Opinion ID: 4187247
Heading Depth: 2
Heading Rank: 2

Heading: Chapter 7 and Chapter 13 Cases

Text: The Hawks also contend that Frost is distinguishable because it was a Chapter 13 case, whereas the instant case was filed under Chapter 7. As an initial matter, this argument is unconvincing given that Frost relied heavily on principles established in Zibman, a Chapter 7 case. Furthermore, Frost does not limit its holding to Chapter 13 cases and does not even mention that the case was brought under Chapter 13. See In re Frost, 744 F.3d at 387; Lowe v. DeBerry, No: 5:15-cv-1135, slip op. at 17 (W.D. Tex. Mar. 10, 2017) (“[N]othing in Frost itself limits its holding to Chapter 13.”). “The only section of the Bankruptcy Code examined by the Frost court is Section 522, which applies to both Chapter 7 and Chapter 13 cases.” DeBerry, slip op. at 17. Nevertheless, the Hawks insist that Frost does not apply in the instant case because of important differences between Chapter 7 and Chapter 13 proceedings. “Chapter 7 allows a debtor to make a clean break from his financial past, but at a steep price: prompt liquidation of the debtor’s assets. When a debtor files a Chapter 7 petition, his assets, with specified exemptions, are immediately transferred to a bankruptcy estate.” Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015). The trustee then sells the property of the estate and distributes the proceeds to the debtor’s creditors. 11 U.S.C. §§ 704(a)(1), 726. The Hawks argue that when exemptions are allowed in a Chapter 7 case, the exempted property is permanently “removed from the property of the estate,” and “the debtor can later sell them and use the proceeds as he or she will.” See In re D’Avila, 498 B.R. 150, 159 (Bankr. W.D. Tex. 2013). 1 The Hawks also argue that the funds were permanently exempted because the Trustee first objected to the exemption after filing a report declaring that there were no assets for distribution. However, the Hawks have not cited any authority in support of this position. 11 Case: 16-20641 Document: 00514080518 Page: 12 Date Filed: 07/19/2017 No. 16-20641 Chapter 13 is a “wholly voluntary alternative to Chapter 7.” Harris, 135 S. Ct. at 1835. In a Chapter 13 case, a debtor is allowed “to retain his property if he proposes, and gains court confirmation of, a plan to repay his debts over a three- to five-year period.” Id.; see 11 U.S.C. §§ 1321, 1322, 1325. “[T]he Chapter 13 estate from which creditors may be paid includes both the debtor’s property at the time of his bankruptcy petition, and any wages and property acquired after filing.” Harris, 135 S. Ct. at 1835; see 11 U.S.C. § 1306(a). “Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.” 11 U.S.C. § 1327(b). The Hawks argue that “unlike the operation of property exemptions in Chapter 7,” exempted property does not actually leave the bankruptcy estate during Chapter 13 proceedings “because no property vests with the debtor prior to confirmation.” In support, the Hawks point to one case in which a bankruptcy court held that Frost does not apply to Chapter 7 cases. See In re Montemayor, 547 B.R. 684, 713 (Bankr. S.D. Tex. 2016). In Montemayor, the bankruptcy court reasoned that the homestead in Frost “never truly left the chapter 13 estate, because it was exempt but would not vest in the debtor until the resolution of either an order granting plan confirmation or . . . completion of all plan payments under the plan and the entry of an order of discharge.” 2 Id. at 710 (emphasis omitted). The bankruptcy court noted that “there is no similar provision applicable in a chapter 7 bankruptcy.” Id. at 712. Accordingly, the court concluded that “Frost’s core holding is based on factually distinguishable underpinnings and, as such, is distinguishable in a chapter 7 where, such as here, the debtor sells a properly exempted homestead post-petition.” Id. at 713. 2 Though acknowledging that this rationale was “not specifically mentioned by the Fifth Circuit” in Frost, the bankruptcy court viewed this as the Fifth Circuit’s “implied analysis.” Montemayor, 547 B.R. at 709. 12 Case: 16-20641 Document: 00514080518 Page: 13 Date Filed: 07/19/2017 No. 16-20641 Yet other district and bankruptcy courts have held that Frost is applicable in Chapter 7 cases. DeBerry, slip op. at 19; In re Smith, 514 B.R. 838, 850 (Bankr. S.D. Tex. 2014). For example, in Smith, the debtor filed for Chapter 7 bankruptcy and claimed a homestead exemption under Texas law, without objection from the trustee or any creditors. 