Developments Concerning Minnesota's Homestead Law May Have You Looking For New Neighbors
By: JOHN M. KONECK & BRIAN S. MCCOOL
November 2003
Entrepreneurs often enter into contracts for their businesses, sign personal guarantees, and subject themselves to various other forms of liability in the interest of their business. If the business encounters rough times and it is unable to satisfy all of its debts, its creditors will look to the entrepreneur to collect. Most entrepreneurs, although risk takers by definition, take solace in the thought that regardless of whether their business endeavors struggle or fail, they will always be able to protect certain assets, including their home, from their business’s creditors. A pair of recent decisions by the Minnesota Court of Appeals have cast serious doubt upon this assumption.
Minnesota law allows debtors to claim certain assets as exempt from the claims of creditors. Included within these exemptions is the “homestead exemption,” which permits debtors to protect all or part of their house and the property on which it sits, depending on the value of the house and size of the lot. This exemption has been available to debtors since Minnesota became a state.
In 1993, however, in response to lenders’ complaints that financially distressed debtors were sheltering their assets from creditors’ claims by purchasing million dollar homes to take advantage of the then – unlimited homestead exemption, the Minnesota legislature imposed dollar limitations on the amount of equity a debtor could protect in a homestead. Only $200,000 of equity in city property and $500,000 of equity in rural property are exempt.
When an entrepreneur’s business fails, and creditors come knocking, their claims, and ultimately their judgments, are against the entrepreneur and do not include a spouse with no involvement in the business. Because a spouse typically owns one-half of a family’s assets, including its home, it would seem logical that the actions of an entrepreneurial spouse would not jeopardize the non-debtor’s interest in the family home. Unfortunately, the aforementioned decisions by the Minnesota Court of Appeals – both captioned Kipp v. Sweno – indicate otherwise.
The Kipps hired Sweno, a building contractor, to build a house in Washington County. The house had substantial problems, and the Kipps sued Sweno, ultimately obtaining a $165,000 judgment against him. After trying unsuccessfully to collect their judgment through other means, the Kipps eventually went after the house that Sweno and his wife called home, owned half by Sweno and half by his wife.
According to real estate tax records, the Swenos’ home was worth over $300,000. Sweno argued in the trial court that his interest in the house – valued at roughly $150,000 – was fully exempt from creditors’ claims because, under Minnesota law, he was entitled to exempt $200,000 in equity under his homestead exemption. The trial court agreed, but it was reversed by the Minnesota Court of Appeals, which noted that a married couple is entitled to only one homestead exemption. Thus, the practical effect of the court’s decision was to permit Mr. Sweno, the judgment debtor, to use only one-half of the $200,000 exemption.
In response, Mrs. Sweno argued that, regardless of Mr. Sweno’s homestead exemption, because she owned one-half of the house and because the judgment was not against her, the Swenos’ homestead could not be sold at an execution sale. Wrong again, said the Court of Appeals. Even though Minnesota law does not expressly allow jointly owned homestead property to be sold when a judgment is only against one of the owners, the Court of Appeals held that all of the Swenos’ property could be sold at the execution sale.
The Washington County Sheriff sold the Swenos’ property at a Sheriff’s execution sale, where the Kipps, the only bidders, purchased the property for a little over $300,000, the amount to which their judgment had grown with nearly thirteen years of interest. Because the Kipps were the judgment creditors causing the sale, they were not required to pay any cash at the sale. So, at the end of the day, through the execution sale, the Kipps used their approximately $300,000 judgment against Mr. Sweno to become owners of the Swenos’ house.
But what about Sweno’s wife? Even though she owned one-half of the house and her one-half interest was also sold at the sale, Mrs. Sweno received nothing from the sale. Mrs. Sweno went back to court seeking, among other things, one-half of the price paid at the execution sale for her interest in the property. Mr. Sweno joined her in court, and they both argued that the Kipps failed to pay them their $200,000 of exempt proceeds. Wrong for the third and fourth times, said the Court of Appeals.
According to the court, after the debtor’s one-year redemption period expired, the Kipps could sell the property and then, and only then, would they be obligated to pay the Swenos the $200,000 exemption amount. As to Mrs. Sweno’s ability to receive compensation for her interest in the property, the Court of Appeals stated that it refused to speculate what Mrs. Sweno was entitled to receive. Thus, an open question continues to exist as to Mrs. Sweno’s ability to obtain any compensation for her one-half interest in the property that was sold.
The recent Court of Appeals’ decisions in Kipp v. Sweno emphasize that all entrepreneurs must at least consider the risks presented to their home by their business dealings, and whenever possible, should take steps to eliminate and/or minimize these risks. It may mean the difference between keeping your home or looking for a new place to live.