IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 09-40912

In the Matter of: GREGORIO VILLARREAL; ESTELA VILLARREAL,

Debtors

------------------------------

GREGORIO VILLARREAL; ESTELA VILLARREAL,

Appellants

v.

Trustee DAVID W. SHOWALTER

Appellee

Appeal from the United States District Court

for the Southern District of Texas

USDC No. 7:09-CV-67

Before DENNIS, OWEN, and SOUTHWICK, Circuit Judges.

PER CURIAM:

*

Debtors-Appellants, Gregorio and Estela Villarreal, challenge the

bankruptcy court’s determination that they are equitably estopped from

protecting the restaurant and ballroom within which they covertly resided under

United States Court of Appeals

Fifth Circuit

F I L E D

November 10, 2010

Lyle W. Cayce

Clerk

 Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not *

be published and is not precedent except under the limited circumstances set forth in 5TH CIR.

R. 47.5.4.

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the Texas Constitution’s homestead exemption provision, Article 16, § 50. This

case presents a novel question of Texas state law, which is dispositive of the

entire case. We certify the question to the Texas Supreme Court.

CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT TO THE SUPREME COURT OF TEXAS, PURSUANT

TO THE TEXAS CONSTITUTION ART. 5, § 3-C AND RULE 58 OF THE

TEXAS RULES OF APPELLATE PROCEDURE

TO THE SUPREME COURT OF TEXAS AND THE HONORABLE JUSTICES

THEREOF:

I. STYLE OF THE CASE

The style of the case in which certification is made is In re Villarreal or

Villarreal v. Showalter, No. 09-40912, in the United States Court of Appeals for

the Fifth Circuit, on appeal from the United States District Court for the

Southern District of Texas, McAllen Division, Civil Action No. 7:09-CV-67, and

the Bankruptcy Court, Southern District of Texas, McAllen Division, In re

Villarreal, 401 B.R. 823 (Bankr. S.D. Tex. 2009). The Fifth Circuit, on its own

motion, has decided to certify this question to the Justices of the Texas Supreme

Court.

II. STATEMENT OF THE CASE

This bankruptcy case concerns whether the husband and wife Debtors are

equitably estopped from asserting the Texas homestead exemption to protect the

real property on which they surreptitiously resided, a restaurant and ballroom

known as Greg’s Ballroom, from foreclosure by their creditors, because (1)

although Debtors lived on the property, their residence there did not give a

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reasonable prudent person notice that it was their homestead; and (2) Debtors

disclaimed the homestead protection of the property in a manner that met all the

doctrinal requirements for equitable estoppel to apply. See In re Villarreal, 401

B.R. 823.

In 2005, Debtors’ prior family home was foreclosed upon. They moved into

their only other property, their place of business, Greg’s Ballroom, and

surreptitiously used it as their sole family home. They resided “in the restaurant

portion of the building behind a black curtain that concealed their bed and

bedroom furniture.” Id. at 830. “They use[d] the shower area in the back of the

building, which is inaccessible to visitors.” Id. While a friend of Debtors’ testified

that she was aware that they were living on the property, she also stated that

Debtors never allowed her to view their living area. Id. “Debtors admitted that

they have kept secret their residence at Greg’s Ballroom.” Id. Consequently,

there generally was no clothing, personal effects or home furnishings visible on

the property. Id. Although a police officer testified that he once saw toys and

furniture by the black curtain leading to Debtors’ sleeping area, he stated that

he had the impression that the curtain demarcated a storage area, not a living

space. Id. No county or real estate records indicated that Debtors were living on

the property. Id.

In 2007, Mr. Villarreal settled lawsuits with the clients of David

Showalter, an attorney who would subsequently assume the role of Trustee for

his clients’ interests in the settlement. Id. at 828. The settlement, in relevant

part, stated that Mr. Villarreal would execute a promissory note for $70,000 plus

interest to Showalter as Trustee for his beneficiaries and that note would be

secured by a deed of trust against Greg’s Ballroom. Id. Mr. Villarreal executed

the promissory note. Id. at 829. That note listed Greg’s Ballroom as Mr.

Villarreal’s mailing address. Id. Debtors, both Mr. and Mrs. Villarreal, also

executed the deed of trust against Greg’s Ballroom. Id. The deed stated, “No part

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of the property is used for residential purposes and is not, in whole or in part the

homestead of Grantors. Grantors acknowledge and represent that the debt

evidenced by the Note is used for business purposes for value received by

Grantors.” Id. The deed also listed Greg’s Ballroom as Debtors’ mailing address.

