Court Opinion

ID: 4186877
Source: CourtListenerOpinion
Date Created: 2017-07-18 00:01:09.85874+00
Date Added: 2024-06-11T14:39:59.200623
License: Public Domain

Case: 16-31108      Document: 00514076447         Page: 1    Date Filed: 07/17/2017

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT
                                                                           United States Court of Appeals
                                                                                    Fifth Circuit

                                      No. 16-31108                                FILED
                                                                              July 17, 2017
                                                                             Lyle W. Cayce
In the Matter of: HAROLD L. ROSBOTTOM, JR.,                                       Clerk

              Debtor

HAROLD L. ROSBOTTOM, JR.,

              Appellee

v.

GERALD H. SCHIFF,

              Appellant

                   Appeal from the United States District Court
                      for the Western District of Louisiana
                             USDC No. 5:15-CV-758

Before KING, PRADO, and SOUTHWICK, Circuit Judges.
PER CURIAM:*
       The bankruptcy court granted summary judgment in favor of the
bankruptcy trustee, finding Harold Rosbottom’s condominium in Dallas was
part of his bankruptcy estate. The district court disagreed and reversed the

       * 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 R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH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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                                No. 16-31108
grant of summary judgment.       We find ourselves in agreement with the
bankruptcy court, and thus we REVERSE the district court.

              FACTUAL AND PROCEDURAL BACKGROUND
      The pertinent facts are undisputed. During their marriage, Harold L.
Rosbottom, Jr. and his then-wife Leslie B. Fox resided with their two children
in a home in Shreveport, Louisiana.         At the time, Rosbottom was a
businessman, and he and Fox owned the home as community property.
      In 1999, Rosbottom and Fox executed four instruments seeking to
transfer their respective interests in the Shreveport residence to separate
trusts. One instrument created and governed the Harold Rosbottom Louisiana
Trust #1 (“the Rosbottom Trust”), and another created and governed the Leslie
Fox Rosbottom Louisiana Trust #1 (“the Fox Trust”).            The final two
instruments each sought to convey one spouse’s interest in the residence to his
or her respective trust. The instruments all bore the same date, were notarized
by the same notary, and were witnessed by the same witnesses. The parties
intended the conveyances to occur simultaneously. Both trusts are Qualified
Personal Residence Trusts (“QPRT”), an IRS designation for a trust containing
property that is exempt from estate and gift taxes because it is limited to a
personal residence. See 26 U.S.C. § 2702; 26 C.F.R. § 25.2702–5.
      The instrument creating the Rosbottom Trust named Rosbottom as the
settlor and both Rosbottom and Fox as the trustees. Rosbottom and Fox signed
the instrument using those designations. The instrument creating the Fox
Trust named Fox as the settlor and both Rosbottom and Fox as trustees; again,
the parties signed in that manner. Rosbottom sought to donate his undivided
one-half interest in the residence to the Rosbottom Trust, and Fox donated her
comparable interest to the Fox Trust.

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       In 2005, Rosbottom and Fox listed the residence for sale. The buyer’s
attorney expressed concerns that the spouses’ prior donations were null
because they violated the community-property principle against a spouse
conveying the individual’s one-half share to a third party.                         The attorney
conditioned the sale “on Fox and Rosbottom signing the sale deed in their
individual capacities.” Rosbottom and Fox signed the deed as trustees of their
respective trusts and individually as intervenors.                     The residence sold for
$1,850,000. After the sale, Rosbottom and Fox divided the proceeds evenly,
“with each half share deposited into bank accounts for the Rosbottom and Fox
Trusts, respectively.”
       Later that year, Fox filed for divorce in Dallas, Texas, where she and
Rosbottom had moved. Rosbottom later purchased a condominium at The
Vendome in Dallas for $1,900,000. Rosbottom used his portion of the sale
proceeds from the residence to finance his purchase of the Vendome
condominium. Rosbottom later transferred title to the condominium to the
Rosbottom Trust. Fox also used her share of the sale proceeds to purchase a
residence in Dallas. 1
       Rosbottom filed for bankruptcy in 2009. The bankruptcy court appointed
Gerald Schiff as trustee after it noticed irregularities in Rosbottom’s
bankruptcy filings. Rosbottom was later convicted of conspiring to commit
bankruptcy fraud, illegally transferring and concealing assets, and falsifying
an oath. Rosbottom is now incarcerated. After the bankruptcy court confirmed
the Chapter 11 reorganization plan, Schiff and Fox sought “a declaratory
judgment that [the] condominium in Dallas belonged to the bankruptcy estate,

