Romo v. Montemayor (In re Montemayor)
Romo v. Montemayor (In re Montemayor)
Opinion of the Court
MEMORANDUM OPINION DENYING TRUSTEE’S MOTION FOR SUMMARY JUDGMENT AND GRANTING SUMMARY JUDGMENT FOR THE DEBTOR
I.INTRODUCTION
As a matter of first impression for this court, there are two issues in this case, both of which are simply stated, but neither are simply answered. First, what happens to the proceeds from the sale of a properly exempted Texas homestead if not timely reinvested into a new Texas homestead within the statutory six-month period where the proceeds would lose their exemption under Texas law? Second, does the Fifth Circuit’s Opinion in In re Frost apply in this chapter 7 proceeding rendering the sale proceeds non-exempt and subject to pre-petition creditor’s claims? This Court considers: a Motion for Summary Judgment filed by the chapter 7 trustee, wherein he requests the return of the proceeds from the sale of debtor’s homestead that have not been timely reinvested under Texas law; the arguments presented in a hearing on this matter held December 16, 2015; all other evidence in the record; and relevant case law. Although the Motion for Summary Judgment was filed by the chapter 7 trustee, under Rule 56(f), the court may alternatively grant summary judgment in the debtor’s favor.
II.PROCEDURAL BACKGROUND
On May 26, 2015, (approximately 355 days after closing on the sale of Debtor’s homestead) the Chapter 7 Trustee, William C. Romo (“Romo”), initiated a freeze on the Debtor’s bank account in order to preserve such assets as may remain from the proceeds of the sale of the Debtor’s Texas homestead (“Proceeds”). [Case No. 14-10031, ECF Nos. 38, 40], The pro se Motion in Objection Against Trustee’s Action to Take Possession of Debtor’s Homestead Exemption Proceeds and Estate (“Motion in Objection”), [ECF. No. 40], filed by Juan Jose Montemayor (“Debtor”) on July 17, 2015, was mooted at a hearing held on September 18, 2015, as Romo had initiated an adversary proceeding to recover the Proceeds on September 17, 2015. [ECF No. 49]. After filing the pending adversary, Romo also filed a Motion for Summary Judgment (the “Motion”), which is currently pending before this Court. [Case No. 15-1003, ECF No. 9].
This Court makes the following Findings of Fact and Conclusions of Law pursuant to Federal Rules of Bankruptcy Procedure 7052, which incorporates Fed. R. Civ. P. 52, and 9014. To the extent that any Finding of Fact constitutes a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law constitutes a Finding of Fact, it is adopted as such.
III.FINDINGS OF FACT
Debtor filed his voluntary petition for relief under chapter 7 of title 11 of the United States Code (the “Bankruptcy
On February 24, 2014, the First Meeting of Creditors, pursuant to 11 U;S.C. § 341, was noticed for March 21, 2014, and the last day to oppose discharge or discharge-ability of certain debts was May 20, 2014. [ECF No. 11]. On March 21, 2014 the First Meeting of Creditors was held and continued to April 17, 2014. On April 17, 2014 the First Meeting of Creditors was held and continued to May 23, 2014. [ECF No. 11],
On May 19, 2014, Romo filed his Motion to Extend Time to Object to Discharge (“Motion to Extend ”). [ECF No. 13]. In his Motion, Romo sought to extend the time due to the Debtor’s counsel being unable to attend the May 23, 2014 Meeting of Creditors, due to out of town work-related matters. Id. at ¶ 2.
On May 28, 2014, Debtor filed his Motion for Authority to Sell Homestead. [ECF No. 14], This Court granted Debt- or’s Motion for Authority to Sell Homestead on June 3, 2014, which ordered that the Proceeds of the sale be used to extinguish the outstanding liens to Regions Mortgage and HEB Federal Credit Union, with the- remaining Proceeds to be evenly divided between Debtor and Debtor’s ex-spouse. [ECF No. 18].
On June 5, 2014, Debtor closed on the sale of his homestead resulting in Debtor receiving net Proceeds in the amount of $107,627.25. [ECF No. 49 ¶ 7]; [Case No. 15-1003, ECF Nos. 9-3, 9-4]; Pl. Exs. C and D. On June 9, 2014, it is undisputed that Debtor utilized $41,521.72 of the Proceeds from the sale of his former homestead to purchase a lot on which he intended to construct a new homestead (the “New Property”). [Case No. 14-10031, ECF No. 49 ¶ 8]; see also Pl. Exs. E and F. Over the course of the next three months, Debtor expended another $9,558.96 from the Proceeds (for a total of $51,080.68) in mostly dirt work to prepare the lot for construction. [ECF No. 49 at ¶ 9]; see also Pl.Ex. G.
On June 12, 2014, this Court granted Romo’s Motion to Extend, extending Romo’s deadline to object to discharge to June 30, 2014. [EOF No. 20]. On June 25, 2014, Romo filed his Second Motion to Extend Time to Object to Discharge (“Second Motion to Extend”) [ECF No. 22], In his Motion, Romo stated that Debtor’s attorney was again unable to attend the Meeting of Creditors, this time scheduled for July 11, 2014, due to attendance at an out of town bankruptcy conference. Id. at ¶ 3. The First Meeting of Creditors was again continued to July 11, 2014. On July 18, 2014, this Court granted Romo’s Sec
On August 6, 2014, The First Meeting of Creditors was held and concluded, wherein it was determined that there were potential assets in which to provide creditors a dividend. On August 6, 2014, Romo issued a Trustee’s Notice of Assets, Notice to Creditors And Other Parties In Interest Of The Need To File Claims, setting the bar date to November 10, 2014. [ECF No. 25]. Pursuant to Fed. R. Bankr. P. 4003(b) the last day to object to Debtor’s exemptions expired on September 5, 2014. The statutory six (6) month period, pursuant to Tex. Prop. Code § 41.001(c), for which Texas law provisions the Proceeds to be free from creditor’s claims expired on December 5, 2014.
This Court issued an Order of Discharge, [ECF No. 27], and a Final Decree, [ECF No. 28], on February 25, 2015, but subsequently vacated both orders on February 26, 2015. [ECF No. 29 and 30]. This Court issued a new Order of Discharge for Debtor on March 3, 2015. [ECF No. 35]. A Final Decree was not subsequently re-entered by this Court.
On March 13, 2015, Debtor deposited $58,731.70, which constituted the residue of his Proceeds, into an account at First Community Bank of San Benito, Texas. Pl.Ex. H. On May 26, 2015, Romo initiated a freeze on Debtor’s bank account containing the Proceeds. Id.; [ECF No. 40].
Romo filed an Application to Employ Villeda & Romo, as Counsel on July 14, 2015. [ECF No. 37], The Application was filed for the purpose of prosecuting a § 542 action related to the non-exempt proceeds from Debtor’s sale of homestead in June 2014. [ECF No. 37, ¶ 1]. This Court granted the Application to Employ on July 22, 2015. [ECF No. 43].
On July 17, 2015, Debtor filed a pro se “Motion in Objection Against Trustee’s Action To Take Possession of Debtor’s Homestead Exemption, Proceeds & Estate”, alleging that Romo had frozen the remaining Proceeds in his bank account and requesting that an extension be granted for Debtor to finish construction of his new homestead using the proceeds. [ECF No. 40]. At the time of the filing, Debtor stated that his prior counsel had ceased representing him for unknown reasons and Debtor was therefore seeking representation. Id.
On September 17, 2015, Romo filed a Complaint for Turnover (the “Complaint”), thereby initiating the pending adversary proceeding, Case No. 15-1003, seeking the “turnover of homestead sales Proceeds that were not timely reinvested into a habitable homestead.” [Case No. 14-10031, ECF No. 49]; [Case No. 15-1003, ECF No. 1], On September 18, 2015, this Court conducted a hearing on Debtor’s Motion in Objection. At the hearing, Debtor was represented by new counsel, Richard Habermann, and former counsel, Judith Flores Saldivar of Davis Law Firm, was also in attendance. Debt- or’s Motion in Objection was mooted by the pending adversary proceeding. On October 21, 2015, Debtor filed his Response to Trustee’s Original Complaint for Turnover (the “Answer”). [ECF No. 8]. In the Answer, the Debtor admits, inter alia, that the sale of the homestead occurred during the bankruptcy, that the proceeds were divided evenly between the Debtor and the Debtor’s ex-spouse, that the Debtor used a portion of the Proceeds to purchase the New Property, that the Debtor prepared the New Property for construction, and that, as of the filing of the Complaint, the Debtor had $58,731.70 on deposit at First Community Bank. [ECF No. 8]. However, Debtor denies
On November 23, 2015, Romo filed the instant Motion for Summary Judgment arguing that summary judgment was appropriate given Debtor’s alleged partial non-reinvestment of homestead sale proceeds, given the Fifth Circuit’s decision in Viege-lahn v. Frost (In re Frost), 744 F.3d 384, 386 (5th Cir. 2014), which held that Texas Prop. Code § 41.001 provided a 6-month timeframe for reinvestment of proceeds from the sale of a homestead and that noncompliance rendered the proceeds non-exempt and subject to creditor claims. [Case No. 15-1003, ECF No. 9], Romo’s Motion did not raise any fact issues in regard to the New Property, only to the Proceeds. On December 13, 2015, Debtor filed his Response to Romo’s Motion for Summary Judgment (the “Response”). [ECF No. 14]. In his Response, Debtor substantially reiterates the same arguments, admittances, and denials as in his Answer. Id.
