Judge Says "Over My Dead Body" to Trustee's Mediation Plans

The importance of alternate dispute resolution to resolve cases is enshrined in federal law, 28 U.S.C. §651(a), and is encouraged by most judges.   However, one bankruptcy judge recently told lawyers in a case that they would mediate “over my dead body.”    While the court’s ruling was triggered by the parties’ failure to request permission to expend estate funds, his comments expressed a high level of skepticism toward mediation in general.  The case is In re Cody Smith, No. 12-32096 (Bankr. S.D. Tex. 9/3/14).

What Happened

The Cody Smith case involves several different adversary proceedings.   When the parties asked to abate various deadlines so that they could mediate, the following discussion took place.   This is my attempt at transcription from the electronic recording of the proceeding.   Any errors are unintentional.

The Court:               As I understand it, the Second Joint Emergency Motion is being filed because you’re going to mediate.

Mr. Wentworth (Trustee’s attorney):    That’s correct, your Honor.

The Court:                  Did I give you permission to go to mediation?

Mr. Wentworth:          Your Honor, maybe I’ll defer to Mr. Lemmon on that.  I didn’t file any motion.

The Court:                   Mr. Lemmon, did I give the Trustee permission to mediate?

Mr. Lemmon (Trustee’s Special Counsel):      No, your Honor.

The Court:                  Does the Trustee have any intention of paying the mediator out of estate funds?

Mr. Lemmon:             My firm is advancing . . . .

The Court:                 That’s not my question, not who’s advancing.    Is the Trustee eventually going to be using estate funds to pay the mediator?

Male Speaker:             I think that’s what we had envisioned.

The Court:                  Over my dead body.  I do not like mediation.    I think it is wasteful for the most part and you all needed to get my permission.  I assume counsel for the Trustee is going to the mediation and I assume counsel for the Trustee’s going to ask me to approve those fees.

Mr.  Lemmon:             Yes, your  Honor.

Male Speaker:            For the mediatior . . .

The Court:                  Aint gonna happen.   Don’t you ever do that again, Mr. Cage.

Mr. Cage (the Trustee):           Yes, your Honor.

The Court:                  I’m going to do a general order to put all my chapter 7 cases (on notice).  You are not to mediate without my approval.   Or if you’re gonna do it, you’re going to get my approval or if you’re going to do it (without my approval), I’m not going to allow attorneys to be paid.   I think for the most part mediation is a waste of time and money.  You all are grown up big boy attorneys.   You can talk settlement.   You’ve been talking settlement.    And I’m not going to allow more money to go to a mediator.   Either you settle it or you don’t.   But don’t ever do that again.

Mr. Cage:                    Understood, your Honor.

Mr. Lemmon:             This is Steve Lemmon.   I am sorry your Honor.   The idea of doing a mediation was my idea, so I apologize.

The Court:                  Mr. Lemmon, I’ll grant you a lot of judges love mediation, but I don’t.   I think mediation is undercutting the jury trial system in this country and I think it is making lawyers lazy and judges lazy and I also think it’s excess costs to pay for a mediator.   Lawyers are supposed to do two things.    They are supposed to get ready for trial and they are supposed to talk settlement professionally.    And I think it is rare that I allow people to go to mediate so don’t do it ever again.   If you want to mediate, then file a motion and come in here and explain to me why, but I’m not going to allow a mediation, not in this case certainly, so I’m going to deny the Second Joint Emergency Motion and with that you all are free to go.

Recording, 9/3/14, 3:04:01-3:07:22 (emphasis added).

My Perspective

I have not been involved in the Cody Smith case although I know most of the lawyers involved.   None of them asked me to write this article.    I heard about from an observer who happened to be in the courtroom that day.   However, I have heard Judge Bohm express similar comments informally.  The fact that the judge made the comments on the record and expressed an intent to issue a general order on the subject made it an appropriate subject for a blog article in my mind.

I am a trained mediator, although I use that experience as a participant in mediations much more than as a mediator.    More importantly, I practice with an attorney who is an artist when it comes to mediation and has successfully settled many difficult cases.   All of this gives me a bias in favor of mediation.

On the other hand, I have no problem with trying cases.   I enjoy trying cases although my work is in bankruptcy court where juries are forbidden absent consent.  In nearly twenty-eight years of practice, I have been second chair on two jury trials and I served on a jury once.   As a result, the jury system is something I have heard about more than I have experienced.

Why the Hostility to Mediation?

Judge Bohm has a legitimate point that parties wishing to use estate funds to mediate should request court permission.  However, in most courts, that request would be met with enthusiasm.    Indeed, federal policy encourages mediation.    28 U.S.C. §651(b) provides that:

Each United States District Court shall authorize by local rule adopted under section 2071(a), the use of alternate dispute resolution processes in all civil actions, including adversary proceedings in bankruptcy in accordance with this chapter  . .  . .

Southern District of Texas Local Rule 16.4 states that mediation is approved for use in bankruptcy proceedings and goes on to state that:

If the parties agree upon an ADR method or provider, the judge will respect the parties’ agreement unless the judge believes another ADR method or provider is better suited to the case and parties.

Local Rule 16.4C.

Let’s look at the reasons given by Judge Bohm for his distaste for mediation.

1.                  Mediation is a waste of time and money.    Judge Bohm expressed his opinion that “grown up big boy attorneys” should be able to “talk settlement professionally.”    If you follow Judge Bohm’s logic, either the case should be able to settle, in which case the lawyers should be able to get there on their own, or it needs to go to trial, in which case mediation would be a waste of time.    I think this logic is oversimplified.   In my experience, there are plenty of cases where qualified, professional attorneys will be unable to settle a case without assistance from a third party.   However, I do agree with Judge Bohm in part.   Attempting to mediate with the wrong mediator at the wrong time can be a waste of time.   As a result, it is important to carefully select a case for mediation and to pick the right mediator.   I will give my opinions about which cases are good for mediation below.

2.                  Mediation undermines the jury system.   This one baffles me.  Judge Bohm is a bankruptcy judge.   Juries are not allowed in bankruptcy without consent of both parties and are an extreme rarity.  As a result, allowing mediation in bankruptcy cases could never have an effect on the jury system.  However, beyond that, I wonder, what is so great about the jury system?   I have to admit a bias here.      No one ever comes to a Debtor’s lawyer and says I need to file bankruptcy because the jury got it right.    It is my personal opinion that the jury system today is often used for tactical reasons, such as to delay trial or increase costs, or in cases where emotion can be counted on to overwhelm the facts.   While juries are intended as a protection for the accused, they convict innocent people often enough to cause concern.   Having said that, the only jury that I served on voted to acquit.     Even if you acknowledge that juries serve a valuable function, they are expensive and not every case needs one.   If every civil and criminal case resulted in a jury trial, the system would quickly collapse.

