MEMORANDUM OPINION REGARDING DEFENDANTS’ SUPPLEMENTAL AND AMENDED MOTION TO DISMISS COMPLAINT FOR FAILURE TO STATE A CLAIM
The Court writes this Memorandum Opinion because it concerns an important
I. PROCEDURAL BACKGROUND
On April 11, 2014, Lowell T. Cage, the Chapter 7 trustee in the main case (the Trustee), initiated an adversary proceeding against Cody W. Smith (the Debtor) and his wife, Tracy G. Smith (collectively, the Defendants), requesting the turnover of proceeds from the post-petition sale of the Defendants’ homestead located at 3419 Locke Lane, Houston, Texas 77027 (the Property). [Adv. Doc. No. 1]. Pending before this Court is the Defendants’ Supplemental and Amended Motion to Dismiss Complaint for Failure to State a Claim Under Fed.R.Civ.P. 12(b)(6) as Incorporated by Fed. R. Bankr.P. 7012 (the Motion). [Adv. Doc. No. 17]. In the Motion, the Defendants seek dismissal of this suit on the grounds that the Property was timely exempted without objection and sold after the Debtor received his discharge; and that, therefore, the proceeds from the sale of the Property are exempt from the Debt- or’s pre-petition creditors. [Id. at pp. 24-25, ¶¶ 120 & 124], The Motion thus seeks dismissal of the Trustee’s complaint for failure to state a claim pursuant to Federal Rule of Bankruptcy Procedure 7012(b)(6).
The Trustee filed a response in opposition to the Motion on June 20, 2014 (the Response). [Adv. Doc. No. 24]. In the Response, the Trustee argues that the Motion should be denied because the proceeds from the sale of the Property automatically reverted to the bankruptcy estate 181 days after the sale of the Property due to the Debtor’s failure to reinvest the proceeds in a new homestead. [Id. at pp. 12-13, ¶ 31]. The Trustee’s argument is thus that the six-month proceeds exemption provision under Texas law is just as applicable in Chapter 7 cases as it is in Chapter 13 cases. The Trustee’s argument turns on the holding in Frost, a Fifth Circuit opinion issued on March 5, 2014 involving a Chapter 13 debtor, which interprets the statutory language of Texas Property Code § 41.001 as it applies in bankruptcy. [IcLl
On June 27, 2014, the Debtor replied to the Response (the Reply) essentially reiterating the arguments articulated in the Motion. [Adv. Doc. No. 25].
On July 8, 2014, this Court held a hearing on the Motion, and counsel for the parties made oral arguments. The Court then took the matter under advisement. Subsequently, on July 17, 2014, the Debtor filed a supplemental brief in support of the Motion.
The Court, having now considered the Motion, the Response, the Reply, the oral arguments of counsel, and the supplemental brief, denies the Motion for the reasons set forth herein.
The Court makes the following Findings of Fact and Conclusions of Law under Federal Rule of Civil Procedure 52, as incorporated by Federal Rules of Bankruptcy Procedure 7052 and 9014. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such.
II. Findings op Fact
The parties do not dispute the relevant facts, which are as follows:
1. The Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code2 on March 20, 2012 (the Petition Date). [Main Case Doc. No. 1].
2. On April 3, 2012, the Debtor exempted the Property as his homestead under Texas law pursuant to Texas Constitution Article XVI, §§ 50, 51 and Texas Property Code §§ 41.001 and 41.002. [Main Case Doc. No. 16, p. 15]. Neither the Trustee nor any creditor filed an objection to the Debtor’s claimed homestead exemption of the Property. [Adv. Doc. No. 24, p. 2, ¶ 3].
3. On June 14, 2012, the Clerk of Court sent a notice to all creditors that the Trustee may make a distribution to creditors in the future and that therefore proofs of claim must be filed by no later than September 12, 2012. [Main Case Doc. No. 31]. Thus, this is an “asset case” in which the Trustee will liquidate non-exempt assets and make distributions to creditors.
4. On April 25, 2013, this Court issued an order discharging the Debtor. [Main Case Doc. No. 201].
5. On June 21, 2013, the Defendants sold the Property and, after payment of the mortgage, taxes, and other closing costs, received net sale proceeds in the amount of $813,935.77 (the Proceeds). [Adv. Doc. No. 24, p. 2, ¶ 4].