On December 14, 2015, Romo filed a Reply to the Response filed by Debtor. [ECF No. 15]. In the Reply, Romo argues that Debtor’s delay in reinvesting the Proceeds, due to Debtor’s proclaimed inability to secure financing, does not constitute a basis by which an extension beyond the statutory six month provision should be granted. Id. at 2-3. In addition, Romo reiterates that Debtor’s failure to reinvest all of the Proceeds into a new homestead within the statutory timeframe renders the remaining Proceeds as non-exempt under the Fifth Circuit’s In re Frost decision. Id. at ¶ 5.
On December 16, 2015, this Court conducted an evidentiary hearing (the “Hearing”), in conjunction with the planned Scheduling Conference, on the Motion for Summary Judgment. At the hearing, Debtor testified extensively and both parties offered exhibits to be admitted.
1. Exhibits offered at the Hearing;
a. Debtor’s counsel offered and moved to admit a letter from Key Mortgage. However, since Debtor’s counsel failed to follow BLR 9013-2(c)-(d),2 opposing counsel objected*690 to the exhibit and, as a result, this Court sustained the objection. Thus, it was not admitted into evidence.
b.Romo offered and moved to admit eight exhibits. All eight were admitted without objection:
i. Exhibit A: Debtor’s Schedule A filed in Case No. 14-10031
ii. Exhibit B: Warranty Deed, dated January 31, 2002, conveying title of the Homestead to Debtor and Debtor’s former spouse.
iii. Exhibit C: General Warranty Deed, dated June 5, 2014, conveying title from Debtor and Debtor’s former spouse to new owners.
iv. Exhibit D: HUD-1 Settlement Statement, dated June 5, 2014, for the transfer documented in Exhibit C.
v. Exhibit E: Warranty Deed, dated June 9, 2014, conveying title of the New Property to Debtor.
vi. Exhibit F: HUD-1 Settlement Statement for the purchase of the New Property by Debtor.
vii. Exhibit G: Summary of expenditures to prepare the New Property and supporting invoices.
viii. Exhibit H: Copy of Deposit Slip, dated March ' 13, 2015, from First Community Bank documenting deposit made by Debtor.
2.Debtor testified to the following:
a. Debtor stated, and subsequently confirmed, that the closing on the sale of the Homestead occurred on June 5, 2014. See Pl. Exs. C and D. Debtor also confirmed that the signature on the closing documents was his signature.
b. Debtor testified that, at the conclusion of the closing of the sale of his former Homestead, he had full control and free access over the Proceeds from the sale, which totaled $107,627.25, until approximately February 2015. See Pl. Ex. D.
c. Debtor testified that a portion of the Proceeds was used to purchase the New Property upon which he intended to build a new homestead. This New Property was purchased for $41,521.72 on June 9, 2014. See also Pl.Ex. E and F.
d. Debtor testified that, in addition to the purchase of the New Property, he expended an additional $9,558.96 to purchase supplies and pay contractors to prepare the property for the eventual building of a new home. See also Pl.Ex. G.
e. Debtor also testified that the present state of the New Property is such that it could not be deemed a homestead due to its uninhabitable nature and is not his homestead, thus he presently lives in Harlin-gen, Texas.
•f. Debtor had divided the Proceeds as he was attempting to secure financing to construct a home on the New Property. Debtor further testified that the deposit on March 13, 2015 was a consolidation of those two different bank accounts and totaled $58,731.70. See Pl.Ex. H.
3.On cross examination Debtor testified:
a. that his intentions for the New Property, in his opinion, had been stymied by Romo’s actions.
*691 b. that the Davis Law Firm, his prior counsel,' had communicated with Romo via email regarding the discharge, but there was no evidence to corroborate this communication.
c. that Romo had told him that he would receive his discharge within two to three weeks of the completion of the § 341 meeting.
d. that he repeatedly asked Davis Law Firm, his prior counsel, to get his discharge completed but that Davis Law Firm did not do so. But see [ECF No. 35].
e. that he had been pre-qualified for a home mortgage from Key Mortgage, a firm that Debtor had previously worked with, but the financing was contingent on the discharge being granted. See also Finding of Fact 1(a).
f. Debtor, and his counsel, attempted to hold Romo accountable for the delay in the discharge being granted, but Debtor’s counsel admitted, on the record, that both of Romo’s Motions to Extend Time to Object to Discharge that rescheduled the § 341 meeting were both due to scheduling conflicts by Debtor’s pri- or counsel at the time.
g. Debtor, in repeating what he had included in his Motion in Objection, [Case No. 14-10031, ECF No. 40], claimed that he had never been made aware of the statutory limitation to reinvest the proceeds from the sale of the Homestead.
h. that as of the date of the hearing, he had no construction blueprints or plans for the home that he intended to build on the New Property
4. Debtor also provided limited testimony on redirect'and testified to the following:
a. Romo did not represent Debtor as his attorney, but only served as the Trustee for the chapter 7 bankruptcy estate.
b. Debtor estimated that the total cost of the home that he intended to build on the New Property was approximately $150,000, excluding all the site preparation work that had been done, thus meaning he would require approximately an additional $100,000 in financing to complete the project.
IV. CONCLUSIONS OF LAW
a. Jurisdiction & Venue
This Court holds jurisdiction pursuant to 28 U.S.C. § 1334, which provides that “the district courts shall have original and exclusive jurisdiction of all cases under title 11.” 11'U.S.C. § 157 allows a district court to “refer” all bankruptcy and related cases to the bankruptcy court, wherein the latter court will appropriately preside over the matter. The Southern District of Texas’s standing “Order of Reference to Bankruptcy Judges,” provides for the automatic referral of bankruptcy cases to bankruptcy courts. In re: Order of Reference to Bankruptcy Judges, General Order 2012-6 (S.D.Tex. May 24, 2012). This is a core matter for the purpose of § 157, which provides that bankruptcy judges may issue final orders or judgments where the matter is determined to be core. Section 157 enumerates a non-exclusive list of core matters, which includes “matters concerning the administration of the estate.” 11 U.S.C. § 157. The decision to grant or deny a settlement, which includes a decision on awarding compensation to a professional, is squarely one that involves the administration of an estate and furthermore the allowance or disallowance of exemptions from property of the estate.
This Court may only hear a case in which venue is proper. Venue with respect to cases under title 11 is governed by 28 U.S.C. § 1408, which designates that venue may hold wherever “in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity ...” In his petition, Debtor designates his principal place of residence as Harlingen, Texas. Therefore, venue is proper.
b. Constitutional Authority To Enter A Final Order
This Court also has an independent duty to evaluate whether it has the constitutional authority .to sign a final order. Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). In Stern v. Marshall, the Supreme Court considered the constitutional limitations that Article III imposes upon § 157’s grant of final order and judgment powers to non-Article III courts. Id. The Supreme Court held that § 157 violated Article III to the extent that it authorized final judgments on certain matters. Id. at 2616. The Court found that the particular bankruptcy ruling in dispute did not stem from bankruptcy itself, nor would it necessarily be resolved in the claims allowance pro cess, and it only rested in a state law counterclaim by the estate. Id. at 2618. The Court reasoned that bankruptcy judges are not protected by the lifetime tenure attribute of Article III judges, but they were performing Article III judgments by judging on “all matters of fact and law” with finality. Id. at 2618-19. Hence, the Court held that Article III imposes some restrictions against a bankruptcy judge’s power to rule with finality. The Court found that a solely state law based counterclaim, while statutorily within the bankruptcy judge’s purview, escaped a bankruptcy court’s constitutional power. Id. at 2620. This Court reads Stem to authorize final judgments only where the issue is rooted in a right created by federal bankruptcy or the resolution of which relies on the claims allowance process. In other words, this Court may issue final judgments and orders where the issue “arises in” or “arises under” bankruptcy, but not where the issue is merely “related to” bankruptcy. See 28 U.S.C. § 157. However, even where the case does create a “Stern problem,” Article III will be satisfied where the parties to the case knowingly and voluntarily consent to the bankruptcy court’s power to issue final judgments. Wellness Int’l Network v. Sharif, — U.S. -, 135 S.Ct. 1932, 1938-39, 191 L.Ed.2d 911 (2015).
