Hawk
Filing
8
OPINION AND ORDER. The Court AFFIRMS the Final Judgment of the Bankruptcy Court. (Signed by Judge Melinda Harmon) Parties notified.(rhawkins)
United States District Court
Southern District of Texas
ENTERED
August 29, 2016
IN THE UNITED STATES DISTRICT COURT
David J. Bradley, Clerk
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
IN RE:
§
§ BANKR. CASE NO. 13-37713
Gregory D. Hawk, et al.,
§
CHAPTER 7
§
Debtor
§
----------------------------------------------------------------Gregory D. Hawk,
§
§
Appellant/Plaintiff,
§
§
VS.
§
CIVIL ACTION NO. H-15-914
§
Eva S. Engelhart, Chapter 7
§
Trustee,
§
§
§
Appellee/Defendant.
§
OPINION AND ORDER
The above referenced appeal seeks reversal of a Final Judgment
by Chief Bankruptcy Judge Jeff Bohm,1 in a case addressing an issue
of first impression, requiring Appellant Gregory D. Hawk (“Hawk”)
to
pay
Chapter
7
Trustee
Eva
S.
Engelhart
(“the
Trustee”)
$129,895.76 because he withdrew exempt retirement funds after no
party in interest timely objected to his claimed exemption,2 but
1
Copies of the Final Judgment are found at #2-17 and as an
attachment to Appellant’s Brief, #4. Judge Bohm’s findings of
fact and conclusions of law underlying this final judgment, which
the Court is reviewing on this appeal, are available at In re
Hawk, 524 B.R. 706 (S.D. Tex. 2015).
2
Under Federal Rule of Bankruptcy Procedure 4003, where
there is no timely objection from a creditor, a debtor’s claimed
exemptions are approved as a matter of law on the later of (1)
the 30th day following the conclusion of the creditors’ meeting
or (2) the 30th day following an amendment to the debtor’s
claimed exemptions.
-1-
before the bankruptcy case was closed.
The legal issue before
Judge Bohm, and now before this Court, is does the Fifth Circuit’s
recent holding in Viefelahn v. Frost (In re Frost), 744 F.3d 384
(5th Cir. 2014), a Chapter 13 case which dealt with homestead
exemptions
under
Texas
Property
Code
§
41.001(c),3
requiring
property owners who sell their exempt homestead to reinvest the
proceeds in another homestead within six months, by analogy require
debtors withdrawing funds from their exempt Individual Retirement
Accounts (“IRAs”) to roll over those funds into another exempt IRA
account within sixty days under Texas Property Code 42.0021(c),4 in
order to retain their exemption from the bankruptcy estate and
creditors?
Standard of Review
This Court reviews the bankruptcy court’s conclusions of law
de novo and its findings of fact for clear error.
419 F.3d 323, 326 (5th Cir. 2005).
In re Coppola,
Whether an exemption from the
3
Under Texas law, while a debtor’s homestead is permanently
exempted from the bankruptcy estate, the funds obtained from
selling the homestead are exempted for only six months. Frost,
744 F.3d at 385. See Texas Prop. Code § 41.001(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.”).
Section 41.001(c) is sometimes referred to as the
“Texas Proceeds Rule.”
4
Section 42.0021(c) states, “Amounts distributed from a
plan, annuity, account, or contract entitled to an exemption
under Subsection (a) are not subject to seizure for a creditor’s
claim for 60 days after the date of distribution if the amounts
qualify as a nontaxable rollover contribution under Subsection
(b).”
-2-
bankruptcy estate exists is a question of law for the Court.5
Zibman v. Tow (In re Zibman) 268 F.3d 298, 301 (5th Cir. 2001),
citing In re England, 975 F.2d 1168, 1172 (5th Cir. 1992).
The
Court therefore reviews the appeal de novo. Because the facts here
are uncontested and the issue is a question of law, the Court finds
that an oral hearing is not necessary.
Applicable Law
When a debtor files a petition for bankruptcy, a bankruptcy
estate is created comprised of all legal and equitable interests
the debtor has in property.
Zibman, 268 F.3d at 301.
Under 11
U.S.C. § 522(b),6 the debtor may then remove some of the property
5
This Court has jurisdiction over this appeal under 28
U.S.C. § 158(a) because a bankruptcy court’s order that denies an
exemption is a “final order.” Zibman v. Tow (In re Zibman), 268
F.3d 298, 301 (5th Cir. 2001).
6
Section 522(b)states in relevant part,
(1) Notwithstanding section 541 of this title, an
individual debtor may exempt from property of the
estate the property listed in either paragraph (2) or,
in the alternative, paragraph (3) of this subsection. .
. .
(2) Property listed in this paragraph is property that
is specified under subsection (d), unless the State law
that is applicable to the debtor under paragraph (3)(A)
specifically does not so authorize.
(3) Property listed in this paragraph is-–
(A) subject to subsections (o) and (p), any
property that is exempt under Federal law, other
than subsection (d) of this section, or State or
local law that is applicable on the date of the
filing of the petition to the place in which the
-3-
from the bankruptcy estate by electing to exempt it under either
federal law, with subject property identified in 11 U.S.C. §
522(d), or under state law, identified in § 522(b)(2).
