Viegelahn v. Frost (In Re Frost)

Case: 12-50811 Document: 00512550869 Page: 1 Date Filed: 03/05/2014

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

United States Court of Appeals

Fifth Circuit

FILED

No. 12-50811 March 5, 2014

Lyle W. Cayce

In the Matter of: MARK ALAN FROST, Clerk

Debtor

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MARY K. VIEGELAHN,

Appellee

v.

MARK ALAN FROST,

Appellant

Appeal from the United States District Court

for the Western District of Texas

Before STEWART, Chief Judge, and DeMOSS and CLEMENT, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

Under Texas law, a debtor’s homestead is permanently exempted from

the bankruptcy estate, whereas proceeds from the sale of a homestead are only

exempted for six months. Debtor Mark Alan Frost (“Frost”) challenges the

district court’s determination that proceeds from the post-certification sale of

an exempted homestead revert to the estate if not reinvested within six

months, arguing that once the homestead is permanently exempted from the

estate, any proceeds from its sale are also exempt. We affirm.

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FACTS AND PROCEEDINGS

When Frost filed his bankruptcy petition, his homestead in Cibolo,

Texas, was exempted from the bankruptcy estate under Texas Property Code

section 41.001(a). Subsequently, he sold the property and used some of the

funds for non-bankruptcy expenses. Under Texas law, property owners who

sell their homesteads must reinvest the proceeds in another homestead within

six months. 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 Bankruptcy Court determined that,

because Frost did not reinvest the proceeds in a new homestead, he had

recharacterized the proceeds as nonexempt property; accordingly, the

Bankruptcy Court ordered that the proceeds be distributed in part to Frost’s

creditors and that a small amount of the remaining funds, approximately

$18,000, be held in trust for Frost’s future use to purchase a new homestead.

The bankruptcy court based its conclusion on this court’s opinion in In

re Zibman, which held that proceeds from the pre-petition sale of a Texas

homestead are not permanently immune from bankruptcy creditors. 268 F.3d

298, 305 (5th Cir. 2001). Frost argues that Zibman is distinguishable because

it concerned homestead proceeds obtained prior to bankruptcy, whereas he sold

his homestead after petitioning for bankruptcy, at a time when the homestead

had already been declared exempt from the bankruptcy estate. In support,

Frost points to the text of 11 U.S.C. § 522(c), which provides: “Unless the case

is dismissed, property exempted under this section is not liable during or after

the case for any debt of the debtor that arose, or that is determined under

section 502 of this title as if such debt had arisen, before the commencement of

the case, except” as otherwise provided in § 522(c). Frost also points to the

general rule that all bankruptcy exemptions are fixed at the time of the

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bankruptcy petition and do not later lose their exempt status (the “snapshot

rule”). See Zibman, 268 F.3d at 301.

Frost appealed to the district court, arguing: (i) that Zibman is

distinguishable because it concerned homestead proceeds obtained prior to

bankruptcy, whereas he sold his homestead after petitioning for bankruptcy,

at a time when the homestead had already been declared exempt from the

bankruptcy estate; (ii) that the plain text of §§ 522(c) & (l), together with

bankruptcy’s “snapshot rule,” require that his homestead remain permanently

exempted, regardless of whether he subsequently sells the homestead and

regardless of whether he reinvests the proceeds; and (iii) that the Supreme

Court’s decision in Schwab v. Reilly, 560 U.S. 770 (2010), requires that his

proceeds be protected under federal law, preempting the Texas limitation that

proceeds be reinvested within six months. The district court affirmed,

concluding that there was no distinction between a pre-petition and post-

petition homestead sale and that the six-month reinvestment requirement

applied in either instance, notwithstanding the terms of § 522(c). Frost

appeals, raising the same argument.

STANDARD OF REVIEW

We apply the same standard of review as the district court, reviewing

the bankruptcy judge’s factual findings for clear error and its decisions of law

de novo. In re Mercer, 246 F.3d 391, 402 (5th Cir. 2001).

DISCUSSION

The “snapshot rule” of bankruptcy law holds that all exemptions are

determined at the time the bankruptcy petition is filed, and that they do not

change due to subsequent events. Zibman, 268 F.3d at 301; see Owen v. Owen,

500 U.S. 305, 314 n.6 (1991); White v. Stump, 266 U.S. 310, 311-13 (1924) (“The

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[homestead] exemption arises when the declaration is filed, and not before. . . .

[T]he point of time which is to separate the old situation from the new in the

bankrupt’s affairs is the date when the petition is filed. . . . [T]he law discloses

a purpose ‘to fix the line of cleavage’ with special regard to the conditions

existing when the petition is filed[.]”); In re Williamson, 804 F.2d 1355, 1359

(5th Cir. 1986). Federal and Texas law both provide homestead exemptions,

and a debtor may rely on either the federal or state exemption. 11 U.S.C.

