The plight of the non-filing spouse who stands to lose an interest in the homestead is a trap that is easy to overlook. Under 11 U.S.C. Sec. 541(a)(2), when one spouse files bankruptcy, all joint management community property enters the bankruptcy estate. This means that if the filing spouse elects not to claim the homestead as exempt in favor of selecting other property or is subject to a cap, the non-filing spouse may lose her interest in the property without having any say in the matter.
I have previously written about the Odes Ho Kim case here. In the Kim case, an involuntary petition was filed against Mr. Kim. The creditors then sought to impose a cap upon his homestead exemption. Mrs. Kim intervened asserting that she had an independent interest in the homestead. The Bankruptcy Court and the District Court ruled that Mr. Kim was subject to a cap on the homestead exemption and that Mrs. Kim had no separate interest in the property. If both spouses had filed, they would have been entitled to two times the amount of the cap. However, with Mrs. Kim sitting outside of bankruptcy, her interest in the homestead was completely divested by the bankruptcy filing.
Up until this point, the result of the case illustrated an unfair result for the non-filing spouse, but one which was based on an arguable reading of the code. However, things got interesting after the case was appealed to the Fifth Circuit. On September 10, 2010, Pronske & Patel and Andrews & Kurth appealed the District Court ruling on behalf of the Kims. The case was argued to Judges Higginbotham, Owens and Haynes on July 8, 2011. Now, almost two years have passed since oral argument without a ruling. According to the Bar Association for the Fifth Circuit, the case is the oldest bankruptcy case still under advisement and is the second oldest case of any kind under advisement.
While speculation about the reason for the long gestation of the opinion is not worth much, I will engage in some anyway. Both Judges Owens and Haynes sat on Texas state benches before being named to the Fifth Circuit. (Indeed, Judge Owens was on the Texas Supreme Court). Texas has a long tradition of protecting homestead rights. Additionally, according to a recent book on the history of the Texas Supreme Court (Haley,The Texas Supreme Court: A Narrative History 1836-1986, University of Texas Press 2013), Texas also was also the first state to recognize property rights for married women. It may be that the judges are struggling with how to reconcile these strong Texas state law protections with the Bankruptcy law applicable here. It will be interesting to see how the case is finally resolved.