Ongoing Saga of Homestead Proceeds

In the latest installment of the homestead proceeds saga, the US District Court for the Western District has issued an opinion reversing Judge Gargotta’s opinion in In re DeBerry, 2015 WL 6528024. The District Court opinion can be found on the Western District Court website under Case N. 5:15-cv-01135-RCL, Docket No. 9.

This case starts with an unusual fact pattern as the property in question was the separate property of the debtor husband at the time of filing. The property was sold pursuant to a court order post-petition and the trustee requested and obtained a paragraph in the order approving the sale that stated:

ORDERED, ADJUDGED and DECREED that nothing in this Order shall prohibit John Patrick Lowe, as Chapter 7 Trustee (the “Trustee”) for the bankruptcy estate (the “Estate”) of the Debtor, or any other successor trustee, from seeking to recover the proceeds from the sale of the real property located at 8 Tudor Glen, San Antonio, TX 78257 as an asset of the Estate under 11 U.S.C. §541, to the extent the proceeds from such sale are no longer exempt under Texas Prop. Code §41.001.

Upon sale of the homestead on September 26, 2014, the Debtor netted $364,592. The proceeds were deposited into a bank account solely in the name of the non-filing spouse. $85,000 of those proceeds were subsequently transferred into another account, also solely in the name of the non-filing spouse. Out of that account $50,000 was transferred to Goldstein, Goldstein & Hilley, a criminal defense firm that had previously been engaged to represent the Debtor, by check dated September 29, 2014. The $85,000 in proceeds were not reinvested in another homestead within six months of the sale of the property. (The record is unclear what happened to the remaining $280,000 in proceeds.)

Mr. Lowe then filed an adversary in which he sought declaratory relief that the proceeds of Mr. Deberry’s separate property homestead were also his separate property and that the proceeds became property of the bankruptcy estate, and sought turnover of the proceeds from the non-filing spouse, the criminal defense attorneys and unidentified Jane or John Does.

The defendants filed a motion to dismiss contending that the Texas Proceeds Rule and In re Frost, 744 F.3d 384 (5th Cir.2014) do not apply in Chapter 7 cases. Judge Gargotta agreed, relying primarily on Judge Davis’ opinion in In re D’Avila, 498 B.R. 150 (Bankr.W.D.Tex.2013) and rejecting Judge Bohm’s opinion in In re Smith, 514 B.R. 838 (Bankr.S.D.Tex.2014).

Mr. Lowe appealed and on March 10, 2017, the District Court issued its ruling holding that Judge Gargotta was incorrect and that Frost and the Texas Proceeds Rule do apply in Chapter 7 cases, relying primarily on Judge Bohm’s opinion in Smith. The court also relied on In re England, 975 F.2d 1168 (5th Cir.1992) for its oft cited statement that the purpose of the proceeds exemption “was solely to allow the claimant to invest the proceeds in another homestead, not to protect the proceeds in and of themselves.” The court also relied on In re Zibman, 268 F.3d 298 (5th Cir.2001) which held that a debtor who sold his homestead prior to filing Chapter 7 and was holding proceeds on the petition date was subject to the Texas Proceeds Rule.

This is an important and binding opinion for attorneys in the Western District of Texas and is clearly an important opinion for attorneys everywhere in Texas. (At least until the Fifth Circuit tells us what the official answer is.)

Now for my soapbox. Please feel free to stop reading at this point.

1. Texas enacted the first version of what is now Texas Property Code Sec. 41.001(c) in 1897. That’s 120 years ago. The statute provides, in total: “The homestead claimant’s proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.” There is nothing in the statute (nor has there ever been) that says that the homestead claimant cannot use the proceeds for some other lawful purpose. What if the debtor needs to buy a car to get to and from work? What if he needs to acquire tools or equipment to perform his vocation? What if he needs to feed his kids? It is not the function of the courts to create statutory limitations through judicial gloss when the legislature has failed to act to impose those limitations.

2. There is a clear rule of statutory construction that Texas exemption statues are to be liberally construed, particularly with respect to homesteads. Woods v. Alvarado State Bank, 19 S.W.2d 35 (Tex. 1929): “The rule that homestead laws are to be liberally construed to effectuate their beneficient purpose is one of general acceptation.” Trawick v. Harris, 8 Tex. 312 (Tex.1852): “Profoundly impressed with the wisdom in which our homestead policy is founded, and fully impressed with its ameliorating influences, we admit that it is entitled to the most liberal construction for the accomplishment of its object.”

3. As noted above, England is almost invariably cited for the proposition that proceeds were never meant to be protected as proceeds, but only to allow the debtor to re-invest the proceeds in another homestead. England cites no authority to support that “holding.” (It isn’t actually holding, by the way.) England is a 1992 opinion. Was there no precedent in 99 years that supports England’s statement?

4. The District Court opinion in DeBerry lists six bankruptcy sections that courts addressing this issue have relied upon: 541(a)(1), 541(a)(6), 522(c), 1306(a), 1306(b), and 1327(b). I have another one that DeBerry and none of the other homestead proceeds cases mentions – 1307(b) which provides:

On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable. [Emphasis added.]

It is my opinion that 1307(b) represents a fundamental difference between Chapter 13 (Frost) and Chapter 7 (Smith). 1307(b) allows a debtor in a Chapter 13 case to dismiss his/her case without any cause. One of the very basic goals of Chapter 13 is to encourage/allow debtors to save their home and vehicles and to pay something to unsecured creditors. Many of my debtor Chapter 13 clients file to try to keep their home that they are in default on. If they try to save their home by curing the default but are unable to do so, there are several options available: (1) allow the mortgage holder to foreclose; ( 2) sell the house while in a Chapter 13 and use the proceeds to buy a new homestead; (3) sell the homestead and turn over the proceeds to the Chapter 13 trustee; or (4) dismiss the Chapter 13 and use the proceeds to play “let’s make a deal” with the debtor’s unsecured creditors.

5. Unfortunately, the courts talk about the debtor buying a new homestead while in a pending bankruptcy case as if it is a realistic financial option. For most debtors, that is a false option. If the debtor has sufficient equity in the prior homestead to purchase a new homestead for cash, that is one reality. Most of my clients have relatively low amounts of equity – $50,000 to $100,000. That may suffice as a down payment on a home, but it won’t buy a home Austin, Texas. And lenders will not finance the purchase of a home for a debtor in a pending bankruptcy case.

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by Michael Baumer