The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") capped the amount of a homestead exemption which could be claimed by a debtor that acquired a homestead within 1,215 days prior to bankruptcy. Currently, the amount of the cap, as set by 11 U.S.C. Sec. 522(p), is $160,375 in equity per debtor. This cap has resulted in a seismic shift in Texas where the unlimited homestead exemption is part of the State Constitution. Now debtors' attorneys must learn how to count to 1,215 and calculate the allowable equity before filing a bankruptcy petition. However, what of the case where only one spouse files? The short answer is that all community property enters the bankruptcy estate and that the cap is based on the one spouse that filed. This means that the non-filing spouse can be involuntarily divested of her otherwise sacrosanct homestead interest. The Fifth Circuit has now ruled on three different variations of this scenario and in each case, including the recent decision in Wiggains v. Reed (Matter of Wiggains), No. 15-11249 (5th Cir. 2/14/17), which can be found here, the non-filing spouse has come up short.
Showing posts with label 522(p). Show all posts
Showing posts with label 522(p). Show all posts
Sunday, March 12, 2017
Friday, November 07, 2014
Fifth Circuit's Bankruptcy Opinions from October 2014
It's been a slow month in the Fifth Circuit, my home Circuit with just two bankruptcy-related opinions. This month's cases involve a non-filing spouse who lost her homestead interest and a bank which provided "reasonably equivalent" value but not enough to constitute a complete defense to a fraudulent transfer claim.
Homestead Exemption; Takings Claim by Non-Filing Spouse
Thaw v. Moser (Matter of Thaw), No. 14-40108 (5th Cir. 10/9/14), which can be found here, is another case of the non-filing spouse losing her homestead interest. Dr. Stanley Thaw filed bankruptcy while his spouse, Kernell Thaw, did not. Because the Thaws bought their home within 1,215 days, the exemption was capped at $146,450. However, because Dr. Thaw had liquidated non-exempt property and used it to pay down the homestead, the Bankruptcy Court reduced the homestead exemption to $0 under Sec. 522(o). Mrs. Thaw argued that she had a separate homestead interest in the property and that the Bankruptcy Code provisions which eliminated the homestead exemption constituted an unconstitutional taking. The Fifth Circuit held that because the homestead was purchased after the adoption of BAPCPA, there was not a valid takings claim. "The Thaws acquired the property after the enactment of BAPCPA, there is no 'gratuitous confiscation,' and the sale is not 'so unreasonable or onerous as to compel compensation.'” Opinion, p. 9.
Fraudulent Conveyance; Defense for Providing "Value"
In Williams v. Federal Deposit Insurance Corporation (Matter of Positive Health Management), No. 12-20687 (5th Cir. 10/16/14), which can be found here, the Fifth Circuit required an "innocent" recipient of a fraudulent transfer to return the funds received in excess of value given.
The Debtor occupied a building which was owned by a related party and was subject to a lien. The Debtor made the payments on the building as "rent." Because the Debtor was not obligated on the building loan, Trustee Randy Williams brought suit to recover the funds as fraudulent transfers. The Bankruptcy Court, having read Stern v. Marshall, submitted proposed findings of fact and conclusions of law to the District Court which adopted them.
The Bankruptcy Court found that the Debtor received "reasonably equivalent value" for the payments. The Court found that the reasonable rental value of the property was $253,333.33 while the amount of the payments received was $367,681.35. Although these two numbers were not equal, they were "reasonably equivalent." Nevertheless, the Bankruptcy Court found that the transfers were made with actual intent to hinder, delay or defraud. Unfortunately for the trustee, the Bankruptcy Court also found that the bank was entitled to a defense under 11 U.S.C. Sec. 548(c) for the reason that it took the payments in good faith and gave value in return. In determining value, the Bankruptcy Court used the same "reasonably equivalent" standard that it used in determining liability. The Court of Appeals held that for purposes of the defense, value meant dollar for dollar value. Because the payments received by the bank were more than the rental value received by the Debtor, the bank had to pay back the excess of $114,348.02.
That's the news from the Fifth Circuit where the judges are strong, the clerks are good looking and all of the lawyers are above average. (Apologies to Garrison Keillor).
Tuesday, January 04, 2011
Judge Rules That Home is Where the Heart Is
In 2000, Natalie Portman starred in "Where the Heart Is," a movie about a pregnant 17 year old girl who makes her home in a Walmart. Judge Stacey Jernigan recently had to decide a quite different case about home and the heart. The case involved whether a modern day cowpoke's heart was down on the ranch or in town in his wife's bedroom. Fortunately, like a character in a John Wayne movie, the Debtor fended off every attack and saved the ranch. In re Tinsley, No. 09-36036 (Bankr. N.D. Tex. 11/16/10). The opinion can be found here.
