Opinion
No. 02-85621
September 8, 2003
OPINION
The issue in this unusual case is whether a debtor who was the high bidder at a foreclosure sale, and who filed a Chapter 7 petition after the purchase price was paid but before the deed was issued, has acquired a sufficient ownership interest in the property to be entitled to claim a homestead exemption therein under Illinois law. The case is before the Court on briefs without trial. The facts, with one exception, appear to be undisputed and are easily summarized.
On October 21, 2002, Kathleen Renee McKown ("DEBTOR"), one of the Debtors, bid the sum of $44,000.00 at a foreclosure sale auction of the real estate commonly known as 35965 N. Schoonover Rd., London Mills, IL 61564, conducted by the Sheriff of Fulton County, Illinois, as part of a foreclosure proceeding pending in the Circuit Court of Fulton County as Case No. 02 CH 09. The Sheriff accepted the DEBTOR'S bid and struck off and sold the property to her as the highest bidder. The DEBTOR was not a party to the foreclosure action.
In order to pay the bid price, the DEBTOR obtained a loan from the Fairview State Banking Company, which deposited the loan proceeds with the Sheriff's Office within a few days of the sale. The parties do not dispute that the loan was completely undocumented, with neither a note nor a mortgage executed between the DEBTOR and the bank. A Report of Sale was subsequently executed by the Fulton County Sheriff and filed in the foreclosure case on December 9, 2002. A Certificate of Sale was not issued to the DEBTOR.
The Debtors filed their Chapter 7 petition on December 13, 2002. The Debtors listed the subject real estate as their residence on their bankruptcy petition and claimed a homestead exemption therein on Schedule C. After notice and without objection, the Trustee ("TRUSTEE") administered the real estate as an asset of the bankruptcy estate and sold it to Fairview State Banking Company for $10,000.00, obtaining the Bank's waiver of its unsecured claim as part of the bargain. The DEBTOR seeks to be paid a homestead exemption of $7,500.00 out of the proceeds, to which the TRUSTEE objects. The TRUSTEE does not dispute that the Debtors were occupying and residing in the property as their sole residence as of the petition date.
Attached to the TRUSTEE'S memorandum is a copy of an order confirming the foreclosure sale entered on December 23, 2002, in the foreclosure case. The TRUSTEE relies on this order in asserting that the foreclosure sale was not confirmed until after the bankruptcy filing. The Debtors do not address this issue in their brief. Taking judicial notice of the contents of the foreclosure court file, the Court finds that the foreclosure sale was, in fact, confirmed on November 22, 2002, prior to the bankruptcy filing. A copy of the order entered on that date is attached hereto.
The order entered November 22, 2002, establishes a deficiency judgmentin the amount of $36,657.02. The order entered December 23, 2002, reduces the amount of the deficiency judgment to $36,137.04. The foreclosure court file reflects that a third confirmation order was entered on December 17, 2002. Neither of the subsequent orders vacated the November 22, 2002 order and the Court finds that the foreclosure sale was confirmed by entry of the order on that day.
The Illinois Homestead Exemption statute provides as follows:
§ 12-901. Amount. Every individual is entitled to an estate of homestead to the extent in value of $7,500 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise and occupied by him or her as a residence, or in a cooperative that owns property that the individual uses as a residence. That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts or other purposes and from the laws of conveyance, descent, and legacy, except as provided in this Code or in Section 20-6 of the Probate Act of 1975. This Section is not applicable between joint tenants or tenants in common but it is applicable as to any creditors of those persons. (Footnote omitted).
If 2 or more individuals own property that is exempt as a homestead, the value of the exemption of each individual may not exceed his or her proportionate share of $15,000 based upon percentage of ownership.