3.                  Mediation makes lawyers and judges lazy.   I can’t speak for judges since I have never been one.  However, in my experience, mediation does not make good lawyers lazy.   Mediation forces a lawyer to prepare his case in order to persuade the other side that going to trial is a real option.  It also forces lawyers to examine the weaknesses in their case and to find ways around them.    Mediation also allows lawyers to spend focused time with their client talking about the case.    Mediation is about finding a better alternative than trial, not for the unprepared lawyer to avoid trial  Some cases are really difficult and will inevitably lead to a bad outcome for both sides if they go to court.  I have witnessed mediation resolve disputes that had festered for a decade or more.  As a result, I believe that dedicated, hard-working attorneys can use mediation as a tool.   Obviously, mediation can be used as a crutch by the unprepared or unwilling, but that is the fault of the lawyer rather than the procedure.

What Makes for a Good Mediation?

Economics teaches that an efficient market depends upon a willing buyer and a willing seller with access to complete information.   Lawsuits are similar.   In order to settle, there have to be parties who are willing to negotiate in good faith and have good information.   Mediation can change a party’s willingness to settle if the unwillingness was based on an unreasonable attorney or where the mediation process allows the party to save face.  This is especially true where emotional considerations rather than money are driving the case. Otherwise, having an unwilling party probably means an unsuccessful mediation.   

Mediation can be very successful when parties have been acting on incomplete information.    Attorneys are supposed to be both counselors and advocates.   However, the process of obtaining clients often depends on projecting strength and confidence rather than giving good counsel about the weaknesses of a case.   Other times, a client will filter out information he doesn’t want to hear.    A combination of a good lawyer and a good mediator can help a difficult client evaluate his case more accurately and reach an agreement.  

There are also cases involving difficult situations which require a lot of creativity to solve.   While the parties could theoretically resolve these cases on their own, the presence of a neutral third party can help the attorneys and the parties consider solutions they would not have thought of otherwise in a format allowing vigorous give and take.   This is especially true of multi-party cases.   

Finally, there are a few cases where both sides show up ready to make a deal and arrive at a sensible result within a short period of time.   There is no reason that these cases should not have settled without mediation.  However, sometimes the mediation process itself serves to focus a party’s attention on settling better than a series of calls with counsel.   

Final Thoughts

I can agree with Judge Bohm to a very limited extent.    Mediation can be a waste of time and money if the parties are doing it for the wrong reasons or are not prepared.    I can also agree with Judge Bohm that a lazy attorney may seek out mediation if he is not ready for trial and is trying to stall.     However, when good attorneys tell the court that they favor mediation, the Court should defer to their judgment, as I believe is required by Local Rule 16.4C.  

I agree that it is a good practice to seek court approval for mediation on any number of grounds.   First, it helps to keep the Court informed and allow the Court to ask questions as to the reasons for the mediation.    Good lawyers should be prepared to give good answers to those questions.    Second, I agree with Judge Bohm that paying a mediator is an expense not in the ordinary course of business which should be approved in advance.  I don’t think it is necessary for attorneys who represent estates to get special permission to participate in a mediation.  When an attorney is appointed in a case where litigation is involved, mediation is inherently part of that appointment.   Finally, I think that mediation pursuant to court order is useful because it binds the parties to mediate in good faith.   While the parties will ordinarily agree to mediation in advance, a court order makes it harder for parties to back out at the last minute to try to secure a tactical advantage.     A court order also helps to impress the parties with the seriousness of the process.

Federal Rule of Civil Procedure 1 states that the rules "should be construed and administered to secure the just, speedy, and inexpensive determination of every action and proceeding."    I believe that mediation is a valuable tool to achieve these goals in appropriate cases.   I would encourage Judge Bohm to reconsider his hostility toward mediation, or at the very least, to discuss the issue in a public forum where a back and forth dialog can take place..

September's Bankruptcy and Related Decisions in the Fifth Circuit

The Fifth Circuit had several bankruptcy-related decisions during September.   This month, it dealt with jury trials, mootness, subject matter jurisdiction,  "quasi-estoppel" and the difference between civil and criminal contempt.   Click on the style of the case to read the underlying opinion.

U.S. Bank, National Association v. Verizon Communications, Inc., et al, No. 13-10752 (5^th Cir. 7/30/14, revised 9/2/14).    Idearc, Inc. was spun off from Verizon Communications in 2006.  In March 2009, it filed for Chapter 11.  The litigation trust created under its plan sued Verizon and two of its subsidiaries for fraudulent transfers in connection with the amount of debt allocated to Idearc under the spin-off.    The District Court denied the litigation trustee’s request for a jury trial and concluded that Idearc was solvent on the date of the spin-off.   The Fifth Circuit affirmed the take-nothing judgment.    The 53 page opinion has extensive discussions of the right to a jury trial.   Where a claim is essential to the restructuring of the debtor-creditor relationship, it is equitable and there is not a right to a jury trial.   The jury trial issue depends on the nature of the claim rather than the identity of the party pursuing it.   The Fifth Circuit disapproved of the  contrary conclusion in Crescent Resources Litigation Trust v. Duke Energy Corp., No. A-12-CA-009-SS, 2013 WL 1865450 (W.D. Tex. May 2, 2013).   While there is a lot of additional discussion in the case, the most interesting part is the discussion of the right to jury trial.

TMTProcurement Corporation v. Vantage Drilling Company (Matter of TMT ProcurementCorporation), No. 13-20622 (5^th Cir. 9/3/14).     This case started with a state court action brought by Vantage Drilling Company against Hsin-Chi Su alleging fraud among other claims.    Vantage had issued 100 million of its shares to F3 Capital, an entity controlled by Su.    Meanwhile, 23 shipping companies controlled by Su filed Chapter 11.   These did not include either Su or F3 Capital.    When creditors sought to dismiss the shipping company bankruptcies, the Su offered to place 25 million of the Vantage shares into an escrow to ensure the debtors’ compliance with court orders.   The Bankruptcy Court granted the motion and the District Court withdrew the reference.   The District Court authorized additional shares to be pledged and then re-referred the matter back to the Bankruptcy Court.   The Bankruptcy Court entered orders for post-petition financing and cash collateral involving the disputed Vantage shares.  

