Opinion ID: 775218
Heading Depth: 2
Heading Rank: 2

Heading: Exemption of Proceeds from the Sale of a Homestead under Texas Law

Text: 6 The bankruptcy and district courts determined that the Zibmans' filing of a bankruptcy petition during the 6-month period in which proceeds from the sale of a homestead enjoy protection from creditors under Texas law froze the exemption as it existed on the date of filing. These courts reasoned that, on that one day, the exemption was in existence, and subsequent events -- here, the expiration of the balance of the 6-month period without reinvesting the proceeds -- could not retouch the snapshot. The Trustee contends that this determination was error because the 6-month limit of the exemption for proceeds is an integral feature of the Texas law applicable on the date of the filing of the [bankruptcy] petition. 7 Therefore, reasoned the Trustee, this essential element of the exemption must continue in effect even during the pendency of a bankruptcy case. We agree with the Trustee. 8 7 Under the Bankruptcy Code, the commencement of a bankruptcy case creates an estate comprising all legal and equitable interests in property (including potentially exempt property) of the debtor as of that date. 9 The debtor may have certain property exempted from the bankruptcy estate by electing to take advantage of either the federal exemption provisions in the Bankruptcy Code or those provided under state law. 10 As to the state-law alternative, the Bankruptcy Code provides the exemption for 8 any property that is exempt under...State or local law that is applicable on the date of the filing of the petition at the place in which the debtor's domicile has been located for the 180 days immediately preceding the date of the filing of the petition, or for a longer portion of such 180-day period than in any other place.... 11 9 As the Supreme Court noted in Owen v. Owen, 12 [n]othing in subsection (b) [of § 522] (or elsewhere in the Code) limits a State's power to restrict the scope of its exemptions; indeed, it could theoretically accord no exemptions at all. 13 Any exemptions claimed, however, are determined by the facts and the law as they exist on the date of filing the bankruptcy petition. 14 This focus on the status as of the date of filing is commonly referred to as the snapshot approach to determining the extent of the bankruptcy estate and the scope of the exemptions. 10 When the Zibmans filed their bankruptcy petition on February 9, 1999, they exercised the § 522 option and elected to claim exemptions offered by Texas state law. Now as in February of 1999, Texas law provides a homestead exemption, as follows: 11 41.001. Interests in Land Exempt from Seizure 12 (a) A homestead...[is] exempt from seizure for the claims of creditors except for encumbrances properly fixed on homestead property. 13 .... 14 (c) The homestead claimant's proceeds of a sale of a homestead are not subject to seizure for a creditor's claim for six months after the date of sale. 15 15 As noted above, the Zibmans sold their Texas homestead in late November 1998, and filed for bankruptcy just over three months later, in early February 1999. When, by May 1999, the 6-month statutory protection period had expired without the Zibmans' having reinvested their homestead sale proceeds in a new Texas homestead, the Trustee objected to the exemption of the proceeds. In rejecting the Trustee's objection, the bankruptcy court stated that, [o]n the petition date, these funds were exempt. Post petition acts or failures to act does [sic] not effect [sic] the exempt status. 16 In reaching its conclusion, the bankruptcy court cited In re Harlan, 16 a 1983 Bankruptcy Court case that also involved the filing of a bankruptcy petition during the 6-month period in which proceeds from the sale of a homestead continued to enjoy protection under the Texas statute. The Harlan court in turn relied on White v. Stump 17 to arrive at its holding that the debtors' homestead proceeds were exempt on the date that they filed their ... petition ... because their petition was filed within six months of the date of the sale of their homestead[,] and that because the substantive rights of the parties were fixed on the date of the filing of the petition the proceeds must, therefore, be allowed as exempt, regardless of what use the debtors might make of the proceeds after the date of the filing of their petition. 18 As the following analysis will show, White v. Stump introduced the snapshot theory, but both courts misapplied the holding of White to this fact pattern. A later Supreme Court case, Myers v. Matley, 19 illustrates the appropriate refinement of White when the state law in question includes a condition on its application. 