The statute has two requirements, both of which must be satisfied. First, the property must be "owned or rightly possessed" by the homestead claimant and, second, it must be "occupied by him or her as a residence." Conceding that the second prong has been met, the TRUSTEE disputes that the DEBTOR either owned or rightly possessed the property. The ownership element is not satisfied, says the TRUSTEE, since title was still in the name of the mortgagors at the time of the DEBTOR'S bankruptcy filing. The TRUSTEE also questions whether the DEBTOR rightly possessed the property since the order confirming sale did not award possession to the DEBTOR for thirty days, to a date after the bankruptcy filing.
The DEBTOR relies upon the doctrine of equitable conversion. The doctrine of equitable conversion is defined to be that change in the nature of property whereby real estate is considered as personal, and personal property as real. In re McDonough's Estate, 113 Ill. App.2d 437, 251 N.E.2d 405 (Ill.App. 3 Dist. 1969). It stems from the maxim that equity regards that as done which ought to be done. Keller v. Schobert, 58 Ill.2d 137, 317 N.E.2d 510 (1974).
Applying the doctrine in the context of a debtor who, prior to bankruptcy, entered into a contract to sell her homestead real estate, Bankruptcy Judge Kenneth Meyers summarized the principles pertaining to contingencies or conditions, as follows:
By this definition, equitable conversion occurs only when a valid and enforceable contract exists and is not applicable if there is an unmet contingency or condition precedent that prevents the contract from being enforceable or effective. See Dodson v. Nink, 72 Ill. App.3d 59, 28 Ill. Dec. 379, 382-84, 390 N.E.2d 546, 549-51 (1979). Where a contract contains a condition precedent, the contract is neither enforceable nor effective until the condition is performed or the contingency occurs. Jones v. Seiwert, 164 Ill. App.3d 954, 115 Ill. Dec. 869, 872, 518 N.E.2d 394, 397 (1987). Thus, the doctrine of equitable conversion "will not be applied if the contract of sale is not enforceable because a condition precedent, the occurrence of which is not governed by either party to the contract, is unfulfilled." Hinsdale Fed. Sav. Loan Ass'n v. Gary-Wheaton Bank, 100 Ill. App.3d 746, 56 Ill. Dec. 558, 560, 427 N.E.2d 963, 965 (1981).
In re Walston, 190 B.R. 855, 859 (Bankr.S.D.Ill. 1996). Finding that the contract contained a provision making it subject to the approval of the bankruptcy trustee, a condition necessarily unfulfilled as of the petition date, Judge Meyers held that equitable conversion had not yet taken place, so that the debtor was entitled to claim her own homestead exemption and that of her deceased husband in the proceeds of sale.
Relying upon the misconception that the foreclosure sale had not yet been confirmed at the time of the bankruptcy filing, the TRUSTEE frames the issue as whether property occupied by a debtor who was the high bidder at a foreclosure sale, at which no Certificate of Sale was issued and which has not been confirmed, is "owned or rightly possessed by lease or otherwise" by the debtor to qualify for a homestead exemption. In fact, however, the foreclosure sale was confirmed and the bid price had been paid in full to the Sheriff, although the deed had not yet issued. Under the Illinois Mortgage Foreclosure Law, these are the only two conditions precedent to the purchaser's right to a deed. The TRUSTEE'S point that no certificate of sale was issued is immaterial. Upon payment in full of the amount bid, the successful purchaser becomes entitled to receive a Certificate of Sale from the Sheriff. 735 ILCS 5/15-1507(f). The purchaser's right to a deed is not, however, conditioned upon the issuance of a Certificate of Sale. Section 15-1509 of the Illinois Mortgage Foreclosure law provides as follows:
§ 15-1509. Transfer of Title and Title Acquired. (a) Deed. After (i) confirmation of the sale, and (ii) payment of the purchase price and any other amounts required to be paid by the purchaser at sale, the court (or, if the court shall so order, the person who conducted the sale or such person's successor or some persons specifically appointed by the court for that purpose), shall upon the request of the holder of the certificate of sale (or the purchaser if no certificate of sale was issued), promptly execute a deed to the holder or purchaser sufficient to convey title.