The matter at bar requires this Court to evaluate the chapter 7 trustee’s Motion for Summary Judgment, [ECF No. 9], for the adversary proceeding seeking to require the Debtor to turn over assets belonging to the bankruptcy estate, a matter which solely concerns federal bankruptcy law. See 11 U.S.C. § 542. Therefore, this Court holds constitutional authority to enter a final order and judgment with respect to the core matter at bar.
c. The Legal Standard
1. Motion for Summary Judgment
In the Federal Rules of Civil Procedure, summary judgment is proper when there “is no genuine dispute as to any material fact and the movant is entitled to. judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also Williams v. Placid Oil Co. (In re Placid Oil Co.), 753 F.3d 151, 154 (5th Cir. 2014). Rule 7056 of the Federal Rules of Bankruptcy Procedure incorpo
citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.
Fed. R. Civ. P. 56(c)(1)(A)-(B). Additionally, Rule 56 provides that an opposing party may object to the material cited by the movant when the material is not presented in a form that is admissible as evidence in the proceeding. Fed. R. Civ. P. 56(c)(2). Furthermore, Rule 56 also provides that courts may consider other material found in the record beyond what has been cited by a party. Fed. R. Civ. P. 56(c)(3). The ability to consider material found in the record does not mean that the court must engage in a quest to pursue support for the non-movant. Malacara v. Garber, 353 F.3d 393, 405 (5th Cir. 2003). The courts must, in determining whether there is a material issue, interpret “the facts and the inferences to be drawn there from in the light most favorable to the nonmoving party.” Kinkade v. Kinkade (In re Kinkade), 707 F.3d 546, 548 (5th Cir. 2013) (citing to Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410, 412 (5th Cir. 2003)); see also Campo v. Allstate Ins. Co., 562 F.3d 751, 754 (5th Cir. 2009). In order for a fact to rise to the level of a genuine issue of material fact, the fact must be one that “could affect the outcome of an action or allow a reasonable fact finder to find in favor of the nonmoving party.” In re Fauser, No. 10-31501, 2015 WL 877451, at *1-2 (Bankr.S.D.Tex. Feb. 26, 2015) (citing to Brumfield v. Hollins, 551 F.3d 322, 326 (5th Cir. 2008)); see also Randall D. Wolcott, M.D., P.A. v. Sebelius, 497 Fed.Appx. 400, 404 (5th Cir. 2012) (citing to Crowe v. Henry, 115 F.3d 294, 296 (5th Cir. 1997), which states that “A factual dispute is ‘genuine,’ if the evidence is such that a reasonable [trier of fact] could return a verdict for the non-moving party.”). In other words, the non-movant bears the burden of showing a genuine dispute through specific evidence, which includes the requirement that the non-movant demonstrate to the court “the manner in which that evidence supports [their] claim.” Id. at *3 (citing to Fed.R.Civ.P. (56(c)(1); Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Johnson v. Deep E. Tex. Reg’l Narcotics Trafficking Task Force, 379 F.3d 293, 301 (5th Cir. 2004)). The burden shifts to the non-movant only if the movant should meet its burden of demonstrating the “absence of any genuine issues of material fact,” at which time the non-moving party must “establish that there is a genuine issue of material fact in dispute.” Condrey v. SunTrust Bank of Ga., 431 F.3d 191, 197 (5th Cir. 2005) (citing to Celotex, 477 U.S. at 322, 106 S.Ct. 2548). If a party fails to establish “the existence of an element essential to that
Alternatively, the 2010 amendment to the Federal Rules of Civil Procedure codified what had been a long standing belief that courts were permitted to enter summary judgment sua sponte against a nonmovant when that party was on notice. See Fed. R. Civ.P. 56(f)
2. Texas Homestead Rights and Fifth Circuit Precedent
a. Texas Property Code § Jpl.001 and Texas Homestead Rights
The Bankruptcy Code provides that a debtor may exempt property interests from the bankruptcy estate under either federal exemptions or, if available, state exemption provisions. 11 U.S.C. § 522(b); Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991) (discussing the process and decisions required for the debtor to exempt property from the estate). Once a property interest has been exempted, the property is not liable for most pre-petition debts, absent dismissal of the case. § 522(c) (detailing the types of pre-petition debts that exempt property can be liable for); see also Owen, 500 U.S. at 308, 111 S.Ct. 1833; In re Luongo, 259 F.3d 323, 335 (5th Cir. 2001) (stating that “[pjroperty that is properly exempted under § 522 is (with some exceptions) immunized against liability for prebankruptcy debts”). Texas law has, historically, provided and continues to provide very generous protections to the homestead. England v. FDIC (In re England), 975 F.2d 1168, 1172, 1174-75 (5th Cir. 1992); In re Smith, 514 B.R. 838, 842-44 (Bankr.S.D.Tex. 2014); In re D’Avila, 498 B.R. 150 (Bankr.W.D.Tex. 2013). The application of homestead exemptions in the bankruptcy context is an interpretation of Texas law, as developed by Texas courts, and so this Court must determine what the current state of the law is for Texas homestead exemptions. In re Norra, 421 B.R. 782, 789 (Bankr.S.D.Tex. 2009) (citing to In re Moody, 77 B.R. 580, 590 (S.D.Tex. 1987) (“Bankruptcy courts must resort to state law for an interpretation of state exemption rights in homesteads”), aff'd, 862 F.2d 1194, 1201 (5th Cir. 1989); In re Leonard, 194 B.R. 807, 810 (Bankr.N.D.Tex. 1996) (a “bankruptcy court must look to state law to interpret state homestead exemption rights.”)). The Texas Constitution provides the definition for a homestead in Article XVI, § 51, which states:
The homestead, not in a town or city, shall consist of not more than two hundred acres of land, which may be in one or more parcels, with the improvements thereon; the homestead in a city, town or village, shall consist of a lot or contiguous lots amounting to not more than 10 acres of land, together with any improvements on the land; provided, that the homestead in a city, town or village shall be used for the purposes of a home, or as both an urban home and a place to exercise a calling or business, of the homestead claimant, whether a single adult person, or the head of a family; provided also, that any temporary renting of the homestead shall not change the character of the same, when no other homestead has been acquired ...
In addition to the homestead protection enshrined in the Texas Constitution, the Texas Property Code also contains a provision that grants an exemption to the homestead from most encumbrances and that grants a six month timeframe for which proceeds from the sale of a homestead are “not subject to seizure for a creditor’s claim ... after the date of sale.” Tex. Prop.Code § 41.001(a)
In order for property to be properly exempted as a homestead, there
Accordingly, a person is entitled to homestead protections under Texas law when that person can demonstrate the requisite intent to make non-homestead real property their homestead when that intent is coupled with overt acts beyond mere ownership and at minimum taking good faith preparatory measures on such
However, the protection of the homestead upon sale is a different matter. Section 41.001(c) also provides a limited exemption on proceeds from a properly claimed homestead. The present limitation is a six-month time period from the sale of the homestead and receipt of the proceeds by the owner. Tex. Prop. Code § 41.001(c) (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.”) (the “Proceeds Rule”); In re Frost, 744 F.3d at 391 (affirming the bankruptcy court’s order distributing a portion of the proceeds from the sale of an exempt homestead to creditors based on debtor’s violation of § 41.001(c) by failing to reinvest the distributed proceeds into a new homestead within six months). This limitation is designed such that Texas citizens can have time to transition to a new homestead from their prior homestead without having creditors seizing the proceeds upon sale of the homestead. See In re England, 975 F.2d at 1174-75 (discussing the history of the homestead exemptions in Texas, noting that the 1897 statute was enacted to prevent “those who voluntarily sold their homestead with the intention of investing the sale proceeds in another homestead ... [from] fac[ing] ... the possibility of losing all of the proceeds to creditors”); see also Kirby v. Giddings, 75 Tex. 679, 13 S.W. 27 (1890). A debtor in bankruptcy, however, faces a less straightforward application of the Proceeds Rule based on differences between the various chapters of bankruptcy. See In re Frost, 744 F.3d at 384-90; In re Morgan, 481 Fed.Appx. 183, 183-84 (5th Cir. 2012); In re Zibman, 268 F.3d 298, 301-05 (5th Cir. 2001); In re England, 975 F.2d at 1168; Lowe v. DeBerry (In re DeBerry), Adv. No. 15-05054, 2015 WL 6528024, at *1, *2-4 (Bankr.W.D.Tex. Oct. 28, 2015); In re Smith, 514 B.R. at 842-44; In re D’Avila, 498 B.R. at 153-57; Lowe v. Yochem (In re Reed), 184 B.R. 733, 735 (Bankr.W.D.Tex. 1995).
b. Fifth Circuit Interpretations of Texas Property Code § 11-001
The Fifth Circuit has discussed the ramifications of proceeds from the sale of a homestead not being used towards a new homestead, in part or in whole, within the six-month statutory limitation on several occasions based on the Texas homestead exemption. In re Frost, 744 F.3d 384 (5th Cir. 2014); In re Morgan, 481 Fed.Appx. at 183; In re Zibman, 268 F.3d at 301-05; In re England, 975 F.2d at 1168. This Court will now examine the relevant federal case law on the issue of homestead exemptions, proceeds from a sale of the homestead, and what impact, if any, such exemption provisions will have on this debtor and in this particular case.
