcy court decision – In re Rasmussen.23 But

Rasmussen is questionable support for the trustee's position that § 522(p)(1) applies to equity

21 The regular payments totaling $161,480 during the 1,215-day period reduced the

principal balance of the mortgage by $74,989. Debtor's $240,000 payment on the mortgage on July 18, 2005 reduced the principal balance of the mortgage by $239,025. ($74,989 + $239,025 = $314,014).

22 In re Sainlar, 344 B.R. 669 (Bankr. M.D. Fla. 2006); In re Blair, 334 B.R. 374 (Bankr. N.D. Tex. 2005).

23 349 B.R. 747 (Bankr. M.D. Fla. 2006).

8

acquired during the 1,215-day period. Rasmussen can be readily distinguished from the instant

case on its facts. In Rasmussen the joint debtors purchased their Florida homestead within the 1,215

day period prior to filing bankruptcy. Their purchase was partially funded from proceeds rolled over

from the sale of their previous Florida homestead (thus implicating the § 522(p)(2)(B) exception)

and a mortgage loan. At the time of filing, the value of the homestead had appreciated some

$400,000 since its purchase. Based upon the values in the schedules, debtors had $175,000 of

equity in their homestead on the date of filing. Apart from the issue whether the $125,000 cap may

be stacked in a joint case, the Florida bankruptcy court framed the remaining issue as follows:

whether the increase in value of the Homestead attributable to appreciation [occurring during the

1,215-day period] falls within the section 522(p) cap.24

In reaching its conclusion that appreciation in value is not subject to the $125,000 limit, the

bankruptcy court went through the language of §522(p)(1) and construed the key phrases any

amount of interest and acquired by the debtor. It concluded that because appreciation in value

is not acquired by the debtor, it was not subject to § 522(p)(1).25 The bankruptcy court did,

however, conclude that the interest referenced in subsection (p)(1) means equity, drawing its

interpretation from the use of the same language in subsection (p)(2)(B):

This conclusion is buttressed by the use of the same phrase any amount of interest . . . in section 522(p)(2)(B): For purposes of paragraph (1), any amount of such interest does not include any interest transferred from a debtor's previous principal residence . . . into the debtor's current principal residence . . . . 11 U.S.C. § 522(p)(2)(B) (emphasis added). This second use of the term interest can only refer to the equity in the prior residence that is rolled into the current homestead.[citations omitted]. Thus it is clear that section 522(p)(2)(B) defines

24 349 B.R. at 751.

25 Id. at 757-58.

9

interest through usage to mean the debtor's equity in the property – not the debtor's fee simple interest. While one may roll equity from one property to another, one does not roll a fee simple property ownership interest from one property to another.26

Applying rules of statutory construction, the bankruptcy court concluded that the interest in §

522(p)(1) means equity in the homestead just as it means equity in a prior homestead when

referenced in section 522(p)(2).27

Ultimately, the Rasmussen court overruled the trustee's objection to debtors' homestead

exemption, concluding that equity resulting from appreciation in market conditions does not

constitute an interest acquired by the debtors within the meaning of § 522(p)(1). No attempt was

made to calculate the amount of equity acquired by the debtors versus the amount of equity

attributable to appreciation because the total equity did not exceed the § 522(p)(1) cap where each

debtor could claim the exemption up to $125,000.

The two decisions cited by the debtors in support of their position are more directly on point

with the facts of this case, although obviously not controlling on this Court. The first, In re Sainlar,

is also out of the bankruptcy court for the Middle District of Florida and was actually decided prior

to Rasmussen.28 In Sainlar, the debtors homestead exemption claim drew a § 522(p)(1) objection.

Even though the debtors purchased the homestead long before the start of the 1,215-day look back

period, the objecting creditor contended that the equity gained in the property during the 1,215 day

period was subject to the limit in § 522(p)(1). The bankruptcy court disagreed, overruling the

objection and allowing the debtors' claim of homestead exemption:

26 Id. at 756.

27 Id.

28 344 B.R. 669 (Bankr. M.D. Fla. 2006).

