                                  PUBLISH

                    UNITED STATES COURT OF APPEALS
Filed 12/31/96
                              TENTH CIRCUIT



 In re: EDWIN D. KRETZINGER, also
 known as Edwin Kreitzinger, and
 RENA J. KRETZINGER,

             Debtors,                               No. 95-6185

 ____________________________

 EDWIN D. KRETZINGER; RENA J.
 KRETZINGER,

             Appellants,

 v.

 FIRST STATE BANK OF
 WAYNOKA, an Oklahoma Banking
 corporation,

             Appellee.


         APPEAL FROM THE UNITED STATES DISTRICT COURT
       FOR THE DISTRICT OF WESTERN DISTRICT OF OKLAHOMA
                      (D.C. No. CIV-94-298-B)


Submitted on the briefs:

Kenneth L. Spears of Kenneth L. Spears, P.C., Oklahoma City, Oklahoma, for
Appellants.

Max M. Berry of Max M. Berry, P.C., Ponca City, Oklahoma, for Appellee.
Before BALDOCK and BRISCOE, Circuit Judges, and LUNGSTRUM, * District
Judge.


BALDOCK, Circuit Judge.



      Debtors Edwin D. and Rena J. Kretzinger appeal from a district court order

affirming the decision of the bankruptcy court denying a homestead exemption for

all but two of the eighty acres surrounding their rural home. 1 The dispositive

question presented is whether, as a matter of Oklahoma law, an express

declaration of rural homestead is vitiated by lease of the designated property for

agricultural activities which, if conducted by the resident owners themselves,

would be consistent with homestead status. We conclude that it is not and,

accordingly, reverse with directions to grant debtors the exemption claimed as to

all eighty acres.

                                         I




      *
             Honorable John W. Lungstrum, District Judge, United States District
Court for the District of Kansas, sitting by designation.
      1
             After examining the briefs and appellate record, this panel has
determined unanimously that oral argument would not materially assist the
determination of this appeal. See Fed. R. App. P. 34(a); 10th Cir. R. 34.1.9. The
case is therefore ordered submitted without oral argument.


                                        -2-
      Because Oklahoma has opted out of the federal bankruptcy exemption

scheme, see Okla. Stat. tit. 31, § 1(B); 11 U.S.C. § 522(b), the existence and

extent of debtors’ homestead is governed by state law. See In re Jones, 107 B.R.

350, 351 (Bankr. E.D. Okla. 1989). See generally David Dorsey Distrib., Inc. v.

Sanders (In re Sanders), 39 F.3d 258, 260 (10th Cir. 1994). In Oklahoma,

homesteads are categorized as either urban or rural. The pertinent exemption for

the rural homestead is established by the following constitutional and statutory

provisions:

             The homestead of any family in this State, not within any city,
      town, or village, shall consist of not more than one hundred and sixty
      acres of land, which may be in one or more parcels, to be selected by
      the owner . . . . [A]ny temporary renting of the homestead shall not
      change the character of the same when no other homestead has been
      acquired.

            The homestead of the family shall be, and is hereby protected
      from forced sale for the payment of debts [with certain specified
      exceptions]; nor shall the owner, if married, sell the homestead
      without the consent of his or her spouse, given in such manner as
      may be prescribed by law . . . .

Okla. Const. art. XII, §§ 1, 2;

      [T]he following property shall be reserved to every person residing in
      the state, exempt from attachment or execution and every other
      species of forced sale for the payment of debts, except as herein
      provided: . . . The home of such person, provided that such home is
      the principal residence of such person.

              The homestead of any family in this state . . . not within any
      city, town, or village, shall consist of not more than one hundred
      sixty acres (160) of land, which may be in one or more parcels, to be

                                         -3-
       selected by the owner. . . . [A]ny temporary renting of the homestead
       shall not change the character of the same, when no other homestead
       has been acquired.

Okla. Stat. tit. 31, §§ 1, 2.