The Debtors argued that the appeal was moot for failure to obtain a stay pending appeal.  The Fifth Circuit decided the mootness issue prior to deciding whether the courts below had subject matter jurisdiction.   The Fifth Circuit found that the appeal was not moot because the DIP lender had knowledge that there was an adverse claim to the shares being pledged and therefore could not claim good faith status.

The Fifth Circuit found that the Bankruptcy Court lacked jurisdiction over the shares themselves because they were not property themselves.    The Debtors tried to argue that they had acquired an interest in the shares by virtue of the fact that they were deposited into custodia legis during the bankruptcy.   The Fifth Circuit held that third party collateral was not property of the estate even if it was pledged to secure DIP financing.    The Court found that the lower courts could not create in rem jurisdiction over the shares merely by exercising jurisdiction over them.

Finally, the Fifth Circuit found that the lower courts did not have subject matter jurisdiction to adjudicate Vantage’s claims to the Vantage shares.   Vantage was not a creditor of the Debtors and the shares were not property of the estate.   The outcome of the dispute could not have any conceivable impact on the estate.   Therefore there was not even related-to jurisdiction. 

   

This case is useful as an example of how convoluted the facts in a bankruptcy appeal can get.  It also has useful discussions of mootness and subject matter jurisdiction.

Highway82/Fannin Joint Venture v. Capital One Bank (Matter of Highway 82/Fannin JointVenture), No. 13-41146 (5^th Cir. 9/9/14)(unpublished).   A joint venture purchased property that was subject to liens granted by the seller to Capital One Bank.    Although the JV made its payments to the seller, the seller did not pay the bank which posted for foreclosure.    The JV filed bankruptcy and brought a declaratory judgment action against Capital One based on “quasi-estoppel,” which is a state law doctrine.    The Bankruptcy Court dismissed the claim for failure to state a cause of action because Capital One had not taken inconsistent positions with regard to its cross-collateralization clause with the seller.   Specifically, Capitol One did not take an inconsistent position when it refused to allow the JV to pay off the seller’s debt. 

Janveyv. Brown, No. 13-10266 (5^th Cir. 9/11/14).   This is not a bankruptcy decision, but deals with claims under the Texas Uniform Fraudulent Transfer Act arising from the Allen Stanford Ponzi scheme.   The Stanford Receiver sought to recover so-called fictitious profits from investors who received more than the amount of their investments back.    The District Court granted partial summary judgment and the Fifth Circuit authorized an interlocutory appeal.    The Court applied the Texas Uniform Fraudulent Transfer Act and rejected a number of defenses asserted by the defendants.    The Fifth Circuit affirmed the District Court. 

In re Glay H. Collier, No. 14-30887 (5^th Cir. 9/19/14)(unpublished).     Don’t let the “In re” designation fool you.   This was not a bankruptcy appeal.   Rather, it was a mandamus action brought by a bankruptcy attorney who was held in contempt and sentenced to 48 hours of confinement.   Mr. Collier was a consumer bankruptcy lawyer who advertised “no money down” bankruptcy cases.   A client sued him in U.S. District Court for violating the automatic stay and the discharge.   The District Court found that he had violated the discharge and ordered him to take down all “no money down” advertisements within seven days.   Nine days later, the Court entered a show cause order threatening contempt for failure to comply with the order.   By the date of the hearing, the attorney had stopped all TV advertisements and had successfully canceled all but one internet ad (and the process for canceling that one was in process).   Nevertheless, the Court held Collier in contempt and sentenced him to 48 hours confinement.   The Fifth Circuit granted the mandamus on the basis that the order was for criminal contempt in that it was intended to punish rather than coerce compliance.   Because the Court did not afford Mr. Collier the procedural protections necessary for a criminal contempt hearing, the order was improper.   This case has two take-aways.   The first is that orders from federal courts should be taken seriously.   The second is that it is helpful to know the difference between civil and criminal contempt.

Both Sides Support Cert in Appeal of Order Denying Chapter 13 Plan

The Supreme Court may add another bankruptcy case to its agenda this term in a case where both the Petitioner and the Respondent support the grant of cert.    No. 13-1416, Gordon v. Bank of America.   The Petition can be found here and the Response in Support is here.   Of course, the parties want to reverse the Tenth Circuit for very different reasons.

The case involves a chapter 13 debtor who included an "object or forfeit" provision in his plan stating that if a creditor did not object to the plan, it would be bound to the amount of its claim listed in the plan.   No creditors objected to the plan nor did the Chapter 13 trustee object.   The Bankruptcy Court requested briefing but ultimately found the provision allowable and confirmed the Plan.   Bank of America appealed.    The District Court found that the object or forfeit provision was invalid and reversed.   The Debtor then appealed to the Tenth Circuit which found that an order denying confirmation of a plan was not appealable.  It dismissed the appeal for lack of jurisdiction.  Bank of America v. Gordon, 743 F.3d (10th Cir. 2014).   Instead, the Tenth Circuit said that the Debtor could propose a new plan without the offending provision and appeal that order or allow the case to be dismissed and appeal.    

The Debtor filed a petition for cert in which it requested that the Supreme Court rule that an order denying confirmation of a chapter 13 plan is appealable.   It noted that there is presently a 6-3 split among the circuits.   Bank of America responded and said that orders denying confirmation on a legal ground should be appealable.  It said that it wanted an order from the Tenth Circuit striking down the object or forfeit provision and that it could not get that ruling because of the Tenth Circuit's approach to appellate jurisdiction.   

It will be interesting to see whether the Supreme Court takes a case where both parties want to see cert granted and where there is a clear circuit split.

There is a Texas connection to this case.   Douglas Kiel, the Chapter 13 Trustee, previously worked for Al Olson and Deborah Langehennig, two Chapter 13 Trustees in the Western District of Texas.

Kim Case KOs Homestead Interest of Non-Filing Spouse

This has not been a good year for Texas homesteads involved in bankruptcy proceedings.    In April, the Fifth Circuit ruled (after nearly two years under advisement) that the non-filing spouse does not have a separate homestead estate entitled to protection when the other spouse files bankruptcy, or, as happened in this case, has an involuntary petition brought against him.    Kim v. Dome Entertainment, Inc. (In re Kim), No. 10-10882 (5th Cir. 4/9/14), which can be found here.   While the legal reasoning of the decision is solid, it is a blow to those of us who consider the Texas homestead to be sacrosanct.