§ 522(c); Tex. Prop. Code § 41.001(a). When claiming an exemption under state

law, it is important to remember that “it is the entire state law applicable on

the filing date that is determinative.” Zibman, 268 F.3d 298, 304 (5th Cir.

2001).

Frost claimed his exemption under Texas law, which is more generous

than the federal exemption because it exempts the homestead itself—

regardless of value—from the bankruptcy estate, while federal law limits that

exemption to “the debtor’s interest, not to exceed $22,975 in value” in his

residence. See 11 U.S.C. § 522(d)(1). But while the homestead is permanently

exempt from the bankruptcy estate, Texas law provides that the proceeds from

the sale of a homestead are only exempt for six months after the sale. 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.”). Because Frost sold his homestead and did not reinvest the

proceeds in another homestead within this six month period, the bankruptcy

court ruled that the proceeds were no longer exempt from the estate.

Frost argues that this ruling conflicts with federal bankruptcy law.

Section 522(c) of the Bankruptcy Code provides: “Unless the case is dismissed,

property exempted under this section is not liable during or after the case for

any debt of the debtor that arose, or that is determined under section 502 of

this title as if such debt had arisen, before the commencement of the case,”

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with certain statutory exceptions not asserted here. 11 U.S.C. § 522(c)

(emphasis added).

A. 11 U.S.C. §§ 522(c) & (l) and the snapshot rule

Frost’s argument that exemptions are fixed as they appear on the date

of the bankruptcy filing is foreclosed by this court’s decision in Zibman, 268

F.3d 298 (5th Cir. 2001). In Zibman, the debtors sold their homestead three

months prior to filing bankruptcy and never reinvested the proceeds in a new

homestead. When the six month exemption expired, the trustee challenged the

exemption of those proceeds from the estate. The debtors argued that the

snapshot rule “froze the exemption as it existed on the date of filing” and that

“post petition acts or failures to act does [sic] not effect [sic] the exempt status.”

Id. at 301, 303. This court rejected debtors’ argument, holding that the six

month limit on the exemption was “an integral feature of the Texas law

‘applicable on the date of the filing’” and that “this essential element of the

exemption must continue in effect even during the pendency of a bankruptcy

case.” Id. at 301.

Frost’s homestead was exempted from the estate—when the rest of his

assets were not—by virtue of its character as a homestead. As in Zibman, this

“essential element of the exemption must continue in effect even during the

pendency of the bankruptcy.” Id. Once Frost sold his homestead, the essential

character of the homestead changed from “homestead” to “proceeds,” placing it

under section 41.001(c)’s six month exemption. 1 Because he did not reinvest

1 Frost disagrees with our characterization of his property, arguing that his exempted

interest is the “equity in his homestead” and that after “the asset was sold, it was the same

asset in different form – dollars, not dirt.” This argument is erroneous. The “property

exempted under this section” is the property exempted under Texas law, which clearly

differentiates between a “homestead” and “proceeds of a sale of a homestead.” They are

different types of property accompanied by different types of protection. If the form of the

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those proceeds within that time period, they are removed from the protection

of Texas bankruptcy law and no longer exempt from the estate.

Frost argues that Zibman is distinguishable because it concerned

proceeds obtained prior to filing bankruptcy, whereas he sold his homestead

after petitioning for bankruptcy, at a time when the homestead had already

been declared exempt from the estate. He argues: (i) that § 522(c) protects

“property exempted under this section” both “during and after” the

bankruptcy, and (ii) that while the proceeds in Zibman were already

temporarily exempted at the time of filing, the homestead was a permanent

exemption and placed forever outside the estate.

This temporal distinction is insufficient to escape the holding of Zibman.

The court’s insistence that an “essential element of the exemption must

continue in effect even during the pendency of the bankruptcy case” indicates

that a change in the character of the property that eliminates an element

required for the exemption voids the exemption, even if the bankruptcy

proceedings have already begun. 2 Under this court’s precedent, (i) the sale of

the homestead voided the homestead exemption and (ii) the failure to reinvest

the proceeds within six months voided the proceeds exemption, regardless of

whether the sale occurred pre- or post-petition.

homestead—house or cash—was immaterial, the Texas statute would not differentiate

between the two.