       The Oklahoma Supreme Court set out the basic principles governing

establishment of the rural homestead many years ago in Kerns v. Warden, 213 P.

70, 72 (Okla. 1923), stating that “in order to constitute any portion of [a] tract a

homestead, two requisites must concur as to such portion: (1) The owner must

intend the property as a part of his homestead; and (2) he must in some way use it

as such.” See In re Shields, 85 B.R. 582, 585 (Bankr. N.D. Okla. 1988)(for

assessing homestead claims, “[t]he leading case is [still] Kerns v. Warden”). The

Kerns court went on to clarify, however, that “[t]he word ‘homestead’ does not

include merely the dwelling house, but it also embraces everything connected

therewith which may be used and is used for the more perfect enjoyment of the

home, such as outhouses for servants, for stock, or property, gardens, yard, and

farming land to the extent of 160 acres.” Kerns, 213 P. at 72 (quotation omitted).

Further, the supreme court “has repeatedly held that [the homestead] provisions

are to be liberally construed in the interest of the family home.” First Nat’l Bank

of Sentinel v. Anderson, 240 P.2d 1066, 1068 (Okla. 1952); see Burrows v.

Burrows, 886 P.2d 984, 988 (Okla. 1994).

                                           II


                                          -4-
      Debtors own a fee simple interest in an eighty-acre tract in rural Woods

County, Oklahoma. They formally and publicly claimed the entire tract as their

homestead by filing a declaration with the county assessor after debtor Edwin

Kretzinger inherited the bulk of his interest therein in 1984. The land is fenced

and has pastured livestock over the years, allegedly including several butcher

calves for Mr. Kretzinger, who proposes to raise cattle after his impending

retirement. In the meantime, however, debtors reside in a home on just two of the

eighty acres (where Edwin has lived for nearly sixty years) and derive income

from the rest of the tract through a property lease, recently renewed until April

2000 at $750 per year, and an oil and gas lease, which pays a $200 monthly

royalty.

      In the late 1980's, appellee First National Bank of Waynoka financed

debtors’ ill-fated purchase of a bar, on which it also held a mortgage from the

seller. Although the bank had requested that the Woods County property serve as

collateral, it went ahead with the loan despite debtors’ refusal to pledge the

property. When debtors’ business failed, the bank foreclosed, bought the bar for

$2,100 at foreclosure, and then obtained a judgment against debtors for an

additional $20,000 deficiency. That deficiency judgment is debtors’ primary debt,

while the Woods County property, also valued at $20,000, is their largest asset in

this proceeding.


                                         -5-
      When debtors listed the Woods County property as their rural homestead,

the bank objected to any exemption regarding the seventy-eight acres under lease.

The bankruptcy court sustained the objection, stating:

              Based on the evidence that has been presented, the Court feels
      that it has the obligation to find that the property in question, the 78
      acres of the 80, was not part of the homestead, that the two acres
      resided on by the debtors is part of their homestead and is exempt.
      It’s unfortunate that the debtors, by application of the law, will lose
      their ownership, or will eventually lose their ownership in the
      remaining 78 acres merely because they have leased it out for a small
      amount.

            But this is what the law dictates. And this is what the ruling of
      the Court must be. So, the Court finds that the 78 acres is [sic] not
      exempt, and two acres is [sic] exempt.

R. I doc. 1, attached “Transcript of Proceedings Had on the 2nd Day of

November, 1993,” at 23. The district court affirmed, likewise reasoning that

debtors’ lease of the property precluded the requisite finding that it was being

used to support the family in its residence on the rural homestead. Id. doc. 10.

                                         III

      “We review legal determinations by the bankruptcy court de novo, while we

review its factual findings under the clearly erroneous standard.” Osborn v.

Durant Bank & Trust Co. (In re Osborn), 24 F.3d 1199, 1203 (10th Cir.

