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In re Zahn

decided: August 20, 1979.


Appeal from the United States District Court for the Eastern District of Wisconsin. Nos. 75-B-2620, 75-B-2621 -- John W. Reynolds, Judge .

Before Pell and Tone, Circuit Judges, and Leighton, District Judge.*fn*

Author: Per Curiam

This is an appeal by a trustee in bankruptcy from an order by which the district court adopted the decision of a bankruptcy judge as its own, and then resolved additional issues. We agree with the district court, including its adoption of the decision which in the district judge's opinion, and ours as well, correctly articulated the applicable law. That decision is reported In the Matters of Kurt W. Zahn and Anna Zahn, Bankrupts, 2 Bankruptcy Court Decisions 1609 (E.D.Wis.1977), and is attached hereto as an Appendix.

From the record of the bankruptcy court, it appears that appellees Kurt W. Zahn, and his wife Anna, filed a voluntary petition in bankruptcy on November 20, 1975. They owned a farm, their homestead, valued at $141,000 which appellant trustee sold free and clear of liens for an amount in excess of $25,000. All of their debts, with one exception, were contracted prior to March 12, 1974, the effective date of Wis.Stat. § 272.20 (1974) which increased homestead exemption in Wisconsin from $10,000 to $25,000.

In his report of exempt property, appellant refused to set aside more than $10,000 as exempt homestead for appellees, contending that to do so would have unconstitutionally invaded the contract rights of persons who were appellees' creditors when the statutory limit was $10,000. The bankruptcy judge sustained appellees' objections to appellants' report and directed that $25,000 be set aside as exempt homestead, the amount allowed by Wis.Stat. § 272.20 (1974). He held that the duty of a trustee is to set off the exemptions which exist as to creditors generally on the day a petition in bankruptcy is filed; and that creditors with liens or special claims against the exempt property can seek their remedy in the state court. The district court accepted this ruling and rejected appellant's remaining arguments. The order appealed from is affirmed.



Kurt W. Zahn and his wife, Anna Zahn, filed bankruptcy on November 20, 1975. They owned a farm valued at $141,000 which was their homestead. Although the bankrupts did not appear to have very much equity in the farm, the trustee in bankruptcy was able to sell the farm free and clear of liens so that he has in excess of $25,000 on hand. The bankrupts claim a homestead exemption in the amount of $25,000 pursuant to Sec. 272.20 of the Wisconsin Statutes. This Statute was amended on March 12, 1974 to increase the homestead exemption from $10,000 to $25,000. The Statute also provides that where a husband and wife own land jointly and reside in the same household, the exemption may be claimed by either or may be divided in any proportion between them, but in no event shall the exemption exceed $25,000.*fn1 In the original schedules each spouse claimed a $25,000 exemption, but the schedules were later amended so as to claim an exemption of $24,000 for the wife and $1000 for the husband. Upon the sale of the farm it was agreed that their exemption claims would apply to the proceeds of the sale.

The trustee filed his report of exempt property on January 19, 1976 setting aside a homestead exemption "not to exceed a total of $10,000 to be divided between husband and wife." He stated as his reason: "Trustee respectfully refuses and declines to set aside as exempt the homestead of the bankrupts in excess of $10,000 on the grounds that any allowance by the trustee in excess of $10,000 would be unconstitutional invasion of the contract rights vis-a-vis judgment creditors that existed at the time that the Wisconsin statutory allowance for homestead was limited to $10,000."

It is the trustee's position that the bankrupts cannot assert the $25,000 exemption against creditors who extended credit prior to the amendment of March 12, 1974. In support of his position he relies upon the general rule of constitutional law which holds that when a state statute is passed after a contract has been entered into, and the statute so affects the creditor's remedy as to impair substantially the value of the contract, the application of the statute to that contract violates Article 1, Sec. 10 of the U.S. Constitution. Edwards v. Kearzey, 96 U.S. 595, 24 L. Ed. 793 (1877); W. B. Worthen Co. v. Thomas, 292 U.S. 426, 54 S. Ct. 816, 78 L. Ed. 1344 (1934). This rule was applied by the Wisconsin Supreme Court to preclude the application of an increased homestead exemption to an action arising out of a contract entered into when the exemption was only $5000. Ohio Casualty Ins. Co. v. Holz, Inc., 24 Wis.2d 587, 129 N.W.2d 330.

Counsel for the bankrupts objected to the Exempt Property Report of the trustee on the grounds that the creditors did not rely upon the lower exemption of $10,000 when they extended credit, and upon the further grounds that the creditors did not have lien rights prior to the amendment of the Statute. If the court were to consider only these objections raised by counsel for the bankrupts, the objections would be overruled because there is no requirement in the constitutional rule that creditors have a judgment lien. The rule is based upon the impairment of contract and all that need be shown is that the debt was incurred prior to the amendment. Campbell v. Mickelson, 227 Wis. 429, 279 N.W. 73; W. B. Worthen Co. v. Thomas, 292 U.S. 426, 54 S. Ct. 816, 78 L. Ed. 1344 (1934).

The question presented is extremely important to the future administration of bankruptcy cases in Wisconsin and for that reason the court feels compelled to consider other reasons not advanced in the briefs which go to the heart of the problem. The principal problem is whether a trustee in bankruptcy should examine the claims of creditors to determine if any of the creditors extended credit prior to the amended of the homestead statute so that as to them the exemption would be only $10,000.

The basic direction to a trustee in bankruptcy may be found in Sec. 6 of the Bankruptcy Act which provides in part:

This Act shall not affect the allowance to bankrupts of the exemptions which are prescribed by the laws of the United States or by The State laws in force at the time of the filing of the petition . . . (Underscoring ours.)

Rule 403(b) requires that the trustee shall examine the bankrupt's claim for exemptions and set apart such as are lawfully claimed and allowable. This report is to be filed no later than 15 days after his appointment. If no objections are filed within 15 days, the report is deemed to be approved by the Court (Rule 403(e)). It should be observed that the trustee must act very promptly and that he has only 15 days to set off the exemptions. It should be further noted that the exemptions are determined by the laws in force on the date of the filing of the petition. The ...

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