The Story
Our story goes back to 1979, when the Debtor's father purchased 116 acres located in Kaufman, Texas. In 2004, the Debtor moved into the Kaufman property to take care of his father. From 2004 to 2008, the Debtor stayed at the property full time and operated his own business, which consisted of running cattle and growing hay.
On September 24, 2008, the Debtor's father passed away and left the ranch to the Debtor. under his will A few days later on October 14, 2008, the Debtor married. After marriage, he d spent his days at the Kaufman property and his nights at his wife's home. The Debtor generously allowed his adult son and his family to live at the Kaufman property.
On September 10, 2009, the Debtor filed bankruptcy. Title to the Kaufman property remained in the name of his deceased father because the probate case had not been concluded. The Debtor used his wife's address as his address on the bankruptcy petition, but claimed the Kaufman property as his homestead.
The Objections
The Trustee and a creditor objected to the claimed homestead exemption on the grounds that:
a. The Kaufman property was not his homestead under Texas law; and
b. The homestead exemption was capped at $136,875 because the Debtor acquired his interest within 1,215 days before bankruptcy.
Texas Homestead Exemption
In order to establish a Texas homestead, a person must show that he has a present possessory interest in the property and must show a combination of both overt acts and intent to make the property his homestead.
The objecting parties claimed that the Debtor did not have a present possessory interest in the property because he did not hold legal title. The Court rejected this argument, finding that legal title was not necessary. The Court found that the Debtor was a tenant at will of the probate estate. While his continued possession of the property "depends upon the will and whim of the fee simple owner (i.e., the probate estate of his father)," the fact that he was the devisee under the will made it unlikely that he would lose his possessory interest.
The next issue was thornier. The homestead "is a possessory right which inures to the benefit of a family unit." The Debtor and his wife occupied two separate properties. Therefore, the Court had to determine whether the Debtor showed sufficient overt acts and intent to make the Kaufman property his homestead. The Court noted the possibility that the couple could claim both properties as a noncontiguous rural homestead, but found that this theory had not been pled.
The court found that in a dual residence scenario, the first step is to determine whether one residence was objectively the only homestead. If the usage is sufficiently ambiguous, then the court may honor the Debtor's subjective intent.
While finding that the case was extremely close, the Court found enough ambiguity to take the Debtor's subjective intent into account.
1. The Debtor spent almost every day at the Kaufman property.
2. The Debtor intended to move his bride onto the Kaufman property once it was renovated.
3. "While his new bride is eight miles down the road, the Debtor's horses, boots, tools, livelihood the past 17 years and now extended family are at the Kaufman property 365 days a year." Judge Jernigan shows real discernment here. The real test of a cowboy's residence is where he keeps his boots.
Homestead Cap
However, the ranch was not out danger yet. The creditors argued that because the Debtor acquired his interest in the Kaufman property under his father's will and his father passed away less than 1,215 days before bankruptcy, that the exemption was capped at $136,875.
The Court found that the Debtor had acquired a "vested economic interest" under the will. While noting that she "had grave doubts whether section 522(p) should apply at all in the context of a homestead 'acquired' by devise in a will within 1,215 days of the debtor filing for bankruptcy," she found that the Fifth Circuit had assumed without discussion that an inherited property was acquired. She also noted that Black's Law Dictionary defined "acquire" to mean "to gain by any means."
While it looked like a bad result, the Court was willing to hold her nose and apply the cap. However, there is an exception to the cap for the principal residence of a family farmer. After an exhaustive analysis, the Court found that: the Kaufman property was the Debtor's principal residence; that the Debtor was engaged in farming operations even though he no longer grew crops and didn't have any cattle on the property at the time of the filing (the Court found it compelling that he had operated a ranching operation on the property since 1993 and had resumed his ranching operation after recovering from a heart attack), the Debtor's debts were less than $3,544,525 and that the Debtor received more than 50% of his gross income from farming during the three years prior to bankruptcy.
The end result was that the Debtor got to keep the ranch without being subject to a cap.
The Story
Our story goes back to 1979, when the Debtor's father purchased 116 acres located in Kaufman, Texas. In 2004, the Debtor moved into the Kaufman property to take care of his father. From 2004 to 2008, the Debtor stayed at the property full time and operated his own business, which consisted of running cattle and growing hay.
