Court Opinion

ID: 3046245
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:18:30.720993+00
Date Added: 2024-06-11T11:49:09.823754
License: Public Domain

United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT
      ___________

      No. 07-1792
      ___________

Rita Fix,                                *
                                         *
               Appellee,                 *
                                         *
      v.                                 *
                                         *
First State Bank of Roscoe,              *
                                         *
           Appellant.                    *
      ___________
                                             Appeals from the United States
      No. 07-1798                            District Court for the
      ___________                            District of South Dakota.

Rita E. Fix,                            *
                                        *
               Appellee,                *
                                        *
      v.                                *
                                        *
John S. Lovald,                         *
                                        *
               Appellant.               *
                                   ___________

                              Submitted: January 14, 2008
                                 Filed: March 17, 2009
                                  ___________

Before BYE, BEAM, and GRUENDER, Circuit Judges.
                           ___________
BYE, Circuit Judge.

        This bankruptcy proceeding involves a dispute between Rita Fix and the First
State Bank of Roscoe (the Bank) over Fix's home, which the Bank sold to a third party
despite representing to Fix she could possess the home as long as she lived. The
district court determined Fix enjoyed a homestead right in the property. The district
court also determined she did not – by signing a settlement agreement with the Bank
– release the claims she may have against the Bank for its alleged misconduct related
to selling her home.

       The Bank appeals, arguing Fix only had a contractual interest in the property
rather than a homestead, and released all claims she may have had against it. John S.
Lovald, the bankruptcy trustee, also appeals arguing Fix's interest in the home is a
personal property interest which belongs to the bankruptcy estate, and the estate is free
to pursue the claims against the Bank because the estate was not a party to the
settlement agreement. We reverse and remand for further proceedings.

                                            I

       Rita Fix lived in the same home for almost sixty years, between 1948 and 2006.
In May 1997, she and her husband signed a contract for deed with their son and
daughter-in-law, Jeff and Marie Fix, to convey the property that included the home
– the NW1/4 NW1/4 of Section 26, Township 120, Range 71, Faulk County, South
Dakota. Fix reserved a life estate "in and to the house, outbuildings, and immediately
surrounding yard." Appellee's App. 161. Two years later, Jeff and Marie approached
the Bank seeking additional financing for their farm operation. The Bank agreed to
give them the financing if they obtained a warranty deed on the property. Fix was
reluctant to give up her life estate interest, however, which was a prerequisite to Jeff
and Marie obtaining a full warranty deed. In order to facilitate the financing, the
Bank wrote a letter to Fix on March 12, 1999, which stated:

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      This letter is to memorialize to you that you are deeding NW1/4NW1/4
      26-120-71, Faulk County, South Dakota, to Jeffrey F. Fix and Marie Fix.
      First State Bank of Roscoe will be taking a real estate mortgage on this
      real estate. In the event that for any reason the bank becomes the owner
      of the described real estate, you will have full right of possession to the
      home on the premises as long as you are living.

Appellant's App. 128. The Bank's president, John Beyers, signed the letter.

        As a result of the Bank's letter, Fix gave a warranty deed to Jeff and Marie on
March 15, 1999. The warranty deed used the term "grant," which, under South
Dakota law, carries with it the implied covenant that the grantor has not previously
conveyed the same interest in the property to someone else, and the implied covenant
that, at the time of the instant conveyance, the property is free from all encumbrances
suffered by the grantor or any person claiming under him, e.g., there is no retained life
estate. See S.D. Codified Laws § 43-25-10.

       Several years passed, during which time Fix lived in the home. In March 2004,
she filed a Chapter 13 bankruptcy petition. She did not claim a homestead exemption,
nor did she list as personal property her interest based on the March 1999 letter from
the Bank. In June 2005, she converted her petition to Chapter 7. In October 2005,
about the time she received a discharge of her debts, the Bank filed an adversary
complaint against her. Fix's son, Jeff, had granted the Bank a security interest in his
grain. The alleged scheme involved Jeff selling grain – covered by the Bank's
mortgage – in Fix's name. She would thereafter endorse the grain checks, deposit
them in her account, and then write her son a check in the same amount. The Bank
claimed the Fixes diverted over $125,000 of secured proceeds through the scheme.