What Happened

Odes Ho Kim purchased a home in Irving, Texas for $1,048,028.36 which he occupied with his spouse Chong Ann Kim.    About two years later, Dome Entertainment Center obtained a judgment against him in California for more than $5 million.   Dome then filed an involuntary petition against Mr. Kim in Texas.   Because the home was acquired less than 1,215 days before bankruptcy, Dome objected that Mr. Kim's homestead exemption  was limited to $136,875.    The Bankruptcy Court sustained the objection.   Mr. Kim then filed a declaratory judgment seeking to determine Mrs. Kim's interest in the property.   Dome intervened.   Judge Harlin "Cooter" Hale ruled that 11 U.S.C. Sec. 522(p) preempted the unlimited Texas homestead exemption and that Mrs. Kim did not have a “separate and distinct exempt homestead interest in the property that would entitle her to compensation or to prevent the sale of the Property.”   The District Court affirmed and held that Mrs. Kim did not have a vested property right in the property.

The Fifth Circuit's Ruling

Mrs. Kim argued on appeal that under Texas law, she had a homestead interest which was independent of her husband's interest in the property and that this interest was her separate property which did not enter the bankruptcy estate.    The characterization of this interest was important because under 11 U.S.C. Sec. 541(a)(2), any interest which the debtor has in property as separate, sole management or joint management property enters the estate.   The parties stipulated that the real property fit into one of these categories which made sense since the property was purchased by Mr. Kim and was titled in his name.   

Texas law offers several unique protections to spouses:

• Under Texas Property Code Sec. 41.004, a homestead cannot be abandoned without the consent of the other spouse.
• Under Texas Family Code Sec. 5.001, regardless of whether the property is characterized as separate or community property, it cannot be conveyed without the consent of the other spouse.
• Finally, under Texas Estates Code Sec. 102.003 and 102.005, the homestead right shall descend and vest in the heirs unless the property is still occupied by a surviving spouse.  

So, were the unique rights granted to spouses under Texas law a property interest excluded from the bankruptcy estate?    The Fifth Circuit said that it didn't matter.

Even were we to accept this argument, it would not affect our analysis of the bankruptcy court’s authority to order a forced sale of the Kims’ residence. Both the United States Supreme Court and the Supreme Court of Texas have rejected arguments similar to those urged by the Kims.

Opinion, p. 9.    The Court relied on United States v. Rogers, 461 U.S. 677 (1983), which held that a Texas homestead could be sold to pay taxes owing by one spouse over the objection of the other spouse based on the federal government's superior right to collect taxes.    The court found that this ruling was analogous to 11 U.S.C. Sec. 363 which allows property to be sold free and clear of the interest of a co-owner.    The Court also relied on Texas case law that held that Texas homestead laws could not preclude enforcement of a federal statute allowing sale of the homestead.   Because the spousal rights under Texas law exist to prevent non-consensual sale or abandonment of the homestead, a superior federal law allowing sale of the property could trump these Texas rights.

Having concluded that the Bankruptcy Court had the authority to order sale of the residence, the Court turned to the issue of whether Mrs. Kim was entitled to a separate share of the proceeds from Mr. Kim.    Unfortunately, the Court had previously ruled in Matter of Rogers, 513 F.3d 212 (5th Cir. 2008) that section 522(p) only applied to "vested economic interests."    If Mrs. Kim had held a vested economic interest, she might have qualified for a share of the proceeds.

After a lengthy analysis of Texas law, the court concluded that, although the spouse's rights had been analogized to a life estate, they did not qualify as "vested economic rights."    As a result, Mrs. Kim went away empty-handed.

Dealing With Kim

The Kim case exposes a danger when dealing with Texas homesteads.    If the exemption is capped by Sec. 522, the non-filing spouse can be kicked out of the property and limited to her husband's capped exemption.    What can be done to avoid this?   I can think of three ways to mitigate the problem of varying utility.

Because the property was purchased by Mr. Kim in his sole name, it was likely his sole management community property or at least joint management community property.   If a couple purchases a high-dollar home knowing that the husband has a high risk of getting sued within the next 1,215 days, it might make sense to take title in the wife's name.   Outside of bankruptcy, Texas law would protect the husband from the wife selling the property and making off with the proceeds.   Another option would be for the couple to enter into a marital partition agreement prior to purchasing the home stating that any property acquired jointly by them would be owned as their separate property in equal shares.    If the non-filing spouse had a 50% interest in the property as separate property, that interest would not enter the estate.    Of course, a partition done on the eve of bankruptcy could be set aside as a fraud on creditors.    As a result, this would need to be done well before bankruptcy is contemplated.   

Of course, most people don't purchase property expecting to file bankruptcy within 1,215 days.   This leads to the second fix.   The Texas legislature could state that each spouse individually owns a life estate in the property.   Current law tries to give each spouse something approximating a life estate.   The legislature could make this explicit so that each spouse would have a separate vested economic interest in the property.   This wouldn't stop sale of the property, since section 363(h) would still be there.   However, it would ensure that the non-filing spouse received a financial consolation prize.

Finally, when faced with a bankruptcy within 1,215 days after acquiring a homestead, it might make sense for both spouses to file.   Section 522(m) says that homestead exemptions are calculated per debtor.   If two debtors file, the cap is twice as much as if one had filed.   Generally, the conventional wisdom is to keep the other spouse out of bankruptcy if she has limited exposure on the debts (such as when the husband is sued on debts from his business for which the wife is not liable).   However, if the homestead exemption is capped, then two spouses filing means 2x the exemption.    There may have been other reasons why it didn't make sense for Mrs. Kim to join her husband's filing.   However, from here on out, it is a topic that bankruptcy counsel should broach with both spouses.

 

 

Fifth Circuit's Bankruptcy Opinions From August 2014

There are more bankruptcy decisions that come out of the Fifth Circuit each month than I could ever write about.   I am going to try to provide at least a brief blurb for each one.  Here are five cases from the Fifth Circuit that came out during August.   They deal with discharge, dischargeability, jurisdiction and Stern issues, lien claims and preferences.

Graham Mortgage Company v. Goff (In re Goff),No. 13-41148 (5th Cir. 8/22/14)(unpublished).   Fifth Circuit affirmed denial of discharge for failure to keep records under § 727(a)(3).  Opinion here.

Galaz v. Galaz (In re Galaz), No. 13-50781 (5th Cir. 8/25/14).   Court found no jurisdiction over claims brought by non-debtor against non-debtor.   Debtor's fraudulent transfer claims against non-debtor were non-core claims for which Bankruptcy Court could not enter final judgment but could submit proposed findings and conclusions here.   Opinion here.