The Fifth Circuit examined dual homestead exemption claims by a chapter 7 debtor in In re England. 975 F.2d at 1170-71. In In re England, the debtor and non-debtor spouse owned an urban homestead, which was sold pre-petition and for which the debtor received $10,000 cash and a Note Receivable in the amount of $210,000, which contained a balloon,
The Fifth Circuit in Zibman heard an appeal on the issue of exemptions under Texas law for the proceeds from the sale of a homestead. In re Zibman, 268 F.3d at 298. In Zibman, the debtors sold their Texas homestead in November 1998, which was approximately three months prior to their filing for chapter 7 bankruptcy. Id-at 300-01. The debtors completed then-move out of Texas in February 1999 and filed for bankruptcy four days later, where they claimed an exemption on the full amount of the proceeds. Id. at 300. The chapter 7 trustee objected to the exemption in May 1999, for which the bankruptcy court, and district court on appeal, relied on the “snapshot rule”
In Morgan, the Fifth Circuit examined a case where a debtor sold a homestead post-petition, but failed to reinvest the proceeds within the six-month limitation provided by statute. 481 Fed.Appx. at 183-84. The matter came before the Fifth Circuit as an appeal by the chapter 7 trustee after the district court affirmed the bankruptcy court’s final order denying the objection made on the debtor’s claim of exemption by the trustee. Id. at 184. When the debtor filed chapter 7 bankruptcy in July 2010, he elected to use federal exemptions and there was no exempted equity in the homestead. Id. The debtor proceeded to sell the homestead, pay the secured creditor for the homestead, and then amend the schedules in order to elect Texas state law exemptions for the homestead proceeds in February 2011. Id. The trustee objected to the exemption in the amended schedules on the basis that § 41.001(c) protects the homestead proceeds temporarily and argued that as the six-month proceeds exemption period had elapsed without the proceeds being reinvested into a new homestead, the proceeds were no longer exempt. Id. The debtor argued that since he possessed a homestead exemption at the filing of the petition, the proceeds derived from the sale of that homestead were also exempt but without temporal limitation. Id. The Fifth Circuit noted that the debtor’s argument was flawed because the debtor claimed the homestead exemption only after he sold the house, thus attempting to exempt proceeds rather than the homestead itself, and under operation of § 541(a), the proceeds had already become property of the estate. In re Morgan, 481 Fed.Appx. at 185-86 (citing to Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991), for the proposition that while the debtor may exempt certain property from property of the estate, the estate must possess an interest in the property for an effective exemption); see also 11 U.S.C. § 541(a); Payne v. Wood, 775 F.2d 202, 204 (7th Cir. 1985) (discussing how the debtor’s interest in property transfers to the trustee, upon filing for bankruptcy, from the debtor). The Fifth Circuit further distinguished In re Morgan from that of In re Reed,
Finally, the Fifth Circuit most recently confronted the issue of unused proceeds from the sale of a homestead when deciding In re Frost, 744 F.3d at 384. The debtor, upon filing his chapter 13 bankruptcy petition, declared-his homestead as exempt under Texas law, but subsequently sold the homestead post-petition. Id. at 385. While the proceeds were exempt under Texas law for six-months, the bankruptcy court determined, based on the holding in Zibman, that the debtor had failed to reinvest the proceeds into a new homestead within that timeframe and ordered that the proceeds be distributed to the creditors. Id. at 385-86. On appeal before the district court, the debtor attempted to distinguish the facts of Zib-man, inter alia, from the facts of his case and argued for the permanent exemption of the proceeds rather than the temporary exemption provided by § 41.001(c) — an argument that the district court rejected in affirming the bankruptcy court’s order. Id. at 386. On appeal, the Fifth Circuit reviewed the “snapshot rule” in conjunction with the holding in Zibman on the applicability of the “entire state law applicable on the filing date” and then used those two premises to analyze the facts presented in the debtor’s case. Id. at 386-89 (emphasis omitted) (concluding that “Frost’s reading of the statute is in conflict with Zibman and cannot be accepted”). The Fifth Circuit further analyzed prior holdings before concluding that the current precedent provides that the sale of a homestead voids the exemption and that proceeds not reinvested within the six-month statutory provision, regardless of pre or post-petition timing, become nonexempt. In re Frost, 744 F.3d at 388-89; see also In re England, 975 F.2d at 1174-75 (holding that “the acquisition of another homestead during that six month period instantly changes the prior homestead to former homestead and deactivates the proceeds exemption statute such that the proceeds of the former homestead are no longer exempt”). The Fifth Circuit concluded by emphasizing that the debtor’s exemption of the homestead property has no value limitation, but rather, the exemption is “land itself — not its monetary value — -that is protected under Texas law ...” In re Frost, 744 F.3d at 391. Thus, the decision of the district court was affirmed and the debtor’s unused proceeds were non-exempt and, accordingly, subject to pre-petition creditor claims. Id.
Thus, the foregoing cases create a uniform interpretation of the applicability of § 41.001 in bankruptcy to the extent that the temporal limitations of § 41.001(c) are violated. The effect is that the debtor’s homestead is subject to the loss of its exemption because the snapshot taken upon filing catches the potential for movement not unlike a photograph from a Harry Potter novel captures the movement of the subjects in the photograph.
Given the limited time since the Fifth Circuit rendered its decision in Frost, there have been limited interpretations of § 41.001(c) and there are even fewer instances arising in a chapter 7.
As briefly considered by the Morgan court, In re Reed provides an analysis of a debtor’s post-petition sale of homestead property and the effect of the homestead exemption on the proceeds of the sale. In re Reed, 184 B.R. at 735-36; see also In re Morgan, 481 Fed.Appx. at 185-86 (distinguishing, but not overruling or rejecting, In re Reed from the matter before the court). In early 1991, the debtor filed his initial petition for chapter 11 bankruptcy and claimed a rural home as his exempt homestead pursuant to the Texas exemption law. Id. at 735. The debtor sold the house approximately a year and a half after filing his petition and the purchaser provided cash and a note for the exempted homestead. Id. However, the debtor had a number of expenses related to the sale of the homestead and, in turn, the purchase note was pledged for each of these expenses. Id. at 735-36 (detailing the expenses by party and the value owed). The debtor and his spouse purchased a new ranch for their home, and this too involved a pledge of the purchase note. Id. at 735. In May 1993, the chapter 11 case was converted to a chapter 7 and the homestead buyer subsequently paid off the outstanding note, which had been placed in trust with the debtor’s attorney. Id. at 735-36. Accordingly, the debtor’s attorney made corresponding payments to each of the parties owed money by the debtor in relation to the post-petition real estate transactions. In re Reed, 184 B.R. at 736. After the debtor had been granted a discharge, the chapter 7 trustee brought an adversary proceeding to avoid the transfers, contending that they amounted to unauthorized transfers of estate property. Id. The basis for the trustee’s argument was that the homestead proceeds had lost their exemption, pursuant to § 41.001(c), prior to the conversion to chapter 7 and thus became property of the chapter 7 estate. Id. To address the arguments made by the trustee, the court first defined what property interests of the debtor becomes property of the estate upon the commencement of the case and determined that, pursuant to 11 U.S.C. § 541(a)(1)-(7), all property interests possessed by the debtor prior to commencement of the case become property of the estate by operation of statute even if the debtor intends to exempt the assets.
In 2013, the D’Avila court reviewed another case of a post-petition sale of a homestead by a chapter 7 debtor. In re D’Avila, 498 B.R. at 150. The debtor owned the house jointly with her estranged husband, but was exempted pursuant to the Texas homestead exemption, and sought to sell the property based on a pre-petition contract to sell the home. Id. at 152. The chapter 7 trustee objected to the debtor’s application to sell on the basis that the proceeds from the homestead sale are subject to a six-month limitation for the exemption and sought an extension on the objection deadline. Id. at 152-53. The court reviewed § 41.001(c) and the snapshot rule, including its application in Zibman, before turning to how the Fifth Circuit applied the Texas Proceeds Rule in Morgan. Id. at 154-57. The court contrasted the case law, but ultimately determined that both Zibman and Morgan were distinguishable, since both cases dealt with the exemption of proceeds, not the exemption of a homestead itself. Id. at 157. The court also distinguished two chapter 13 cases, In re Zavala, 366 B.R. 643 (Bankr.W.D.Tex. 2007), and the district court’s decision in Frost, and noted that a chapter 13 case is factually distinguishable from that of a chapter 7, due to absence of a provision whereby property of the estate is as broadly construed as in a chapter 13 case. In re D’Avila, 498 B.R. at 157-59. Importantly, the court noted how the In re Frost bankruptcy court’s response to the debtor’s attempt to distinguish Zibman in the case of a post-petition sale, which was, inter alia, that:
If it was a Chapter 7,1 would agree with you. But since it’s a Chapter 13, you have — you don’t have a snapshot of property of the estate.... During a 13 ... new property of the estate comes in during the pendency of the case and becomes property of the estate.