In re Camp,
631 F.3d 757, 759 (5th Cir. 2011; In re Jarboe, 365 B.R. 717, 720
(S.D. Tex. 2007).
Each state can chose to opt out of the federal
exemption scheme, and if the debtor’s state does so, the debtor is
limited to the state’s exemptions.
states
have
opted
out
exemption provision.
Susan
V.
Kelley,
of
the
Id. at 760.
federal
The majority of
bankruptcy
substantive
Robert E. Ginsberg, Robert D. Martin and
Ginsberg
&
Martin
on
Bankruptcy
§
debtor’s domicile has been located for the 730
days immediately preceding the date of the filing
of the petition or if the debtor’s domicile has
not been located in a single State for such 730day period, the place in which the domicile was
located for 180 days immediately preceding the
730-day period or for a longer portion of such
180-day.
(B) Any interest in property in which the debtor
had, immediately before the commencement of the
case, an interest as a tenant by the entirety or
joint tenant to the extent that such interest as a
tenant by the entirety or joint tenant is exempt
from process under applicable nonbankruptcy law;
and
(C) retirement
funds are in a
taxation under
457, or 501(a)
1986.
funds to the extent that those
fund or account that is exempt from
section 401, 403, 408, 408A, 414,
of the Internal Revenue Code of
If the effect of the domiciliary requirement under
subparagraph (A) is to render the debtor ineligible for
any exemption, the debtor may elect to exempt property
that is specified under subsection (C).
-4-
6.01
(Substantive
Exemption
Rights)(Aspen
states that have opted out).
Publishers
2016)(listing
Texas has not opted out of the
federal bankruptcy exceptions nor enacted any law to prevent its
debtors
from
choosing
between
state
exemptions
or
federal
exemptions of § 522(d), so Texas debtors may choose either federal
exemptions specified in § 522(d) or, if qualified, state exemptions
in § 522(b)(2).
NCNB v. Volpe (In re Volpe), 120 B.R. 843, 845,
846 (W.D. Tex. 1990), aff’d, 943 F2d 1451 (5th Cir. 1991); In re
Kang, 243 B.R. 666, 668 (N.D. Tex. 1999).
“Anything properly exempted passes through bankruptcy; the
rest goes to the creditors.”
Cir. 1985).
Payne v. Wood, 775 F.2d 202, 204 (7th
The debtor claiming an exemption must file “a list or
property that the debtor claims as exempt,” and “[u]nless a party
in interest objects, the property claimed as exempt on such list is
exempt.”
Id., quoting 11 U.S.C. 522(l).
Here Hawk elected exemption of his IRA accounts7 under Texas
Property Code Ann. § 42.0021.8
Therefore Hawk bears the burden of
7
Generally federal and state statutes recognize an
exemption for an IRA that is provided for under 26 U.S.C. § 408
(governing the creation, operation, and taxability of IRAs).
8
Section 42.0021(a) of the Texas Property Code provides in
relevant part, “In addition to the exemption prescribed by
Section 42.001, a person’s right to the assets held in or to
receive payments, whether vested or not, under . . . an
individual retirement account or individual retirement annuity .
. . is exempt from attachment, execution, and seizure for the
satisfaction of debts to the extent that 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
-5-
proving that he is entitled to the exemption.
In re Jarboe, 365
B.R. at 721, citing Lozano v. Lozano, 975 S.W. 2d 63, 67 (Tex.
App.--Houston [14th Dist.] 1998, pet. denied).
Texas liberally
construes its exemption statutes in favor of the debtor claiming
the exemption.
Id., citing In the Matter of Walden, 12 F.3d 445,
448 (5th Cir. 1994), citing Hickman v. Hickman, 149 Tex. 439, 234
S.W. 2d 410, 413-14 (1950).
Facts
The facts are not in dispute here.
H.
Hawk,
filed
a
voluntary
petition
Hawk and his wife, Marcie
under
Chapter
7
of
the
Bankruptcy Code on December 15, 2013 and disclosed in their
Schedules two IRA accounts, one with USAA Federal Savings Bank and
the other managed by NFP Securities, Inc., with a balance of
$164,902 at the time of the filing of the petition, for which they
claimed exemption from the bankruptcy estate under Texas Property
Code Ann. § 42.0021(a).
discharge
expired
on
The period to object to the Debtors’
March
17,
2014,9
but
that
deadline
was
benefits to the person . . . .”
9
Under Rule 4003 (a) “A debtor shall list the property
claimed as exempt under § 522 of the Code on the schedule of
assets required to be filed by Rule 1007.” Under Rule 4003(b)(1)
a party in interest may file an objection to the list of property
claimed as exempt within 30 days after the meeting of creditors
held under § 341(a) is concluded or within 30 days after any
amendment to the list or supplemental schedule is filed,
whichever is later. The court may, for cause, extend the time
for filing objections if, before the time to object expires, a
party in interest files a request for an extension.”
