Studensky v. Morgan (In Re Morgan)

Case: 11-51180 Document: 00511923581 Page: 1 Date Filed: 07/17/2012

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

July 17, 2012

No. 11-51180 Lyle W. Cayce

Clerk

In the Matter of: RONALD CARL MORGAN,

Debtor

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JAMES STUDENSKY,

Appellant

v.

RONALD CARL MORGAN,

Appellee

Appeal from the United States District Court

for the Western District of Texas

U.S.D.C. No. 6:11-cv-00147

Before JOLLY, HIGGINBOTHAM, and DENNIS, Circuit Judges.

PER CURIAM:*

This appeal involves the application of a Texas law exemption for the

proceeds from the sale of a Texas homestead in a Chapter 7 bankruptcy

proceeding. The Trustee, James Studensky, appeals the order of the district

*

Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not

be published and is not precedent except under the limited circumstances set forth in 5TH CIR.

R. 47.5.4.

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No. 11-51180

court affirming the final order of the bankruptcy court denying the Trustee’s

objection to the claim of the Debtor, Ronald Morgan, for an exemption for the

value of his Texas homestead. The district court held that because the Debtor

owned his homestead when he filed his bankruptcy petition, the proceeds from

the postpetition sale of the homestead were exempt from the bankruptcy estate,

even though he did not reinvest them in a new Texas homestead within six

months of the sale. Because the Debtor did not claim an exemption for his

homestead until after he sold his home, we reverse the district court’s order,

render judgment for the Trustee on this issue, and remand this matter to the

bankruptcy court for continued proceedings consistent with this decision.

I.

Ronald Morgan filed his Chapter 7 bankruptcy petition on July 30, 2010.

On August 6, he sold his Texas home, and used the proceeds to pay off a lien on

the house held by his brother, Rocky Morgan. On August 24, Ronald filed the

required bankruptcy schedules, listing his home as an asset valued at $100,000

and Rocky’s secured claim on the full value of the home, and applied federal

exemptions, but did not claim any value of his home as exempt. The next month,

when the Trustee discovered that Ronald had sold his house and paid the

proceeds to Rocky, the Trustee contested the validity of Rocky’s lien, and

demanded that Rocky pay the $100,000 proceeds back to the bankruptcy estate.

On February 11, 2011, Ronald filed an amended bankruptcy schedule, now

applying Texas state law exemptions, and claimed a $100,000 homestead

exemption. The Trustee objected, and argued that under Texas law, the

proceeds from the sale of a homestead are only exempt for six months, and

unless they have been reinvested in a new Texas homestead within that time,

they cease to be exempt from creditors’ claims. See Tex. Prop. Code § 41.001(c).

The Trustee contended that since Ronald had not reinvested the proceeds from

his homestead sale in a new Texas homestead within the six-month window, the

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proceeds were no longer exempt. The bankruptcy court denied the Trustee’s

objection and allowed Ronald’s homestead exemption. The Trustee appealed to

the district court, which affirmed the decision of the bankruptcy court. The

district court concluded that at the time he filed his bankruptcy petition, Ronald

had a real property interest in his homestead, and not an interest in proceeds

from the sale of a homestead. Thus, the district court held, the Texas

Constitution exempted his homestead from the bankruptcy estate, and that

protection could not be statutorily limited by the six-month protection on the

proceeds of a homestead sale. The Trustee timely appealed.

II.

This court’s “[j]urisdiction over bankruptcy cases arises from 28 U.S.C.

§ 158(d), which grants courts of appeals appellate jurisdiction over ‘all final

decisions, judgments, orders, and decrees’ of bankruptcy judges.” England v.

Fed. Deposit Ins. Corp. (In re England), 975 F.2d 1168, 1171 (5th Cir. 1992). “An

order that grants or denies an exemption is deemed a final order for the purpose

of 28 U.S.C. § 158(d).” Zibman v. Tow (In re Zibman), 268 F.3d 298, 301 (5th

Cir. 2001) (citing In re England, 975 F.2d at 1172). “The determination of

whether both homestead and proceeds of former homestead are exempt is a

question of law, which this Court reviews de novo.” In re England, 975 F.2d at

1172 (citing Frame v. S-H, Inc., 967 F.2d 194, 202 (5th Cir. 1992)).