The first post-Frost case, In re Smith, provides an analysis of the sale of an exempted homestead post-petition and post-discharge by the debtors but prior to the case being closed. 514 B.R. 838, 841 (Bankr.S.D.Tex. 2014). The debtors filed for chapter 7 bankruptcy on March 20, 2012 and received their discharge on April 25, 2013. Id. at 841. After receiving their discharge, the debtors sold their properly exempted homestead on June 21, 2013, resulting in net proceeds of $813,935.77, and which were not reinvested into a new homestead within six-months as required by § 41.001(c). Id. The chapter 7 trustee initiated an adversary proceeding for turnover of the proceeds, arguing that they were non-exempt by operation of law. Id. The bankruptcy court reviewed the history behind the Proceeds Rule, including the effect of In re England, and reactions by the legislature that brought about the current revision of the statute. Id. at 842-45. The bankruptcy court also discussed the holding from In re Frost, which was announced five months earlier, and how it applies to chapter 7 as well as chapter 13 cases. Id. at 844-50. The bankruptcy court reasoned that, since the decision in In re Frost was premised upon § 41.001(c) and not 11 U.S.C. § 1306,
The Smith court, in order to further support its conclusion, cited to a sister court’s opinion, In re Evans, 135 B.R. 261 (Bankr.S.D.Tex. 1991). In re Evans dealt with dueling exemptions in a similar fact pattern to that of In re England, which was decided the following year. Compare
The second post-Frost case is In re DeBerry and analyzes a similar situation as In re Smith and the instant matter. In re DeBerry, 2015 WL 6528024, at *1. In In re DeBerry, the issue before the court was “whether the proceeds from the post-petition sale of a chapter 7 debtor’s properly exempted Texas homestead loses its exempt character if not reinvested in another Texas homestead within six months following the date of sale.” Id. The debtor had filed for bankruptcy in February 2014, properly exempted his homestead, but sought and received court approval to sell the homestead in September 2014. Id. After the sale had been completed, the debtor failed to reinvest the proceeds into .a new homestead within the six-month statutory limitation and the chapter 7 trustee initiated an adversary proceeding to recover the proceeds for the benefit of the pre-petition creditors. Id. The DeBerry court reviewed the Zibman, Morgan, and Frost decisions by the Fifth Circuit for their applicability in the matter before the court, but distinguished all three as factually dissimilar. Id. at *2-3;
d. In re Brown — Clarifying the Meaning of In re Frost?
The Fifth Circuit briefly addressed the interpretations of the effect of the snapshot rule from In re Frost and In re Zibman. In re Brown, 807 F.3d 701, 709-10 (5th Cir. 2015). In Brown, the Fifth Circuit addressed a chapter 7 bankruptcy wherein the debtor died during the pen-dency of the case and the chapter 7 trustee objected to certain claims on the basis that the Texas Estates Code provision relied upon for the exemption was not applicable. Id. at 704-05. The debtor died, effectively intestate, in Florida, but had previously resided in Texas, and thus the issue of which state law exemptions were applicable was the primary issue, as the debtor’s personal representative was attempting to
Zibman and Frost hold that, if a debtor is eligible for a state law exemption at the time he files bankruptcy, but the debtor fails to comply with the State’s requirements for remaining eligible for that exemption throughout the entirety of the bankruptcy case, then the debtor loses the exemption. Neither Zibman nor Frost holds that a debtor may become eligible for an exemption that was originally unavailable to him when circumstances change during the pendency of the bankruptcy.
Id. (emphasis in original). Thus, the debt- or’s argument failed because he was ineligible for exemptions under the Texas Estate Code at the time of filing and his death is immaterial. Id. at 710. The Fifth Circuit’s resolution of the remainder of the case disposes of unrelated issues to the instant matter at bar, but consisted of the application of laws of Florida. Id. at 710-16. Ultimately, In re Brown does not clarify the meaning or applicability of In re Frost in a chapter 7 bankruptcy such as the one before this Court. Recall that In re Zibman, a chapter 7 proceeding, stands for the proposition that the snapshot rule catches both the asset exempted and the governing state law at the time of filing and In re Frost, a chapter 13 proceeding, stands for the proposition that § 41.001(c)’s temporal limitation of exemption must be complied with or a debtor will face the loss of their homestead proceeds exemption, but neither case stands for the proposition that the holding in In re Frost is applicable in a chapter 7 proceeding such as the one before this Court today.
e. PosC-Petition Homestead Sales in Chapter 7 Bankruptcies Post-Frost
The preceding cases demonstrate a dichotomy of holdings within Texas bankruptcy courts, but show a consistent approach by the Fifth Circuit in a variety of differing factual scenarios. Thus, the Frost court’s summary of Fifth Circuit precedent is that “(i) the sale of the homestead void[s] the homestead exemption and (ii) the failure to reinvest the proceeds within six months void[s] the proceeds exemption, regardless of whether the sale occurred pre- or post-petition.” Id. at 388; see also In re Brown, 807 F.3d 701, 709-10 (5th Cir. 2015) (explaining that the holdings of Zibman and Frost create a single interpretation, regardless of the chapter of bankruptcy case at bar, of § 41.001(c) that requires a debtor to remain “eligible for th[e] exemption throughout the entirety of the bankruptcy case” or risk losing the exemption).
The facts of the instant case do not fit into the precedent of the Fifth Circuit cases as Debtor properly -exempted his Texas homestead, without objection by Romo, and, with court approval, sold the Homestead post-petition. This Court will now discuss how each of the precedents,
1. Application of Proceeds Rule in Chapter 7 Cases
As previously discussed, supra, there are three chapter 7 cases where the Fifth Circuit has analyzed the Proceeds Rule and each is distinguishable from the instant matter. First, In re Zibman is factually distinguishable'in cases, such as here, where a debtor opts to exempt the actual homestead, rather than homestead proceeds, under Texas law in their initial petition and subsequently sells the homestead post-petition. Second, In re Morgan is also factually distinguishable from the instant case where the homestead is exempted pursuant to Texas law, rather than under federal law with no exempted value, sells the exempted homestead post-petition, and then attempts to exempt the homestead proceeds under Texas law. Third, In re England is distinguishable, in some respects, when a debtor exempts only a homestead and does not attempt to exempt proceeds from the pre-petition sale of a prior homestead as well.
Here, Debtor properly exempted the Homestead, pursuant to Tex. Prop. Code §§ 41.001-002, not proceeds from a pre-petition sale of his homestead as in Zib-man. Thus, Debtor is similar to the debt- or in England with respect to his exemption of the rural homestead, but dissimilar to the England debtor by not attempting to exempt prior homestead proceeds as well. Furthermore, Debtor elected to exempt his homestead under Texas law, thus fully exempting the value of the homestead less secured liens, not proceeds from a post-petition sale of the homestead as in Morgan. Therefore, all three of the chapter 7 precedent cases are distinguishable to the instant ease on material facts relevant to their disposition and, as such, are not controlling in the instant case.
2. Understanding the Underpinnings of In re Frost
The remaining Fifth Circuit precedent is In re Frost. There are facts from the underlying bankruptcy case, and thus contributing to the affirmed order, of In re Frost that are factually distinguishable from the instant case and, like the subsurface portion of an iceberg, must be taken into account. Taking these underlying facts into consideration, in this Court’s opinion, is key to understanding what proposition the decision in In re Frost really stands for. The context of In re Frost, which is raised in the parties’ briefs, is not controlling, but they are persuasive to the extent that they reveal the underlying facts upon which In re Frost is built.
First, at the most basic level, the instant case is a chapter 7 bankruptcy, rather than the chapter 13 bankruptcy in Frost. While not determinative by itself, as the Frost court did not specifically rely on any provisions of chapter 13 bankruptcy as a basis of authority, there are certain provisions of chapter 13 that provide significant context for the decision. See Br. for Appellant at 13-16, In re Frost, 744 F.3d 384 (5th Cir. 2014), (No. 12-50811), 2012 WL 5464325; Br. for Appellee at 20, 29, 32-35, 744 F.3d 384 (5th Cir. 2014), (No. 12-50811), 2012 WL 6563305; Reply Br. for Appellant at 1-2, 5, 744 F.3d 384 (5th Cir. 2014), (No. 12-50811); see also In re Frost, 744 F.3d at 389; see also In re Smith, 514 B.R. at 848. To wit, the chapter 13 trustee presented arguments based on the distinctions between the two chapters of bankruptcy, when noting the difference between Frost, as a chapter 13 debt- or thus subject to 11 U.S.C. § 1306, and the debtor from Reed v. Lowe, which Frost attempted to rely upon for authority in his brief, as a basis for the chapter 13 trustee’s argument as to why In re Reed was inapposite and the proceeds should be
Second, as pointed out by the chapter 13 trustee in her brief, the chapter 13 plan, in use by the Western District of Texas, San Antonio Division at the time of the case,
The first of these issues is the retention of the “exempt” property by the chapter 13 estate, which means that Frost’s exempted homestead, while proper, remained property of the estate until the exempted homestead fully vested back in Frost upon discharge. The chapter 13 plan’s treatment of the homestead is significant given the timeline of the case. Frost’s Motion to Sell Property was granted by the bankruptcy court on March 26, 2010, more than a year before Frost’s chapter 13 plan was confirmed. Compare Order Granting Debtor’s Motion to Sell Real Property Free An[d] Clear of All Liens and Interests, In re Frost, No. 09-54674 (Bankr.W.D.Tex. Mar. 26, 2010), ECF No. 23 with Order Confirming the Debtor’s Chapter 13 Plan, In re Frost, No. 09-54674 (Bankr.W.D.Tex. May 20, 2011), ECF No. 69. Therefore, pursuant to the chapter 13 plan, the homestead had not fully revested in Frost and thus was still property of the estate at the time Frost sold his homestead irrespective of unmodified operation of § 1327(b).