On September 24, 2008, the Debtor's father passed away and left the ranch to the Debtor. under his will A few days later on October 14, 2008, the Debtor married. After marriage, he d spent his days at the Kaufman property and his nights at his wife's home. The Debtor generously allowed his adult son and his family to live at the Kaufman property.
On September 10, 2009, the Debtor filed bankruptcy. Title to the Kaufman property remained in the name of his deceased father because the probate case had not been concluded. The Debtor used his wife's address as his address on the bankruptcy petition, but claimed the Kaufman property as his homestead.
The Objections
The Trustee and a creditor objected to the claimed homestead exemption on the grounds that:
a. The Kaufman property was not his homestead under Texas law; and
b. The homestead exemption was capped at $136,875 because the Debtor acquired his interest within 1,215 days before bankruptcy.
Texas Homestead Exemption
In order to establish a Texas homestead, a person must show that he has a present possessory interest in the property and must show a combination of both overt acts and intent to make the property his homestead.
The objecting parties claimed that the Debtor did not have a present possessory interest in the property because he did not hold legal title. The Court rejected this argument, finding that legal title was not necessary. The Court found that the Debtor was a tenant at will of the probate estate. While his continued possession of the property "depends upon the will and whim of the fee simple owner (i.e., the probate estate of his father)," the fact that he was the devisee under the will made it unlikely that he would lose his possessory interest.
The next issue was thornier. The homestead "is a possessory right which inures to the benefit of a family unit." The Debtor and his wife occupied two separate properties. Therefore, the Court had to determine whether the Debtor showed sufficient overt acts and intent to make the Kaufman property his homestead. The Court noted the possibility that the couple could claim both properties as a noncontiguous rural homestead, but found that this theory had not been pled.
The court found that in a dual residence scenario, the first step is to determine whether one residence was objectively the only homestead. If the usage is sufficiently ambiguous, then the court may honor the Debtor's subjective intent.
While finding that the case was extremely close, the Court found enough ambiguity to take the Debtor's subjective intent into account.
1. The Debtor spent almost every day at the Kaufman property.
2. The Debtor intended to move his bride onto the Kaufman property once it was renovated.
3. "While his new bride is eight miles down the road, the Debtor's horses, boots, tools, livelihood the past 17 years and now extended family are at the Kaufman property 365 days a year." Judge Jernigan shows real discernment here. The real test of a cowboy's residence is where he keeps his boots.
Homestead Cap
However, the ranch was not out danger yet. The creditors argued that because the Debtor acquired his interest in the Kaufman property under his father's will and his father passed away less than 1,215 days before bankruptcy, that the exemption was capped at $136,875.
The Court found that the Debtor had acquired a "vested economic interest" under the will. While noting that she "had grave doubts whether section 522(p) should apply at all in the context of a homestead 'acquired' by devise in a will within 1,215 days of the debtor filing for bankruptcy," she found that the Fifth Circuit had assumed without discussion that an inherited property was acquired. She also noted that Black's Law Dictionary defined "acquire" to mean "to gain by any means."
While it looked like a bad result, the Court was willing to hold her nose and apply the cap. However, there is an exception to the cap for the principal residence of a family farmer. After an exhaustive analysis, the Court found that: the Kaufman property was the Debtor's principal residence; that the Debtor was engaged in farming operations even though he no longer grew crops and didn't have any cattle on the property at the time of the filing (the Court found it compelling that he had operated a ranching operation on the property since 1993 and had resumed his ranching operation after recovering from a heart attack), the Debtor's debts were less than $3,544,525 and that the Debtor received more than 50% of his gross income from farming during the three years prior to bankruptcy.
The end result was that the Debtor got to keep the ranch without being subject to a cap.
Conclusion
In conclusion, Judge Jernigan remarked:
The court would conclude with the old saying that “home is where the heart is,” and, although the Debtor may have spent his nights with his new bride at the Kemp Property, rather than the Kaufman Property, the facts and circumstances in this case certainly show that the Kaufman Property is the Debtor’s true home and where his “heart” is. This case is certainly unique in that it implicates section 522(p)(1) for reasons not originally contemplated by Congress (i.e., this is hardly a case of letting a debtor get through a “mansion loophole,” in that no non-exempt property was put in a large, luxurious mansion on the eve of bankruptcy). Fortunately, for this Debtor, even though he “acquired” property which he used as his homestead within 1,215 days of filing bankruptcy, Congress anticipated certain situations to which they did not want section 522(p)(1) to apply and drafted section 522(p)(2)(A).
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