2 This position is also embraced by the Ninth Circuit. See In re Jacobson, 676 F.3d

1193 (9th Cir. 2012) (holding debtor lost exemption as to proceeds of postpetition sale of

homestead property when they were not reinvested in a new homestead within six months

pursuant to California law); see also In re Zavala, 366 B.R. 643 (Bankr. W.D. Tex. 2007); 3

Norton Bankr. L. & Prac. 3d § 56:9 & n.6 (stating that “[o]nce property has been properly

exempted it is no longer property of the estate and its transformation into a nonexempt type

of property does not enable the trustee to recover it . . . [but] the exemption may be lost if the

proceeds are not reinvested within the limits required by the exemption,” while noting that

the Ninth Circuit’s holding in Jacobson “is questionable because the estate’s rights in assets

should be determined as of the filing of the petition and at that time, the six month period

had not expired”).

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This interpretation of § 522(c) is in accordance with Texas law and the

decisions of this court. In In re England¸ this court noted that “[t]he object of

the proceeds exemption statute was solely to allow the claimant to invest the

proceeds in another homestead, not to protect the proceeds, in and of

themselves.” 975 F.2d 1168, 1174-75 (5th Cir. 1992). It further stated that it

is “[o]nly during the six months following the sale of a homestead when a

claimant has not acquired another homestead do claimants have any protected

rights in homestead sale proceeds.” Id. at 1174 (emphasis added). Once a new

homestead is purchased—even if the six month exemption has not expired—

any surplus proceeds from the sale lose their exempt status and can be used to

satisfy claims of the estate. Id.; In re Davis, 170 F.3d 475, 483 n.10 (5th Cir.

1999) (en banc) (“Even during this six month window, if the debtor purchases

a new homestead any remaining proceeds from the sale of the first homestead

are instantly rendered non-exempt.”). This is because once a new homestead

has been purchased, the funds become proceeds from the sale of a former

homestead, which fall outside the protection of the Texas statue. If exempted

funds can lose their statutorily-mandated exempt status within the six month

window because they are transformed into proceeds of a former homestead,

then so too can a homestead lose its exemption when it becomes a “former

homestead” or “homestead proceeds.”

Finally, this interpretation gives effect to both the fact that the

homestead exemption is in place at the petition filing date and that the state’s

law remains equally enforceable with regard to those in bankruptcy and non-

bankruptcy. See Owen, 500 U.S. at 308 (“Nothing in subsection (b) (or

elsewhere in the Code) limits a State’s power to restrict the scope of its

exemptions; indeed, it could theoretically accord no exemptions at all.”).

Reading the statute to exempt property that would not be protected by state

law “limits a State’s power to restrict the scope of its exemptions.” To rule

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otherwise would allow a debtor-in-bankruptcy to obtain the liquidity of its

homestead at a much earlier date—and without the risk of exposing itself to

creditors—than a debtor who had not filed.

Frost claims his position finds support in the First and Eleventh

Circuits. In In re Cunningham, the First Circuit rejected the estate’s argument

that the voluntary post-petition sale of the debtor’s homestead rendered the

homestead proceeds available to satisfy pre-petition debts. 513 F.3d 318, 323-

24 (1st Cir. 2008). Citing the plain language of § 522(c), that court held that

property exempted on the date of filing is “permanently immuniz[ed]” and

withdrawn from the state, “unless the case is dismissed.” Id. Similarly, in In

re Gamble, the debtors claimed $10,800 of equity in property as exempt

property under the Georgia statute, whose “exemptions are identical to those

found in the federal bankruptcy code, except that Georgia has lowered the caps

on certain values that the debtor may exempt.” 168 F.3d 442, 444 (11th Cir.

1999). The debtors sold the property for a profit of $6,731.22. The Eleventh

Circuit ruled the surplus proceeds exempt, holding that “[o]nce the property is

removed from the estate through exemption, the debtor may use it as his own.”

Id. But unlike the Texas exemption in this case—which exempts the

homestead property itself as an interest in real property without a monetary

limit 3—the Massachusetts statute exempts “an estate of homestead to the

extent of $300,000,” 4 while the Georgia statute exempts “the debtor’s aggregate

interest” in its residence, up to $21,500. 5 So while the debtor’s interest in those

cases remained the same—a monetized interest in equity—Frost’s interest in

his homestead changed from an unconditionally exempted interest in the real

3 See England, 975 F.2d at 172 n.7 (homestead interests exist in real property, and

the proceeds from the sale are personal property).

4 Cunningham, 513 F.3d at 321 (quoting Mass. Gen. Laws ch. 188, § 1).

5 Ga. Code Ann. § 44-13-100(a)(1).

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property itself to a conditionally exempted interest in the monetized proceeds

from the sale of that property. Once the conditional exemption expired—as it

did in Zibman—Frost lost his right to withhold the sale proceeds from the

estate.