The Supreme Court and the Fifth Circuit have reviewed § 1327(b) on several occasions and given effect to the plain meaning of the statute. Harris v. Viege-lahn, — U.S. -, 135 S.Ct. 1829, 1839, 191 L.Ed.2d 783 (2015) (discussing the impact of the chapter 13 plan provisions, as
3. Implied Analysis of In re Frost
If Frost’s homestead was property of the estate under the chapter 13 plan, then the second issue focuses on the appropriate framework to analyze the impact of the Proceeds Rule on Frost’s homestead sale proceeds. As such, the appropriate section of the Code is either under 11 U.S.C. § 1306, as after-acquired property, or 11 U.S.C. § 541(a)(6), as proceeds of property of the estate. The implied analysis in Frost, albeit not specifically mentioned by the Fifth Circuit, as to the effect of the Proceeds Rule derives from 11 U.S.C. § 541(a), as the homestead, despite its exemption, had not vested in the debtor and was still property of the chapter 13 estate at the time the exemption was claimed through the time the statutory six-month provision terminated. Compare Order Granting Debtor’s Motion to Sell Real Property Free An[d] Clear of All Liens and Interests, In re Frost, No. 09-54674 (Bankr.W.D.Tex. Mar. 26, 2010), ECF No. 23 and Order Confirming the Debtor’s Chapter 13 Plan, In re Frost, No. 09-54674 (Bankr.W.D.Tex. May 20, 2011), ECF No. 69 with 11 U.S.C § 1327 and 11 U.S.C § 541(a). The district court in Frost applied Zibman, inter alia, as a basis to analyze the impact of the Proceeds Rule and determined that, as required by Zib-man, the homestead exemption was terminated upon Frost’s failure to meet the requirements imposed by the Proceeds Rule. Memorandum Opinion and Order Affirming Decision of the Bankruptcy Court, In re Frost, No. 09-54674 (Bankr.W.D.Tex. July 9, 2012), ECF No. 111 (Opinion of the District Court for the Western District of Texas citing to In re Zibman, 268 F.3d 298, 304-05 (5th Cir. 2001), for the proposition that exemption of proceeds evanesced by operation of law at the end of the six-month statutory provision of § 41.001(c)); see also In re Davis, 170 F.3d 475, 483 n. 10 (5th Cir. 1999). In doing so, the district court affirmed the bankruptcy court’s interpretation of Frost’s proceeds as, upon the six months elapsing, becoming non-exempt and property of the estate to the extent that Frost had not used the $23,000 on a new homestead. Id. at 7.
By analyzing the sale of Frost’s homestead under a § 541(a) framework, due to the provisions of the chapter 13 plan, the outcome of In re Frost becomes a much clearer standard to apply. According to the Fifth Circuit, at the termination of the six-month exemption under § 41.001(c), Frost’s distributed proceeds from the homestead sale reverted back to the chapter 13 estate. In re Frost, 744 F.3d at 389. However, by looking to the provisions of
This interpretation of the underlying facts of Frost’s chapter 13 bankruptcy case is also supported by the Fifth Circuit’s analysis in In re Morgan, where the debt- or failed to exempt any value on his homestead under the federal exemptions, thus resulting in the homestead passing into the bankruptcy estate under § 541(a) upon the filing of Morgan’s petition. 481 Fed.Appx. at 184-86. The debtor subsequently sold the homestead property and then attempted to exempt the proceeds pursuant to § 41.001. Id. at 184-187. The Fifth Circuit analogized the Morgan case to a prior case in order to determine that “[wjhen Ronald filed his bankruptcy petition and did not claim an exemption for his Texas homestead, that property passed by operation of law into the bankruptcy estate” and the later sale of the homestead resulted in “the proceeds of that sale, and not the homestead itself, ... [being] property of the estate.” Id. at 186-87 (citing to Hardage v. Herring National Bank, 837 F.2d 1319 (5th Cir. 1988), and 11 U.S.C. § 541(a)). Therefore, upon Frost’s failure to comply with the provisions of § 41.001(c), the distributed proceeds became non-exempt property of the estate, just as the homestead proceeds had in Morgan, and, pursuant to § 541(a)(6), the distributed proceeds were reclaimed by the chapter 13 estate as proceeds of property of the estate, just as they had been in Morgan.
Additionally, an implied analysis of Frost’s distributed proceeds under the guise of § 1306 can be completed by analogizing the distributed proceeds to case law on the sale of non-exempt assets in a chapter 13 bankruptcy. The bankruptcy court in In re Garcia analyzed a similar fact pattern to that of Frost, but in a plan modification context, and came to a similar conclusion by applying § 541(a)(6) and § 1306 to determine that the homestead proceeds became non-exempt property of the estate upon failure to reinvest within
Therefore, using either § 541(a) or § 1306 results in the same outcome for Frost’s distributed proceeds — once the temporal exemption was lost, the assets reverted to their initial status as property of the chapter 13 estate and, thus, eligible for distribution to creditors.
. 4. In re Frost Does Not Apply in the Instant Chapter 7 Bankruptcy
Having reviewed the holding of In re Frost, given its proper context, and examined the effects of § 1306, § 1327, and § 541(a) within the underlying facts of the case, this Court will now turn to determining the extent, if any, to which the core holding of In re Frost applies in this chapter 7 bankruptcy. This Court’s analysis is aided by the analysis of our learned sister court’s opinion in In re Smith, discussed in greater detail above, and its interpretation of Frost in a chapter 7 context and, more recently, In re DeBerry.
The Smith court concluded that Frost’s central holding applied in the chapter 7
However, as previously discussed, § 1306 is not the only avenue for Frost’s distributed proceeds to have reverted to property of the chapter 13 estate. In this Court’s opinion, the more persuasive argument is that Frost’s distributed proceeds were exempted, but, pursuant to the chapter 13 plan, remained property of the estate, having not fully revested in the debt- or, until the point at which the temporal exemption expired. At the moment the exemption lapsed, the distributed proceeds were simply reclaimed by the chapter 13 estate by operation of § 541(a)(6). Furthermore, the key section that permitted this retention to occur is § 1327(b) and, importantly, there is no similar provision applicable in a chapter 7 bankruptcy that constrains the transfer of property from the bankruptcy estate back to the debtor upon exemption or the loss thereof. This retention is unlike the debtor in In re Reed, where the court concluded that as the exempt property had been withdrawn from the bankruptcy estate, § 541(a)(6)-(7) could not act to revest an exempted property interest back into the bankruptcy estate and, as such, the relief sought by the trustee was inappropriate because the thing they sought was not property of the estate, but former property of the estate now revested in the debtor. In re Reed, 184 B.R. at 738-41. Thus, Frost’s proceeds, once the exemption had lapsed, are no different than those of the debtors in Zibman, Morgan, or England, where each had been effectively only, at best, contingently exempt by operation of the Proceeds Rule and compliance thereto. In re Morgan, 481 Fed.Appx. at 186-87; In re Zibman, 268 F.3d at 304 (stating that the effect of the lower courts’ treatment of Zibman’s proceeds was to “effectively read the 6-month limitation out of the statute, and transform an explicitly limited exemption into a permanent one”); In re England, 975 F.2d at 1175 (concluding that England’s act of claiming a homestead exemption on his ranch terminated the exemption on the proceeds of his urban homestead); see also In re DeBerry, 2015 WL 6528024, at *2-3 (discussing how the exemptions by the debtor in Zibman and Morgan were “necessarily contingent upon their reinvestment and lost their character when the proceeds were not timely reinvested”); In re D’Avila, 498 B.R. at 155 (discussing how the debtor in both Zibman and Myers held mere contingent exemptions that “could be established or lost depending on later events.”).
