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In Re: Randal Scott Banks and Debra Louise Banks v. Washington Trust Bank; C. Barry Zimmerman

July 31, 2012

IN RE: RANDAL SCOTT BANKS AND DEBRA LOUISE BANKS, DEBTORS.
RANDAL SCOTT BANKS; DEBRA LOUISE BANKS, APPELLANTS,
v.
WASHINGTON TRUST BANK; C. BARRY ZIMMERMAN, CHAPTER 13TRUSTEE, APPELLEES.



Appeal from the United States Bankruptcy Court for the District of Idaho Honorable Terry L. Myers, Chief Bankruptcy Judge, Presiding Bk. No. 11-20008

SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

MEMORANDUM*fn1

Argued and Submitted on June 14, 2012 at Boise, Idaho

Filed - July 31, 2012

Before: HOLLOWELL, JURY, and MARKELL, Bankruptcy Judges.

The debtors appeal an order of the bankruptcy court that disallowed their homestead exemption claim.

We AFFIRM.

I. FACTS

Randal and Debra Banks (the Debtors) filed a chapter bankruptcy petition on January 4, 2011. At the time of filing, they lived at a home situated on five acres of real property 7 located on Linzy Lane in Athol, Idaho (Linzy Lane). The Debtors' 8 schedules revealed that Linzy Lane was over-encumbered. It was 9 valued by the Debtors at $250,000. Bank of America held a first 10 deed of trust in the amount of $263,933 and a second deed of 11 trust in the amount of $54,028.92.

12 In addition to owning Linzy Lane, the Debtors owned a 50% 13 interest in a commercial building in Pinehurst, Idaho 14 (Pinehurst). The Debtors valued their interest in Pinehurst, 15 which is unencumbered, at $100,000. The Debtors and their 16 business associate rent Pinehurst to Real Life Ministries (the 17 Church) for a monthly rent of $2,630. The Church's lease ran 18 through May 2012 with options for renewal. However, according to 19 the Debtors, the Church wanted a location with more adequate 20 parking and told the Debtors it did not intend to renew the lease 21 after it expired.

22 Just prior to filing bankruptcy, on December 22, 2010, the 23 Debtors executed and recorded a declaration of abandonment of 24 homestead on Linzy Lane. At the same time, the Debtors also 25 executed and recorded a declaration of homestead on Pinehurst 26 (Declaration). The Declaration stated that the Debtors "intend 27 to reside [at Pinehurst] in the future." On their bankruptcy 28 Schedule C, the Debtors claimed a $100,000 homestead exemption 1 for Pinehurst.

2 On January 19, 2011, the Debtors' filed their chapter 13 3 plan. The chapter 13 plan proposed to pay Linzy Lane's first 4 mortgage directly to Bank of America (on which they were current) 5 and "strip-off" the second mortgage as wholly unsecured. They 6 did not propose to surrender Linzy Lane. Indeed, the Debtors 7 continue to reside there.

8 At the § 341 meeting of creditors held February 4, 2011, the 9 Debtors testified that they did not, at the time, intend to move 10 to Pinehurst. They stated that if they lost the rental income 11 and were unable to re-lease the space, they would have to 12 consider leaving Linzy Lane for Pinehurst. Thus, they stated 13 that, "If we can't maintain our house, we might have to [move to 14 Pinehurst]." Based in part on this testimony, the Trustee filed 15 an objection to the Debtors' homestead exemption for Pinehurst. 16 Washington Trust Bank (Washington Bank) joined in the objection.

17 An evidentiary hearing was held on July 6, 2011. At the 18 hearing, Mr. Banks testified that the Debtors intended to reside 19 at Pinehurst if the rental income was lost. Mr. Banks 20 acknowledged that Pinehurst was not zoned for residential living 21 and was not available for occupancy until at least June 2012. He 22 testified that the Debtors had not taken steps to re-zone 23 Pinehurst in order to reside there. However, the Debtors 24 provided photographs of Pinehurst and asserted that Pinehurst was 25 ready for residential habitation given that the Church had 26 facilities for restrooms, an industrial kitchen, and various 27 rooms that could be used as bedrooms. 28 Additionally, the evidence revealed ...

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