10

The statute [§ 522(p)(1)] has no applicability to property in which a debtor obtained an ownership interest more than 1,215 days before the petition date, even if the property's equity increases during the 1,215-day pre-petition period.29

As the bankruptcy court observed, the interest a debtor must acquire to come within the

limits of § 522(p)(1) is not defined by BAPCPA and is not a term of art in the law of property. The

bankruptcy court found that the plain language of § 522(p)(1) was unambiguous. It applied the

Black's Law Dictionary definitions to interest, and acquired and distinguished interest and

equity as follows:

Interest is defined as [a] legal share in something; all or part of a legal or equitable claim to or right in property. Title to real property is acquired, equity is not. Equity is the difference between value and debt. It [equity] is not a constant, but fluctuates based upon market conditions and when mortgage principal is paid. A debtor who holds title to property obtained that property as the debtor's own. The debtor's interest in the property is his legal right in the property.

The phrase interest that was acquired as used in § 522(p)(1) means the acquisition of ownership of real property. Section 522(p), therefore, does not apply to property to which a debtor acquired title more than 1,215 days before a bankruptcy filing.30

The Sainlar court went on to conclude that even though it need not resort to the legislative

history to ascertain the meaning of interest in § 522(p)(1), the legislative history supported its

interpretation that interest means the acquisition of ownership of property. It cited the legislative

history to restrict the mansion loophole.31

The other case cited by debtors, In re Blair,32 is in accord with Sainlar. In Blair, the debtors

29 Id. at 674.

30 344 B.R. at 673.

31 Id.

32 334 B.R. 374 (Bankr. N.D. Tex. 2005).

11

purchased their Texas homestead on July 18, 2000. They filed their chapter 7 petition on May 27,

2005 and claimed the homestead exempt.33 On Schedule C, debtors valued the equity in their

homestead at approximately $688,000. Debtors made regular mortgage payments and built-up

equity in the homestead during the 1,215-day period.  A creditor objected under § 522(p) to the

debtors' claim of exemption, contending that the increase in equity in excess of $125,000 during the

1,215 day period was subject to the cap and not exempt.

The Texas bankruptcy court held that the plaint meaning of interest in § 522(p)(1) means

the title and fee to a home acquired by a debtor. It observed that one does not actually acquire

equity in a home.34 The Texas bankruptcy court concluded that its interpretation of § 522(p)(1) was

supported by the rollover exception in § 522(p)(2)(B):

. . . this subsection allows for rollover by debtors of the equity in one home to another home located in the same state. A debtor is not subject to the homestead cap if he takes the proceeds of his first residence and reinvests them in a second residence even within the prescribed period of section 522(p). The bank's reading of the statute would seem at odds with this provision. If debtors had sold their home during the 1215 day period and bought another they would be protected. Surely the non-selling debtors should enjoy the same protections.35

The Blair court purported to find that the statutory language of § 522(p)(1) was unambiguous,

33 Like Kansas, Texas provides for an unlimited homestead exemption.

34 Even the Rasmussen court recognized that not all equity is truly acquired by the

debtor: As stated in Sainlar, '[t]he plain import of the word [acquired] is 'obtained as one's own.' Sainlar, 344 B.R. at 672-73. In this regard, a debtor may acquire or obtain equity by making a down payment, by paying down the mortgage, or by appreciation due to market conditions. The first two methods of acquiring equity requires active conduct on the part of the debtor – payment of money. The third, appreciation, is passive, requiring no active conduct. Rasmussen, 349 B.R. at 757. The Rasmussen court concluded that § 522(p)(1) captures active acquisition of equity but not passive acquisition of equity, even though the language in § 522(p)(1) makes no distinction between active and passive equity and § 522(p)(2)(B) seemingly excepts actively acquired equity from the homestead cap in certain instances.

35 334 B.R. at 377.

12

making resort to legislative history unnecessary – the statute is reasonably clear in its application

to real property acquired within the statutory period.36 The bankruptcy court went on to declare

that even if it were required to examine legislative history, it would also support this interpretation

of interest in § 522(p)(1).