       1 The district court stated that the trustee “apparently treated [Fox’s new home] as part of
Rosbottom’s bankruptcy estate but, because it became a net liability, his only actions with respect to
the property were to coordinate with Fox and the property’s mortgagees for a short sale that relieved
Rosbottom’s bankruptcy estate of any liability stemming from the property.”
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rather than a trust, because the transactions purportedly creating the trust
violated Louisiana community property law, thereby depriving them of any
effect.”
       Until Schiff and Fox filed their adversary action, the Vendome
condominium was not treated as a part of Rosbottom’s bankruptcy estate
because the Rosbottom Trust ostensibly had title. Schiff and Fox argued,
though, that the Vendome property was a part of the Rosbottom-Fox
community and not a part of the trust. As the district court stated:
       They asserted that the 1999 donations [of their residence] had no
       effect because they violated article 2337 of the Louisiana Civil
       Code, which prohibits a spouse subject to a community property
       regime from alienating, encumbering, or leasing his undivided
       interest in any community property. . . . Without any valid receipt
       of property, the argument continued, the Rosbottom and Fox
       Trusts were from their inception lacking a res, which in turn
       prevented them from ever existing. . . . Both the [residence] and
       the proceeds from its sale therefore remained community property.

They further argued that, because Texas is a community-property state, the
purchase of the Vendome condominium with the proceeds of the sale of the
residence “amounted to nothing more than the reshuffling of community assets
and liabilities[.]” The bankruptcy court agreed, holding the Rosbottom Trust
never existed and the Vendome condominium was part of Rosbottom’s
bankruptcy estate.
       On appeal, the district court reversed the grant of summary judgment.
It concluded that Rosbottom and Fox had effectively made a “single donation”
of their former residence, an act which did not violate Article 2337’s prohibition
against one spouse alienating community property.           It found that both
Rosbottom and Fox consented to the donations, and their post-donation
conduct manifested an intent to convey their entire interest in the Shreveport
residence. Thus, the trusts held the proceeds of the sale until Rosbottom

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purchased the Vendome condominium. Schiff filed for reconsideration, which
the district court denied. The district court certified this interlocutory appeal
under 28 U.S.C. § 1292(b), and a panel of this court granted leave to appeal.