Id. Later in 2007, Mr. Villarreal defaulted on the promissory note and Trustee

“foreclosed on the lien.” Id.

Debtors then brought suit in state court alleging that Trustee wrongfully

foreclosed on their property as it was exempt from seizure because it was their

homestead. Id. While those proceedings were pending, Debtors sought protection

under Chapter 13 of the bankruptcy code. Id. Debtors then removed their

wrongful foreclosure suit to federal court as part of the bankruptcy proceedings.

Id. See also 28 U.S.C. §§ 1334, 1452. Objections were entered to Debtors’ claimed

protection of Greg’s Ballroom as a homestead. In re Villarreal, 401 B.R. at 828.

It was argued both that the property was not Debtors’ valid homestead and that

even if it was, Debtors should be equitably estopped from protecting it from

foreclosure. Id. at 828, 833.

Following hearings, the bankruptcy court concluded that Greg’s Ballroom

was Debtors’ valid homestead because, beginning in 2005, they had used it as

their sole and continuous residence. Id. 832-33. The bankruptcy court noted that

under Texas law, liens are generally not enforceable against homesteads. Id. at

833. However, the bankruptcy court determined that Texas law allows a certain

narrow class of homestead claimants to be equitably estopped from protecting

their homesteads from foreclosure. Id. at 834. Specifically, under the bankruptcy

court’s interpretation of Texas law, when a homestead claimant is living on the

property as his or her homestead, he or she can nonetheless be equitably

estopped from protecting that property as such, if his or her “acts were [not] such

as to put a reasonable prudent person on notice that the tract constituted a part

of the homestead.” Id. at 834-35 (quoting Prince v. N. State Bank, 484 S.W.2d

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405, 411 (Tex. Civ. App.-Amarillo 1972, writ ref’d n.r.e.)) (internal quotation

marks omitted). Such a rule, the bankruptcy court continued, is consistent with

the “ambiguous possession” doctrine articulated by the Texas courts: that when

a claimant owns “only one piece of property but does not occupy it” and the

“‘visible circumstances’” on the property are consistent with the owner’s

disclaimer of the property as his or her homestead, the owner may be estopped

from later claiming the property as his or her homestead. Id. at 835 (quoting

First Interstate Bank v. Bland, 810 S.W.2d 277, 284, 287 (Tex. Civ. App.-Fort

Worth 1991)) (citing Alexander v. Wilson, 77 S.W.2d 873, 874 (Tex. 1935))). The

court acknowledged that this analysis was in tension with “[t]he general rule

that Texas courts have adopted unanimously in this situation where the

claimant owns only one piece of property and occupies it at the time of the

mortgage . . . that ‘the claimant is not estopped to set up the homestead

exemption notwithstanding the declarations in the mortgage contract.’” Id. at

834 (quoting First Interstate Bank, 810 S.W.2d at 283 (citing Tex. Land & Loan

Co. v. Blalock, 13 S.W. 12, 13 (Tex. 1890); Ray v. Metzger, 165 S.W.2d 207, 209

(Tex. Civ. App.-Fort Worth 1942), aff’d, 141 S.W.2d 480 (1943))). Yet the court

concluded that this apparent conflict in Texas law was reconcilable because the

rule against estoppel assumed that by occupying the homestead, the claimant’s

“use of the property as a home [would be] of so obvious a nature” that the lender

must have had notice it was the claimant’s homestead. Id. (quoting First

Interstate Bank, 810 S.W.2d at 283-84) (internal quotation marks omitted).

Accordingly, the bankruptcy court determined that the rule against estoppel did

not apply to the instant case. Id. at 836.

Based on this interpretation of Texas law, the bankruptcy court concluded

that Debtors could be equitably estopped from protecting their property as their

homestead because Debtors had concealed their residence from public view. Id.

The area in which they were living appeared to an outsider as “a storage area.”

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Id. at 835. Neither the presence of visitors nor some personal items contradicted

this impression, as visitors were associated with Debtors’ business activities and

too few personal items were in public view to indicate that individuals were

living on the property. Id. Further, the external appearance of the property

suggested that it was a business. Id. Therefore, the bankruptcy court concluded

that “Debtors’ use of Greg’s Ballroom as a residence . . . was insufficient ‘to put

a reasonable prudent person on notice that the property was a homestead.’” Id.