Accordingly, once the sale was confirmed and the purchase price paid in full, the DEBTOR'S right to have a deed issued to her upon her request, was fully vested and enforceable at law. There were no remaining conditions or contingencies that would preclude equitable conversion from taking place.
The TRUSTEE also contends that the doctrine of equitable conversion is limited to situations where the buyer's interest arises by contract. The TRUSTEE cites no authority for this proposition and the Court's research proves it to be incorrect. It is well established, for example, that equitable conversion may apply to real estate to be sold pursuant to the terms of a will. Keller v. Schobert, supra. For there to be an equitable conversion of realty under the terms of a will, the will must contain a definite expression and direction that the land be sold and turned into money, and that the proceeds then be distributed to the beneficiaries. If the executor is given discretion whether to sell the property, then equitable conversion does not occur because there is no duty to sell the land. Rehbein v. Norene, 2 Ill.2d 363, 118 N.E.2d 287 (1954). If sale of the real estate is mandatory, the will effects an equitable conversion which takes place upon the death of the testator, and the interests of the beneficiaries in the proceeds are personal, not real, property interests. Keller v. Schobert, supra. Similarly, in the case at bar, the DEBTOR'S right to a deed was a fait accompli, lacking only the ministerial act of obtaining the Sheriff's signature.
In addition, the doctrine of equitable conversion has been applied to treat as realty, the insurance proceeds from the destruction of a dwelling in Matter of McGee's Estate, 66 Ill. App.3d 994, 383 N.E.2d 1012, 23 Ill. Dec. 141 (Ill.App. 4 Dist. 1978). The Court is aware of no contrary precedent, and perceives no policy reason, why the doctrine of equitable conversion should not be applicable to a foreclosure sale purchaser simply because the purchaser's rights arise by statute rather than by contract.
The TRUSTEE argues that Illinois law does not recognize a successful bidder at a foreclosure sale as holding any interest in the property, equitable or otherwise. The TRUSTEE cites several cases for the general proposition that until delivery of the deed, a foreclosure sale purchaser acquires no title to the land, either legal or equitable. Kling v. Ghilarducci, 3 Ill.2d 455, 121 N.E.2d 752 (1954); Harms v. Sprague, 105 Ill.2d 215, 473 N.E.2d 930, 85 Ill. Dec. 331 (1984). These cases, however, were decided before substantial changes to the foreclosure process were enacted when the Illinois Mortgage Foreclosure Law became effective on July 1, 1987. Most significantly, foreclosure sales, which had been conducted prior to expiration of the redemption period, are now required under the IMFL to be held after the redemption period expires. Previously, with an unexpired right to redeem, the owner held legal title and equitable title to the property, notwithstanding a foreclosure sale. With the mortgagor's right to redeem now having expired prior to the sale, however, and the foreclosure sale purchaser having paid the full purchase price and having had the sale confirmed, and therefore holding an unconditional right to a deed, the equities of ownership are undeniably with the purchaser. This Court is of the opinion that the Illinois Supreme Court would hold that a foreclosure sale purchaser like the DEBTOR, where the bid price has been paid and the sale confirmed, has an equitable ownership interest in the property sufficient to permit application of the doctrine of equitable conversion.
This Court agrees with Judge Ronald Barliant's analysis of the status of a post-IMFL foreclosure sale purchaser in In re Crawford, 215 B.R. 990 (Bankr.N.D.Ill. 1997), rev'd, 217 B.R. 558 (N.D.Ill. 1998), abrogated by, Colon v. Option One Mortg. Corp., 319 F.3d 912 (7th Cir. 2003). The high bidder at a foreclosure sale acquires a right to a deed that can be denied only if the sale did not conform to Illinois law. Id. at 995. The sale results in the creation of enforceable rights in the property. Id. at 995. Since the redemption period expired before the sale, the foreclosure sale marks the point at which the mortgagor's right to remain in title is terminated and a third party's rights in the property begin. Id. at 997. The foreclosure sale purchaser's interest is properly characterized as an ownership interest in the purchased property. Id. at 1001.