Rule 4003
(c) provides, “In any hearing under this rule, the objecting
-6-
extended by agreement between the U.S. Trustee and creditor Res-TX
One, LLC (“Res-TX One”) to May 17, 2014.
After several extensions, the meeting of the creditors took
place on March 28, 2014, so under Bankruptcy Rule 4003(b)(1),10 the
deadline to object to the Hawks’ claimed exemption was April 28,
2014.
On April 3, 2014 the Trustee filed a report stating that this
was a “no asset” case11 and proposed abandonment of all assets not
claimed as exempt.
On May 16, 2014 Res-TX One filed an Adversary Proceeding, No.
14-3191, objecting to the discharge of the Debtors.
party has the burden of proving that the exemptions are not
properly claimed. After hearing on notice, the court shall
determine the issues presented by the objections.”
Bankruptcy Rule 4004(a) states in relevant part, “In a
chapter 7 case, a complaint, or a motion under § 727(a)(8) of the
Code, objecting to the debtor’s discharge[,] shall be filed no
later than 60 days after the first date set for the meeting of
creditors under § 341(a).”
10
The purpose of Rule 4003 and 11 U.S.C. § 522(l)(“The
debtor shall file a list or property that the debtor claims as
exempt under subsection (b) of this section.”) “is to protect the
rights of a debtor by requiring a prompt determination of the
right to exemptions,” . . . “so all parties may then freely
pursue their rights with regard to the exempt property,” and to
establish “a notice procedure to alert the debtors that the
property claimed as exempt cannot be so treated until the
controversy surrounding its status is resolved.” In re Starns,
52 B.R. 405, 410 (S.D. Tex. 1985), citing In re Allen, 44 B.R.
38, 40 (Bankr. D.N.M. 1984), and In re Earnest, 42 B.R. 395, 401
(Bankr. D. Ore. 1984).
11
A no-asset case is one where there are no assets other
than exempt assets. In re Dye, 108 B.R. 135, 136 (W.D. Tex.
1989).
-7-
Meanwhile
from
December
11,
2013-July
14,
2014,
Debtors
withdrew all of the funds in the NFP IRA account (the “Liquidated
Funds”), but did not reinvest or “roll over” any of them into a new
exempt IRA account, instead dipping into them to pay for their
regular living expenses.
On November 18, 2014 counsel for Res-TX
deposed Hawk, who testified that approximately $30,000 of the
Liquidated Funds remained in his possession, stored “in a shoebox.”
The Trustee learned of these Liquidated Funds initially from this
deposition and made a demand that Debtors turn them over to the
Trustee, but Debtors refused.
The Trustee then filed an expedited
motion seeking a turnover order under 11 U.S.C. § 542(a) compelling
the Debtors to turn over the Liquidated Funds from the postpetition liquidation of their IRA account.
An evidentiary hearing
was held on January 5, 2015.
Relying on Frost and on Judge Bohm’s earlier ruling in In re
Smith, 514 B.R. 838 (Bankr. S.D. Tex. 2014), the Trustee argued
that the Liquidated Funds automatically reverted to the bankruptcy
estate because the Debtors failed to reinvest them in another
exempt IRA account within sixty days, as mandated by Texas Property
Code § 42.0021.
The Trustee analogized the situation here to that
in Frost, in which a debtor who sold his exempt homestead while his
Chapter 13 bankruptcy proceeding was still pending, but failed to
reinvest the proceeds in another exempt homestead within six months
as required under Texas Property Code § 41.001.
-8-
Therefore the
proceeds became non-exempt property, reverted to the bankruptcy
estate, and lost their protection under state law. Frost, 744 F.3d
at 385. The Fifth Circuit emphasized in Frost that when the Debtor
elects the state law exemption, “‘it is the entire state law
applicable on the filing date that it determinative.’” Id. at 386,
quoting Zibman, 268 F.2d at 304.
The panel then pointed out that
while federal law permanently exempts the homestead from the
bankruptcy estate, in contrast Texas Property Code § 41.001(c)
exempts proceeds from a sale of a homestead for only six months
after the sale.
Id. at 386-87.
Thus “‘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.’12” Hawk, 524 B.R. at 711-12, citing Frost, 744
F.3d at 388.
Moreover, Judge Bohm further noted regarding Frost,
that construing federal bankruptcy law to permanently exempt the
proceeds would be contrary to Texas Law and Fifth Circuit precedent
since “‘the 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 . . . .’”
712, citing id. at 388 (emphasis in the original).
Id. at
Judeg Bohm
observed that the Frost Bankruptcy Court accordingly ordered that
12
The Fifth Circuit in Frost continued, “Under this court’s
precedent, (i) the sale of the homestead voided the homestead
exemption and (ii) the failure to reinvest the proceeds within
six months voided the proceeds exemption, regardless of whether
the sale occurred pre- or post-petition.” Id. at 388.
-9-
the proceeds be distributed in part to Frost’s creditors, with the
small remainder not needed to pay his debts to be held in trust for
Frost’s later use.