6. The Defendants did not reinvest the Proceeds within six months of the sale of the Property. [Id.].
7. On April 11, 2014, the Trustee initiated this adversary proceeding seeking turnover of the Proceeds from the Debtor on the basis that the Proceeds are non-exempt and therefore property of the Debtor’s Chapter 7 estate. [Adv. Doc. No. 1].
8. The main case remains open while the Trustee continues to locate and liquidate assets for distribution to creditors.
III. Conclusions op Law
A. Jurisdiction
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This particular dispute is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) because it affects the administration of this Chapter 7 estate. Further, it is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(B) and (E) because it is a suit to determine the allowance or disallowance of exemptions from property of the estate and the relief sought is an order to turn over property of the estate. Finally, this dispute is core under the general “catch-all” language of 28 U.S.C. § 157(b)(2). See Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.),
Venue is proper pursuant to 28 U.S.C. § 1409(a).
C. Constitutional Authority to Enter a Final Order
The Supreme Court’s decision in Stem v. Marshall recognized certain limitations on bankruptcy courts’ authority to enter a final order. Stern v. Marshall, — U.S. -,
D. History of “The 6-Month Rule” Regarding Use of Proceeds from the Sale of a Texas Homestead
The Debtor’s position in this dispute is heavily ladened with the notion that the Texas statute governing the exemption of proceeds from the sale of a homestead exists to promote one — and only one— public policy: the prevention of homelessness. The Debtor is off the mark. A review of the history of the Texas homestead proceeds exemption law underscores that the Texas legislature passed this statute not only to prevent homelessness, but also to provide for collection of debts. See, e.g., Rabon v. Tolliver,
Since its original drafting in 1845, the Texas Constitution has included a homestead protection provision preventing the forced sale of a debtor’s homestead. Tex. Const. of 1845, art. VII, § 22; see also England v. FDIC (In re England),
In response to this harsh result, the Texas legislature, in 1897, passed Article 2896 to protect homestead sale proceeds from creditors. In re England,
The termination of the safe harbor period after six months, therefore, reflects the Texas legislature’s attempt to balance two competing public policies — the need to minimize homelessness versus the need to afford creditors the opportunity to collect on their debts. Texas state courts have issued rulings over many years in conformity with the legislative intent to balance these competing interests. See, e.g., Fairfield Fin. Grp., Inc. v. Synnott,
In 1985, the Texas Legislature replaced Article 2396 with § 41.001 of the Texas Property Code. In re England,
In sum, the 6-Month Rule balances the interests of both debtors and creditors. The Fifth Circuit issued its ruling in Frost with this statutory history in play. This Court now reviews the holding in Frost in order to arrive at its ruling in the dispute at bar.
E. The Fifth Circuit’s Holding in Viegelahn v. Frost (In re Frost)
In Frost, the debtor, whose homestead was in Cibolo, Texas, filed a Chapter 13 petition. In re Frost,
In affirming the district court’s ruling, the Fifth Circuit emphasized that “[w]hen claiming an exemption under state law, it is important to remember that ‘it is the entire state law applicable on the filing date that is determinative.’ ” Id. at 386 (quoting Zibman v. Tow (In re Zibman),
The Fifth Circuit then stated that, pursuant to § 41.001, “while the homestead is permanently exempted from the bankruptcy estate, Texas law provides that the proceeds from the sale of a homestead are only exempt for six months after the sale.” In re Frost,
Finally, this interpretation gives effect to both the fact that the homestead exemption is in place at the petition fifing date and that the state’s law remains equally enforceable with regard to those in bankruptcy and non-bankruptcy. See Owen [v. Owen], 500 U.S.*845 [305], 308,111 S.Ct. 1833 [114 L.Ed.2d 350 (1991) ] (“Nothing in subsection (b) (or elsewhere in the Code) limits a State’s power to restrict the scope of its exemptions; indeed, it could theoretically accord no exemption at all.”). Reading the statute to exempt property that would not be protected by state law “limits a State’s power to restrict the scope of its exemptions.” To rule otherwise would allow a debtor in bankruptcy to obtain the liquidity of [his] homestead at a much earlier date — and without the risk of exposing [himself] to creditors — than a debtor who had not filed.
Id. at 388.
Thus, the Chapter 13 trustee in Frost was successful in having the debtor’s proceeds from the homestead sale declared to be non-exempt and forcing the debtor to turn over these proceeds to her for distribution to pre-petition creditors. The Trustee in the ease at bar argues that the same result should obtain here. The Debtor disagrees.