Essentially, while the language of the statute is broader, one purpose was to prevent out of state residents from moving to certain states [those with unlimited homestead exemptions] in order to file for bankruptcy under more advantageous state homestead exemption laws.37

The Blair court thus concluded that the increase in the value of the equity in the debtors' homestead

that was acquired more than 1,215 days prior to the petition date was not subject to the $125,000 cap

in § 522(p)(1).

This Court has reviewed in-depth the cases cited above and other authoritative bankruptcy

treatises and concludes that Blair and Sainlar better analyze and interpret § 522(p)(1). Because the

debtor in Rasmussen purchased the property within the 1,215 day period, and because that case

involves equity obtained through market appreciation, it is factually distinguishable from the instant

case and is simply not persuasive on the issue framed here. The courts that have viewed Rasmussen

favorably are In re Rogers38 and In re Chouinard.39 Chouinard is virtually identical to the facts of

Rasmussen and distinguishable from our case. The debtors purchased their home within the 1,215

day period and the court held that equity resulting from passive market appreciation of the property

is not an interest subject to the $125,000 cap but that non-scheduled reductions in principal might

36 Id.

37 Id. at 378.

38 354 B.R. 792, 798 (N.D. Tex. 2006).

39 358 B.R. 814 (Bankr. M.D. Fla. 2006).

13

be.

Similarly, Rogers does not address the application of § 522(p)(1) to a situation where the

debtor acquires the real property outside the 1,215 day period and pays down the mortgage during

the 1,215 day period. In that case, the debtor acquired the property outside the 1,215 day period but

first declared the property as her homestead during the 1,215 day period. The objecting creditor

unsuccessfully argued that the classification of real property as a homestead is an interest in

property and subject to the $125,000 limit of § 522(p)(1). The Texas district court determined that

the plain meaning of interest refers to some legal or equitable interest that can be quantified by

a monetary figure.40 Applying this interpretation, it held that a debtor who inherited real property

outside the 1,215 day period but did not begin to occupy the property and claim it as her homestead

until the 1,215 day period prior to filing was not subject to the § 522(p)(1) cap.41

This Court has misgivings about the Rasmussen, Rogers, and Chouinard case as persuasive

authority in the matter at bar. There is no suggestion in Rasmussen that those debtors paid additional

funds to their home lender in the 1215 day period. The only value the trustee sought to recover in

Rasmussen was the appreciated value of the debtors' previous homestead. While the Rasmussen

court declined to conclude that debtors acquire appreciation equity, it volunteered that equity

generated by voluntary pay-down of a mortgage might, in fact, be deemed acquired equity. In

40 354 B.R. at 796.

41 Id. at 798 (By ruling that the term interest does not encompass the classification of

real property as a homestead, the court concludes that the limitations of § 522(p) are wholly inapplicable to this case.). But see, In re Greene, 346 B.R. 835, 840-43 (Bankr. D. Nev. 2006) (Debtor who purchased property well before the 1,215 day period but recorded declaration of property as his homestead within the 1,215 day period was subject to § 522(p); court found that homestead interest was separate interest from ownership of real property).

14

Chouinard, the court opined that equity acquired via regular monthly payments might not count

toward the $125,000 cap, but that off-schedule extra payments would be recoverable. In the

Chouinard case, there was no suggestion that such payments had been made. Because neither of

these cases involved extra payments in the 1215 day period, this Court considers their statements

concerning such payments and the equity those payments generate to be dicta and therefore

unpersuasive.

The Court's independent research of other cases construing § 522(p)(1) suggest, without

deciding, that the interest that must be acquired by the debtor during the 1,215 day look-back period

is one of ownership.42 The lone appellate court decision construing § 522(p)(1) and the term

interest is In re Khan.43 In that case, the First Circuit Bankruptcy Appellate Panel affirmed the

bankruptcy court's order sustaining the trustee's objection to the debtor's homestead exemption.