McClendon v. Springfield (In re McClendon), No. 13-41030 (5th Cir. 8/26/14).   Court affirmed judgment of non-dischargeability for defamation claim under § 526(a)(6).   Employee who was fired brought claims for defamation against president of employer who accused him of theft.   Court did not give collateral estoppel effect to jury verdict but conducted trial.    Court found objective certainty of harm from statements.

Endeavor Energy Resources, LP v. Heritage Consolidated, LP (In re Heritage Consolidated, LLC), No. 13-10969 (5th Cir. 8/27/14).    Court affirmed summary judgment against drillers for constructive trust and equitable lien claims.   Court reversed and remanded on summary judgment on drillers' mineral subcontractor lien claims.    Opinion here.

Flooring Systems, Inc. v. Chow (In re Poston), No. 13-41050 (5th Cir. 8/28/14).   Court affirmed judgment to recover preference from creditor.    Transfer occurred when state court receiver served certified copy of receivership order on bank, not when turnover receiver was appointed.   Opinion here.  

Fifth Circuit Provides Valuable Guidance on Jurisdiction and Authority Post-Stern

Many cases deal with debtors who fraudulently convey away their assets before filing bankruptcy.   But what about the situation where the debtor is the victim of a fraudulent conveyance rather than the perpetrator?    In Galaz v. Galaz (In re Galaz), No. 13-50781 (5th Cir. 8/25/14), which can be found here, the Fifth Circuit answers important jurisdictional and Stern questions about the debtor's quest to recover wayward assets.   

What Happened

Lisa and Raul Galaz were once married to each other.   One of their assets was an interest held by Raul in Artist Rights Foundation, LLC ("ARF"), a company which owned the rights to the Ohio Players music catalog.    The other owner of ARF was Julian Jackson.   When Lisa and Raul were divorced in 2002, Raul assigned Lisa 50% of his 50% interest in ARF.   Because the transfer was made without Julian's consent, Lisa received a 25% economic interest in the company but was not a member.    While it is not really relevant to the opinion, another significant occurrence in 2002 was that Raul pled guilty to mail fraud and surrendered his California law license.    

From 1998 to 2005, the Ohio Players catalog was not generating any revenue.   While the opinion describes the Ohio Players as "a former funk band," a little more explanation is justified.   The Ohio Players were formed in 1959 and had gold records with "Funky Worm," "Skin Tight," "Fire" and "Love Roller Coaster."   Their heyday was between 1973 and 1976, when they had seven Top 40 hits.  Their last studio album was released in 1998 and they were inducted into the Official R & B Music Hall of Fame in 2013.  

On June 3, 2005, Raul transferred all of ARF's rights to the Ohio Players to Segundo Suenos, which was nothing more than a name at the time, but was later established as a Texas limited liability company.  According to the Fifth Circuit, when Segundo Suenos is spelled with the tilde (⁓--an accent mark used in Spanish), it means "Second Dreams" in Spanish.   Raul did not get permission from Lisa or Julian before embarking on his second dream of exploiting the Ohio Players music in an entity which excluded them.  Shortly after this transfer, the catalog began to make money, about a million dollars over five years.    The opinion does not say why the catalog started making money.   However, it is worth noting that the song "Love Rollercoaster" appeared in the film Final Destination 3 in 2006.  

In 2007, Lisa filed chapter 13 in the Western District of Texas.   She brought an adversary proceeding against Raul, his father, Alfredo, and Segundo Suenos.   The Defendants brought a third party complaint against Julian, who counterclaimed against them.   After a five day trial, Chief Bankruptcy Judge Ronald B. King found that the transfer to Segundo Suenos was invalid and that Raul had breached his fiduciary duty to Julian but not Lisa.   The Bankruptcy Court awarded $250,000 in actual damages and $250,000 in exemplary damages to Lisa and $500,000 in actual damages and $500,000 in exemplary damages to Julian.   After an appeal to the District Court, the fraudulent transfer judgment was affirmed but the case was remanded for a recalculation of damages.    The Bankruptcy Court reduced the actual damages slightly to reflect taxes incurred by Segundo Suenos, but otherwise left the award intact.   The District Court affirmed the second judgment and the case was appealed to the Fifth Circuit.

 Jurisdiction and Authority

The Fifth Circuit considered two important issues in its opinion:  whether the Bankruptcy Court had jurisdiction over the claims and whether it had authority to enter a final judgment.    These are very different concepts.   Jurisdiction looks at whether the federal courts have authority to consider a matter, while the authority question looks at whether the Bankruptcy Court or the District Court has authority to render a final judgment.

With regard to Lisa, the Fifth Circuit had no trouble finding jurisdiction.   The test for "related to" jurisdiction, which is the most expansive source of bankruptcy jurisdiction, is whether the dispute could "'conceivably' have any effect on the estate being administered in bankruptcy."   See Opinion, p. 5.  Since Lisa's suit could increase the size of the estate, there clearly was jurisdiction.   Julian was another matter.   He was a non-debtor suing another non-debtor.   That is the scenario that was struck down by the Supreme Court in Northern Pipeline.   Even though Julian was unwillingly dragged into the suit, there was ultimately no jurisdiction for his claims and so they went away.   Julian may have recognized this reality before the Fifth Circuit did, since he did not bother to file a brief in the appeal despite being ordered to.  

Although the Bankruptcy Court had jurisdiction to consider Lisa's claims, it did not have authority to enter a final judgment.    This was not a difficult question in 2014 (although it was much less obvious in 2010 when the case was originally tried).    The Fifth Circuit dutifully noted that

when a debtor pleads an action that would augment the bankruptcy estate, but not necessarily be resolved in the claims process, then the bankruptcy court is constitutionally prohibited from entering final judgment.

 Opinion, pp. 7-8.  The Bankruptcy Court had attempted to justify its final judgment on implied consent.   However, the Fifth Circuit's Frazin and BP RE decisions have eliminated consent as a ground for authority in the circuit.   The Supreme Court recently considered and dodged the consent issue in Bellingham and has granted cert to consider the issue again in Wellness International Network.   Nevertheless, the Court noted that "Until the Supreme Court decides, we are bound by controlling circuit precedent."  Opinion, p. 8.

Thus, the Bankruptcy Court had jurisdiction to consider Lisa's claims but not authority to enter a final judgment.    Where does that leave the case?  