F. Contrary to the Debtor’s Position, Frost Applies to this Chapter 7 Case
In the dispute at bar, the Debtor argues that the holding in Frost is limited to Chapter 13 cases. The Debtor’s argument seems to be based on the following reasoning: (1) § 1306(a)(1) expressly sets forth that “property of the estate” in a Chapter 13 case includes property acquired by the debtor post-petition; (2) the proceeds from the homestead sale in Frost became non-exempt after the filing of the debtor’s Chapter 13 petition, but before his Chapter 13 case was closed; and (3) therefore, an estate was in existence at the time the proceeds became non-exempt and thus became property of the debtor’s Chapter 13 estate subject to the trustee’s control. The Debtor contends that because Chapter 7 has no companion provision to § 1306(a)(1), there is no possible way for any property that became exempt after his Chapter 7 filing to later become “property of the estate.” Thus, so the Debtor’s argument goes, because the Proceeds became exempt after the filing of his Chapter 7 petition, they cannot possibly be property of his Chapter 7 estate, subject to claims of his pre-petition creditors. Moreover, the Debtor argues that even if the Proceeds became non-exempt due to the 6-Month Rule, they became non-exempt after the petition date and therefore cannot be property of the estate subject to the claims of pre-petition creditors, but rather can only be property of the Debtor subject solely to the claims of post-petition creditors.
It is certainly true that, in a Chapter 7 case, property of the estate consists solely of property in existence as of the date of the filing of the Chapter 7 petition. 11 U.S.C. § 541(a)(5); see also In re Harris, No. 13-50374,
As of the Petition Date, the applicable Texas homestead exemption statute in effect was § 41.001. In re Zibman,
In White, the debtor, having filed his bankruptcy petition without having properly declared his homestead under Idaho law, found himself in a predicament. Under § 70a of the Bankruptcy Act, the trustee stood in the shoes of any creditor who might have levied upon the debtor’s property. Id. at 312-13,
The Supreme Court reversed the Ninth Circuit’s ruling, basing its decision on what courts would subsequently refer to as the “snapshot rule:”
The Bankruptcy Law does not directly grant or define any exemption, but directs, in section 6 (Comp.St. § 9590), that the bankrupt be allowed the exemptions ‘prescribed by the state laws in force at the time of the filing of the petition’; in other words, it makes the state laws existing when the petition is filed the measure of the right to exemptions.
Id. at 312,
The Supreme Court’s establishment of this “snapshot rule” meant that, in White, because the debtor had not properly declared his homestead under Idaho law pri- or to filing his bankruptcy petition, the trustee, as a hypothetical creditor under § 70a levying on the debtor’s property, took title to this land for the benefit of creditors. Id. at 314,
Nearly eighteen years later, the Supreme Court re-examined the “snapshot rule” under a more difficult set of facts in Myers v. Matley,
If the law of Nevada respecting homestead exemptions were like that of Idaho, or operated in the same way, White v. Stump would be in point ... Our question then is whether, under the constitution and statutes of Nevada, a declaration of homestead would be effective as against a creditor to prevent a judicial sale of the property if made and recorded after levy but before sale thereunder. If it would, it must be equally effective as against the trustee, whose rights rise no higher than those of the supposed creditor and attach at the date of the inception of bankruptcy.
Id. at 626-27,
Turning to the applicable Nevada statute concerning homestead exemptions, the Supreme Court noted that Nevada “entitles the debtor to his homestead exemption if the selection and recording occurs at any time before actual sale under execution.” Id. at 627,
While the outcomes in White and Myers are different insofar as the trustee prevailed in White, but lost in Myers, the Supreme Court was entirely consistent in its application of the “snapshot rule.” In White, the Supreme Court took a “snapshot” of the applicable Idaho homestead exemption statute on the date of the filing of the debtor’s bankruptcy petition, and concluded that this Idaho statute prevented the debtor from claiming his homestead exemption. In Myers, the Supreme Court took a “snapshot” of the applicable Nevada homestead exemption statute on the date of the filing of that debtor’s bankruptcy petition, and concluded that this Nevada statute allowed the debtor to exempt his homestead. Although still captured at the time of the filing of bankruptcy petition, the “snapshot” in Myers encompassed this more expansive — albeit, conditional — aspect of Nevada state law. The Supreme Court emphasized that its ruling in Myers was in line with its previous holding in White, holding that “the [debtor’s] right to a homestead exemption becomes fixed at the time and the date of the filing.” White,
In the case at bar, after filing his bankruptcy petition, the Debtor timely and properly exempted the Property as his homestead pursuant to § 41.001 [Finding of Fact No. 2]. Like the conditional aspect of the Nevada homestead exemption law, which the Supreme Court applied in Myers, § 41.001 contains a condition on its application: it expressly contains the 6-Month Rule and unambiguously states that if a debtor sells his homestead, then the