The issue was framed as follows:  . . . whether an interest in property transferred to the Debtor by

a trust is considered an interest acquired by the Debtor within the time period [1,215 days preceding

42 While most of those cases reviewed address the question of whether § 522(p)(1) applies to debtors in opt-out states, and did not directly address the nature of the interest referenced in the statute, the language utilized by those courts suggests that the interest is one of ownership. See e.g., In re Landahl, 338 B.R 920, 921 (Bankr. M.D. Fla. 2006) (The bankruptcy court stated the issue as whether the homestead limit of $125,000 applies if the debtor has not owned the residence for 1,215 days before filing . . . .); In re Summers, 344 B.R. 108, 111 (Bankr. D. Ariz. 2006) (Stating that by enacting § 522(p)(1) Congress has established a homestead exemption cap of $125,000 if a homestead is acquired within 1,215 days . . .); In re Kane, 336 B.R. 477, 479 (Bankr. D. Nev. 2006) (referring to the 1,215 day limit on homestead exemption as containing an ownership requirement). See also, In re Leung, 356 B.R. 317 (Bankr. D. Mass. 2006) (Debtor acquired an interest within the 1,215 day period when non-debtor wife, in whom the property had been solely titled, deeded the property to herself and debtor as tenants by the entirety; even though the deed was a gift by his wife, debtor accepted delivery of the deed and affirmatively declared the property as his homestead during the look-back period).

43 ___ B.R. ___, 2007 WL 2506031 (1st Cir. BAP Sept. 6, 2007).

15

the filing of bankruptcy] . . . thereby resulting in a limitation of the amount of homestead exemption

that may be claimed by the Debtor.44 In Khan, real property was held in a family trust since 1997.

The debtor and his brother, were the co-trustees and co-beneficiaries of the trust. Within 1,215 days

of filing bankruptcy, the real property was conveyed by the trust to the debtor and his brother as

joint tenants with right of survivorship. Contemporaneous with recording of the deed, the debtor

filed a declaration of homestead. Debtor argued that he held legal title to the property as a co-

beneficiary of a nominee trust,45 prior to the conveyance of the deed, and therefore did not acquire

an interest subject to the limitation in § 522(p). The appellate court rejected the debtor's nominee

trust argument because he had not raised it in the bankruptcy court and had failed to introduce the

trust declaration as evidence below. Because debtor could not prove the interest he held in the

property prior to the conveyance, the trustee's objection was sustained. The appellate court

concluded, and it was undisputed, that legal title to the Property was transferred from the Trust to

the Debtor and his brother less than 1215 days prior to the Petition Date.46 Debtor's claim of

homestead exemption was therefore subject to the statutory limit of § 522(p)(1).

Nearly all of the courts that have interpreted the term interest in § 522(p)(1) have

concluded that it is unambiguous and should be given its plain meaning. Even if the plain language

of § 522(p)(1) does not unambiguously refer to title or ownership of a homestead acquired during

the 1,215 look-back period, resort to the legislative history and reading of § 522(p)(1) in conjunction

44 Id. at *1.

45 The appellate court described a nominee trust under Massachusetts law as an entity

created for the purpose of holding legal title to property with the trustee having only perfunctory duties and in a nominee trust, the legal title of the trustee and the equitable title of the beneficiary merge when the same person hold[s] both titles. Id. at *3.

46 Id. at *7.

16

with other sections of § 522 makes it clear. The Court cannot believe that Congress envisioned

limiting a debtor's homestead exemption where, as here, debtor purchased the homestead property

some 3½ years prior to the start of the 1,215-day period (and almost 7 years prior to filing

bankruptcy) and accumulated equity by making regular mortgage payments. It clearly excepted the

accumulation of equity from a rollover of a prior homestead (with some limits) from the operation

of § 522(p)(1).47 If Congress had intended to capture the accumulation of equity during the 1,215

day period, whether by paying down the debt against the property or by appreciation in value of the

property, it could have easily used the term equity or specifically defined interest to include

equity in § 522(p)(1). It did not. The Court is convinced that Congress intended to deal with the

excessive accumulation of equity in a homestead by its enactment of § 522(o), and it appears that

this is the avenue available to the trustee here to contest the homestead exemption claimed by debtor.

The Court concludes that accumulation of equity by early payoff or substantially paying down the

mortgage against the homestead property, such as debtor's $240,000 one-time lump sum payment

during the 1,215 day period here, may be subject to challenge under § 522(o).