17 In Myers v. Matley, the Supreme Court refined White's snapshot principle, analyzing a slightly more complex Nevada state law situation. As in White, the state law provided that either member of a married couple could file a declaration to create a homestead exemption, and, as in White, the debtors attempted to file the declaration after a petition in bankruptcy was filed against the debtor. The Myers Court did not blindly apply White with a broad brush and deny the debtors' attempt to file the declaration, however. Instead, it reviewed Nevada law and discovered that the settled law of the State entitles the debtor to his homestead exemption if the selection and recording occurs at any time before actual sale under execution. The Court linked to this the observation that under the theory of the present [Bankruptcy] Act, ... [t]he trustee is vested not only with the title of the bankrupt but clothed with the right of an execution creditor with a levy on the property which passes into the trustee's custody. 20 From this the Myers Court concluded that, taking all facets of Nevada law into account, the post-petition declaration should be allowed, because state law allowed such declarations after levy, up until the execution sale: 18 In conformity to the principle announced in White v. Stump, that the bankrupt's right to a homestead exemption becomes fixed at the date of the filing ... and cannot thereafter be enlarged or altered by anything the bankrupt may do, it remains true that, under the law of Nevada, the right to make and record the necessary declaration of homestead existed in the bankrupt at the date of filing the petition, as it would have existed in case a levy had been made upon the property. 21 19 Myers thus confirms the basic holding from White v. Stump that the law and facts existing on the date of filing the bankruptcy petition determine the existence of available exemptions, but flags the important reminder that it is the entire state law applicable on the filing date that is determinative. Courts cannot apply a juridical airbrush to excise offending images necessarily pictured in the petition-date snapshot. 20 The bankruptcy and district courts did not apply the entire Texas law that is applicable in the instant case. Instead, their denial of the Trustee's objection to the exemption in the instant case, freezing the exemption for the proceeds simply because it was in effect at the date the petition was filed, effectively read the 6-month limitation out of the statute, and transformed an explicitly limited exemption into a permanent one. This transgresses the teaching of Myers that the entire state law applicable on the date of filing must be considered. 21 In a case virtually identical to this one, the Ninth Circuit rejected the debtor's similar attempt to enlarge the homestead exemption, saying that, [a]cceptance of the debtor's position would frustrate the objective of the California homestead exemption and the bankruptcy act itself, which limits exemptions to that provided by state or federal law. 22 As observed by the Owen Court, a state may choose not to provide exemptions at all, or it may provide exemptions limited as it sees fit. 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 (like the post-petition right to file in Myers) but also to the limitations (like the temporal element of the reinvestment feature of California's homestead exemption in Golden) integral in those exemptions as well. In Texas, the 6-month limitation is inextricably intertwined with the exemption the state has chosen to provide for proceeds from the sale of the homestead. As an Oregon bankruptcy court so aptly observed, This court finds nothing in the Bankruptcy Code that requires or allows it to fragment the state law in this manner to grant a benefit to the debtors they would not have received if they had not filed bankruptcy. 23 22 Our decision today conforms with the objective of the Texas's exemption for proceeds from the sale of a homestead. In In re England, 24 we focused on this exemption, reviewing in particular the legislative intent in providing the exemption. We expressly noted in England that Texas law originally provided only for an exemption of the homestead (that is, the real property itself), and that the objectives of the exemption were to provide a secure asylum of which the family cannot be deprived by creditors, 25 and to support the public policy of preventing homelessness among Texas residents. 26 Historically, the absence of an exemption of the proceeds from the voluntary sale or exchange of the homestead resulted in many persons being left homeless when they sold their homestead with the intention of investing the proceeds in another homestead. 27 In response to this problem, the Texas Legislature passed the proceeds exemption statute. As we announced in no uncertain terms in England, [t]he object of the proceeds exemption statute was solely to allow the claimant to invest the proceeds in another homestead, not to protect the proceeds, in and of themselves. 28 23 When the Zibmans failed to invest the proceeds from the sale of their Houston homestead in another Texas homestead within the allotted time, the exemption on these proceeds evanesced by operation of law. Allowing the intervening bankruptcy petition to improve the Zibmans' pre-petition exemption by expurgating the 6-month clock and thereby freezing the exemption permanently would not only require a fragmented reading of state law, but would contravene the purpose of the exemption, transforming it into a protection of the proceeds, in and of themselves. This we refuse to do.