There is a further point undermining the Debtor’s argument that Frost is limited to Chapter 13 cases: Frost never mentioned § 1306(a)(1) as the basis for its decision. Rather, the Fifth Circuit focused on § 41.001 of the Texas Property Code in rendering its ruling. The Debtor, and at least one outside commentator,
In Zibman, prior to filing their Chapter 7 petition, the debtors sold their homestead. In re Zibman,
On appeal, the Fifth Circuit reversed. Id. It held that these courts incorrectly applied the “snapshot rule” articulated in White. Id. The Fifth Circuit clarified the Supreme Court’s explanation of the “snapshot rule” in White by holding that it is the controlling exemption statute at the time of filing, not the exempted character of the property, that under-girds the “snapshot rule.” Id. Under the “snapshot rule,” a snapshot is taken of the facts and the applicable law as of the date of filing. Id. at 302. Furthermore, it is not the exempt status itself that carries through the entirety of a case, but rather the law governing the exemption. Id. Zib-man thus explains that a debtor may not exempt his homestead under § 41.001 and then pick and choose which provisions of that statute will govern his exemption during the pendency of his Chapter 7 case. See Bradley v. Pac. Sw. Bank, FSB (In re
Eleven years later, the Fifth Circuit again held that the 6-Month Rule applied in a Chapter 7 case. In Morgan, an unpublished opinion from 2012, a Chapter 7 debtor sold his homestead after filing for bankruptcy and used the proceeds to pay off a lien held by his brother. Studensky v. Morgan (In re Morgan),
These two cases — Zibman and Morgan — thus underscore why the Fifth Circuit, in Frost, did not rely on § 1306(a)(1) to justify its holding in that case and to limit § 41.001(c) to Chapter 13 cases. The Fifth Circuit had already held that the 6-Month Rule applies in Chapter 7 cases.
It is worth noting that in 1991, well before the issuance of Zibman, Morgan, and Frost, one of the undersigned judge’s colleagues — the Honorable Karen K. Brown — issued a ruling that is entirely consistent with these three subsequent Fifth Circuit decisions. In Evans, a Chapter 7 debtor sold his rural homestead and used a portion of the proceeds to purchase a new urban homestead. In re Evans,
In sum, the Debtor’s contention that Frost is limited to Chapter 13 cases is incorrect. Indeed, this Court concludes that in the Chapter 7 case at bar, the Fifth Circuit’s holdings in Frost and Zibman constitute binding precedent that this Court must apply. See Gonzalez v. Bayer Healthcare Pharm., Inc., 930 F.Supp.2d 808, 816 n. 6 (S.D.Tex.2013) (“This Court is bound by the Fifth Circuit’s ruling ... ”); see also United States v. Zimmerman,
G. The Debtor’s Receipt of his Discharge Prior to the Sale of his Homestead does not Immunize the Proceeds from the 6-Month Rule
The Debtor emphasizes that he sold the Property only after he had first received his discharge in this case [Findings of Fact Nos. 4 & 8], and that it is unfair for him, having received his discharge, to still be subject to the clutches of the Trustee. There is no question that the purpose of an individual filing a Chapter 7 case is to procure a “fresh start” by obtaining a discharge. Hill v. Jones (In re Jones),
Does this Court’s holding mean that Chapter 7 trustees can forever make a claim on the proceeds from the sale of a debtor’s homestead after six months has passed without the debtor reinvesting those proceeds in a new homestead? The answer is no. Once a Chapter 7 case is closed, any property that the trustee has not administered at the time of closing is abandoned to the debtor under § 554(c). The effect of abandonment is that “the
H. The Debtor’s Suggestion that Trustees Should File a “Conditional Objection” to Homestead Exemptions in Every Chapter 7 Case is Unreasonable
The Debtor asks this Court to allow the exemption of the Proceeds because of the Trustee’s failure to object to his validly claimed homestead exemption prior to the sale of the Property [Finding of Fact No. 2], The Debtor argues that it would be unfair and inequitable to hold otherwise. This Court disagrees that it is unfair and inequitable to apply the 6-Month Rule simply because the Trustee lodged no objection to the Debtor’s exemption of the Property. As the Fifth Circuit has articulated in Frost, such application is merely enforcing the entire exemption law passed by the Texas legislature — and there is nothing inequitable or unfair about that. Moreover, as a practical matter, if this Court were to accept the Debtor’s argument, then necessarily all Chapter 7 trustees — to protect themselves from being sued by creditors for negligence— would have to conditionally object to validly claimed homestead exemptions in every case so as to protect against the potential scenario of a debtor subsequently selling his homestead, failing to reinvest the proceeds within six months, but then refusing to turn over the sale proceeds on the grounds that the trustee did not timely object to the homestead exemption. Trustees would have to file a pleading entitled, for example, “Conditional Objection to Debtor’s Legitimate Exemption of [Description of Real Property ] to Preserve the Right to Seize the Proceeds from Any Future Sale of the Homestead if the Sale Proceeds Are Not Reinvested within Six Months.” Such an objection would languish on the docket for months, if not years, and would generally not be disposed of until the earlier of: (1) the 181st day after any sale of the homestead; or (2) the date the case is closed. Requiring trustees to file such a conditional objection would be both cumbersome and burdensome on trustees and bankruptcy court dockets alike. This Court will not issue a ruling that would wreak such havoc upon the bankruptcy system.