      In November 2005, about a month after the Bank brought the fraud claim
against Fix, Jeff and Marie conveyed the home and the property on which it sits to the
Bank pursuant to a non-merger deed in lieu of foreclosure. The transfer of the home

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and property was part of a settlement between the Bank and Jeff and Marie in their
own bankruptcy proceeding.

      Meanwhile, the Bank tried to reach a settlement with Fix regarding the fraud
complaint against her. After being told by its attorney that a global settlement had
been reached with Fix, the Bank sold the home in question outright to James and
Pamela Baer. The deed was recorded on December 9, 2005. Fix was still living in the
home at the time.

      On February 16, 2006, Fix's bankruptcy attorney signed a "Settlement
Agreement" on her behalf resolving the Bank's fraud claim against her. Fix signed
the agreement on March 8, 2006, and a Bank representative signed it on March 14,
2006. Two days later, the Bank presented the agreement to the bankruptcy court for
approval, and the bankruptcy court approved it. The agreement contained a release
clause which provided:

      As a part of this agreement, and in consideration for the mutual
      covenants contained herein, [Fix] hereby releases, acquits and forever
      discharges [Bank] and all of [Bank's] officers, directors, employees,
      representatives, agents and assigns, past or present, from any and all
      liability whatsoever, whether presently existing, known or unknown,
      contingent or liquidated, including all claims, demands, and causes of
      action of every nature which [Fix] has, or may claim to have, by reason
      of any transactions occurring between [Fix] and the above institution or
      persons. [Fix] hereby acknowledges that no outstanding loan
      commitments have been made to [Fix] by [Bank].

Appellant's App. 138-39.

       On March 17, 2006, the day after the bankruptcy court approved the settlement,
the Baers' attorney wrote Fix stating the Baers were "quite anxious to take possession"
of the home, and asking "when you anticipate your departure so they can arrange for

                                         -4-
the utilities to be transferred and propane delivered." Id. at 60. According to Fix, this
was the first notice she had that the Bank sold her home.

       On March 30, 2006, Fix filed a complaint against the Bank in South Dakota
circuit court. The complaint alleged five causes of action: 1) the right to possession
of her home; 2) breach of fiduciary duty; 3) intentional infliction of emotional
distress; 4) deceit in getting her to deed away her home; and 5) fraudulent
misrepresentation in deceiving her into deeding away her home. The complaint also
included a request for exemplary damages. Her counsel represented to the bankruptcy
trustee that the suit was a million dollar case. Shortly thereafter, Fix amended her
bankruptcy schedules to claim a homestead exemption for the first time. She
represented the value of her home as $34,605.

      The Bank filed another adversary proceeding in bankruptcy court seeking an
injunction of the state court lawsuit. The bankruptcy court entered a preliminary
injunction preventing Fix from going forward with the suit. After the adversary
proceeding was tried to the bankruptcy court, it entered a permanent injunction
preventing Fix from pursuing the state court action against the Bank.

       Fix appealed the bankruptcy judge's order to the district court. The district
court reversed the bankruptcy court, concluding: 1) Fix retained a life estate interest
in real property as a consequence of the promise from the Bank in the March 1999
letter; 2) the life estate interest entitled Fix to a homestead exemption in her
bankruptcy proceeding; 3) the settlement agreement did not waive or destroy the
homestead or life estate interest; 4) Fix had no notice of a potential claim against the
Bank until it breached its agreement in March 2006, which occurred after Fix had
received her bankruptcy discharge; 5) the state court lawsuit belonged to Fix, not to
the bankruptcy trustee; and 6) the fraud claim settlement did not release the claims Fix
had against the Bank related to the sale of her home. As a result of the district court's
order, Fix's state court lawsuit against the Bank was allowed to proceed. The state

                                          -5-
court circuit judge determined the request for exemplary damages was appropriate and
granted a motion to pursue discovery and a motion for a trial of that claim.

