Hawk v. Engelhart (In Re Hawk)Hawk v. Engelhart (In Re Hawk)
Before STEWART, Chief Judge, and WIENER and PRADO, Circuit Judges.
Gregory and Marcie Hawk’s petition for panel rehearing is GRANTED, and the opinion previously filed in this case is withdrawn. This opinion is substituted therefor. The Hawks’ petition for rehearing en banc is DENIED.
After filing for Chapter 7 bankruptcy, the Hawks claimed an exemption for funds held in an individual retirement account (“IRA”). They sought to exempt the funds from the bankruptcy estate because tax-exempt or tax-deferred assets held in a qualifying retirement account are generally exempt from creditors’ claims under Texas law. However, over the course of several months, the Hawks withdrew the funds from the IRA. Texas law provides that amounts distributed from a retirement account remain exempt only if rolled over into another retirement account within sixty days. After withdrawing the funds from the IRA, the Hawks did not roll them over into another qualifying account. Thus, the bankruptcy court held that the funds had lost their exempt status and ordered that the Hawks turn over the funds to the Trustee, Eva Engelhart. The district court upheld the bankruptcy court‘s decision on appeal. We REVERSE and REMAND.
I. BACKGROUND
On December 15, 2013, the Hawks filed a voluntary bankruptcy petition under
Meanwhile, between December 11, 2013, and July 14, 2014, the Hawks withdrew all of the funds from the IRA and used most of those funds to pay for living and other expenses. They never deposited the funds into another retirement account. When Res-TX One deposed Mr. Hawk in November 2014, he stated that approximately $30,000 of the liquidated IRA funds remained in his possession and that the funds were “in a shoebox.” The Trustee first learned about the liquidated IRA funds from Mr. Hawk‘s deposition and subsequently demanded that the Hawks give the funds to the estate. After the Hawks refused, the Trustee filed a motion with the bankruptcy court seeking to compel the Hawks to turn over the funds.
Following an evidentiary hearing, the bankruptcy court ordered the Hawks to turn over the funds that were withdrawn from the IRA ($133,434.64 in total). The bankruptcy court concluded that the funds “lost their exempt status” under Texas law because the Hawks “did not roll them over to another individual retirement account within 60 days.” The Hawks appealed to the district court, which affirmed the bankruptcy court‘s decision. This appeal followed.
II. STANDARD OF REVIEW
As a “second review court,” “[o]ur review is properly focused on the actions of the bankruptcy court.” In re Age Ref., Inc., 801 F.3d 530, 538 (5th Cir. 2015) (quoting In re T-H New Orleans Ltd. P’ship, 116 F.3d 790, 796 (5th Cir. 1997)). “We apply the same standard of review to the bankruptcy court‘s findings of fact and conclusions of law as applied by the district court.” In re Pratt, 524 F.3d 580, 584 (5th Cir. 2008). The “[d]etermination [of] whether an exemption from the bankruptcy estate exists is a question of law, which we review de novo.” In re Zibman, 268 F.3d 298, 301 (5th Cir. 2001). “Although we may ‘benefit from the district court‘s analysis of the issues presented, the amount of persuasive weight, if any, to be accorded the district court‘s conclusions is entirely subject to our discretion.’” In re Age Ref., 801 F.3d at 538 (quoting In re CPDC, Inc., 337 F.3d 436, 441 (5th Cir. 2003)).
III. DISCUSSION
Under
[A] person‘s right to the assets held in . . . an individual retirement account ... is exempt from attachment, execution, and seizure for the satisfaction of debts to the extent the account is exempt from federal income tax, or to the extent federal income tax on the person‘s interest is deferred until actual payment of benefits to the person....
A. The Snapshot Rule
To understand this court‘s case law on Texas homesteads, it is helpful to first provide some background on the so-called snapshot rule. In White v. Stump, a debtor filed for bankruptcy, and his wife later sought a homestead exemption for the land where the debtor and his family resided. 266 U.S. 310, 310-11 (1924). The Supreme Court noted that “[t]he laws of the state of Idaho, where the land is situate, provide for a homestead exemption, but only where a declaration that the land is both occupied and claimed as a homestead is made and filed.” Id. at 311. State law provided that until the landowner filed such a declaration, “the land is subject to execution and attachment like other land; and where a levy is affected while the land is in that condition the subsequent making and filing of a declaration neither avoids the levy nor prevents a sale under it.” Id. The Supreme Court explained that “the state laws existing when the petition is filed [are] the measure of the right to exemptions.” Id. at 312. Moreover, the date of filing is the point at which “the status and rights of the bankrupt, the creditors and the trustee . . . are fixed.” Id. at 313.