The TRUSTEE also relies upon a series of cases that hold that a spouse of a sole titleholder may not claim a homestead exemption in the marital residence without a title interest. In re Hartman, 211 B.R. 899 (Bankr.C.D.Ill. 1997); In re Owen, 74 B.R. 697 (Bankr.C.D.Ill. 1987). In those cases, however, the homestead exemption claim was founded on the spousal relationship with the titleholder. In the case at bar, the exemption claim is not derivative, but instead flows directly from the claimant's own status as purchaser. A more appropriate analogy is that of a contract for deed.
The Illinois Supreme Court has long held that a person who establishes a homestead on land that he is purchasing under a contract for deed, is entitled to claim a homestead exemption therein as against his creditors, even though title to the land is held by the contract seller and even if the purchase price is not paid in full. Stafford v. Woods, 144 Ill. 203, 33 N.E. 539 (1893); Watson v. Saxer, 102 Ill. 585 (1882). The DEBTOR here is in a situation similar to a contract purchaser who has paid the full purchase price and is merely awaiting delivery of the deed. Under that circumstance, Illinois law recognizes that the contract purchaser has sufficient rights in the property to support a homestead exemption.
The sole distinction, not material in this Court's view, is that the contract purchaser's right to a deed is based on the contract, while the foreclosure sale purchaser's right to a deed is provided by statute. Both rights are equally enforceable at law.
The DEBTOR relies upon In re Morris, 115 B.R. 626 (Bankr.S.D.Ill. 1990), where Judge Kenneth Meyers construed the same statutory language as follows:
Illinois courts have consistently held that the statutory phrase "owned or rightly possessed by lease or otherwise" requires that a debtor have title or some ownership interest in property in order to claim a homestead exemption. DeMartini v. DeMartini, 385 Ill. 128, 52 N.E.2d 138 (1943); Sterling Savings and Loan Ass'n v. Schultz, 71 Ill. App.2d 94, 218 N.E.2d 53 (1966). While there must be some right or interest to which the homestead attaches, fee simple title is not necessary, and the homestead exemption will protect any estate in land that could be seized and sold on execution were it not occupied as a residence. See 20 I.L.P., Homesteads, § 30 (1956).
Applying that latter concept here, it is difficult to square the TRUSTEE'S position that the DEBTOR is not entitled to a homestead exemption claim because her interest in the property was insufficient, when it was sufficient enough for the TRUSTEE to administer the real estate, by seizing and selling it, as an asset of her bankruptcy estate.
This Court holds, that where a debtor is the successful bidder at a foreclosure sale of real estate, where the sale has been confirmed and the purchase price paid in full prior to bankruptcy, and where the debtor resides in the property as her residence as of the bankruptcy filing, the debtor has an equitable ownership interest that is sufficient to support a claim of homestead exemption therein pursuant to 735 ILCS 5/12-901, notwithstanding that title has not yet been conveyed to the debtor.
It may seem to be a windfall that the DEBTOR can walk away with a $7,500.00 sum for her homestead exemption created out of whole cloth when the purchase price was paid fully with borrowed funds. This result is enabled solely by Fairview State Banking Company's failure to secure its loan with a mortgage containing a waiver of homestead exemption.
Having concluded that the DEBTOR had a sufficient ownership interest in the property, it is not necessary to address the TRUSTEE'S alternative argument that the DEBTOR failed to establish that she "rightly possessed" the property as of the petition date. This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
Dated: September 8, 2003.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that the Trustee's objection to Kathleen R. McKown's claim of homestead exemption is DENIED and the homestead exemption is allowed in the amount of $7,500.00.