Second Western District Judge Finds Proceeds From Post-Petition Sale Can't Be Clawed Back in Chapter 7

After sorting through conflicting precedents, Judge Craig Gargotta has ruled that a chapter 7 debtor who owned a homestead property on the date of bankruptcy and claimed the property as exempt did not lose the exemption when the property was sold and proceeds were not reinvested within six months.    Lowe v. DeBerry (In re Deberry), Adv. No. 15-5054 (Bankr. W.D. Tex. 10/28/15).

In the DeBerry case, Judge Gargotta tried to reconcile two competing rules with regard to sale of homestead property.   First, exemptions are determined as of the date of the petition.   Second, under Texas law proceeds from sale of a homestead remain exempt for six months after the sale date.    In making this analysis, Judge Gargotta considered three different Fifth Circuit opinions which have considered the issue.   In Matter of Zibman, 268 F.3d 298 (5th Cir. 2001), the Debtor sold the property pre-petition.   As a result, Judge Gargotta concluded that the exemption was in proceeds rather than the property.   In Matter of Morgan, 481 Fed. Appx. 183 (5th Cir. 2012), the Debtor did not claim the property as exempt until after it had been sold.   In this instance, the relevant asset was proceeds at the time of the exemption.   Finally, in Matter of Frost, 744 F.3d 384 (5th Cir. 2014), the case was a chapter 13 proceeding with an enhanced definition of property of the estate.    

As a result, Judge Gargotta found that each of the three Fifth Circuit cases were distinguishable.    Instead, he followed his Western District colleague Tony Davis, who had found that:

as a matter of course, in a chapter 7 bankruptcy . . . once an exemption is granted, the debtor can sell or dispose of exempt property, or even encumber property with post-petition debts, without involving the bankruptcy court or the bankruptcy estate.

In re D'Avila, 498 B.R. 150, 153 (Bankr. W.D. Tex. 2013).  In trying to thread the needle between the conflicting precedents, Judge Gargotta concluded that:

Here, like in D’Avila, the homestead itself was held as of the petition date and as of the date the exemption was claimed. As such, the Texas Proceeds Rule is not implicated—it is not “necessarily pictured” in the post-petition snapshot.

Opinion, pp. 7-8.

I believe that Judges Davis and Gargotta got it right.  As D'Avila stated:

A contrary holding would lead to the anomalous result that because Texas provides additional protection to proceeds from the homestead sale, homesteads enjoy less protection than other categories of exempt assets. If a Chapter 7 debtor exempts tools of the trade or family heirlooms, they are removed from the property of the estate, they belong to the debtor, and the debtor can later sell them and use the proceeds as he or she will. The same should be true of a homestead properly exempted and then later sold.

D'Avila, at 159–60.   The Texas rule allowing exemption of proceeds is an enhancement of the exemption, not a restriction.   Any time a homestead property is claimed as exempt and the exemption becomes final, that property is no longer subject to being clawed back into the estate.   That was the lesson of Taylor v. Freeland & Kronz, 112 S.Ct. 1644 (1992) and it is the correct result in this case.    

 
Note:   I am told that Chief Judge Ronald King has also taken the same position in an oral ruling.