Subsequently in Smith, 514 B.R. at 852, Judge
Bohm applied the reasoning in Frost,13 to homesteads that were sold
in Chapter 7 proceedings.14
Because
of
Res-TX’s
objection
in
its
pending
Adversary
Proceeding, which was tried but then taken under advisement, the
bankruptcy case remains open, and the Debtors have not been granted
a discharge.
In the instant case, the Trustee argued that the reasoning of
the
six-month
reinvestment
requirement
for
exemption
for
the
proceeds from the sale of a homestead should apply by analogy to
the sixty-day requirement for reinvestment of withdrawn IRA funds
13
Property of the estate is defined more broadly under
Chapter 13 than under Chapter 7: under 11 U.S.C. § 1306(a), the
property of the bankruptcy estate under Chapter 13 includes, in
addition to property designated under 11 U.S.C. § 541, “property
that the debtor acquires after the commencement of the case, but
before the case is closed, dismissed, or converted to a case
under chapter 7, 11 or 12 . . . .” Chapter 13 does not
distinguish between income from exempt versus non-exempt assets
even if the funds are received from exempt sources. Proceeds
from the sale of a homestead after the filing of the bankruptcy
petition of a Chapter 13 debtor that were not timely reinvested
in another homestead, so that the exemption expired under Texas
Property Code § 41.001, go into the bankruptcy estate and are
subject to distribution to the creditors of the estate even
though the proceeds were income from an exempt asset. Garcia v.
Bassel, 507 B.R. 907, 913-14 (N.D. Tex. 2014).
14
Judge Bohm noted that the Texas homestead proceeds
exemption law was enacted not only to prevent homelessness, but
also to provide for collection of debts. Smith, 514 B.R. at 842.
-10-
under Texas Property Code § 42.0021(c).
Therefore the result of
Hawk’s failure to reinvest timely the funds he withdrew from his
IRA is that they were no longer exempt from the bankruptcy estate
and the Trustee was entitled to them to distribute to creditors.
In response Debtors contended that the Liquidated Funds are
not part of the bankruptcy estate because they were withdrawn after
the deadline for objections to exemptions, after the deadline for
objections to discharge, and after the filing of the Trustee’s
report declaring no assets for distribution and proposing that the
non-exempt assets be abandoned.
The Hawks argued that the funds
should be permanently exempted, fixed in character as they appear
on the date of the bankruptcy filing.
After the evidentiary hearing on the Trustee’s request for a
turnover order on January 5, 2015, the Trustee abandoned her effort
to have the proceeds from the USAA Savings Bank IRA because the
evidence showed that the funds withdrawn from it were rolled over
into another exempt account.
Judge Bohm then made oral findings of fact and conclusions of
law regarding the funds withdrawn from the NFP Securities IRA and
subsequently entered the written opinion now found at 524 B.R. 706,
discussed herein.
12,
2015
(#2-17
Judge Bohm entered a Final Judgment on February
or
attachment
to
#4).
Hawk
moved
for
reconsideration, but Judge Bohm denied the motion on March 24,
2015.
Judge Bohm issued findings of fact, in accord with those in
-11-
the Court’s summary above, and conclusions of law, which are the
focus of this appeal.
Disagreeing with Debtors, Judge Bohm determined that Frost and
Smith are not only applicable, but “directly on point” to the
dispute here, regarding whether the property, which is exempt under
Texas state law, loses its statutory protection at any time during
the pendency of a Chapter 7 case while the bankruptcy case is still
open.
were
He concluded that in this case because the Liquidated Funds
not
reinvested
within
60
days
of
being
withdrawn,
the
Liquidated Funds became non-exempt and thus became property of the
bankruptcy estate which the Trustee was immediately entitled to
distribute to creditors.
Appellant’s Brief (#4)
Hawk argues that because no objections were made to his “timelimited” exemption for proceeds from the liquidation of an IRA
account within thirty days after the creditors’ meeting, his
exemptions were allowed and the exempt property vested with him as
the Debtor, placing it forever beyond the reach of the trustee or
the pre-petition creditors.
Therefore the Bankruptcy Court erred
in entering the Final Judgment (#2-17 or copy attached to #4).
Hawk contends that the snapshot rule (which states that a debtor’s
allowed exemptions are based upon the applicable law in effect on
the petition date and that events that happen post-petition have no
impact on the exemptions), as applied by Frost, was improperly
-12-
applied by Judge Bohm to Hawk’s case.
Observing that to maintain
the homestead exemption beyond the six-month period from the sale
of a homestead under Texas Property Code § 41.001(c), the debtor
must reinvest the proceeds into a new homestead before it expires,
Hawk insists that the snapshot rule is modified when an exemption
expires after a set period of time if no action is taken by the
debtor.
Frost,
which
addressed
a
post-petition
sale
of
a
homestead, relied on Zibman, 268 F.3d 298, which involved a prepetition sale of a homestead on November 17, 1998, followed by a
Chapter 7 bankruptcy petition filed on February 9, 1999 within the
six-month period that the proceeds were exempt under the Texas
Property Code.