Finally, the bankruptcy estate also includes “[a]ny interest in property that the estate acquires after the commencement of the case.” § 541(a)(7). “Congress enacted § 541(a)(7) to clarify its intention that § 541 be an ‘all-embracing definition and to ensure that property interests created with or by property of the estate are themselves property of the estate.’ ” In re Hanley, 305 B.R. 84, 87 (Bankr.M.D.Fla. 2003) (quoting 124 Cong. Rec. H11096 (daily ed. Sept. 28, 1978) (statements of Rep. Edwards); 124 Cong. Rec. S17413 (daily ed. Oct. 6, 1978) (statements of Sen. De-Concini)). The Proceeds from the sale of
This Court finds that the conclusions drawn by the In re Reed court and that of its progeny, In re D’Avila and In re De-Berry, is the proper interpretation of § 41.001’s application to chapter 7 bankruptcy, the effect of § 522(c), and § 541(a)(6)-(7) and adopts them to the extent that they apply to a post-petition sale of a properly exempted Texas homestead, such as the one in instant case. Furthermore, this Court concludes that In re Frost’s core holding is based on factually distinguishable underpinnings and, as such, is distinguishable in a chapter 7 where, such as here, the debtor sells a properly exempted homestead post-petition. Which is, necessarily, to say that In re Frost does not apply in the instant chapter 7 bankruptcy because to the extent that In re Frost could apply is really to say that the precedent upon which it is based, such as England and its progeny, are what is being applied and not In re Frost. To wit, Zibman, Morgan, and England are not applicable in this situation, as their core holdings dealt with debtors who had only exempted or attempted to exempt proceeds then let the statutory period provided by § 41.001(c) expire.
f. Effect of the “Sise-Month” Rule in the Instant Case
Based on the foregoing analysis of Fifth Circuit precedent, the instant matter becomes remarkably simple. Debtor sold his homestead, which had been properly exempted without objection under Texas law, in June 2014. The result, pursuant to the standard in Taylor v. Freeland & Kronz, is that the exemption became final when Romo failed to lodge a timely objection to the exemption. § 522(1); Taylor, 503 U.S. at 642, 112 S.Ct. 1644. Therefore, as the exemption of the homestead was final and, giving the full effect to § 522(c), the homestead was exempted from pre-petition liability because, unlike the debtor in Frost, the homestead was no longer property of the chapter 7 estate. § 522(c) (stating that “property exempted under this section is not liable during or after the case for any debt of the debtor that arose [pre-petition]”, with certain inapposite exceptions, so long as the case is not dismissed); Owen, 500 U.S. 307-08, 111 S.Ct. 1833 (“[a]n exemption is an interest withdrawn from the estate (and hence its creditors) for the benefit of the debtor”); In re De-Berry, 2015 WL 6528024, at *3; In re Garcia, 499 B.R. at 514 (noting that the Fifth Circuit only distinguished In re Reed in In re Morgan when it had the opportunity to reject or overrule its conclusion of once exempt, forever exempt in a chapter 7 bankruptcy); In re D’Avila, 498 B.R. at 156-57 (noting that In re Morgan’s distinguishing of In re Reed was only on a factual basis, not a legal one); In re Reed, 184 B.R. at 737-38. As such, the Debtor’s exempted homestead, and necessarily its proceeds, are “withdrawn from the estate (and hence its creditors).”
The conclusion that this Court reaches is not to say that, should post-petition creditors seek relief against Debtor that they would necessarily be unsuccessful. There is no question that Debtor has violated the requirements of § 41.001(c) in regard to the Proceeds. However, the principles announced in Owen, which arose from a chapter 7 bankruptcy, and one of the fundamental twin pillars of bankruptcy is that the filing of a petition, including the claiming of exemptions, cuts off pre-petition unsecured creditors from seeking relief against those exempt assets.
g. Motion for Summary Judgment
Therefore, as this Court has concluded that the Proceeds from the sale of Debt- or’s properly exempted Texas homestead is an exempt asset, the remaining issue is whether Romo has met his burden for the Motion to be granted or, alternatively, have summary judgment granted sua sponte against Romo pursuant to Rule 56(f). The standard, as articulated in Fed. R. Civ. P. 56, is “[that] the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Summary judgment is proper “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “A factual dispute is ‘genuine,’ if the evidence is such that a reasonable [trier of fact] could return a verdict for the nonmoving party.” Crowe, 115 F.3d at 296. “After giving notice and a reasonable time to respond, the court may ... consider summary judgment on its own after identifying for the parties material facts that may not be genuinely in dispute.” Fed. R. Civ. P. 56(f); see also Celotex, 477 U.S. at 326, 106 S.Ct. 2548 (“[District courts are widely acknowledged to possess the power to enter summary judgments sua sponte, so long as the losing party was on notice that she had to come forward with all her evidence.”). With respect to the material facts of the instant matter, a successful claim by Romo for the turnover of Debtor’s non-exempt proceeds would need to meet the following elements: (1) the homestead was properly exempted under Texas law; (2) the properly exempted Texas homestead was sold after the bankruptcy case was filed; (3) the debtor, having received the proceeds from the sale of the homestead, failed to reinvest the proceeds into a new Texas homestead within the six month statutory time limitation; and (4) that by Debtor’s failure to reinvest the Proceeds in a new Texas homestead within the statutory timeline that the Proceeds have lost their exemption in the instant bankruptcy. In
Thus, the second stage of the analysis begins with whether the summary judgment should be granted against Romo and for the Debtor. This Court finds that, pursuant to Rule 56(f)’s requirement, the parties have had their opportunity to present their evidence and arguments on the movant’s Motion. Fed. R. Civ. P. 56(f); see also Filson, 336 U.S. at 683, 69 S.Ct. 754; Evans, 754 F.Supp. at 95 (requiring that all that need be done is that the parties have “fully briefed the issues involved in this case”); British Caledonian Airways Ltd., 819 F.2d at 595 (stating that the movant’s motion for summary judgment “opened the door to allow the district court to grant summary judgment for [the nonmovant] sua sponte”). As such, if Debtor carries his burden of production, this Court may grant summary judgment for Debtor and against Romo. To that end, in order for Debtor to carry the burden of production for this Court to grant summary judgment against Romo, he must show that: (1) the Debtors Texas homestead was properly exempted and neither the Trustee or any party in interest objected to the exemption; (2) Romo failed to object to the Debtor’s discharge; and (3) that the case has not been dismissed.
As a pre-requisite matter, this Court must first look to see if Romo was properly on notice regarding his burden and the potential for summary judgment to be de-. cided against him. Romo’s Motion provides that Debtor had claimed the Texas homestead exemption for the Homestead at the time of filing, [ECF No. 9 at ¶ 7], and Debtor’s response to the Motion admits to that fact. [ECF No. 14 at ¶ 4], Moreover, in Romo’s Motion, he specifically cites to Celotex as a basis for his Motion. [ECF No. 9 at ¶ 16]. It can hardly be said that Romo was unaware of the holding in Celotex, which as discussed above clearly provides that a district court may grant summary judgment sua sponte “so long as the losing party was on notice that [he] had to come forward with all of [his] evidence.” Celotex, 477 U.S. at 326, 106 S.Ct. 2548. As the movant, Romo’s foremost responsibility is to “come forward with all of [his] evidence” otherwise his motion for summary judgment must fail. Id.; see also Norwegian Bulk Transp. A/S, 520 F.3d at 412; Condrey v. SunTrust Bank of Georgia, 429 F.3d 556, 562 (5th Cir. 2005). Therefore, this Court concludes that the parties were properly on notice, that they marshalled their evidence as they deemed fit, and had fair opportunity to present that evidence in a hearing. Filson, 336 U.S. at 683, 69 S.Ct. 754.
The facts are undisputed. Debtor, in his initial petition, claimed the homestead as exempt pursuant to Tex. Prop. Code § 41.001-.002 and Tex. Const, art. 16 §§ 50-51. [Case No. 14-10031, ECF No. 1 at 12]. Although Romo filed his Motion to Extend and his Second Motion to Ex
Thus, as Debtor fulfilled his burden of proof, the burden of proof then shifted to Romo to prove any genuine issues of material fact. Romo’s Summary Judgement arguments and evidence presented to this Court do not raise, much less prove, any genuine issues of material fact relevant to the decision to grant summary judgment for Debtor.
Accordingly, this Court determines that Romo, as the moving party, has not met his burden and therefore his Motion must be DENIED. However, this Court, sua sponte, has taken up summary judgment on behalf of Debtor, as is its right to do so pursuant to § 105(a), who has met the burden of establishing the non-existence of genuine issues of material fact. The burden having shifted to Romo, has failed to prove that there are genuine issues of material fact; Debtor is therefore entitled to judgment as a matter of law. See Celo-tex Corp., 477 U.S. at 322-23, 106 S.Ct. 2548. Therefore, this Court holds that Romo’s Motion for Summary Judgment is DENIED and summary judgment is GRANTED for Debtor against Romo.
