In re Torres

646 B.R. 895

IN RE: Jaime Castillo TORRES, Debtor

No. 5:21-bk-71685

United States Bankruptcy Court, W.D. Arkansas, Fayetteville Division.

Signed December 6, 2022

Amy M. Driver, I, Fayetteville, AR, Cindy Hawkins, Hawkins Law Firm, P.A., Springdale, AR, for Debtor.

J. Brian Ferguson, Ferguson Law Firm, PLLC, Rogers, AR, Trustee, Pro Se.

ORDER AND OPINION OVERRULING OBJECTION TO EXEMPTIONS

Bianca M. Rucker, United States Bankruptcy Judge

On December 5, 2021, Jaime Castillo Torres [debtor] filed his chapter 7 voluntary petition, and J. Brian Ferguson [trustee] was appointed as the chapter 7 trustee of the debtor's bankruptcy estate. The same day, the debtor filed his schedules and statements. In Schedule A/B, the debtor listed his 100% interest in certain real property located at 4346 North Oak Street, Springdale, Arkansas [Oak Property], and valued such property at $196,300. (Dkt. No. 1.) In the debtor's initial Schedule C, he claimed a homestead exemption in the Oak Property pursuant to the Arkansas Constitution, article 9, sections 3 and 5, in the amount of $97,127.¹ On February 6, 2022, the trustee filed his Objection to Claim of Exemptions [objection]. (Dkt. No. 16.) In his objection, the trustee argues that the debtor's homestead exemption is improper because the Oak Property is urban and, as a result, the debtor is entitled to claim an exemption of no more than one-quarter acre under article 9, section 5.

On February 17, 2022, the debtor filed two amended Schedule Cs. In his February 17 amendments, the debtor disclosed that the Oak Property consists of 1.1 acre and claimed an exemption in the Oak Property under article 9, section 4 of the Arkansas Constitution, rather than under section 5, as he had claimed in his original Schedule C.² Section 4 provides for a homestead exemption of up to eighty acres for rural property. After the debtor filed his first amended Schedule C on February 17, the debtor filed a response to the trustee's objection, stating that one purpose of the amendment was to clarify the debtor's position that the property is rural. Although the trustee did not file a formal objection to either of the debtor's two amended Schedule Cs, he has maintained his original objection that the debtor should be limited to a homestead exemption of one-quarter acre because, according to the trustee, the property is urban rather than rural.

On October 18, 2022, the Court held a hearing on the trustee's objection and the debtor's response. J. Brian Ferguson appeared on behalf of the trustee. Cindy Hawkins and Amy M. Driver appeared on behalf of the debtor. At the conclusion of the hearing, the Court took the matter under advisement. For the reasons stated below, the Court finds that the Oak Property is rural in nature and overrules the trustee's objection.

I. Jurisdiction

This Court has jurisdiction over this matter under 28 U.S.C. § 1334 and 28 U.S.C. § 157, and it is a core proceeding under 28 U.S.C. § 157(b)(2)(B). The following order constitutes finding of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052, made applicable to this proceeding under Federal Rule of Bankruptcy Procedure 9014.

II. Applicable Law & Issue

Both the applicable law and the issue before the Court are straightforward. A debtor may elect to claim exemptions pursuant to applicable state law. 11 U.S.C. § 522(b)(2)(A). In this case, the applicable state law is Arkansas law. Under Arkansas Code Annotated § 16-66-217, a debtor may claim a homestead exemption under the Constitution of the State of Arkansas, as the debtor did in this case. The portion of the Arkansas Constitution under which the debtor claimed the Oak Property exempt provides that "[t]he homestead of any resident of this state who is married or the head of a family shall not be subject to the lien of any judgment, or decree of any court, or to sale under execution or other process thereon[.]" ARK. CONST. art. IX, § 3. Three elements are required to establish a homestead under the Arkansas Constitution: (1) the claimant must be married or the head of a family; (2) the property must be occupied as a home; and (3) the claimant must be a resident of Arkansas. Smith v. Webb (In re Webb ), 121 B.R. 827, 829 (Bankr. E.D. Ark. 1990). Here, the trustee concedes that the debtor meets these three requirements and is entitled to exempt some portion of the Oak Property as his homestead under Arkansas law. The parties disagree, however, regarding whether the property is rural or urban—a distinction that dictates how much of the Oak Property the debtor is entitled to exempt under the Arkansas Constitution. For rural property, article 9, section 4 provides:

[t]he homestead outside any city, town or village, owned and occupied as a residence, shall consist of not exceeding one hundred and sixty acres of land, with the improvements thereon, to be selected by the owner, provided the same shall not exceed in value the sum of twenty-five hundred dollars, and in no event shall the homestead be reduced to less than eighty acres, without regard to value.