The Fifth Circuit decided that Texas law never
contemplated an exemption in the homestead’s sale proceeds that
exceeded six months and held that the Zibmans’ proceeds, which were
not reinvested into a new homestead, reverted to the bankruptcy
estate after the six-month period expired on March 17, 1999.
F.3d
at
304-05.
In
essence,
argues
Hawk,
the
268
time-limited
exemption in the proceeds is not frozen in time simply because of
the filing of a bankruptcy petition, i.e., a debtor in bankruptcy
should not be able to gain greater rights with respect to property
exemptions than a nondebtor who never sought bankruptcy protection.
This reasoning explains the Fifth Circuit’s holdings in Frost and
Zibman, which focus on the rule that debtors’ exemptions are based
on the whole elected state law applicable on the petition date that
-13-
determines a debtor’s property exemptions. Frost, 744 F.3d at 386;
Zibman, 268 F.3d at 304.
In contrast, in the instant case, argues
Hawk, Judge Bohm erroneously extended the snapshot rule in a way
that incorrectly uses the facts and impairs the operation of 11
U.S.C. § 522(c) by suggesting that as long as there is a bankruptcy
case being administered, any expiration of a time-limited exemption
in certain cash proceeds, or the conversion of an exempt asset into
a nonexempt asset during the life of the bankruptcy case, makes
that cash or asset the property of the bankruptcy estate.
Judge
Bohm’s wrongful interpretation would abolish the snapshot rule and
create
absurd
results,
Hawk
claims.
Hawk
insists
that
the
modification of the snapshot rule by Zibman and Frost was not
intended to last through the duration of the bankruptcy case. When
no party in interest objects to a debtor’s claimed exemptions, the
property is withdrawn from the bankruptcy estate and remains
forever exempt from the estate, according to Hawk.
He cites In re
Fonke, 321 B.R. 199, 205 (S.D. Tex. 2005),15 in which Bankruptcy
Judge Marvin Isgur wrote, “It is well-settled law that the effect
15
This Court observes that Fonke addressed the question
whether the claim objection deadline is reset when a bankruptcy
case is converted from Chapter 13 to Chapter 7 and decided that
the deadline does not recommence upon such conversion. 321 B.R.
at 201, 208-09. (Other courts disagree and conclude that the
time period to object to claimed exemptions recommences upon
conversion. See, e.g., In re Campell, 313 B.R. 313 (BAP 10th
Cir. 2004; In re Wiggins,341 B.R. 378 (M.D. Pa. 2006).) In the
instant case there was no conversion; the case was filed by Hawk
under Chapter 7.
-14-
of this self-executing exemption is to remove the property from the
estate and to vest it in the debtor. . . .”
Id., citing inter alia
Owen v. Owen, 500 U.S. 305, 308 (1991)(when property becomes
exempt, it is “withdrawn from the estate (and hence from the
creditors) for the benefit of the debtor.”); and In re Bell, 225
F.3d 303 (2d Cir. 2000)(holding that property acquired postpetition by the debtor, including property that exits the estate
and reinvests in the debtor through the exemption process, does not
enter the estate, but instead remains the separate property of the
debtor under 11 U.S.C. § 541 (listing the property that comprises
the estate)).
Judge Isgur continued, Fonke, 321 B.R. at 2015,
Further, when the property vests in the debtor, § 522(c)
protects the property from liability during the course of
the case. This section states:
Unless the case is dismissed, property exempted
under this section is not liable during or after
the case for any debt of the debtor that arose, or
that is determined under section 502 of this title
as if such debt had arisen, before the commencement
of this case . . . .
11 U.S.C. § 522(c).
Thus, § 522(c) “essentially
‘immunizes’ exempt property against any liability for
prepetition debts.”
In re Reed, 184 B.R. 733, 738
(Bankr. W.D. Tex. 1995)(citations omitted).
Hawk asserts, “The traditional view is once exemptions are
allowed, a Chapter 7 debtor may use that exempt property as he sees
fit.”
#4 at p. 13, citing In re D’Avila, 498 B.R. 150, 159-60
(Bankr. W.D. Tex. 2013)(holding that in a Chapter 7 case, “once an
exemption has been duly claimed on an actual homestead, the
-15-
proceeds that result from the post-petition, post-exemption sale of
the homestead are not subject to later recovery by the bankruptcy
estate under the Texas Proceeds Rule.”)(“If a Chapter 7 debtor
exempts tools of the trade or family heirlooms, they are removed
from the property of the estate, they belong to the debtor, and the
debtor can later sell them and use the proceeds as he or she
will.”); Lowe v. Yochem (In re Reed), 184 B.R. 733, 738 (Bankr.
W.D. Tex. 1995)(“Nothing in section 522(c) even vaguely suggests
that, as a precondition to enjoying the protections of that
provision, the debtor must maintain the exempt character of the
property. . . . Were the rule otherwise, then estates could be
reopened to administer such proceeds at virtually any time, robbing
bankruptcy administration of any sort of meaningful finality, and
robbing the bankruptcy discharge of its efficacy.”).