“Under the Bankruptcy Code, the commencement of a bankruptcy case

creates an estate comprising all legal and equitable interests in property

(including potentially exempt property) of the debtor as of that date.” In re

Zibman, 268 F.3d at 302 (citing 11 U.S.C. § 541). “The debtor may have certain

property exempted from the bankruptcy estate by electing to take advantage of

either the federal exemption provisions in the Bankruptcy Code or those

provided under state law.” Id. (citing 11 U.S.C. § 522(b)). As for state-law

exemptions, the Code allows for exemption of “any property that is exempt under

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. . . State or local law that is applicable on the date of the filing of the petition.”

11 U.S.C. § 522(b)(3)(A).

Texas protects a debtor’s homestead under its constitution and by statute.

The Texas constitution provides that “[t]he homestead of a family, or of a single

adult person, shall be, and is hereby protected from forced sale, for the payment

of all debts”—except for an enumerated list of debts. Tex. Const. art. 16, § 50;

see In re England, 975 F.2d at 1172 (“From the beginning of Texas’ statehood in

1845, its constitutions have provided homestead protection to its residents.”).

This constitutional protection is codified in the Texas Property Code: “A

homestead . . . [is] exempt from seizure for the claims of creditors,” with listed

exceptions. Tex. Prop. Code § 41.001(a).

Texas provides additional statutory protection for the proceeds from the

sale of a homestead. Under the Texas Property Code, “[t]he 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.” Id. § 41.001(c); see also In

re England, 975 F.2d at 1173-75 (describing this law as Texas’s “proceeds

exemption statute”). “The 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.” In re England, 975 F.2d at 1174-75.

Ronald argues that at the time he filed his bankruptcy petition, he owned

his homestead, and therefore, the Texas homestead exemption, which has no

temporal limitation—as opposed to the state’s proceeds exemption, which is

limited to six months—permanently exempts Ronald’s homestead from the

bankruptcy estate. Quoting Lowe v. Yochem (In re Reed), 184 B.R. 733 (Bankr.

W.D. Tex. 1995), Ronald contends that “a postpetition change in the character

of property properly claimed as exempt will not change the status of that

property, relying on the principle that once property is exempt, it is exempt

forever and nothing occurring postpetition can change that fact.” Id. at 737.

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Thus, it is Ronald’s contention that when he filed his bankruptcy petition, he

owned a real property interest in his homestead—and not merely proceeds of the

sale of his homestead—and therefore, his homestead was forever exempt under

article 16, § 50, of the Texas Constitution and Texas Property Code § 41.001(a),

regardless of whether he subsequently sold the home before he was discharged

in bankruptcy.

The problem with Ronald’s argument is that he overlooks the fact that he

did not claim a homestead exemption until after he sold his home, and even then,

he did not claim any value of his home as exempt until he amended his

bankruptcy schedules nearly seven months after filing his petition, and more

than six months after he had sold his homestead. Our decision in Hardage v.

Herring National Bank, 837 F.2d 1319 (5th Cir. 1988), explains the flaw in

Ronald’s argument. There, when the debtor filed his bankruptcy petition, he

designated a certain tract as his exempt homestead under Texas law and did not

claim any portion of another tract, the Mueller Place, on which he had planted

cotton, as exempt. Id. at 1321. After the trustee sold the immature cotton and

collected the proceeds for the estate, the debtor amended his exemption schedule

to claim a further homestead exemption on a portion of the Mueller Place. Id.

The debtor claimed that this exemption applied to the cotton itself (which, it

appeared by then, would be worth more than what the trustee had sold it for).

Id. at 1321-22. This court explained why the debtor’s argument was misplaced:

[The debtor] . . . misunderstands the effect of his delay in

amending his schedule of exemptions. Because [the debtor] had not

yet claimed the exemption, the immature Mueller Place cotton was

the property of the estate when the bankruptcy trustee sold it to the

Bank. 11 U.S.C. §§ 522(b), 541(a)(1). See Payne v. Wood, 775 F.2d

202, 204 (7th Cir. 1985). See generally 4 Collier on Bankruptcy ¶

541.02[3] (15th ed. 1987). The trustee clearly was empowered to sell

the property of the estate. 11 U.S.C. §§ 363(b), (c), 704(1). “Once

the property enters the estate, it does not matter whether the

property changes form.” Payne, 775 F.2d at 204 (citing 11 U.S.C.