ARK. CONST. art. IX, § 4. For urban property, article 9, section 5 provides:

[t]he homestead in any city, town or village, owned and occupied as a residence, shall consist of not exceeding one acre of land, with the improvements thereon, to be selected by the owner, provided the same shall not exceed in value the sum of two thousand five hundred dollars, and in no event shall such homestead be reduced to less than one-quarter of an acre of land, without regard to value.

ARK. CONST. art. IX, § 5.

Therefore, the only issue before the Court is whether the Oak Property is rural or urban. If the Court finds that the Oak Property is rural, the debtor may exempt up to eighty acres—or, more specifically, his entire 1.1-acre parcel. However, if the Court finds that the Oak Property is urban, the debtor may exempt only one-quarter of an acre of the property. ARK. CONST. art. IX, §§ 3-5.

"The determination of whether a property is rural or urban is based on the facts of each case." In re Joe , No. 6:13-bk-72529, 2015 WL 13776207, at *2 (Bankr. W.D. Ark. Mar. 9, 2015) (citing In re Weaver , 128 B.R. 224, 227 (Bankr. W.D. Ark. 1991) (citing King v. Sweatt , 115 F. Supp. 215, 220 (W.D. Ark. 1953) ). Courts focus "on the characteristics of the property and surrounding area in determining whether the homestead should be considered rural or urban." In re Evans , 190 B.R. 1015, 1022 (Bankr. E.D. Ark. 1995). "If the community does not contain the common attributes and conveniences of a city, then the property will be determined to be rural." In re Weaver , 128 B.R. at 227. The debtor's use of the property is also " ‘very much pertinent’ to the determination of the rural or urban character of a debtor's homestead." Id. (quoting Farmers Coop. Assoc., Inc. v. Stevens , 260 Ark. 735, 543 S.W.2d 920 (1976) ). For instance, property used for "exclusively agricultural purposes" is generally deemed to be a rural homestead. Id. However, property not used exclusively for agricultural purposes may still be determined to be rural. Id. (citing Bank of Sun Prairie v. Hovig , 218 F. Supp. 769, 783-84 (W.D. Ark. 1963) ; King v. Sweatt , 115 F. Supp. at 218–19 ; and George v. George , 267 Ark. 823, 591 S.W.2d 655, 657 (Ark. Ct. App. 1979) ). Further, "whether a homestead is urban property is not ‘altogether controlled by the corporate limits,’ thus property located within the corporate limits of a town may still be determined rural and property outside the corporate limits may be determined urban." In re Shefte , 632 B.R. 772, 776 (Bankr. W.D. Ark. 2021) (quoting In re Weaver , 128 B.R. at 227 ).

It is well-settled under Arkansas law that " ‘homestead laws are remedial and should be liberally construed to effectuate the purpose for which they are intended.’ " In re Shefte, 632 B.R. at 775-76 (quoting In re Oldner , 191 B.R. 146, 148 (Bankr. E.D. Ark. 1995) ); see also In re Joe , 2015 WL 13776207, at *2 (quoting Stuckey v. Horn , 132 Ark. 357, 200 S.W. 1025, 1026 (1918) ); and City Nat'l Bank v. Johnson , 192 Ark. 945, 96 S.W.2d 482, 484 (1936) ). Additionally, " ‘[a]ll presumptions are to be made in favor of the preservation and retention of the homestead.’ " In re Shefte , 632 B.R. at 775-76 (quoting In re Kelley , 455 B.R. 710, 715 (Bankr. E.D. Ark. 2011) ). Importantly, "[t]he court's ultimate decision ‘must be determined based on the facts of each case and must be considered in light of the intent of the constitutional provisions allowing the exemption.’ " In re Shefte , 632 B.R. at 776 (quoting In re Oldner , 191 B.R. at 149 ). The burden of proving that the homestead exemption has not been properly claimed is on the objecting party. Fed. R. Bankr. P. 4003(c).

III. Evidence

The debtor purchased the Oak Property in 2016. At the time of the debtor's purchase, the Oak Property was located in the city of Bethel Heights, which had a population of roughly 1300 residents. (Obj. to Exemption Hr'g Tr. 76, Oct. 18, 2022.) Bethel Heights operated two sewer systems, one of which was located directly adjacent to the Oak Property. (Tr. 38.) The Bethel Heights’ sewer systems developed maintenance and bacterial issues that ultimately caused an environmental problem in the area. (Tr. 39.) In order to facilitate the remediation of these issues in Bethel Heights, the city of Springdale annexed Bethel Heights in September 2020, and closed down the two sewer systems within thirty days of the annexation. (Tr. 24.) It is undisputed that, since the annexation, the Oak Property has been located entirely within the city limits of Springdale, which has a population of between 87,000 and 88,000 residents. (Tr. 34.) It is equally undisputed that the Oak Property is zoned by the city of Springdale as being in an "A-1 Agricultural district." (Debtor's Ex. 2.)

A. Trustee's Evidence

At the October 18 hearing, Heath Ward [Ward], Executive Director of Springdale Water Utilities,...