       Both the Bank and the bankruptcy trustee filed timely appeals of the district
court's order. The issues on appeal relate to: 1) the nature of Fix's interest in her home
as the result of the Bank's letter stating she could live there until her death; 2) whether
any possible causes of action against the Bank belong to Fix or her bankruptcy estate;
and 3) the effect on those causes of action, if any, of the release Fix signed as part of
the fraud claim settlement.

                                            II

       "When a bankruptcy court's judgment is appealed to the district court, the
district court acts as an appellate court and reviews the bankruptcy court's legal
determinations de novo and findings of fact for clear error." In re Falcon Prods., Inc.,
497 F.3d 838, 840-41 (8th Cir. 2007) (quoting In re Fairfield Pagosa, Inc., 97 F.3d
247, 252 (8th Cir.1996)). "As the second court of appellate review, we conduct an
independent review of the bankruptcy court's judgment applying the same standards
of review as the district court." Id.

       Although the facts giving rise to this dispute are somewhat convoluted, we
believe the legal questions presented are relatively straightforward. The primary
question raised on appeal is whether, after conveying by warranty deed the property
in question to her son and daughter-in-law in March 1999, Fix retained an interest in
real estate upon which to claim a homestead exemption. The bankruptcy court
concluded she did not. We agree.

     South Dakota law requires an ownership interest in property to claim a
homestead exemption. See S.D. Codified Laws § 43-31-2 ("The homestead must
embrace the house used as a home by the owner thereof[.]") (emphasis added); see

                                           -6-
also United States through Farmers Home Admin. v. Nelson, 969 F.2d 626, 631 (8th
Cir. 1992) ("Homestead rights under South Dakota state law accrue only to owners
who use the property as a home[.]") (emphasis added). When Fix deeded the property
to Jeff and Marie by outright warranty deed, she gave up the life estate interest she had
in the property. In exchange, she received from the Bank a future contingent right to
possession of the home for the rest of her life in the event the Bank became the owner
of the home. This interest was not an interest in real estate, but rather a personal
property interest. See Foster v. Foster, 673 N.W.2d 667, 671-72 (S.D. 2003) (holding
an agreement granting an option to purchase real estate was personal property and
belonged to the bankruptcy estate). The absence of an interest in real estate is
demonstrated by the fact that the Bank, when it wrote the letter in March 1999, had
no present interest in the real property at issue, and thus could not convey such an
interest to Fix.

       In deciding Fix did not retain an interest in real property upon which to claim
a homestead exemption, we are focusing solely upon the nature of the interest she
retained. Her interest was in the nature of personal property, not real property. In so
holding, we express no opinion on the validity or enforceability of the interest Fix
obtained from the Bank.

                                           III

      The next question we must address is whether the five causes of action Fix
brought against the Bank in March 2006 belong to her or to her bankruptcy estate. If
the causes of action belong to the bankruptcy estate, we need not address the Bank's
contention that Fix released the claims as part of the fraud claim settlement because
the bankruptcy estate was not a party to that settlement. If, on the other hand, we
determine all or some of the causes of action belong to Fix, we must go on to address
whether she released the claims in her settlement agreement with the Bank.

                                          -7-
       As stated above, the contingent interest in the home that Fix received from the
Bank via the March 1999 letter was in the nature of personal property, not real
property. All legal and equitable interests of a debtor in personal property become
property of the bankruptcy estate as of the commencement of a bankruptcy. Whetzal
v. Alderson, 32 F.3d 1302, 1303 (8th Cir. 1994). This includes a contractual right of
the type Fix obtained from the Bank in March 1999. Cf. Westmoreland Human
Opportunities, Inc. v. Walsh, 246 F.3d 233, 242 (3rd Cir. 2001) (noting the broad
definition of estate property encompasses rights arising from ordinary contracts). In
addition, when Fix's bankruptcy proceeding was converted from Chapter 13 to
Chapter 7, any property that was part of the bankruptcy estate at the time of the
original filing remains the property of the bankruptcy estate after the conversion. See
11 U.S.C. § 348(f)(1)(a). Thus, at the time the bankruptcy was filed, and later when
the bankruptcy was converted from Chapter 13 to Chapter 7, Fix's rights against the
Bank were part of the bankruptcy estate.