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§§ 541(a)(6)). In Payne, for example, the court held that the

insurance proceeds from destroyed, unexempted household items,

which perhaps originally could have been exempted, were the

property of the bankruptcy estate. Here, once the bankruptcy

trustee sold the immature Mueller Place cotton to the Bank, the

proceeds of the sale, not the cotton, were the property of the estate.

It is against those proceeds that [the debtor] must make his

exemption claim . . . .

Id. at 1322-23 (citations omitted).

We find this reasoning especially instructive in deciding this case. When

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. 11 U.S.C. § 541(a); see In re Zibman, 268 F.3d at 302 (“Under the

Bankruptcy Code, the commencement of a bankruptcy case creates an estate

comprising all legal and equitable interests in property (including potentially

exempt property) of the debtor as of that date.” (citing Owen v. Owen, 500 U.S.

305, 308 (1991))). When he later sold his home, the proceeds of that sale, and

not the homestead itself, were the property of the estate. 11 U.S.C. § 541(a)(6).

Thus, when Ronald subsequently amended his exemption schedule in February

2011, it was against those proceeds that Ronald had to make his exemption

claim. See Owen, 500 U.S. at 308 (“Section 522(b) provides that the debtor may

exempt certain property ‘from property of the estate’; obviously, then, an interest

that is not possessed by the estate cannot be exempted.”).

The final question then is whether the proceeds of Ronald’s homestead

sale, which he sought to exempt from the bankruptcy estate when he filed his

amended exemptions in February 2011, were limited by Texas’s six-month

proceeds exemption statute. We held in In re Zibman that “[t]he Texas statute

that provides an exemption for proceeds from the sale of a homestead,” Tex.

Prop. Code § 41.001(c), “contains a temporal element that explicitly limits the

exemption to six months.” 268 F.3d at 305. Thus, as in that case, “[w]hen

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[Ronald] failed to reinvest the proceeds in another Texas homestead within the

statutory time period, those proceeds lost their exemption.” Id. Therefore, the

bankruptcy court erred in denying the Trustee’s objection to Ronald’s homestead

exemption.

The authorities that Ronald cites in support of his case are inapposite

because they did not involve a debtor who sold his homestead after filing for

bankruptcy but before claiming a homestead exemption. In In re Reed, the

debtor sold his home after he claimed a Texas homestead exemption, 184 B.R.

at 735, and therefore, it is inapplicable here, where Ronald sold his home before

he claimed an exemption on his homestead.1 Additionally, when this court in In

re Zibman stated that “[a]ny exemptions claimed . . . are determined by the facts

and the law as they exist on the date of filing the bankruptcy petition,” 268 F.3d

at 302, it did not purport to address the situation we are confronted with here

— where Ronald sold his homestead before claiming it as exempt — because

there, the debtors had sold their homestead before filing for bankruptcy.

Finally, Ronald’s reliance on Lowe v. Sandoval (In re Sandoval), 103 F.3d 20 (5th

Cir. 1997), is misplaced because we had no occasion in that case to consider the

situation presented in this appeal. There, we held that the relevant date for

“determination of exemption rights in a conversion of a chapter 13 to a chapter

7” proceeding is “the date of the original bankruptcy petition” (as opposed to the

date of conversion). Id. at 23. That conclusion involved application of provisions

of the Bankruptcy Code that are not at issue in this case. Therefore, none of the

1

The language in In re Reed also belies Ronald’s argument by indicating that an

exemption does not shield property until the debtor has properly claimed the exemption. See

In re Reed, 184 B.R. at 737 (“[O]nce property is exempt, it is exempt forever and nothing

occurring postpetition can change that fact.” (emphasis added)); id. at 738 (“[A] postpetition

transformation of exempt property into a form of property which would not be exempt under

state law does not return the property to the estate.” (emphasis added)). Thus, that case does

not support Ronald’s contention that his exemption claim should apply retroactively to

property that was already sold at the time he claimed his exemption.

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cases that Ronald cites affect our conclusion that when he filed his amended

exemption schedule, after selling his homestead, it was against the proceeds of

that sale that Ronald had to make his exemption claim, and those proceeds lost

their exempt status when he failed to reinvest them in a new Texas homestead

within six months.

III.

For the foregoing reasons, we reverse the district court’s decision affirming

the bankruptcy court’s judgment, render judgment for the Trustee on this issue,

and remand this matter to the bankruptcy court for continued proceedings

consistent with this decision.

REVERSE, RENDERED, and REMANDED.

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