(quoting Prince, 484 S.W.2d at 411).

Finally, the bankruptcy court concluded that Debtors’ disclaimer of their

homestead rights satisfied each of the doctrinal requirements for equitable

estoppel because it was: “(1) a false representation or concealment of material

facts; (2) made with either actual or constructive knowledge of the truth; (3) to

a party without knowledge of the truth or without the means of knowing the

truth; (4) with the intention that the false representation or concealment should

be acted on; and (5) the party to whom it was made actually relied on or acted

on it to his prejudice.” Id. at 833, 836-37 (quoting Gulbenkian v. Penn, 252

S.W.2d 929, 932 (Tex. 1952)) (internal quotation marks omitted). Therefore, the

bankruptcy court concluded that the Trustee’s “pre-petition foreclosure” on the

property “was valid”; and that the property should not become part of the

bankruptcy estate because Trustee could foreclose against it in satisfaction of

the debt his beneficiaries were owed, id. at 839.

The Debtors appealed. The district court affirmed, relying on a similar

analysis of the limitations of Texas’s homestead protection and citing primarily

the same Texas case law as the bankruptcy court.

III. FACTUAL AND LEGAL ISSUES RESOLVED

Before setting forth the question to be certified, we resolve the other

pivotal factual and legal issues, leaving the certified question as dispositive of

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the whole case. Debtors contest the bankruptcy court’s factual finding that they

resided surreptitiously and not openly in Greg’s Ballroom. They also deny that

they had actual or constructive knowledge of the fact that Greg’s Ballroom was

their homestead when they signed the deed of trust asserting that “[n]o part of

the property is used for residential purposes” and that Trustee Showalter relied

on their disclaimer of the property as their homestead. The bankruptcy court

resolved each of these factual issues in favor of Trustee.

“We review the bankruptcy court’s rulings and decisions under the same

standards employed by the district court.” In re Perry, 345 F.3d 303, 309 (5th

Cir. 2003). “A finding of fact . . . may be disregarded only if it is clearly

erroneous.” Id. “Estoppel is ordinarily a question of fact.” Nottingham Manor

Owners Ass’n v. El Paso Elec. Co., 260 S.W.3d 186, 197 (Tex. Civ. App.-El Paso

2008).

We see no clear error in the bankruptcy court’s findings. Debtors do not

contest that they concealed their living quarters on the property and that their

visible activities on the property were consistent with the types of business

activities that occurred at Greg’s Ballroom. They argue only that a reasonable

prudent person would have known that the property was their homestead

because (1) they listed the property as their home address in the promissory

note, deed of trust and on their driver’s licenses and tax returns, and (2)

sometimes there were visitors on the property when there were not events

scheduled at the ballroom. However, these marginal facts are insufficient to

establish that the bankruptcy court committed clear error in finding that they

used Greg’s Ballroom as their homestead surreptitiously and not openly.

Likewise, Debtors acknowledge that they had actual or constructive knowledge

that they were using part of the property for residential purposes, contrary to

the disclaimer in the deed of trust they signed. Debtors argue only that they

failed to realize the significance of those facts. Moreover, Debtors point to no

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evidence suggesting Trustee Showalter did not rely on their misrepresentation

that the property was not being used for residential purposes; they merely argue

that he should have investigated further and determined that their homestead

disclaimer was false.

1

The remaining issue in this case, therefore, is whether Texas homestead

claimants can be equitably estopped from protecting their actual homesteads if

they have disclaimed the homestead protection and resided on the property

covertly and not openly. As described in the background section, there is a

tension in Texas law regarding this question. One of the foundational Texas

Supreme Court cases in this area, Texas Land & Loan Co. v. Blalock, states that

“no estoppel can arise in favor of a lender who has attempted to secure a lien on

homestead in actual use and possession of the family, based on declarations of

the husband and wife made orally or in writing contrary to the fact” that the

property was the family’s homestead. 13 S.W. 12, 13 (1890) (emphasis added).

Therefore, actual use of the property as a homestead, regardless of the nature

of that use, would seem to prevent estoppel.

Other Texas courts have endorsed Texas Land’s statement of the law. See

Rutland Sav. Bank v. Isbell, 154 S.W.2d 442, 445 (Tex. 1941) (“Since the courts

below have found that the John D. Isbell family were actually living on the 34

acres as a homestead at that time, the lender should not have relied upon the

affidavit at all” and therefore no estoppel can arise.); Parrish v. Hawes, 66 S.W.

