Opinion ID: 32608
Heading Depth: 3
Heading Rank: 1

Heading: Pretended Sale

Text: 14 Texas permits a family who has filed for bankruptcy protection to exempt up to 200 rural acres of land from the bankruptcy estate if the property is used for the purpose of a rural home. 7 Tex. Prop.Code Ann. § 41.002(b) (Vernon 2000). See also Tex. Const. art. XVI, § 51 (Vernon 1993). The homestead designation precludes property from forced sale in order to satisfy the bankrupt's debts, unless those debts are for the purchase money thereof, or a part of such purchase money, the taxes due thereon, or for work and material used in constructing improvements thereon. Tex. Const. art. XVI, § 50 (Vernon 1993). 15 In his bankruptcy schedule, Perry claimed as an exempt homestead the 26-acre tract and the contiguous 59-acre tract. The Dearings timely objected to this designation. Under Texas's generous homestead law, homestead rights may be lost only through death, abandonment or alienation. 8 In re Moody, 862 F.2d 1194, 1198 (5th Cir.1989). See also Resolution Trust Corp. v. Olivarez, 29 F.3d 201, 206-07 (5th Cir.1994). The Dearings allege that Perry alienated title to the twenty-six acre tract by conveying it to the Corporation, and in the process extinguished his homestead interest. Perry responds that the conveyance was a sham, or pretended sale intended to circumvent Texas homestead laws, and thus void under the Texas Constitution. See Tex.Const. art. XVI, § 50 (Vernon 1993)([A]ll pretended sales of the homestead involving any condition of defeasance shall be void.). 16 The bankruptcy court determined that the 1985 conveyance was not a sham. The district court disagreed, and reversed. A bankruptcy court's determination as to whether a debtor's sale of his home to a corporation was a pretended sale is a question of fact to be reversed only if it is clearly erroneous. Firstbank, 141 B.R. at 118. Applying this standard, we are unable to agree with the district court that the bankruptcy court's conclusion regarding the validity of the 1985 conveyance is deserving of reversal. 17 The claimant has the initial burden of establishing homestead status. Burk Royalty Co. v. Riley, 475 S.W.2d 566, 568 (Tex.1972); Lifemark Corp. v. Merritt, 655 S.W.2d 310 (Tex.App.-Hous.1983). This is accomplished by presenting evidence of both (i) overt acts of homestead usage and (ii) an intent to claim the land as a homestead. Id.; In re Kennard, 970 F.2d at 1458. Perry completed this short hurdle prior to the 1985 transfer to the Corporation by occupying it for more than twenty years. See In re Bradley, 960 F.2d 502, 507 (5th Cir.1992)(Possession and use of land by one who owns it and who resides upon it makes it the homestead in law and in fact. ). Accord In re Claflin, 761 F.2d 1088, 1092 (5th Cir.1985)(finding that use and occupancy of the property establishes a homestead); In re Kennard, 970 F.2d at 1459 (noting that intent to claim property as homestead is presumed where the homestead claimant resides on the property). A claimant's homestead designation, such as the one made by Perry in 1997, is also considered prima facie evidence of what constitutes the family homestead. Wade v. First Nat'l Bank, 263 S.W. 654, 656 (Tex.Civ.App.1925). 18 Once the claimant has made a prima facie case in favor of homestead status, the objecting party has the burden of demonstrating that the homestead rights have been terminated. Bankr.R. 4003(c); In re Rubarts, 896 F.2d 107, 110 (5th Cir.1990); In re Niland, 825 F.2d 801, 808 (5th Cir. 1987). The Dearings thus carry the burden of proof on this issue. 19 When a homestead is conveyed to a corporation, the stock of which is owned by the grantors, the property loses its homestead character regardless of whether the grantors continue to occupy the property. Nash v. Conatser, 410 S.W.2d 512, 521-22 (Tex.Civ.App.1966). Accord Eckard v. Citizens Nat. Bank in Abilene, 588 S.W.2d 861 (Tex.Civ.App.1979); Nowlin v. Wm. Cameron & Co., 54 S.W.2d 1035 (Tex.Civ.App.1932). Valid title then vests in the corporation, and the property becomes subject to the debts of the corporation. Id. 20 The Dearings assert that this is precisely what occurred when Perry transferred title of the 26-acre tract to the Corporation. Perry, however, argues that the transfer was made at the suggestion of the Bank and solely to secure the $127,000 loan with the homestead, in violation of the Texas Constitution. As such, he contends, the transfer was a pretended sale and is thus void. 9 See Tex. Const. art. XVI, § 50. Perry's argument lacks merit. 