Thus, the debtor was not entitled to a homestead exemption because the land “was subject to levy and sale” under state law when the debtor filed his bankruptcy petition. Id. at 314. This approach of looking to the state law in effect at the time of filing came to be known as the “snapshot” rule. See In re Zibman, 268 F.3d at 303.
Two decades later, the Supreme Court expanded the snapshot rule in Myers v. Matley, 318 U.S. 622, 628 (1943). The debtor in that case consented to an involuntary bankruptcy petition filed against him. Id. at 623. A month later, the debtor‘s wife filed a declaration with a Nevada county recorder claiming a tract of land listed in the debtor‘s bankruptcy schedules as a homestead and then filed a petition with the bankruptcy court claiming the land as exempt. Id. at 623-24. In contrast to the Idaho state law applicable
B. Fifth Circuit Homestead Precedent
This court has applied the snapshot rule in two distinct types of bankruptcy proceedings:
“Chapter 13 works differently. A wholly voluntary alternative to Chapter 7, Chapter 13 allows a debtor 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
1. Chapter 7: In re Zibman
In Zibman, the debtors sold their Texas homestead roughly two months before filing for Chapter 7 bankruptcy; they did not reinvest the sale proceeds in another homestead within six months of the sale. 268 F.3d at 300–01. We observed that under Myers and White, “the law and facts existing on the date of filing the bankruptcy petition determine the existence of available exemptions, but . . . it is the entire state law applicable on the filing date that is determinative.” Id. at 304. Although the debtors filed the bankruptcy petition before the six-month exemption period had ended, “‘freezing’ the exemption for the proceeds simply because it was in effect at the date the petition was filed, [would] effectively read the 6-month limitation out of the statute, and transform[] an explicitly limited exemption into a permanent one.” Id. Furthermore, the intent 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.” Id. at 305 (quoting In re England, 975 F.2d 1168, 1174–75 (5th Cir. 1992)). Accordingly, we
2. Chapter 13: In re Frost
This court later applied Zibman’s reasoning to a Chapter 13 case in which a homestead was sold during the pendency of bankruptcy proceedings. See In re Frost, 744 F.3d 384, 387 (5th Cir. 2014). The debtor in Frost sold his Texas homestead after filing for Chapter 13 bankruptcy, but because he failed to reinvest the sale proceeds in another homestead within six months of the sale, we held that the proceeds were “removed from the protection of Texas bankruptcy law and no longer exempt from the estate.” Id. at 385, 387.
Frost argued that Zibman was “distinguishable because it concerned proceeds obtained prior to filing bankruptcy, whereas he sold his homestead after petitioning for bankruptcy, at a time when the homestead had already been declared exempt from the estate.” Id. at 387. Frost pointed out that
Responding to Frost’s arguments, we emphasized that an “essential element of the exemption must continue in effect even during the pendency of the bankruptcy case.” Id. (quoting In re Zibman, 268 F.3d at 301). Therefore, “a change in the character of the property that eliminates an element required for the exemption voids the exemption, even if the bankruptcy proceedings have already begun.” Id. We explained:
Adopting Frost’s argument would require rejecting this court‘s determination in Zibman that
§ 522(c) does not prevent exempt property from losing its exempt status. If§ 522(c) requires strict enforcement of the “snapshot rule” such that property exempted at the moment of filing can never be liable—regardless of restrictions placed on that exemption by state law or a change in the essential character of the property—then the proceeds from the sale in Zibman would have been exempted indefinitely, despite the six month limitation on that exception.
Id. at 389. When Frost sold his homestead, his “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.” Id. The “conditional exemption” that applied to the newly acquired sale proceeds “expired” when Frost failed to reinvest them in another homestead within six months. Id. Thus, we concluded that “Frost lost his right to withhold the sale proceeds from the estate.” Id.