1994)(footnote and citation omitted). Oklahoma courts have characterized the

existence/extent of the homestead as a factual question. See, e.g., Burrows, 886

P.2d at 987 n.9 (citing cases). “However, when a lower court’s factual findings

                                         -6-
are premised on improper legal standards or on proper ones improperly applied,

they are not entitled to the protection of the clearly erroneous standard, but are

subject to de novo review.” Osborn, 24 F.3d at 1203; see also Williams v.

Watkins, 219 P. 643, 644 (Okla. 1923)(when historical facts regarding homestead

are undisputed, “the question involved is a question of law”). Further, the

bankruptcy court’s interpretation of the forum state’s homestead law is reviewed

de novo as well. Osborn, 24 F.3d at 1203 n.5 (citing Salve Regina College v.

Russell, 499 U.S. 225 (1991)).

      Our determination of the relevant Oklahoma law is governed by a decision

of the state supreme court which is materially indistinguishable from this case. In

Exchange National Bank v. Rose, 103 P.2d 496 (Okla. 1940), the defendant

husband and wife sought to discharge, on homestead exemption grounds, a levy

made on a tract of rural property associated (though, unlike here, not even

continuous) with a nearby parcel on which they resided. The court noted that,

like debtors in this case, the defendants had earlier

      filed in the office of the county clerk . . . . an instrument wherein
      they declared that they had selected both of the . . . tracts as their
      homestead; that the defendants had not cultivated either of said tracts
      themselves but had rented all of both of said tracts except a parcel of
      about 300x600 feet on which the dwelling, out buildings and gardens
      were located, for agricultural purposes under a written lease for a
      term of years which provided for cash rental and that the rental thus
      received had been used for the sustenance and benefit of the
      defendants . . . .


                                          -7-
Id. at 497. The levying creditor argued, much as the bank does here, that the

nonresidential parcel could not be claimed as part of the homestead because the

defendants “had never resided upon or cultivated [that] tract themselves but had

continuously rented said tract for cash.” Id. The court flatly rejected this

argument, stating:

      [B]oth the tract upon which the defendants in error resided and the
      tract upon which the levy had been made were used in the interest
      and for the benefit of the family of the defendants in error although
      both were cultivated by a tenant . . . . We know of no law which
      prevents the owner of a rural homestead from cultivating or operating
      the same through the medium of a tenant and accepting a cash rental
      in lieu of a portion of the products of the soil. Any other
      construction we are of the opinion would be narrow and contrary to
      both the letter and spirit of the Constitution and Statutes of the State.

Id. at 497-98; see also Clay v. Brown, 17 P.2d 378, 379, 381-82 (Okla.

1932)(finding rural homestead supported by “actual occupancy” despite fact that

owner ran livestock operation on designated property “sometimes operating with a

hired hand and sometimes having a tenant”).

      The bank does not directly come to grips with the implications of Rose, but

attempts to defend the favorable judgment it obtained below with two collateral

lines of argument. First, the bank contends that because debtors have not

personally worked the leased property, they have failed to satisfy the owner’s

obligation to reside on or use the designated homestead property for family

benefit. This argument obviously loses its force once it is recognized that, under


                                         -8-
Rose, the rural homestead owner may reside on part of the designated property

and beneficially, albeit indirectly, use the rest by obtaining rents from a tenant

who, in turn, works the land in a manner appropriate to a rural homestead. 1

      The bank’s second argument is superficially more compelling, as it

involves case law which, in rejecting rural homestead exemptions for certain

leased property, may at first blush appear to undercut Rose. There is, however, a

significant, straightforward distinction between these two lines of authority that

reconciles their divergent results and leaves Rose clearly applicable to the facts of

this case.

      In Powell v. Powell, 116 P.2d 889 (Okla. 1941), the court considered

whether a tract of rural property qualified as part of a decedent’s constitutional

homestead at the time of his death, so that his surviving spouse could claim a

derivative, probate homestead. The tract, physically separated from the property

where the decedent had resided, had been leased by the decedent to tenant farmers

to provide income for family expenses. Without mentioning Rose, decided the


      1
              Debtors’ lessee pastures livestock on the leased property, and there is
no suggestion that this retired professional with ranching, farming, and oil and
gas interests has set up a family residence thereon. We specifically note these
circumstances, as debtors’ homestead could not “include some other and
independent family’s home and residence. Where houses and lots are rented . . .
[to serve as] the homes and residences of [the] tenants and their families, the
owner certainly cannot then claim that such houses and lots are a part of his own
home and residence, although they may adjoin the same.” Kerns, 213 P. at 72
(quotation omitted).