In other
words, once a debtor’s exemptions are allowed, removing exempt
property from the reach of the Trustee or creditors satisfies the
purpose of a debtor’s “fresh start” and of § 522(c)(“property
exempted under this section is not liable during or after the case
for any debt of the debtor”).16
Hawk
additionally
argues
that
16
because
the
Trustee
never
Significantly all of the cases on which Hawk relies
predate and diverge from the Fifth Circuit’s ruling in Frost,
which is the current law and is binding on this Court. See,
e.g., In re Montemayor, 547 B.R. 684, 702-04 (S.D. Tex. 2016).
Judge Bohm’s post-Frost opinion in Smith, held that Frost applied
to Chapter 7 cases on the grounds that Frost, like Smith, was
based on Texas Property § 41.001(c), and not on 11 U.S.C. § 1306.
-16-
objected to the exemptions and also proposed abandoning the IRA
funds to Hawks, the doctrine of judicial estoppel should bar the
Trustee from arguing an inconsistent position six months later,
i.e., that the assets, which were validly exempted under Rule 4003,
should be brought back into the estate.
Hawk further maintains that Judge Bohm erred in retroactively
applying his holding in Smith, which applied Frost to Chapter 7
cases, to the transactions in the instant suit.
Smith was issued
on August 4, 2014, after Hawk had completely liquidated the NFS
Securities IRA.
Thus, unfairly, Hawk had no opportunity to know
what the law was and to conform his conduct to it.
In the instant
case Judge Bohm described Frost as a “watershed ruling.” Hawk, 524
B.R. at 717. Hawk contends that because the liquidation of his IRA
account
was
effected
in
“a
good
faith
understanding
of
the
conventional view of the effect of the allowance of property
exemptions,
the
Bankruptcy
Court
erred
when
it
retroactively
applied the same holding as Smith to the present case.”
#4 at p.
8.
Appellee’s Brief (#6)
Identifying as the threshold question, whether Frost,
which addressed homestead exemptions, can also extend to IRA
exemptions in a Chapter 7 case, the Trustee asserts that, in light
of the Fifth Circuit precedent in Frost, Judge Bohm’s opinion in
Smith, and a plain reading of the Texas exemption statutes for
-17-
homesteads and IRA, supports Judge Bohm’s conclusion that Frost
applies not only to Chapter 13 cases and exempt homesteads, but to
Chapter 7 cases and to IRAs.
Thus the Hawks’ withdrawn NFP IRA
funds became nonexempt property of the estate when they were not
rolled over into another IRA within sixty days.
Furthermore the
Trustee contends that Hawk’s “antiquated understanding of the
‘snapshot rule’ . . . was corrected by the Fifth Circuit in Frost”
and that Hawk’s only support for his position is based on cases
issued before
Frost
that “are no longer applicable or valid
interpretations of the rule.”
#6 at p. 2.
The debtor in Frost
made the same arguments as Hawk does here, and the Fifth Circuit
rejected them.
Moreover, in Zibman, a Chapter 7 case, the facts
were different (the debtor sold his homestead before filing a
Chapter 7 case, but also did not reinvest the sales proceeds before
the
six-month
deadline
expired
during
the
pendency
of
the
bankruptcy case), but the Fifth Circuit opined in it, too, about
the snapshot rule, 268 F.3d at 304:
[T]he 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.
Courts cannot apply a juridical airbrush to excise
offending images necessarily pictured in the petitiondate snapshot.
Thus while the snapshot rule allowed the debtor to claim the
homestead proceeds as exempt under the Texas Property Code, that
exemption at the same time is governed by the additional state-law
-18-
requirement
homestead
that
the
proceeds
within
six
months
must
or
be
“they
reinvested
are
in
removed
another
from
the
protection of Texas bankruptcy law and no longer exempt from the
estate.”
Id. at 387.
As stated by the Fifth Circuit in Zibman,
268 F.3d at 304,
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 (like the temporal element of the
reinvestment feature . . . ) integral in those exemptions
as well.
In Texas, the 6-month limitation is
inextricably intertwined with the exemption that state
has chosen to provide for proceeds from the sale of the
homestead.
In Zibman the Fifth Circuit ruled that after the debtor “sold his
homestead, the essential character of the homestead changed from
‘homestead’ to proceeds,’ placing it under section 41.001(c)’s six
month exemption” for purchasing another homestead.
Here with
Hawk’s withdrawal the exempt IRA changed to Liquidated Funds,
placing
them
under
section
41.001(c)’s
“reinvestment” in another IRA account.
sixty-day
period
for
In both cases the debtor’s
failure to reinvest the money within the time period removed the
funds from the protection of Texas bankruptcy laws and they are no
longer exempt from the bankruptcy estate.
744 F.3d at 387.
Moreover the Fifth Circuit found that the legislature’s intent
behind the exemption law was to protect the homestead, not the
proceeds.
Id. at 305, citing In re England, 975 F.2d 1168, 1174-75
(5th Cir. 1992). It also clearly rejected the argument that Section
-19-
522(c) of the Bankruptcy Code made the allowance of an exemption
permanent; instead the Fifth Circuit opined, “a change in the
character of the property that eliminates an element required for
the exemption voids the exemption [under state law], even if the
bankruptcy proceedings have already begun.”
