Texas Judges Explore State Law on Liens and Homestead Exemptions

Much state law regarding liens and property rights emerges from the Bankruptcy Courts because they are frequently the first to confront novel issues.   Two recent opinions from the Western District of Texas bankruptcy judges confirm this trend.   In one case, Judge Tony Davis found that an option to acquire a leased homestead could be claimed as exempt, No. 14-11006, James Wayne See (Bankr. W.D. Tex. 7/14/15), while in the other, Chief Judge Ronald King rejected an attempt to void a judgment creditors' lien under the Texas Property Code, Studensky v. Buttery Company, LLP,  Adv. No. 15-6001 (Bankr. W.D. Tex. 7/2/15).

Homesteads and Future Interests

The general rule in Texas is that a homestead may only be claimed in a possessory interest.   Because future interests, such as a remainder interest, are not capable of being possessed, they generally cannot be claimed under a homestead exemption.   However, in the See case, Judge Davis was faced with an unusual fact scenario.    

In a prior bankruptcy, the Debtor's mother had sued him for a nondischargeable debt.  In settlement of that adversary proceeding, the Debtor agreed to a non-dischargeable judgment for $150,000 and his mother agreed to lease three tracts of property to him and to grant him an option to purchase the property within 180 days after her death.    The Debtor did not receive a discharge in the first case because the case was dismissed.   After the settlement was reached, the Debtor filed a second chapter 7 case.   In this case, he claimed both the leases of the property and the options to purchase under the homestead exemption.   The Trustee objected to exemption of the options on the basis that they were not possessory interests.   

 The Court concluded that the options standing alone were not present possessory interests.   However, the Court also concluded that the leases and the options could not be severed from each other.   Thus, the Debtor could claim the leases as exempt because they gave him the right to occupy the land and could claim the options because they were integrated with the leases.

Although the options are future interests, they are future interests in the same properties that are subject to the exempt leaseholds.  Because the leases and options are integrated and cannot be severed, the present possessory interests in the properties are effectively merged with the future interests and James can properly exempt both.

Opinion, p. 12.    The take-away here is that categories such as possessory and non-possessory which look ironclad under the law may sometimes be more amorphous than they first appear.

 Voiding Judgment Liens

Texas Property Code Sec. 52.042 grants relief from certain judgment liens in the event of bankruptcy.  An enterprising Chapter 7 trustee attempted to use it to void liens against property of the estate in Studensky v. Buttery Company, LLP.   However, the Court did not allow this relief.

The Debtor owned two tracts of real property:  his homestead and a vacant tract of 8.884 acres.   While he listed the Buttery Company as an unsecured creditor, the company's proof of claim revealed that it held an abstract of judgment and was claiming status as a secured creditor.      The Trustee filed suit in state court to set aside the judgment lien under the Texas Property Code.   The creditor removed the case to Bankruptcy Court.   The Trustee then filed a Motion for Summary Judgment. 

The Court's opinion contains a helpful discussion of the evolution of the Texas statute dealing with what happens to judgments against bankrupts.     The Texas statutes have been adopted or amended in 1975, 1983 and 1993.   The current provision states:

(a) A judgment is discharged and any abstract of judgment or judgment lien is canceled and released without further action in any court and may not be enforced if:

(1) the lien is against real property owned by the debtor before a petition for debtor relief was filed under federal bankruptcy law; and
(2) the debt or obligation evidenced by the judgment is discharged in the bankruptcy.

 TEX. PROP. CODE ANN. § 52.042.

A second provision provides that liens are not canceled in the following circumstance:

A judgment lien is not affected by [section 52.042] and may be enforced if the lien is against real property owned by the debtor before a petition for debtor relief was filed under federal bankruptcy law and:

(1) the debt or obligation evidenced by the judgment is not discharged in bankruptcy; or
(2) the property is not exempted in the bankruptcy and is abandoned during the bankruptcy.

TEX. PROP. CODE ANN. § 52.043.

Taken at face value, these two provisions appear to state that a Debtor's discharge extinguishes a judgment lien unless the property is claimed as exempt or abandoned by the Trustee.   Does this then mean that the Trustee can extinguish a lien on property of the estate following the Debtor's discharge?   Chief Judge Ronald King said no.

Although Judge King engages in a lengthy discussion, the critical conclusion is contained here:

It appears to the Court that, as with the 1975 statute, the legislative intent in 1993 was not to affect lien rights in a bankruptcy case, but rather to help enable a debtor, following bankruptcy, to sell real property burdened by liens in the county records. The Court therefore concludes that Texas Property Code sections 52.042-043 do not alter the rights of a judgment lienholder in a bankruptcy case. Further, even if, as the Trustee argues, the plain meaning of sections 52.042-.043 purported to transform a judgment lienholder into an unsecured creditor in a bankruptcy case, federal bankruptcy law would preclude such a result.

Opinion, p. 7.   The Trustee gets points for reading Texas law but ultimately no relief from the Court.    While I do not discuss it at length, the opinion contains an excellent discussion of how bankruptcy affects the rights of secured creditors.