209, 212 (Tex. 1902) (stating that once a homestead is established “all persons

must take notice, and hence declarations . . . contrary thereto cannot be relied

Debtors also argue that Ms. Villarreal cannot be estopped because she was not a party 1

to the settlement between Showalter’s clients and Mr. Villarreal. This argument misses the

point. The misrepresentation that led the bankruptcy court to conclude Debtors could be

estopped occurred in the deed of trust. That document, which both Debtors acknowledge that

they signed, stated that Greg’s Ballroom was not their homestead. It is that misrepresentation

that resulted in the bankruptcy court concluding Debtors were equitably estopped.

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on”). Likewise, relying on the above statement from Texas Land, the Fifth

Circuit has suggested “that a homestead claimant is not estopped to assert his

homestead rights in property on the basis of declarations made to the contrary

if, at the time of the declarations, the claimant was in actual use and possession

of the property.” In re Niland, 825 F.2d 801, 808 (5th Cir. 1987). Finally, a Texas

treatise on homestead rights declares that “[w]here it is shown that, at the time

a person dealt with the homestead property, the homestead claimant was

occupying the premises in a manner sufficient to sustain the homestead

exemption [i.e., for it to be found that the property was the claimant’s

homestead], the homestead exemption cannot, as a rule, be destroyed by any

statement, declaration, or representation made by the claimant that the status

of the property is otherwise.” 43 Tex. Jur. Homesteads § 83 (3d ed. 2010).

However, there is a series of cases that supports the rule articulated in the

bankruptcy court opinion: that a homestead claimant can be estopped from

asserting the homestead protection if he or she does not live on the property in

a manner to give a reasonable prudent person notice that he or she was using

the property as a homestead. For instance, Alexander v. Wilson stated that

“unless the visible circumstances existing at the time were of such import as to

apprise [the mortagee] of the fact that the [property] was the home of the

mortgagors,” the mortgagors could be estopped from asserting the homestead

protection for the property. 77 S.W.2d 873, 874 (Tex. 1935). Likewise, in Lincoln

v. Bennett, the Texas Supreme Court stated that liens could be enforced against

homesteads where “the owners, . . . so using it that its status is dubious at the

time the mortgage is executed, represent that it is not their homestead.” 156

S.W.2d 504, 505 (Tex. 1941). Finally, Prince v. North State Bank stated that if

a homestead claimant was living on the property at the same time that he or she

disclaimed the homestead protection, “the determining factor [for whether the

homestead protection will be enforced] is whether the claimant’s acts were such

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as to put a reasonable prudent person on notice that the tract constituted a part

of the homestead.” 484 S.W.2d 405, 411 (Tex. Civ. App.-Amarillo 1972, writ ref’d

n.r.e.).

Nonetheless, each of these cases is factually distinct from the present case.

In Alexander and Prince the homestead claimants were not living on the

property claimed as a homestead at the time that they allegedly disclaimed their

homestead rights. Lincoln never applied the doctrine it articulated, as the court

found that the claimants were openly using the property as their homestead.

Accordingly, it is unclear whether the broad rule that these cases state is

applicable to circumstances in which the homestead claimant is living on the

property as a homestead at the time he or she disclaims the homestead

protection.

Given the tension extant in Texas law between the Texas Land and

Alexander lines of cases, we request that the Texas Supreme Court address and

answer the question that we certify below.

IV. QUESTION CERTIFIED

Whether an otherwise valid homestead exemption claim against seizure

and sale by creditors is foreclosed by equitable estoppel when (1) claimants’ use

of the property as a homestead was surreptitious; (2) the claimants publicly

declared at the time that the lien was placed on the property that no such use

of the property was being made; and (3) the other criteria for equitable estoppel

have been met, viz., (a) that a false representation was made with either actual

or constructive knowledge of the truth; (b) to a party without knowledge of the

truth or without the means of knowing the truth; (c) with the intention that the

false representation or concealment should be acted on; and (d) the party to

whom it was made actually relied on or acted on it to his prejudice.

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We disclaim any intention or desire that the Supreme Court of Texas

confine its reply to the precise form or scope of the question certified. The answer

provided by the Supreme Court of Texas will determine the dispositive issue on

appeal in this case. The record of this case, together with copies of the parties’

briefs, is transmitted herewith.

QUESTION CERTIFIED.

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