Zibman, 268
F.3d at
388.
Furthermore, because Frost is based mainly on Zibman, which is
a Chapter 7 case, Hawk’s argument that Frost should be limited to
Chapter 13 cases fails.
Thus Judge Bohm held in Smith, 514 B.R. at
839, that Frost applies to Chapter 7 cases.
In Smith, Judge Bohm also held that as long as the bankruptcy
case remains open and its assets have not been abandoned to the
debtor under 11 U.S.C. § 554(c), the Chapter 7 trustee is entitled
to recover and liquidate all non-exempt assets.
51.
514 B.R. at 850-
The critical date is the closing of the bankruptcy case, not
the deadline to file objections to exemptions or the filing of a
report of no distribution by the Trustee.
Thus an asset exempt on
the filing of the petition may become non-exempt under state law in
a Chapter 7 case and become property of the estate despite the
passage of the deadline to file objections.
Appellant’s arguments for treating exemptions differently in
Chapter 7 and Chapter 13 cases are based on pre-Frost decisions.
Hawk’s
“traditional
view”
of
exemptions
is
the
pre-Frost
interpretation of the snapshot rule that is no longer valid,
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insists the Trustee.
In sum, the IRA’s Liquidated Funds lost their exempt status
under Texas law on the 61st day after withdrawal because they were
not rolled over into another exempt IRA account.
As for Hawk’s charge that Judge Bohm erred by retroactively
applying Smith to this case, Hawk cited as authority Villarreal v.
Showalter (In re Villarreal), 413 B.R. 633, 640 (Bankr. S.D. Tex.
2009) and Landgraf v. USI Film Products, 511 U.S. 244, 265 (1997)),
both of which are inapposite:
discusses
the
retroactivity
Landgraf is inapposite because it
of
legislation,17
not
of
judicial
opinions, and there has been no change in the Texas exemption
statute; Villarreal holds that one bankruptcy judge in a district
is not bound by the decisions of another in the same district, a
point of law with no application in this case of first impression.
In sum, argues the Trustee, Hawk has not provided any valid
reason to restrict Frost either to solely Chapter 13 cases or to
homestead exemptions.
She maintains that Judge Bohm correctly
17
See Landgraf, 511 U.S. at 265, from which Hawk drew his
words (“[T]he presumption against retroactive legislation is
deeply rooted in our jurisprudence . . . . Elementary
considerations of fairness dictate that individuals should have
an opportunity to know what the law is and to conform their
conduct accordingly; settled expectations should not be lightly
disrupted. For that reason, the ‘principle that legal effect of
conduct should ordinarily be assessed under the law that existed
when the conduct took place has timely and universal appeal.’”),
quoting Kaiser Aluminum & Chemical Corp. v. Bonjorno, 494 U.S.
827, 855 (1990)(Scalia, J., concurring).
-21-
interpreted and applied Frost to this Chapter 7 case and to the IRA
funds.
Appellant’s Reply Brief (#7)
Hawk raises two arguments in his reply brief.
First, he
argues that applying Frost to Chapter 7 cases after the deadline
for objections to exemptions that are not contested (and thus the
property is withdrawn from the bankruptcy estate) would render
superfluous § 522(c)(“property exempted under this section is not
liable during or after the case for any debt of the debtor
that
arose . . . before the commencement of the case” and providing
limited exceptions).
Hawk contends that Judge Bohm’s conclusion
that the Hawks cannot sell the exempt property after it is no
longer part of the bankruptcy estate turns on end § 522.
Holding
that exempted property reverts to the estate, even after the
deadline for objection to exemptions and the vesting of such
property with the Hawks if the Liquidated Funds of the IRA are not
rolled
over
into
another
exempt
account
is
contrary
to
the
statute’s content that “property exempted under this section is not
liable during or after the case for any debt of the debtor. . . .”
This Court finds Hawk’s first challenge meritless because it
ignores the fact that he had a choice and elected to proceed under
Texas state bankruptcy law pursuant to § 522(b)(2), not federal
law.
In re Camp, 631 F.3d
at 759; In re Jarboe, 365 B.R. at 720.
As Judge Bohm clearly articulated, the Fifth Circuit emphasized in
-22-
Frost that when the Debtor elects the state law exemption, “‘it is
the
entire
state
determinative.’”
at 304.
law
applicable
on
the
filing
date
that
is
Frost, 744 F.3d at 385, quoting Zibman, 268 F.2d
While federal law permanently exempts the homestead from
the bankruptcy estate, in contrast Texas Property Code § 41.001(c)
exempts proceeds from a sale of a homestead for only six months
after the sale.
Id. at 386-87.
Thus “‘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.’18” Hawk, 524 B.R. at 711-12, citing Frost, 744
F.3d at 388.
Moreover, Judge Bohm further noted regarding Frost
that construing federal bankruptcy law to exempt permanently the
proceeds would be contrary to Texas Law and Fifth Circuit precedent
since “‘the 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 . . . .’”
Id. at
712, citing id. at 388 (emphasis in the original).