IV. Conclusion
This Court declines the Debtor’s invitation to exempt the Proceeds from the bankruptcy estate on the basis that Frost is inapplicable to Chapter 7 cases. Rather, this Court is bound by Fifth Circuit precedent and concludes that Frost applies in this Chapter 7 case. Moreover, § 41.001 sets forth both the scope and limitations of a Texas homestead exemption, and the “snapshot rule” in bankruptcy law instructs courts to apply the law applicable at the time of the filing. As the Fifth Circuit in Zibman noted, when a debtor avails himself of the Texas homestead law, the debtor has to take the “fat
The Debtor argues that public policy demands “finality” and “certainty” for debtors to obtain a “fresh start” and that a denial of the Motion would undermine these policies. While the Debtor accurately depicts the underlying policies of bankruptcy in general, his argument says little about how the Texas homestead exemption law, including the 6-Month Rule, contravenes these policies. Indeed, certainty and finality are evidenced in the language of § 41.001(c), which provides a hard-and-fast six-month deadline for debtors to invest the sale proceeds in a new homestead; if any debtor has not done so by day 180, then finality exists on day 181, and the proceeds become non-exempt.
For all of the reasons set forth above, this Court holds that the 6-Month Rule applies in this Chapter 7 case, and that the Proceeds became non-exempt on December 19, 2013-which was the 181st day after the sale of the Property. Thus, on December 19, 2013, title to the Proceeds automatically passed from the Debtor to the Trustee, and the Debtor had a duty to turn over the Proceeds to the Trustee. In re Cooper,
An order consistent with this Opinion will be simultaneously entered on the docket.
Notes
. Federal Rule of Bankruptcy Procedure 7012(b) provides that Federal Rule of Civil Procedure 12 is applicable in adversary proceedings. Fed. R. BankrP. 7012(b).
. Any reference to "the Code” refers to the United States Bankruptcy Code, and reference to any section (i.e., §) refers to a section in 11 U.S.C., which is the United States Bankruptcy Code, unless otherwise noted. The one exception is that there is frequent reference to § 41.001, which is a reference to the Texas Property Code.
. Article 2396 read as follows: “The homestead of a family, not in a town or city, shall consist of not more than two hundred acres of land, which may be in one or more parcels, with the improvements thereon; the homestead in a city, town, or village, consisting of a lot or lots, not to exceed in value five thousand dollars at the time of their designation as a homestead, without reference to the value of any improvements thereon; provided, further, that the proceeds of the voluntary sale of the homestead shall not be subject to garnishment or forced sale within six months after such sale." (emphasis added). C.W. Raines, The Laws of Texas 1822-1897131 (H.P.N. Gammel, Volume X, 1898).
. “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.” Tex. Prop.Code § 41.001(c).
. Stephen W. Sather, Fifth Circuit Erodes Protection for Texas Homesteads Sold After Filing, (March 8, 2014) http://stevesathers bankruptcynews.blogspot.coin/2014/03/fifth-circuit-erodes-protection-for.html ("The expanded definition.of property of the estate in a chapter 13 case could justify the result in the Frost case. However, this was not discussed by the Court.”).
. Compare Tex. Prop.Code § 41.001 (providing a nearly unlimited exemption) and 11 U.S.C. § 522(d)(1) (limiting exempted real property to the value of $22,975); In re Peters,