The failure of the consent rationale does not vitiate the lower courts’ work altogether, however. As the Supreme Court recently held, claims designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way as a constitutional matter, may still “proceed as non-core within the meaning of § 157(c).” (citation omitted). Because Lisa’s claim is “related to a case under title 11,” 28 U.S.C. § 157(c)(1), the bankruptcy court may still hear it and “submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.” (citation omitted). Accordingly, the district court’s judgment on Lisa’s TUFTA claim must be vacated and remanded for de novo review of the bankruptcy court’s decision as recommended findings and conclusions.

Opinion, pp. 8-9.   Thus, the District Court which has already reviewed the case twice will get to take a third look at it.   This time, the District Court will consider the Bankruptcy Court's opinion as proposed findings of fact and conclusions of law which it may accept or reject on a de novo basis.  What this means is that the District Court is free to disregard the Bankruptcy Court's factual findings rather than being bound by the clearly erroneous rule.    However, given the Bankruptcy Court's greater familiarity with the facts and the District Court's workload, it is highly likely that the District Court's review will be very deferential.    

The Galaz opinion highlights the silliness of all of the attention paid to Stern and its progeny.  Notwithstanding Stern, Bankruptcy Courts can still hear cases within their jurisdiction.   If a case is non-core (or is designated as core but is outside of the Bankruptcy Court's authority), the Bankruptcy Court can still submit proposed findings of fact and conclusions of law to the District Court.  While the District Court could hear more evidence and re-open the record, the District Courts already have a pretty full docket.   As a result, my guess is that they will review proposed findings and conclusions in much the same manner as they have traditionally reviewed bankruptcy appeals.   However, if the District Courts are faced with a high volume of Bankruptcy Court reports and recommendations, they may be tempted to give them even more deferential review.   The District Courts have substantial experience reviewing reports and recommendations from their Magistrate Judges and, although I have not done the research, I suspect that the normal procedure is to approve them.   To quote the Talking Heads, the practical reality may be "same as it ever was."

Even though the Fifth Circuit sent Lisa back for another round of procedural hell, they did give her a parting gift by answering a substantive legal issue.   Lisa had filed suit under the Texas Uniform Fraudulent Transfer Act which allows a creditor to file suit to avoid a transfer.   Raul claimed that Lisa was not a "creditor" because he didn't owe her any money.    However, the Fifth Circuit concluded that a "creditor" under TUFTA means someone who has a "claim" which means a right to "payment or property."   Because Lisa had the right to a share of ARF's assets upon its dissolution, she had a right to property and was thus a creditor with standing to pursue a TUFTA claim.  

 

  

Texas Homesteads Sold Post-Petition Take Another Hit

Texas bankruptcy judge Jeff Bohm has ruled that a chapter 7 debtor who sold his homestead over a year after filing bankruptcy could not keep the portion of the proceeds when he failed to reinvest them within six months.  In re Smith, 2014 Bankr. LEXIS 3344 (Bankr. S.D. Tex. 8/4/14).    The case concerns the intersection between bankruptcy law, which determines exemptions as of the petition date, and Texas law, which requires reinvestment to maintain the exemption and is part of a continued trend of homestead proceeds at risk

What Happened

 The Debtor filed a chapter 7 petition on March 20, 2012 and claimed his homestead as exempt.   No party objected to the exemption.   The Trustee did not close the case.   On June 21, 2013, the Debtor sold his homestead and received net proceeds of $813,935.77.    The Debtor did not reinvest the proceeds within six months.   On April 11, 2014, the Trustee filed an adversary proceeding seeking to recover the remaining homestead proceeds in the amount of $700,349.09 from the Debtor.   The Debtor filed a Motion to Dismiss.  

The Fifth Circuit and the Vanishing Exemption

The Fifth Circuit has two reported and one unreported decisions dealing with proceeds from sale of a homestead in bankruptcy.  In re Zibman, 268 F.3d 298 (5th Cir. 2001) involved a debtor who sold his homestead, then filed chapter 7 without reinvesting the sales proceeds.   The Fifth Circuit held that the Debtor's exemption was contingent on reinvesting the proceeds and allowed the trustee to recover the funds when they were not reinvested.  In Studensky v. Morgan, 481 Fed.Appx. 183 (5th Cir. 2012), a chapter 7 debtor sold his homestead and paid some of the proceeds to his brother.  When the Trustee sought to recover the funds, the Debtor amended his exemptions to claim the funds as exempt.  The Bankruptcy Court and District Court ruled that the proceeds were exempt, but the Fifth Circuit reversed.  In Frost v. Viegelahn, 744 F.3d  384 (5th Cir. 2014), a chapter 13 debtor sold his homestead during the pendency of the chapter 13 case and did not reinvest the proceeds.   Once again, the Fifth Circuit held that the Debtor lost the exemption when the proceeds were not reinvested.    I wrote about Frost here.  

The difficulty with cases allowing proceeds to lose their exempt status is that exemptions are determined as of the petition date.    An absolutist approach to the snapshot rule would say that if the homestead or the proceeds were exempt on the petition date, they left the estate and could not re-vest.   That is what many of us thought that Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) meant.

However, both cases could be reconciled with the "snapshot" approach.   In Zibman, the asset to be exempted was the proceeds rather the homestead itself.   The exemption of proceeds was a conditional one which depended upon reinvesting them within six months.   As a result, the conditional nature of the exemption was not necessarily at odds with the snapshot.   Frost was a chapter 13 case.  In chapter 13, property which the Debtor acquires post-petition is included in the estate under section 1306(a).    Thus, Frost could have been decided based on section 1306, even though the opinion did not say this.   

Judge Bohm's Ruling

The Smith Trustee could not rely on either of these saving devices.    Because the Debtor had a homestead and not just proceeds on the petition date, the Trustee could not rely on the idea that proceeds were different than the actual property itself.    Because the case was a chapter 7, the after-acquired property provision of section 1306(a) did not apply.   Instead, the Trustee had to argue that a Texas homestead exemption was never really final and could be clawed back if the Debtor sold the property and didn't reinvest the proceeds.     The Trustee made this argument and the Court agreed with him.  

In denying the Motion to Dismiss, the Court ruled that the Six-Month Rule applied to a chapter 7 case and that on the 181st day, "title to the Proceeds automatically passed from the Debtor to the Trustee and the Debtor had a duty to turnover over the Proceeds to the Trustee."   Opinion, at *34.   The Court rejected the arguments that property once exempted remains exempt and that the six-month rule does not apply to chapter 7 cases.  

