Wife's Homestead Claim Remains in Limbo With No Answer From Fifth Circuit

The plight of the non-filing spouse who stands to lose an interest in the homestead is a trap that is easy to overlook.   Under 11 U.S.C. Sec. 541(a)(2), when one spouse files bankruptcy, all joint management community property enters the bankruptcy estate.    This means that if the filing spouse elects not to claim the homestead as exempt in favor of selecting other property or is subject to a cap, the non-filing spouse may lose her interest in the property without having any say in the matter.     

I have previously written about the Odes Ho Kim case here.   In the Kim case, an involuntary petition was filed against Mr. Kim.    The creditors then sought to impose a cap upon his homestead exemption.  Mrs. Kim intervened asserting that she had an independent interest in the homestead.   The Bankruptcy Court and the District Court ruled that Mr. Kim was subject to a cap on the homestead exemption and that Mrs. Kim had no separate interest in the property.    If both spouses had filed, they would have been entitled to two times the amount of the cap.   However, with Mrs. Kim sitting outside of bankruptcy, her interest in the homestead was completely divested by the bankruptcy filing.

Up until this point, the result of the case illustrated an unfair result for the non-filing spouse, but one which was based on an arguable reading of the code.    However, things got interesting after the case was appealed to the Fifth Circuit.    On September 10, 2010, Pronske & Patel and Andrews & Kurth appealed the District Court ruling on behalf of the Kims.    The case was argued to Judges Higginbotham, Owens and Haynes on July 8, 2011.   Now, almost two years have passed since oral argument without a ruling.   According to the Bar Association for the Fifth Circuit, the case is the oldest bankruptcy case still under advisement and is the second oldest case of any kind under advisement.    

While speculation about the reason for the long gestation of the opinion is not worth much, I will engage in some anyway.   Both Judges Owens and Haynes sat on Texas state benches before being named to the Fifth Circuit.   (Indeed, Judge Owens was on the Texas Supreme Court).   Texas has a long tradition of protecting homestead rights.   Additionally, according to a recent book on the history of the Texas Supreme Court (Haley,The Texas Supreme Court: A Narrative History 1836-1986, University of Texas Press 2013),  Texas also was also the first state to recognize property rights for married women.    It may be that the judges are struggling with how to reconcile these strong Texas state law protections with the Bankruptcy law applicable here.   It will be interesting to see how the case is finally resolved.

A Warning Against Do It Yourself Legal Forms

A debtor avoided losing her home in a recent case illustrating the perils of do it yourself legal forms.    Lowe v. Vazquez, No. SA-12-CV-00399-DAE (W.D. Tex. 3/28/13).    

The Debtor paid $10 to download a living trust form while she was living in Nevada.   When she moved to Texas, she conveyed her homestead to the trust.   Her stated reason for setting up the trust was:

 The one and only reason I created the Living Trust after my divorce was to be sure my son could have access to any assets I owned at the time I die and to avoid probate, so I named my son as Successor Trustee. Probate proceedings in Nevada are lengthy and costly and I only wanted to make things easier for him when I die.

When she filed bankruptcy in Texas, the trustee objected to her exemption on the basis that title to the home was vested in the trust.   The Bankruptcy Court denied the objection.    In re Vazquez, 2012 Bankr. LEXIS 642 (Bankr. W.D. Tex. 2012).    

On appeal, the Court found that notwithstanding some confusing language in the pre-printed form, that the Debtor was the sole beneficiary of the trust.   As the sole trustee and sole beneficiary, a valid trust had not formed as of the petition date and the property remained vested in the Debtor.

U.S. District Judge David Ezra had some insightful words for individuals who might want to save money by creating their own legal documents.

This case is a poster child for the proposition that one should not rely on prepaid legal forms with boilerplate language for important legal matters. Had Debtor passed away, it is clear to the Court that the document would not have accomplished what she hoped; indeed, all of the tax consequences she hoped to avoid would have been visited upon her son. It is also clear that a properly drafted trust prepared by a competent lawyer would have accomplished the goal she sought in the first instance.

Opinion, p. 8, n. 2.

I cannot say it any better than Judge Ezra.    If you own a Texas homestead, do not EVER convey it to a trust.   You may place your homestead exemption at risk for no good reason.    The Debtor in this case did not lose her homestead.   However, she had to defend an objection to exemption and an appeal at her own expense.
 

Disclosure:   My firm represented Karen Vazquez in the appeal.    

The Housing Crash and Bounce: Infographic

The following infographic provides an overview of the real estate crash in the United States over the last few years, and provides some perspective on how big the ups and downs have been.

 
Riding the Trillion-Dollar Real Estate Recovery Roller Coaster.

Reprinted from RealEstate.com

Kelsey & Trask, P.C. provides this graphic for informational purposes only. We do not endorse nor claim endorsement from the source site or organization. Kelsey & Trask, P.C. is not responsible for any information contained therein, unless indicated specifically on that site.