Y. CONCLUSION
Romo, as the chapter 7 trustee, came before this Court seeking the turnover of certain assets that remained in the Debt- or’s possession following the sale of his Homestead, which was exempted pursuant to Texas law. Romo argued that the Fifth Circuit’s holding in In re Frost was applicable in a chapter 7 and provides that a debtor in bankruptcy, regardless of the particular chapter under which relief was sought, must maintain any qualifications for an exemption throughout the pendency of the bankruptcy case or risk the loss of the claimed exemption. Debtor, having failed to reinvest all of his proceeds into a
Furthermore, Texas state law provides that Debtor’s New Property qualifies for homestead protection as Debtor has taken substantial steps and evinced a clear intent to make the New Property his new Texas homestead, and thus this Court holds that the New Property retains its exempt status, or alternatively is entitled to exempt status under Tex. Prop. Code § 41.001(a) as a homestead.
This Court, pursuant to Rule 56(f), has, sua sponte, taken up whether Debtor is entitled to summary judgment against Romo. Based on the foregoing analysis, this Court has concluded that Debtor is indeed entitled to summary judgment. As such, summary judgment for Debtor is GRANTED. Accordingly, Romo will be directed to restore Debtor’s bank account to the Debtor within fourteen (14) days of entry of the Order to accompany this Memorandum Opinion.
An Order consistent with this Memorandum Opinion will be entered on the docket simultaneously herewith.
. Any reference to “Code” or “Bankruptcy Code” is a reference to the United States Bankruptcy Code, 11 U.S.C., or any section (i.e.§) thereof refers to the corresponding section in 11 U.S.C.
. (c). Counsel for each party shall also exchange and file exhibit and witness lists with the Clerk of the Court by noon on the Day of Exchange in accordance with Table 1. Witness lists must identity whether each witness is to be called as a fact witness or as an expert. If no delineation is made, the witness will only be allowed to testify as a fact witness unless otherwise ordered by the Court, or the witness is an owner of the property at issue opining as to value.
(d). If counsel intends to use only hard copy exhibits at the hearing or trial, then counsel must deliver either (i) a hard copy of the exhibits to opposing counsel; or (ii) a copy of the exhibits by electronic mail to opposing counsel and, if requested in writing from opposing counsel, a hard copy of the exhibits within 24 hours of receiving the written request. If no written request is made, counsel shall provide a hard copy of the exhibits to opposing counsel at the hearing or trial. If counsel intends to use technology in the courtroom by putting the exhibits on an electronic media so that exhibits may be shown on the screens in the courtroom, then counsel must deliver an electronic copy of the exhibits to opposing counsel and, if requested in writing, a hard copy of the exhibits within 24 hours of receiving the request. The electronic copy must contain the exhibits in the same order as they are contained on the electronic media to be used in the courtroom. Alternatively, the parties may agree in writing to a different manner of exchange, i.e., exchange by electronic mail, facsimile, Dropbox (or other form of internet-based distribution service), etc. Any party agreeing in writing to a different manner of exchange under this paragraph waives the right to object to the admission of any exhibit for non-compliance with this rule
. “Rule 56 F. R. Civ. P. applies in adversary proceedings, except that any motion for summary judgment must be made at least 30 days before the initial date set for an evidentiary hearing on any issue for which summary judgment is sought, unless a different time is set by local rule or the court orders otherwise.’’
. Judgment Independent of the Motion. After giving notice and a reasonable time to respond, the court may:
(1)grant summary judgment for a nonmov-ant;
(2) grant the motion on grounds not raised by a party; or
(3) consider summary judgment on its own after identifying for the parties material facts that may not be genuinely in dispute.
. "A homestead and one or more lots used for a place of burial of the dead are exempt from
. “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.”
. "(b) Encumbrances may be properly fixed on homestead property for:
(1) purchase money;
(2) taxes on the property;
(3) work and material used in constructing improvements on the property if contracted for in writing as provided by Sections 53.254(a), (b), and (c);
(4) an owelty of partition imposed against the entirety of the property by a court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division or an award of a family homestead in a divorce proceeding;
(5) the refinance of a lien against a homestead, including a federal tax lien resulting from the tax debt of both spouses, if the homestead is a family homestead, or from the tax debt of the owner;
(6) an extension of credit that meets the requirements of Section 50(a)(6), Article XVI, Texas Constitution; or
(7) a reverse mortgage that meets the requirements of Sections 50(k)-(p), Article XVI, Texas Constitution.”
.(a) If used for the purposes of an urban home or as both an urban home and a place to exercise a calling or business, the homestead of a family or a single, adult person, not otherwise entitled to a homestead, shall consist of not more than 10 acres of land which may be in one or more contiguous lots, together with any improvements thereon.
(b) If used for the purposes of a rural home, the homestead shall consist of:
(1) for a family, not more than 200 acres, which may be in one or more parcels, with the improvements thereon; or
(2) for a single, adult person, not otherwise entitled to a homestead, not more than 100 acres, which may be in one or more parcels, with the improvements thereon.
(c) A homestead is considered to be urban if, at the time the designation is made, the property is:
(1) located within the limits of a municipality or its extraterritorial jurisdiction or a platted subdivision; and
(2) served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality:
(A) electric;
(B) natural gas;
(C) sewer;
(D) storm sewer; and
(E) water.
(d) The definition of a homestead as provided in this section applies to all homesteads in this state whenever created.
. The terms of the note provided a $1,843 payment for thirty-five months and then the balance owed as a balloon payment.
. The snapshot rule originates from White v. Stump, 266 U.S. 310, 312, 45 S.Ct. 103, 69 L.Ed. 301 (1924), and states that "the bankrupt be allowed the exemptions ‘prescribed by the state laws in force at the time of the filing of the petition’; in other words, it makes the state laws existing when the petition is filed the measure of the right to exemptions.”
. Lowe v. Yochem (In re Reed), 184 B.R. 733, 735 (Bankr.W.D.Tex. 1995).
. "It seemed to- be a handsome, leather-covered book. Harry opened it curiously. It was full of wizard photographs. Smiling and
. As of the issuance of this Memorandum Opinion, there have been fourteen cases where In re Frost was cited and of those fourteen only two involved post-petition homestead sales in a chapter 7 bankruptcy.
. Citing to the legislative record for § 541(a)(1), H.R.Rep. No. 595, 95th Cong., 1st Sess. 6/367-68 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 82-3 (1978), 1978 U.S.Code Cong. and Admin News, 5787, 5967, 6322-24, 5868-69, in footnote 5, which the court summarized as "[u]nder 541(a)(1) all property of the debtor becomes property of the estate, including exempt property.”
. This Court does acknowledge that there is no comparable provision in a chapter 7 to chapter 13’s § 1306, which provides that "[plroperty of the estate include[s] ... all property of the kind specified in [§ 541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted ... and earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted ...”
. Noting that the debtor in In re Zibman claimed a new homestead, unlike the instant debtor, that caused the proceeds to lose their exempt character; the debtor in In re Morgan sold their homestead post-petition, unlike the instant debtor, tried to exempt the proceeds not the homestead itself; and the In re Frost debtor, while factually similar in some respects, filed for bankruptcy under chapter 13 rather than chapter 7.
. The provisions of the chapter 13 plan still maintain this provision. See Chapter 13 Plan, United States Bankruptcy Court for the Western District of Texas, San Antonio Division 3, http://www.txwb.uscourts.gov/sites/defaulV files/file/order_chl3_pln_s an_antonio.pdf
. Vest, Black's Law Dictionary (10th ed. 2014) (“1. To confer ownership (of property) on a person. 2. To invest (a person) with the full title to property. 3. To give (a person) an immediate, fixed right of present or future enjoyment.”); see also Vest, Ballen-tine’s Law Dictionary (3d ed. 1969) (“To give an immediate fixed right of present or future enjoyment.”).
.For the purposes of the Proceeds Rule, some of Frost’s proceeds should have retained their contingent exemption because they had been retained by the chapter 13 trustee and not distributed to Frost. Order Granting Debtor's Motion to Sell Real Property Free An[d] Clear of All Liens and Interests, In re Frost, No. 09-54674 (Bankr. W.D. Tex. Mar. 26, 2010), ECF No. 23. But see Law v. Siegel, - U.S. -, 134 S. Ct. 1188, 188 L.Ed.2d 146 (2014) (holding that by surcharging a debtor's exemption the bankruptcy court exceeded its statutory and inherent sanction powers without a basis in the Bankruptcy Court).
. Should this be deemed in err upon review, the most that the unused Proceeds could be is $58,731.30, which represents the amount deposited by the Debtor on March 13, 2015 that was represented by Debtor to be a combination of two accounts that held Proceeds.
Reference
- Full Case Name
- IN RE: Juan Jose MONTEMAYOR aka Johnny Joe Montemayor aka Juan Montemayor aka Johnny Montemayor aka Johnny J Montemayor, Debtor William C. Romo v. Juan Jose Montemayor
- Cited By
- 10 cases
- Status
- Published