Hawk’s second argument is that Judge Bohm incorrectly applied
the snapshot rule for time-limited exemptions in both Hawk’s case
and in Smith.
The bankruptcy judge in Reed, 184 B.R. at 735, 738,
properly held that after exempt property is removed from the estate
18
The Fifth Circuit in Frost continued, “Under this court’s
precedent, (i) the sale of the homestead voided the homestead
exemption and (ii) the failure to reinvest the proceeds within
six months voided the proceeds exemption, regardless of whether
the sale occurred pre- or post-petition.” Id. at 388.
-23-
it is permanently beyond the reach of the Trustee.
again
finds
that
Hawk
ignores
the
election
of
This Court
Texas
state
bankruptcy law and its different result, the 60-day limit under §
42.0021(c) for rolling over the Liquidated Funds into an exempt
account or reversion of the Funds to the bankruptcy estate, from
application of the federal law where once exempted, the property is
permanently exempted.
Reed relied on federal law, 22 U.S.C. §
522(c), to conclude that this statute immunized the homestead
transformed into proceeds from liability for prepetition debts
permanently.
184 B.R. at 737-38.
Court’s Determination
The Court is aware that there is no controlling case in the
Fifth
Circuit
and
there
are
conflicting
opinions
among
the
bankruptcy courts regarding the permanency of exemptions after the
date they are allowed.
See, e.g., the contrast between Judge
Bohm’s holdings here and in Smith as opposed to those in pre-Frost
In
re
D’Avila,
498
B.R.
at
153-54
(the
debtor
exempted
the
homestead on the date of the petition, but not the proceeds, and
therefor the Proceeds Rule “is not necessarily pictured’ in the
post-petition snapshot”), and post-Frost and -Smith In re DeBerry,
Bankr. No. 14-50406-CAG, Adversary No. 15-05054, 2015 WL 6528024,
at *1 (W.D. Oct. 28, 2015)(holding that proceeds from the postpetition sale of a chapter 7 debtor’s homestead within six months
following the date of sale that are not reinvested do not lose the
-24-
exempt character19). But see Romo v. Montemayor (In re Montemayor),
547 B.R. 684 (S.D. Tex. March 9, 2016)(discussing various diverse
holdings and concluding that the debtor’s failure to reinvest some
of the proceeds in another homestead within the time required by
the Texas statute resulted in those proceeds reverting into the
bankruptcy estate), in accord with Judge Bohm’s opinions.
Given
the
Hawks’
election
to
proceed
under
Texas
state
bankruptcy law, after a de novo review the Court finds Judge Bohm’s
reasoning and his analogy of the Hawks’ IRA account and its
Liquidated Funds under the Texas Property Code § 42.0021 with its
60-day requirement to reinvest the funds to retain their exemption
to a homestead and the proceeds of the homestead’s sale under §
41.001(c) to be highly persuasive. The Fifth Circuit has held that
an “essential element of the exemption must continue in effect even
during the pendency of the bankruptcy.”
In re Frost, 744 F.3d 384,
387 (5th Cir. 2014)(a chapter 13 case), quoting Zibman v. Tow (In
re Zibman), 268 F.3d 298, 301 (5th Cir. 2001)(a chapter 7 case).
It further held that the debtor has a continuing duty to maintain
19
As pointed out in Montemayor, 547 B.R. at 705, the D’Avila
court not only distinguished its facts from those in Zibman and
Frost, but also adopted D’Avila’s approach by concluding that
“the debtor exempted the homestead itself on the date of the
petition, not the proceeds, and therefore the Proceeds Rule ‘is
not ‘necessarily pictured’ in the post-petition snapshot.’ As
such, the court held that the homestead proceeds ‘were never part
of the Debtor’s chapter 7 bankruptcy estate and thus, the Trustee
cannot avoid the purported transfer under § 549.’” Id., citing
DeBerry, 2015 WL 6528024. at *3-4.
-25-
the status quo of exempt property during the pendency of the
bankruptcy case.
If the Debtor fails to do so, the trustee is
entitled to administer assets that were properly claimed exempt as
of the petition date.
Here Judge Bohm, relying on Frost, found
that the funds were removed from an exempt IRA account during the
pendency of the bankruptcy estate for living expenses automatically
became property of the bankruptcy estate once they lost their
exempt status under state law when Hawk failed to meet the state
law’s 60-day reinvestment requirement.
524 B.R. 706, 710-11
(Bankr. S.D. Tex. 2015)(“Once the Liquidated IRA Funds became
nonexempt, the Funds automatically became property of the estate
and the Chapter 7 Trustee was immediately entitled to them.”).
Accordingly the Court
AFFIRMS the Final Judgment of the Bankruptcy Court that
$129,895.76 in proceeds withdrawn from Hawk’s IRA ($133,434.64
withdrawn
from
the
IRA
minus
the
funds
that
Hawk
has
since
delivered to the Trustee) is the property of the bankruptcy estate
and must be turned over to the Trustee.
SIGNED at Houston, Texas, this
29th
day of
August , 2016.
___________________________
MELINDA HARMON
UNITED STATES DISTRICT JUDGE
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