Adopting Frost’s argument would require rejecting this court’s

determination in Zibman that § 522(c) does not prevent exempt property from

losing its exempt status. If § 522(c) requires strict enforcement of the

“snapshot rule” such that property exempted at the moment of filing can never

be liable—regardless of restrictions placed on that exemption by state law or a

change in the essential character of the property—then the proceeds from the

sale in Zibman would have been exempted indefinitely, despite the six month

limitation on that exception. Frost’s reading of the statute is in conflict with

Zibman and cannot be accepted.

B. Schwab v. Reilly

Even if Zibman were not determinative, Frost’s argument that Schwab

v. Reilly requires the conclusion that §§ 522(c) & (l) protect his monetary

interest in the homestead—and thereby preempts Texas’s limitation on

exempting his property 6—is without merit. 560 U.S. 770 (2010). In Schwab,

the debtor (“Reilly”) claimed exemptions on certain assets under §§ 522(b) &

6 See, e.g., In re Cunningham, 513 F.3d 318 (1st Cir. 2008) (holding that the proceeds

from the post-petition sale of the debtor’s homestead retained the exempt status of the home,

and that Massachusetts’ contrary provision was preempted); In re Weinstein, 164 F.3d 677

(1st Cir. 1999) (holding the Bankruptcy Code preempted the Massachusetts Homestead Act’s

exceptions for preexisting liens and prior contracted debts); cf. In re Davis, 170 F.3d 475

(Fifth Circuit held that the Bankruptcy Code’s exceptions to the homestead exemption did

not impliedly preempt Texas law and subject the debtor’s homestead to turnover and sale by

the estate).

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(d). 7 Reilly listed the exemptions on the Schedule C form and claimed the

statutory maximum value on those assets. Schwab did not object. When an

appraisal of the listed assets revealed that they were worth more than the

statutory maximum exemption, Schwab moved to auction off the equipment to

satisfy the obligations of the estate. Reilly argued that the property claimed

as exempt on Schedule C was the asset itself—not the statutorily mandated

maximum value of the exemption—and that by failing to object Schwab had

waived its right to challenge that exemption. Schwab argued that Schedule C

exempted only the value assigned to a debtor’s interest in the property, not the

entire value of the asset itself. The Supreme Court ruled for Schwab, stating

that the exemption applied to the “debtor’s ‘interest’—up to a specified dollar

amount—in the assets described in the category, not [to] the assets

themselves.” Id. at 782.

Frost argues that the Schwab case “focuses on the ‘exempt is exempt’

language of § 522(l) by frequently referring to Schedule C valuations as

authority for fixing the value of an exemption without qualifying reference to

state or federal exemptions.” Because Schwab holds that the dollar value

listed on Schedule C functioned to define the rights of the debtor, “then it must

also (favorably or unfavorably) define the rights of her creditors.” As applied

to the facts in this case, Frost argues that because he “claimed as exempt the

7 11 U.S.C. §§ 522(d)(5)-(6) provide:

The following property maybe be exempted under subsection (b)(2) of

this section:

***

(5) The debtor’s aggregate interest in any property, not to exceed in

value $1,225 plus up to $11,500 of any unused amount of the

exemption provided under paragraph (1) of this subsection.

(6) The debtor’s aggregate interest, not to exceed $2,300 in value, in

any implements, professional books, or tools, of the trade of the

debtor or the trade of a dependent of the debtor.

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full amount of equity in his homestead – that equity was exempt as of the filing

and under the logic in Schwab cannot become ‘unexempt’ be it ‘dirt or

dollars’[.]”

Frost’s reliance on Schwab is misplaced. The issue is not that Schwab

did not distinguish between federal or state exemptions—there was no state

exemption in that case—but rather that the “property exempted” under the

statute was fundamentally different in nature. In Schwab, the federal

bankruptcy exemption allowed a debtor to claim an interest in the property up

to a certain dollar amount. Because the “property exempted” in that case was

a monetary interest in a certain category of property—“not [in] the assets

themselves”—it makes sense that the debtor’s interest would be limited to the

value of his claimed exemption and bound by its Schedule C representations.

But the property in this case—i.e., the “property exempted under this

section”—is exempted as an interest in the real property itself, with no

limitation on its value. See England, 975 F.2d at 1172 n.7 (homestead interests

exist in real property, and the proceeds from the sale are personal property).

The debtor in Schwab was entitled to an exemption in the amount listed in

Schedule C because the exemptions in § 522(d) are defined monetarily. By

contrast, the value of Frost’s homestead is immaterial to whether or not he is

entitled to an exemption. More importantly, it is the land itself—not its

monetary value—that is protected under Texas law and “exempted under this

section.” 8 The rationale of Schwab simply does not apply to this case.

CONCLUSION

For the reasons stated, we AFFIRM the decision of the district court.

8This also distinguishes this case from Cunningham, 513 F.3d 318, and Gamble, 168

F.3d 442, discussed supra section A.

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