514 B.R. at 841. After the bankruptcy court issued an order discharging the debtor, the debtor sold his homestead but did not reinvest the proceeds in another homestead within six months of the sale. Id. The bankruptcy court held that the trustee was entitled to recover the proceeds from the debtor under Frost and Zibman, noting that “it is not the exempt status itself that carries through the entirety of a case, but rather the law governing the exemption.” 3 Id. at 848, 850. Likewise, in the instant case, the snapshot rule dictates that the law governing the IRA exemption (Texas Property Code § 42.0021) is applicable throughout the entirety of the case. Thus, the IRA funds were not forever removed from the property of the estate when the exemption was allowed. “When a debtor elects to avail himself of the exemptions the state provides, he agrees to take the fat with the lean; he has signed on to the rights . . . but also to the limitations . . . integral in those exemptions as well.” In re Zibman, 268 F.3d at 304. Texas law clearly placed a limitation on the Hawks’ IRA exemption during the pendency of the bankruptcy proceeding: if the Hawks elected to receive a distribution from the IRA, they needed to reinvest those funds in another retirement account within sixty days or else lose their exemption. See Tex. Prop. Code § 42.0021(a), (c). Allowing a Chapter 7 debtor to retain distributions from an IRA that have not been rolled over into another account 3 The Hawks argue that the bankruptcy court erred by “retroactively applying” Smith to the instant case, even though the Hawks withdrew funds from the IRA before Smith was decided. But because we review legal conclusions de novo, any error by the bankruptcy court on this point is irrelevant. We simply view Smith as a persuasive interpretation of Frost. 13 Case: 16-20641 Document: 00514080518 Page: 14 Date Filed: 07/19/2017 No. 16-20641 within sixty days would directly contradict § 42.0021(c) and “produce inequitable results, particularly when Chapter 13 debtors in [similar] situations are not permitted to retain such proceeds. It would effectively read the [sixty day] limitation out of the statute in Chapter 7 cases.” DeBerry, slip op. at 19. The Hawks also note that pursuant to 11 U.S.C. § 1306(a)(1), the estate in a Chapter 13 case includes “all property of the kind specified in . . . section [541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted.” The Hawks contend that this Court’s decision in Frost effectively brought “proceeds that became nonexempt after the expiration of the time-limited exemption back into the estate,” which was permissible in a Chapter 13 case because the proceeds supposedly constituted property that the debtor acquired after the commencement of the case. Because Chapter 7 does not contain an analogous provision, the Hawks reason that previously exempted property that becomes nonexempt under state law after commencement of a Chapter 7 case remains excluded from the bankruptcy estate. This argument might make sense if the proceeds from the homestead sale in Frost constituted property that the debtor acquired after the commencement of the case, but Frost did not characterize the debtor as acquiring a new property interest when he sold his homestead. 4 Rather, the opinion stated that Frost’s existing “interest in his homestead changed from an unconditionally exempted interest in the real property itself to a conditionally exempted interest in the monetized proceeds from the sale of that property.” 744 F.3d at 389 (emphasis added). After the conditional exemption 4 In addition, Frost did not mention § 1306 and gave no indication that the Court’s reasoning was based on this attribute of Chapter 13 cases. 14 Case: 16-20641 Document: 00514080518 Page: 15 Date Filed: 07/19/2017 No. 16-20641 expired, “Frost lost his right to withhold the sale proceeds from the estate,” not because the proceeds were a wholly new property interest that Frost acquired after commencement of the case, but because Frost’s interest in the property had changed and no longer met the conditions of the exemption. Id. In the case at bar, the Hawks held a property interest in the IRA funds when their bankruptcy petition was filed. Although the essential character of the funds changed over time, the Hawks did not acquire new property within the meaning of § 1306(a)(1) when they withdrew those funds from the IRA. On the contrary, their existing interest simply changed from an unconditionally exempted interest in the funds held in the IRA to a conditionally exempted interest in the funds distributed from the IRA. Texas law dictated that the Hawks needed to roll over the distributed funds into another retirement account within sixty days in order to maintain the funds’ exempt status. But the Hawks did not do so. Accordingly, we hold that the bankruptcy court did not err in concluding that the Hawks could no longer claim the funds as exempt under Texas law.