21 Perry relies heavily upon Rubarts v. First Gibraltar Bank, FSB, 896 F.2d 107 (5th Cir.1990) to support his argument. The issue in Rubarts was whether homestead claimants, after transferring their property to their wholly-owned corporation in order to facilitate a loan, secured by the property, could be estopped from challenging the validity of the lien (by asserting their homestead rights) as against the Bank after they reconveyed the property to themselves. Id. Rubarts is thus an estoppel case, not a pretended sale case. Furthermore, Rubarts addresses the viability of the claimants' asserted homestead interest as against the Bank from whom they took out the loan, not as against a third-party purchaser, such as the Dearings, who were not involved in either the sale of the property to the corporation or the loan from the Bank. Id. at 111-12. Compare Eylar v. Eylar, 60 Tex. 315 (1883) with Moore v. Chamberlain, 109 Tex. 64, 195 S.W. 1135 (1917). Rubarts, thus, does not assist Perry with respect to his claim that the 1985 transfer of the 26-acre tract was a pretended sale. 10 22 Perry also emphasizes that the Corporation never filed tax returns or by-laws, issued stock certificates, recorded minutes of meetings, or operated the campground. While these facts are certainly evidence that the Corporation fell out of good standing with the State of Texas, and may have been formed solely to facilitate the acquisition of the $127,000 loan, they do not challenge the legitimacy of the Corporation's existence on December 5, 1985, or make the transfer of the 26-acre tract to the Corporation anything less than bona fide. 23 As a Texas Court of Appeals noted in Mayfield v. First State Bank of Holland, 19 S.W.2d 454 (Tex.Civ.App. 1929): 24 We know of no inhibition against incorporating a business and conveying to the corporation the property on which the business is conducted, even if it constitutes a business homestead and the purpose is to obtain credit by making the business homestead an asset of the corporation. 25 Cf. Shepler v. Kubena, 563 S.W.2d 382, 386 (Tex.Civ.App.1978), disapproved on other grounds, Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562 (Tex.2001)(noting that because a corporation cannot have a homestead interest, it may borrow money and pledge the realty as security without violating the Texas Constitution). The mere fact that the 26-acre tract may have been transferred to the Corporation solely in order to avoid the prohibition against encumbering the homestead does not alone convert a legitimate sale into a pretended or sham transaction. Id. Rather, a sale is pretended if the parties to the sale did not intend for title to vest in the purchaser. Hardie & Co. v. Campbell, 63 Tex. 292, 1885 WL 4373 (1885). 26 The testimony of Perry, Bill Lewis, the title company officer who handled the closing, and Mike Healy, the Bank's loan officer on the transaction, provide conflicting evidence of what the Bank and Perry intended the 1985 conveyance to accomplish. The bankruptcy court ultimately found Healy's characterization of the circumstances of the transfer more credible. First, Healy testified that Perry had initiated the idea of forming a corporation in order to limit his personal liability. Second, he noted that the Bank probably would have made the $127,000 loan to Perry in the absence of the transfer of the 26-acre tract to the Corporation. Both Healy and Lewis testified that Perry had told them that he had intended to convey the property to the Corporation in 1985. The bankruptcy court also credited Lewis's statement that Perry was an honorable gentleman who would not engage in a sham transaction (as confirmed by testimony from Perry himself). In the absence of any evidence, other than the self-serving testimony of Perry, that the parties did not intend for title to vest in the corporation, the bankruptcy court's decision that the 1985 transfer of the 26-acre tract was legitimate was not clearly erroneous. 27 Moreover, Texas prohibits only those pretended sales that include a condition of defeasance. Tex. Const. art. XVI, § 50; Hardie & Co. v. Campbell, 63 Tex. 292 (1885); Red River Nat'l Bank in Clarksville v. Latimer, 110 S.W.2d 232, 237 (Tex. Civ.App.1937). A condition of defeasance permits the seller to reclaim the title to the property conveyed after the loan is repaid. See Black's Law Dictionary 428 (7th ed.1999). Perry testified that there was no condition of defeasance attached to the transfer to the Corporation. Therefore, even if the parties did engage in a pretended sale of the 26-acre tract, it was not the kind of pretended transaction that the Texas Constitution prohibits.