There can be no question that § 522(p) is at best a haphazard effort to accomplish the purpose

of closing the mansion loophole. Every court that grapples with subsection (p) shows

considerable frustration with the amount of interest acquired language in (p)(1), particularly when

comparing it to the equity rollover language contained in the safe harbor of (p)(2). Over-emphasis

on making every one of these words meaningful results in the counter-intuitive conclusion that a

debtor can roll earlier-acquired equity into a new homestead during the 1215 day period with

impunity regardless of how that equity was generated, but cannot retain equity gained in the

47 See § 522(p)(2)(B).

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homestead debtor has occupied since before the 1215 day period. This Court is very conscious of

its duty to derive the meaning of BAPCPA from the plain meaning of the words of the statute in

effectuating the intent of Congress. Yet, the Court understands that many debtors prepay principal

on their mortgages, some on a regular basis. This Court cannot conclude that prepayment of a

mortgage debt, especially routine prepayment, is the moral equivalent of a maverick capitalist

fleeing with his ill-got gains to establish a mansion homestead in Florida, Texas or Kansas. That

is the evil that Congress set out to combat in enacting subsection (p). With all deference, Congress

should take careful note of the interpretative mayhem that results when well-meaning judges must

apply plain meaning to poorly chosen words in awkwardly drafted statutes.

This Court also suspects that practical application of the appreciation v. regular payments

v. extra payments distinction the Rasmussen and Chouinard decisions posit will be harder than it

looks. How will courts following the Trustee's theory distinguish between equity acquired by

appreciation and that acquired by regular, or for that matter irregular, mortgage payments? Such

an inquiry would entail not only knowing the value of the property at the date of the petition, but

also what the property was worth at the outset of the 1215 days, if not sooner. What if the debtor

makes extra-mortgage payments but the property depreciates during part of the 1215 day period and

appreciates during another part? Or, what if the debtor makes a small extra principal payment

monthly, as many mortgagors do? The variations are endless and pointless to adjudicate when

Congress has enacted another provision, § 522(o), to deal with the improper conversion of non-

exempt assets to homestead equity.

This Court's interpretation of § 522(p)(1) is confirmed by Collier's authoritative treatise on

bankruptcy.

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The statutory language leaves some uncertainty as to the exact meaning of the phrase interest that was acquired. In view of the apparent purpose of section 522(p)(1), to discourage the more egregious examples of prebankruptcy exemption planning in which some debtors have purchased mansion in states having unlimited homestead exemption laws in contemplation of filing bankruptcy, the phrase should be construed as applying to the actual purchase or acquisition of an ownership or fee interest in the homestead property. Under this view, section 522(p)(1) should not apply to the accumulation of equity in the debtor's homestead resulting from an appreciation in value of the property during the 1,215-day period. Similarly, this provision should not prevent the debtor from claiming as exempt any increase in the debtor's homestead equity by more than [$125,000] attributable to the application of mortgage payments made during the lookback period. However, if the debtor converts nonexempt assets for the purpose of paying down a mortgage, with an intent to hinder, delay or defraud a creditor, such transfer may give rise to an objection to the debtor's homestead exemption under section 522(o), but should not fall within the purview of section 522(p)(1).48

The Court observes that under the trustee's interpretation advocated here, both § 522(p)(1)

and § 522(o) would catch the accumulation of equity in a debtor's homestead. Such a reading of

§ 522 renders subsection (o) superfluous. The inclusion of subsection (o) suggests that Congress

intended to treat the build up of equity differently from the acquisition of a homestead. Section

522(o) contains an intent element, while § 522(p)(1) does not. Section 522(o) provides:

For purposes of subsection (b)(3)(A) [exemptions under State or local law], and notwithstanding subsection (a), the value of an interest in – . . . (4) real or personal property that the debtor or a dependent of the debtor claims as a homestead; shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of the filing of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt, under subsection (b), if on such date the debtor had held the property so disposed of. (Emphasis added.).