                                          -9-
year before, the court denied the spouse’s homestead claim because the property’s

use for rental income “did not distinguish it from any other farm land lying

separate and apart from the home place of the ordinary land owner.” Id. at 890.

A similar treatment of leased rural property is reflected in the older case of Orwig

v. Cloud, 233 P. 1085, 1086 (Okla. 1925), which involved a dispute between

rival, successive grantees of certain property formerly leased out by their common

grantor.

      While a cursory recitation of the holdings in Powell and Orwig may suggest

inconsistency with Rose, on closer reading it becomes clear why these two lines

of authority coexist without any indication of mutual conflict. There is a crucial

circumstance unique to Powell and Orwig bearing directly on the

homestead-intent requirement that is analytically prior to the property-use

question decided in Rose and at issue here.

      “The gist of the requirement under the Constitution to impress a homestead

is in the word ‘selected.’ The act of selecting is the constitutional condition. . . .

The act of selecting . . . is attended, with the manifestations of intention, as

spoken declarations, ownership, possession, occupancy, use in connection with

the home, etc. . . . ” Williams, 219 P. at 645. In Rose, as here, the leased tract

had unequivocally been selected as homestead by the owners, who, moreover, had

made their selection public by a formal, recorded declaration. Thus, the Rose


                                          -10-
court’s analysis regarding the effect of the lease began with the premise that the

owners expressly intended the property to be their homestead, and asked whether

that selection was vitiated by their lease of the property for family income. The

question so framed was emphatically answered in the negative in the passage

quoted above.

      By contrast, in Powell and Orwig, no definitive homestead selection had

ever been declared by the original owner. Consequently, the owner’s uncertain

intention with respect to this fundamental prerequisite was the issue. See Powell,

116 P.2d at 890 (“The question therefore is whether the deceased had selected the

[property] as his homestead.”); see also Orwig, 233 P. at 1086 (noting original

owner’s contradictory statements regarding past homestead intentions were “of

doubtful value” to resolution of dispute between grantees). Thus, the distinct

question these cases addressed was whether a prior owner’s otherwise

unestablished intention to select a parcel of property as homestead could be

inferred from the act of leasing out the property for family income. The court’s

answer, that “that circumstance alone is not sufficient to indicate an intention on

the part of the owner to select the [leased property] as part of the homestead,”

Powell, 116 P.2d at 890; see also Orwig, 233 P. at 1086, does not in any way

undercut the analytically distinct holding in Rose or the application of that

holding to this case.


                                         -11-
        In summary, under Rose, an owner’s lease of rural property for agricultural

purposes to provide family income is a use consistent with a declared homestead

intention, while, under Powell and Orwig, such use alone does not, conversely,

supply by implication a homestead intention not otherwise evident. As this case

falls within the former principle, we are bound by Rose. See Central Nat’l Bank

& Trust Co. v. Liming (In re Liming), 797 F.2d 895, 899 (10th Cir. 1986)(“As a

federal court construing Oklahoma [exemption] law, we must follow [state

supreme court decision on point]”). Accordingly, we hold that, having

definitively manifested the requisite homestead intention and used the designated

property in a manner appropriate to homestead purposes, debtors are entitled to

the exemption claimed for the entire eighty-acre tract surrounding their rural

home.

        The judgment of the United States District Court for the Western District of

Oklahoma is REVERSED, and the cause is remanded for entry of judgment

granting the full homestead exemption claimed by debtors under Okla. Stat. tit.

31, § 1(B) and 11 U.S.C. § 522(b)(2)(A).




                                         -12-