C. Frost’s Applicability to Chapter 7 Cases
Frost relied heavily on principles from Zibman, a Chapter 7 case. Nevertheless, the Hawks contend that Frost does not apply to their Chapter 7 case because Frost was a Chapter 13 proceeding. The Hawks note that the bankruptcy estate in
As an initial matter, we note that the Trustee in this case did not object to the Hawks’ IRA exemption until well after the time for objections passed. This timing is significant in the Chapter 7 context. As noted above,
In Taylor v. Freeland & Kronz, the Supreme Court held that a party in interest in a Chapter 7 case cannot “contest the validity of an exemption after the 30-day period,” even if “the debtor had no colorable basis for claiming the exemption.” 503 U.S. 638, 639, 643–44 (1992); see also In re Davis, 170 F.3d 475, 478 (5th Cir. 1999) (“If the exemptions are not objected to, the property becomes exempt and unavailable to be levied on by pre-petition creditors or managed by the trustee.”). The trustee in Taylor argued that such a strict interpretation of
In light of the Supreme Court‘s decision in Taylor, it is somewhat difficult to understand how proceeds from the sale of the homestead in Frost could be brought into the bankruptcy estate “at a time when the homestead had already been declared exempt from the estate.” Frost, 744 F.3d at 387. However, as the Hawks suggest, Frost makes sense in the context of a Chapter 13 case. We stressed that it was “the land itself—not its monetary value—that [was] protected under Texas law and ‘exempted under [
Notably, in Frost, the bankruptcy court ordered the proceeds to be returned to the estate pursuant to
A [Chapter 7 case] would be a different situation. In a [Chapter 7 case], the property is the debtor‘s, it‘s exempted, it‘s gone, and if he decides to sell it after that, it‘s subject to only his postpetition creditors. But in a [Chapter 13 case], it‘s different. And, so, I think it‘s still subject to the Chapter 13 estate, if it‘s not reinvested.
Id. at 10–11. This reasoning is consistent with this court‘s assessment that Frost’s property interest changed from an unconditionally exempted interest in the real property to a conditionally exempted interest in the proceeds from the sale of his homestead. When Frost acquired the sale proceeds and did not reinvest them in another homestead within six months, this newly acquired property interest became part of the bankruptcy estate under
The situation is different in the Chapter 7 context.
Lower courts have debated whether Frost applies in Chapter 7 cases. One bankruptcy court held 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 postpetition.” In re Montemayor, 547 B.R. 684, 713 (Bankr. S.D. Tex. 2016). Other courts have held that Frost controls when a Chapter 7 debtor sells a homestead after filing for bankruptcy. Lowe v. DeBerry, No: 5:15-cv-1135, slip op. at 19 (W.D. Tex. Mar. 10, 2017); In re Smith, 514 B.R. 838, 850 (Bankr. S.D. Tex. 2014). In one such case, a district court noted that allowing a Chapter 7 debtor to retain proceeds from a postpetition homestead sale that were not reinvested within six months would “produce inequitable results, particularly when Chapter 13 debtors in identical situations are not permitted to retain such proceeds.” DeBerry, slip op. at 19.
But Chapter 7 cases and Chapter 13 cases are not meant to always yield the same results. Chapter 13 is a “wholly voluntary alternative to Chapter 7,” which permits a debtor “to retain his property if he proposes, and gains court confirmation of, a plan to repay his debts.” Harris, 135 S. Ct. at 1835. By filing under Chapter 13, the debtor agrees that the property he acquires after filing for bankruptcy will become property of the bankruptcy estate under
Lower courts have also suggested that the approach we take today will “effectively read the [time] limitation out of the statute in Chapter 7 cases.” DeBerry, slip op. at 19. But limitations on exemptions still apply to property interests debtors hold when they file for Chapter 7 bankruptcy. See Zibman, 268 F.3d at 304. For example, in Zibman, we noted that “freezing the exemption for the proceeds simply because it was in effect at the date the petition was filed, [would] effectively read the 6-month limitation out of the statute.” Id. Therefore, we held that when the debtors “failed to reinvest the proceeds in another Texas homestead within the statutory time period, those proceeds lost their exemption.” Id. at 305. Yet in that case, the debtors already held proceeds when they filed for bankruptcy, and state law provided only a conditional exemption for those proceeds. If the debtors had still owned the homestead at the time of filing, their homestead would have been subject to an unconditional exemption under Texas law.
Likewise, if the Hawks held amounts recently distributed from their retirement account when they filed for bankruptcy, those funds would be subject to the applicable sixty-day limitation on the exemption. See
IV. CONCLUSION
For the foregoing reasons, we REVERSE the bankruptcy court‘s order requiring the Hawks to turn over the liquidated funds to the Trustee, and REMAND the case for further proceedings consistent with this opinion.
EDWARD C. PRADO
UNITED STATES CIRCUIT JUDGE