The Court held that the six-month rule did apply in a chapter 7 case based on the fact that the Frost case did not limit its effect to chapter 13 cases and because Zibman and Morgan applied the rule in chapter 7 cases.    The Court stated:

There is a further point undermining the Debtor's argument that Frost is limited to Chapter 13 cases: Frost never mentioned § 1306(a)(1) as the basis for its decision. Rather, the Fifth Circuit focused on § 41.001 of the Texas Property Code in rendering its ruling. The Debtor, and at least one outside commentator, seem to be at a loss to understand why the Fifth Circuit did not cite § 1306(a)(1) to justify its ruling in Frost and to limit the ruling to Chapter 13 cases. A review of certain pre-Frost opinions from the Fifth Circuit underscores why there should be no surprise that the Fifth Circuit, in Frost, did not use § 1306(a)(1) to limit its holding to Chapter 13 cases.

***

These two cases—Zibman and Morgan—thus underscore why the Fifth Circuit, in Frost, did not rely on § 1306(a)(1) to justify its holding in that case and to limit§41.001(c) to Chapter 13 cases. The Fifth Circuit had already held that the 6-Month Rule applies in Chapter 7 cases.

Opinion, at *25-26, 29.  

The Court went on to write:

This Court declines the Debtor's invitation to exempt the Proceeds from the bankruptcy estate on the basis that Frost is inapplicable to Chapter 7 cases. Rather, this Court is bound by Fifth Circuit precedent and concludes that Frost applies in this Chapter 7 case. Moreover, § 41.001 sets forth both the scope and limitations of a Texas homestead exemption, and the "snapshot rule" in bankruptcy law instructs courts to apply the law applicable at the time of the filing. As the Fifth Circuit in Zibman noted, when a debtor avails himself of the Texas homestead law, the debtor has to take the "fat with the lean." In re Zibman, 268 F.3d at 304. Here, the Debtor availed himself of the generous Texas homestead exemption, and is therefore bound by both its provisions and its limitations, including the 6-Month Rule. Accordingly, when the Debtor failed to reinvest the Proceeds in a new homestead within six months of selling the Property, the Proceeds lost their exempt status. The Debtor's argument of "once exempt, always exempt" is simply incorrect.

Opinion, at *35-36.

The Court sought to dispel the concern that trustees could lurk in the shadows indefinitely waiting for the Debtor to some day sell his homestead.

Does this Court's holding mean that Chapter 7 trustees can forever make a claim on the proceeds from the sale of a debtor's homestead after six months has passed without the debtor reinvesting those proceeds in a new homestead? The answer is no. Once a Chapter 7 case is closed, any property that the trustee has not administered at the time of closing is abandoned to the debtor under § 554(c). The effect of abandonment is that "the trustee is... divested of control of the property because it is no longer part of the estate... Property abandoned under [§] 554 reverts to the debtor, and the debtor's rights to the property are treated as if no bankruptcy petition was filed." (citation omitted).   For example, if the case at bar had been closed after the Debtor had sold the Property but before six months had expired, the Trustee would have automatically abandoned any future right to the Proceeds after the expiration of six months, and the right to the Proceeds would have reverted to the Debtor on the date of the closing of the case.

 Opinion, at 32-33.

Thus, the Court held that even if the property is properly claimed as exempt and no party objects, the exemption allowed is a conditional one.   If the Debtor sells the property and does not reinvest the proceeds within 180 days while the case remains open, the exemption evaporates.  

What Does It Mean?

I am the outside commentator referenced in Judge Bohm's opinion.   I had argued that the Fifth Circuit should have clarified the Frost decision to limit it to the chapter 13 context.   I had previously written:

The Fifth Circuit might want to take another look at this one.   For one thing, the opinion completely fails to appreciate the case's unique procedural posture which could have provided a more coherent basis for the Court's ruling.  It also seems to fumble the intersection between the Bankruptcy Code and Texas exemption law.   This could result in major mayhem in future cases.

This was a chapter 13 case.   As a result, property acquired post-petition is included in the estate.   11 U.S.C. Sec. 1306.   The proceeds from sale of the homestead could have been analogized to property acquired post-petition which would only be exempt if re-invested in a new homestead within six months.    As a result, the timing that would matter is whether the homestead was sold during the case or subsequently.    The expanded definition of property of the estate in a chapter 13 case could justify the result in the Frost case.   However, this was not discussed by the Court.  How would it be applied in a chapter 7 case?    Judge Tony Davis rejected the application of Zibman to a post-petition sale of a homestead in a chapter 7 case in a well-reasoned opinion in In re D'Avila, 498 B.R. 150 (Bankr. W. D. Tex. 8/21/13), which can be found here.   Hopefully the Circuit would agree with Judge Davis when faced with a Chapter 7 case.    However, like I said, the Frost decision does not make this clear.

My concern that Frost could result in "major mayhem in future cases" appears to have come true.  Judge Bohm followed what he considered to be binding precedent.   I would have distinguished Zibman and Frost based on Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) where the Court stated:

Davis claimed the lawsuit proceeds as exempt on a list filed with the Bankruptcy Court. Section 522(l), to repeat, says that "unless a party in interest objects, the property claimed as exempt on such list is exempt." Rule 4003(b) gives the trustee and creditors 30 days from the initial creditors' meeting to object. By negative implication, the Rule indicates that creditors may not object after 30 days "unless, within such period, further time is granted by the court." The Bankruptcy Court did not extend the 30-day period. Section 522(l) therefore has made the property exempt. Taylor cannot contest the exemption at this time whether or not Davis had a colorable statutory basis for claiming it.

Deadlines may lead to unwelcome results, but they prompt parties to act and they produce finality. In this case, despite what respondents repeatedly told him, Taylor did not object to the claimed exemption. If Taylor did not know the value of the potential proceeds of the lawsuit, he could have sought a hearing on the issue, see Rule 4003(c), or he could have asked the Bankruptcy Court for an extension of time to object, see Rule 4003(b). Having done neither, Taylor cannot now seek to deprive Davis and respondents of the exemption.

Taylor, at 644.   In my view, Taylor mandates the "once exempt, always exempt" position advocated by the Debtor and rejected by Judge Bohm (among others).

In Zibman, the Debtor sold their home on November 27, 1998 and filed bankruptcy on February 9, 1999.   They claimed the proceeds from sale of their homestead as exempt.  The Court extended the deadline to object to exemptions until July 6, 1999.   The Trustee filed a timely objection to exemptions on June 3, 1999.    Thus, Zibman was not a failure to object case.    It was simply a case where the Trustee filed a timely exemption to funds which had lost their exempt status as of the date of the objection.  