                                 DISCUSSION
      When we review the decision of a district court acting as an appellate
court, we “appl[y] the same standards of review to the bankruptcy court’s
findings of fact and conclusions of law as applied by the district court.” Sikes
v. Crager (In re Crager), 691 F.3d 671, 675 (5th Cir. 2012). We thus review the
bankruptcy court’s grant of summary judgment de novo. See Grothues v. IRS
(In re Grothues), 226 F.3d 334, 337 (5th Cir. 2000). Summary judgment is
appropriate “if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” FED.
R. CIV. P. 56(a); see also FED. R. BANKR. P. 7056. We construe all evidence in
the light most favorable to the nonmovant. Smith v. Reg’l Transit Auth., 827
F.3d 412, 417 (5th Cir. 2016).
      As he argued before the bankruptcy and district courts, Rosbottom now
claims that the Vendome condominium was purchased with assets that were
held in a trust and were not part of his bankruptcy estate. Schiff and Fox
argue the trusts never existed, so the Vendome condominium was purchased
with community assets. The issues are ones of Louisiana law concerning
conveyances of community property.
      Under Louisiana law, “[a] spouse may not alienate, encumber, or lease
to a third person his undivided interest in the community or in particular
things of the community prior to the termination of the regime.” LA. CIV. CODE
art. 2337. This principle is a “rule of public order” that seeks to prevent the
improper introduction of third parties into the community-property regime.
See LA. CIV. CODE art. 2336 cmt. (b). It applies even when both spouses consent
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to the transaction. See LA. CIV. CODE art. 2337 cmt. (b). Any transaction
alienating one spouse’s undivided interest is an absolute nullity, id., meaning
it “is deemed never to have existed” and may not be confirmed, LA. CIV. CODE
arts. 2030, 2033. The law governing community property is distinct from and
takes priority over the law governing co-ownership. LA. CIV. CODE art. 2369.1
1990 cmt.
        Spouses who wish to divide community property are not without options,
though. “During the existence of the community property regime, the spouses
may, without court approval, voluntarily partition the community property in
whole or in part.” LA. CIV. CODE art. 2336. Such a partition is effective against
third persons when the conveyance is “filed for registry in the conveyance
records of the parish in which the immovable property is located.” LA. CIV.
CODE art. 2339. Property may also be partitioned upon agreement by the
spouses or by judicial action. Hare v. Hodgins, 586 So. 2d 118, 122–23 (La.
1991). Absent judicial action, an agreement to partition community property
need not be explicit and may take the form of, for example, a sale, a donation,
or a compromise. See ANDREA CARROLL & RICHARD D. MORENO, 16 LA. CIV. L.
TREATISE, MATRIMONIAL REGIMES § 7:21 (4th ed. 2016) (collecting cases). Such
agreements usually follow termination of the community. Id. Community
property that is not properly partitioned “remains owned in indivision by the
parties.” See Rollison v. Rollison, 541 So. 2d 375, 377–78 (La. Ct. App. 1989).
        The parties’ intent is relevant when determining whether property was
correctly partitioned. See Fargerson v. Fargerson, 593 So. 2d 454, 456 (La. Ct.
App. 1992). In Fargerson, for example, the parties divided their community
property “by an authentic act termed a donation” before their divorce. Id. at
455.     After their divorce, the trial court set aside the property exchange,
holding that both parties were at fault and so the donation was revoked by
operation of law. Id. On appeal, the court found that the document, although
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styled as a donation, “more accurately reflected a partition of community
property.” Id. at 456. Before divorce, the parties executed the agreement to
establish the separate-property regime and thereafter “remained separate in
property.”   Id.   Considering the circumstances, the parties had clearly
evidenced an intent to partition their property. Id.
      Rosbottom’s and Fox’s intent to partition is less clear. Unlike the parties
in Fargerson, Rosbottom and Fox never executed an agreement designed to
establish their residence as separate property, nor did they obtain partition by
judicial action. Instead, each executed an instrument purporting to donate
their undivided interests in the property, which is exactly what Article 2337
prohibits by its plain language.     Describing the interests as “undivided”
suggests that Rosbottom and Fox intended to continue their community
interests in the property despite the involvement of their respective trusts.
Further, no evidence suggests that Rosbottom and Fox “remained separate in
property” after the execution of the 1999 trust instruments. See id. The
circumstances presented support that Rosbottom and Fox improperly donated
an undivided interest to a third party in violation of Article 2337.
      The parties make opposing policy arguments. Schiff argues the district
court’s ruling “would allow spouses in community to do as they please with
respect to community property despite the Louisiana Civil Code’s express
prohibition against such actions.” In his view, there is a critical distinction
between co-ownership and community property, the latter being designed to
prohibit a spouse from alienating undivided interests in community property
prior to termination of the community-property regime. Rosbottom claims the
district court’s decision simply “endorses a transfer of a community immovable
to two third parties.” In his view, the opposite outcome would needlessly
threaten standard property-ownership rules by making it more difficult for
married parties to alienate community property. Rosbottom further notes that
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his 1999 transaction was not “illicit, immoral or against public order,” which
are the only defects that render agreements absolutely null under Louisiana
law. See LA. CIV. CODE art. 2030.
      We have found no Louisiana caselaw to support Rosbottom’s
interpretation of Article 2337. The plain statutory language prohibits the
conveyances Rosbottom and Fox made. Parties are not free to contract in
violation of law. See Leiter Minerals, Inc. v. California Co., 132 So. 2d 845, 853
(La. 1961).    The bankruptcy court reasoned that when the Shreveport
residence
      was transferred, the transfers were wrong because Mr. Rosbottom
      transferred his undivided interest and Mrs. Rosbottom transferred
      her undivided interest, each to their own trust, not to a trust they
      put together for themselves together, but each to his or her
      separate trust. That can’t be done. That cannot be done. You
      cannot transfer your undivided interest in a community to a third
      person without the termination of the community.

Because it violated Article 2337, the 1999 transaction is an absolute nullity.
See LA. CIV. CODE art. 2337 cmt. (b). Title to the Shreveport residence was
thus never transferred, making the Vendome condominium part of
Rosbottom’s bankruptcy estate. See LA. CIV. CODE art. 2337 cmt. (b).
      REVERSED.

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