Section 522(o) was thus written to limit the debtor's accumulation of equity in his homestead by

liquidating non-exempt property and applying the proceeds to the homestead. It contains a 10-year

48 COLLIER ON BANKRUPTCY ¶ 522.13[2], p. 522-102.5.

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look-back period and requires a showing of intent to hinder, delay, or defraud. By imposing the

familiar intent to hinder, delay or defraud test, § 522(o) does not preclude the debtor from building

up equity in his homestead by making regular mortgage payments called for by the contract, but

does limit a debtor's ability to build equity by liquidating non-exempt assets and making payments

above and beyond what is required by the terms of the debtor's mortgage if those transfers were

done with the requisite bad intent. This is a significant preemption of long-standing Kansas

precedent that has, since Statehood, allowed judgment debtors to convert non-exempt assets to

exempt assets even on the eve of execution unless the assets converted were charged with a

peculiar equity.49

The Court therefore concludes that § 522(p)(1) is inapplicable to a debtor who purchases his

homestead outside the 1,215-day look-back period. The accumulation of equity during the look-

back period by paying down the mortgage is instead limited by the operation of § 522(o). The

Trustee's summary judgment motion should be denied.

This brings the Court to the trustee's motion to dismiss the debtor's cross-motion for

summary judgment as untimely and to strike the debtor's newly raised defenses to the trustee's

summary judgment motion – namely, that the debtor's wife, a non-debtor, made the regular

mortgage payment from her own funds and owned a joint interest in the certificates of deposit that

were liquidated and applied to the mortgage.50 The Court agrees with debtor's contention that it may

grant summary judgment on a pure question of law in favor of the non-movant without a cross-

49 See Metz v. Williams, 149 Kan. 647, 88 P.2d 1093 (1939); McConnell v. Wolcott, 70 Kan. 375, 78 Pac. 848 (1904).

50 Dkt. 263.

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motion for summary judgment.51 Thus, the Court declines to consider the debtor's cross-motion for

summary judgment because it is untimely.

With respect to the debtor's defense to the trustee's summary judgment motion concerning

the source of the payments applied to the mortgage, the Court has reviewed the final pretrial order

and concludes that debtor has not previously raised these matters in defense to the objections to the

homestead exemption. While the source of the payments is not a genuine issue of material fact

necessary to the Court's ruling on the applicability of § 522(p)(1) and was not considered by the

Court in deciding the trustee's summary judgment motion, it is relevant and material to the trustee's

remaining objection to homestead exemption under § 522(o). Because this newly raised defense is

not preserved in the final pretrial order, the Court will permit the trustee, as well as Central Plains

Steel Co. and Salina Steel Supply, Inc., to conduct discovery on this defense prior to trial on the §

522(o) objection to homestead exemption. Debtor shall make himself and his non-debtor wife

available for deposition, and produce all relevant documents pertaining to this defense, within ten

(10) days of entry of this order. If he does not do so within the allotted time, debtor will be barred

from introducing evidence on this defense at trial.

Summary

The Court today holds that § 522(p)(1) is inapplicable to a debtor who purchases his

homestead prior to the 1,215-day period immediately preceding the filing of debtor's bankruptcy

petition. The trustee's motion for summary judgment is therefore DENIED.52 Summary judgment

51 See Dickeson v. Quarberg, 844 F.2d 1435, 1444 n. 8 (10th Cir. 1988); Calder v. Segal (In re Calder), 94 B.R. 200, 203 (Bankr. D. Utah 1988), aff'd 912 F.2d 454 (10th Cir. 1990).

52 Because of its conclusion regarding the applicability of § 522(p)(1) in this case, the Court does not reach the remaining issues raised by the trustee's summary judgment motion.

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is GRANTED in favor of debtor on the trustee's objection to debtor's homestead exemption based

upon § 522(p)(1). The trustee's objection to debtor's homestead exemption is currently set for

evidentiary hearing on the two-day stack docket commencing October 23, 2007 and will proceed

forward on the basis of the trustee's remaining objection to homestead exemption, § 522(o).53

With the result reached by the Court today, the trustee's motion to dismiss debtor's cross-

motion for summary judgment is MOOT and the trustee's motion to strike debtor's newly raised

defense is TEMPORARILY DENIED.

IT IS SO ORDERED.

# # #

53 The Court will hear the § 522(o) objections to homestead exemption filed by Central Plains Steel Co. and Salina Steel Supply, Inc. at the same trial setting.

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