        The more difficult question is whether this potential contractual interest was
still part of the bankruptcy estate when Fix's causes of action accrued, that is, when
the Bank allegedly breached the agreement by selling the home in December 2005.
The Bank's alleged breach occurred after Fix had already received a discharge under
Chapter 7. Thus, while this case involves a pre-petition interest, the claims at issue
did not accrue until post-petition. The bankruptcy trustee contends in such a situation,
where the contract interest was property of the estate at the time the bankruptcy
petition was filed, but the breach occurs post-petition (even post-discharge), the
breach relates back such that any causes of action arising from the breach constitute
property of the estate. See In re Strada Design Assocs., Inc., 326 B.R. 229, 236
(S.D.N.Y. 2005) ("[A] cause of action will be 'property of the estate' if it has sufficient
roots in the debtor's pre-bankruptcy activities and is not entangled with the debtor's
'fresh start,' regardless of when the claim accrues under state law") (citing Segal v.
Rochelle, 382 U.S. 375, 380 (1966)); see also Drewes v. Vote (In re Vote), 276 F.3d
1024, 1026-27 (8th Cir. 2002) (applying Segal).

                                           -8-
        Here, all five causes of action against the Bank arose from the March 1999
letter it wrote purporting to allow Fix to live in her home until she died. Her
reluctance to relinquish her life estate interest occurred in 1999, the Bank wrote the
letter to induce her to give up her life estate interest in 1999, and Fix's decision to
warranty deed the home to Jeff and Marie in exchange for the Bank's letter occurred
in 1999. These activities were not related to Fix's bankruptcy, or the fresh start she
received when her debts were discharged in October 2005. Thus, we believe at least
four of the five causes of action Fix brought against the Bank in March 2006 (the
right-to- possess claim, the breach-of-fiduciary-duty claim, the deceit claim, and the
fraudulent-misrepresentation claim) have sufficient roots in Fix's pre-bankruptcy
activities to be considered property of the bankruptcy estate, even though the Bank's
alleged breach of its promise occurred post-petition.

       The intentional infliction of emotional distress claim presents a closer question.
The elements of a prima facie claim for intentional infliction of emotional distress are:
1) the defendant committed an act amounting to extreme and outrageous conduct; 2)
with the intent to cause severe emotional distress; 3) the act must be the cause in-fact
of the distress; and 4) the plaintiff must suffer an extreme disabling emotional
response to the conduct. Nelson v. WEB Water Dev. Ass'n, 507 N.W.2d 691, 698
(S.D. 1993). The act Fix alleges was extreme and outrageous on the part of the Bank
was sale of the home to the Baers in December 2005. Fix's alleged emotional distress
did not occur until she learned about the sale in March 2006. Thus, all of the prima
facie elements of Fix's alleged claim occurred post-petition. While Fix's claim for
intentional infliction of emotional distress, like her other claims, relates to the Bank's
March 1999 letter, we do not believe it is sufficiently rooted in the pre-bankruptcy
past to be considered part of her bankruptcy estate.

                                           -9-
                                           IV

         Because we conclude the intentional infliction of emotional distress claim
belongs to Fix, it is necessary to address whether the release she signed in favor of the
Bank as part of the fraud settlement bars that claim. We conclude the release does not
apply to this alleged tort claim. South Dakota law prohibits a release which attempts
to "exempt anyone from responsibility for his own fraud or willful injury to the person
. . . of another[.]" S.D. Codified Laws § 53-9-3; see also Holzer v. Dakota Speedway,
Inc., 610 N.W.2d 787, 793 (S.D. 2000) ("[R]eleases that are construed to cover . . .
intentional torts are not valid and are against public policy."). A claim for intentional
infliction of emotional distress is an intentional tort claim, and thus would not be
affected by the release Fix signed.

                                           V

      The order of the district court is reversed, and this case is remanded for further
proceedings consistent with this opinion.
                       ______________________________

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