Frost was more complicated for the reason that the Trustee did not object to the exemptions but at least raised the six month deadline in a written pleading before the deadline had run.    The Debtor filed a chapter 13 petition on November 30, 2009.    He claimed his homestead as exempt at that time.    On March 3, 2010, the Debtor filed a Motion to Sell Property Free and Clear of Liens.   This motion was filed after the exemption had become final.    The Trustee filed a timely objection to the Motion to Sell Free and Clear.    The Trustee argued that "if Debtor is not using proceeds to purchase a new home within the six month exemption period, the proceeds should be paid into the plan to increase the base."    On March 26, 2010, the Court approved the sale but ordered the remaining proceeds deposited with the Chapter 13 trustee.    On January 3, 2011, in connection with the Debtor's proposed chapter 13 plan, the Court released $40,000.00 to the Debtor and allowed the Trustee to retain sufficient funds for a 100% distribution to creditors.   On May 11, 2011, the Court entered a Final Order Regarding Trustee's Objection to Debtor's Motion to Sell Real Property Free and Clear of All Liens and Interests.   The Court ruled that the Debtor would be granted six months to reinvest the $81,108.67 proceeds into a new homestead beginning on January 27, 2011 minus $23,000.00 which had already been spent by the Debtor for non-homestead purposes.   The Debtor moved to vacate the order based upon Taylor v. Freeland & Kronz.   The Court denied this motion and the Debtor appealed.   The Court of Appeals affirmed the Bankruptcy Court's ruling on murky grounds.

 

While I was troubled by Frost, it can be explained away on several grounds that are at least plausible (even if they are not necessarily compelling).     First, Frost was a chapter 13 case.    Under 11 U.S.C. Sec. 1306, post-petition property, such as homestead proceeds which are not reinvested, are added to the estate.   Second, the Debtor sought the benefits of chapter 13 in order to obtain time to sell his home.    The Chapter 13 Trustee, Mary Viegelahn, essentially argued that if the Debtor wanted to get the benefits of Chapter 13 that he should have to either reinvest the proceeds as provided by Texas law or use them to provide a 100% plan to his creditors.    If the Debtor didn't like that deal, he could have simply exercised his absolute right to dismiss his case and have sold his property outside of bankruptcy.    

However, Smith is the case which completely slides down the slippery slope.    Rather than looking for a clever distinction, Judge Bohm applied what he considered to be a straightforward reading of the precedent. The problem with Smith is that the Debtor will potentially lose his homestead proceeds due to the Trustee's two-fold inaction.   First, the Trustee did not object to the homestead exemption which duly became final.    Second, the Trustee left the case open while the Debtor proceeded to sell his home.    Had the Trustee closed the case, we wouldn't be having this discussion.   Instead, because the Trustee chose to lurk in the shadows waiting for the Debtor to make a mistake the Debtor will potentially lose one of the most valuable rights available to him under Texas law.    In my view, Judge Davis's opinion in  In re D'Avila, 498 B.R. 150 (Bankr. W. D. Tex. 2013) has the better side of the argument. 

 

Is the Proceeds Provision A Limitation or an Expansion on the Homestead?

I would like to throw out one more issue for discussion.   The recent cases interpreting the six months to reinvest provision have assumed that it was a limitation on the homestead exemption.  What if they are wrong?   What if it is actually an expansion of the exemption?   If the proceeds provision adds to the rights otherwise available, then it would be a mistake to consider it to be grounds for eviscerating the exemption.   In Frost, the Fifth Circuit stated that "a change in the character of the property that eliminates an element required for the exemption voids the exemption."    Opinion, p. 11.   Where did they get that from?   Section 522(l) states that "Unless a party in interest objects, the property claimed on the list is exempt."   It does not state that unless the property retains its character until the case is closed, it is exempt.  In my view, the Fifth Circuit has re-written the statute.

Protection of proceeds under Texas law is the exception rather than the rule.   The only provisions that I am aware of under Texas law are the six month provision allowing for reinvestment of homestead proceeds and the provision in the Insurance Code stating that proceeds from a life insurance policy are exempt.    Every other Texas exemption says that the thing itself is exempt.   Normally, when Texas exempt property is converted into cash, it loses its exempt character.   For example, current wages are exempt while money obtained from depositing your paycheck is not.   The six month provision adds to what would normally be exempt.   Your homestead is exempt and if you sell it, the proceeds remain exempt for six months.   During that six months, you can reinvest it in a new home or blow it on wild living.    Any money left over after six months becomes subject to claims of creditors.    Thus, homestead proceeds unlike wages deposited into the bank retain their exempt for an extended period of time.
 
The normal rule with exempt property is that once property is exempt, it remains exempt.  Section 522(c) and (l) state that whatever property is claimed as exempt is not liable for any claims that arose prior to the petition date.   What the Debtor does with the exempt property after it leaves the estate is irrelevant.  If the Debtor decides to sell his $50,000 Mercedes and use the money to pay living expenses while he stays home and plays video games, the money is still exempt because the asset giving rise to the proceeds left the estate.  

Under the rationale of Frost and Smith, no exemption is final until the case is closed.   If the Debtor has a yard sale and sells his used yard furniture, that money belongs to the Trustee.   If the Debtor wrecks his car and receives a check from his insurance company, that money is not exempt and belongs to the Trustee.   This is madness because it means that there would never be any finality to any exemption ever.    

Let's go back to Taylor v. Freeland & Kronz.   In that, case the Debtor claimed something that was not exempt and no one made a timely objection.   The Supreme Court said sorry, you missed your chance to object.   However, under Frost and Smith, property only remains exempt if it retains its exempt character throughout the case.   As a result, property that should never have been claimed as exempt could be recovered at any time.    In my opinion, there is a serious problem with using a provision intended to grant additional protection to homesteads to gut the homestead exemption.   This is wrong, wrong, wrong and someone (other than me) needs to say so.        

Final Thoughts

I have known Judge Bohm since he was in private practice in Austin.  He is a very smart guy with a lot of integrity.   While I have been free about disagreeing with him here, opinions of judges have more weight than opinions of bloggers.   Judge Bohm did not engage in judicial activism, but rather tried to follow in the direction the Circuit was pointing.    The error comes from above and that's where it needs to be remedied. In my view, the Circuit has dangerously drifted away from the principle of finality in exemptions and should give this issue another look.   Seriously, Fifth Circuit, I'm saying this as a friend.