Rubarts, Matter of

• Decision Date: 12 March 1990
• Docket Number: No. 89-2364,89-2364
• Citation: 896 F.2d 107
• Parties: In the Matter of Bobby R. RUBARTS and Naomi Rubarts, Debtors. Bobby R. RUBARTS and Naomi Rubarts, Appellants, v. FIRST GIBRALTAR BANK, FSB, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 107

896 F.2d 107

In the Matter of Bobby R. RUBARTS and Naomi Rubarts, Debtors.

Bobby R. RUBARTS and Naomi Rubarts, Appellants, v. FIRST GIBRALTAR BANK, FSB, Appellee.

No. 89-2364.

United States Court of Appeals,

Fifth Circuit.

March 12, 1990.

Elizabeth A. Bates, Mankoff, Hill, Held & Goldburg, Dallas, Tex., for appellants.

Walter H. Dunlap, Jr., Jordan Dunlap & Prather, Edmund R. Wood, Stephen F. Shaw, Stewart Title, Chancellor & Wood, G. Dennis Sullivan, Dallas, Tex., for First Texas Sav. Ass'n.

Appeal from the United States District Court for the Eastern District of Texas.

Before GEE, JONES, and SMITH, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Plaintiffs appeal from a judgment declaring a vendor's lien and deed of trust lien on their residence enforceable. Because we disagree with the district court's conclusion that the evidence in the record is sufficient to strip from the plaintiffs the homestead protections afforded by the Texas Constitution, we reverse and remand.

I.

In 1968, plaintiffs Bobby and Naomi Rubarts obtained a construction loan from Sherman Savings and Loan Association ("Sherman Savings") for the principal sum of $34,700 to build a home at 915 Western Hills, Sherman, Texas. The "Western Hills residence." After the house was completed, the Rubartses executed a first mortgage note and lien in favor of Sherman Savings. Sherman Savings later became First Texas Savings Association ("First Texas"). ¹

In 1979, Bobby Rubarts, acting in his capacity as president of the Rubartses' wholly-owned corporation, Diversified Industries, Inc. ("Diversified"), approached First Texas about securing a loan for the development of other property they owned, known as the "Louella property." Diversified badly needed funds to develop the Louella property, but the Rubartses found that First Texas would not accept any of the company's assets as collateral, since those assets already were too heavily encumbered. The Rubartses then arranged to have Diversified purchase the Western Hills residence in order for Diversified to secure the desired loan from First Texas.

Although the property was transferred to Diversified, the Rubartses continued to use it as their primary residence and maintained the insurance policy on the house. Prior to the conveyance, a vice-president of First Texas, Carney Wilson, inspected and appraised the property, aware that it was the Rubartses' home. After Diversified received the loan proceeds, it paid off the prior first lien on the property, which First Texas itself held, and used most of the remainder of the loan proceeds to pay off some of Diversified's short-term indebtedness.

Sometime after March 1979, the Rubartses indicated to First Texas that they wished to reconvey their residence for tax purposes, as they needed the federal income tax interest deduction from their personal income tax. First Texas explained that in order to do so, they would need to negotiate a new loan. However, noticing that the deed of trust and conveyance did not preclude a reconveyance, the Rubartses did so anyway; in June 1980, Diversified, acting through the Rubartses as officers, reconveyed the property to them individually.

The Rubartses continued to live in the residence until 1985. The 1979 note has been in default since September 1, 1985. In September 1984 Bobby Rubarts had declared personal bankruptcy and had claimed the home as exempt under Texas's homestead provisions.

The Rubartses brought this action to declare First Texas's deed of trust lien on their residence unenforceable. ² In a memorandum opinion, the district court held that the First Texas lien on the property was valid, despite the Rubartses' secret designs to reconvey.

II.

We first consider the posture of this case in terms of the Bankruptcy Code. In addition to holding that Texas law does not bar a judgment for debt and foreclosure by First Texas against the Rubartses, the district court held that the debt is non-dischargeable within the meaning of section 523(a)(2)(A) of the Bankruptcy Code, 11 U.S.C. Sec. 523(a)(2)(A). However, at oral argument First Texas acknowledged that the determination of dischargeability was premature, and we agree, thanking First Texas for its candor.

In an action under chapter 13 of the Bankruptcy Code, a debtor cannot receive a discharge until either (i) the chapter 13 plan is successfully completed or (ii) the debtor has applied for a hardship discharge under 11 U.S.C. Sec. 1328(b). Under both the express wording of section 1328(a) and Bankr.R. 4007(d), an objection to dischargeability cannot be filed nor heard prior to the occurrence of one of those two events. See In re Heincy, 858 F.2d 548, 550 (9th Cir.1988). We note, as well, that under section 1328(b) a debtor cannot seek a hardship discharge until after confirmation.

Thus, the issue of dischargeability is not ripe, irrespective of our determination regarding the validity of the homestead claim. Nonetheless, the homestead issue is properly before us, as the parties actively litigated the validity of the lien in terms not only of dischargeability but also in terms of the claim and cross-claim regarding the lien's validity and First Texas's right to foreclose.

III.

The Rubartses contend that the deed of trust lien created in favor of First Texas was invalid in that it violated the homestead provisions of the Texas Constitution. ³ They argue that although they conveyed their home to Diversified, First Texas acknowledged that the transaction was merely a pretense to circumvent the Texas homestead laws. Indeed, the Rubartses assert that they never had any intention of relinquishing their homestead rights.

As the challenger to the Rubartses' homestead status, First Texas has the burden of demonstrating that their homestead rights have been terminated. McFarland v. Rousseau, 667 S.W.2d 929, 931 (Tex.App.--Corpus Christi 1984, no writ). ⁴ Once it is established that the property is a homestead, there is a presumption that the homestead status continues unless terminated. Sullivan v. Barnett, 471 S.W.2d 39, 43 (Tex.1971). Under Texas law, one method by which the homestead right may be terminated is by abandonment. Hollifield v. Hilton, 515 S.W.2d 717 (Tex.Civ.App.--Fort Worth 1974, writ ref'd n.r.e.). However, there is no evidence in this record that the Rubartses' homestead rights were ever terminated by abandonment; they lived at the residence continuously until 1985.

IV.

First Texas, however, relies upon an estoppel theory, contending that the Rubartses' absolute conveyance of the property estops them from asserting their homestead rights. However, in a recent case in which we undertook a thorough review of Texas homestead law, we observed that a homestead claimant is not estopped to assert his homestead rights, even if declarations have been made to the contrary, as long as the claimant is in actual possession of the homestead. See In re Niland, 825 F.2d 801 (5th Cir.1987).

[N]o estoppel can arise in favor of a lender who has attempted to secure a lien on homestead in actual use and possession of the family, based on declarations of the husband and wife made orally or in writing contrary to the fact. To hold otherwise would practically abrogate the Constitution.

Id. at 808 (quoting Texas Land & Loan Co. v. Blalock, 76 Tex. 85, 89, 13 S.W. 12, 13 (1890)). Niland involved a debtor's misrepresentations as to which of his properties was his homestead. The question we address in the instant appeal, however, is whether the Rubartses' execution and recordation of a warranty deed conveying their residence in fee simple to Diversified is sufficient to estop their homestead claim.

The answer to this question is found in Texas authority dating well into the nineteenth century. First Texas would have us hold that a lienholder need only rely upon the recorded warranty deed as evidence of the grantor's intent to effect an absolute conveyance and that the Rubartses are estopped from making their homestead claim. First Texas, as did the district court, relies heavily upon the venerable case of Eylar v. Eylar, 60 Tex. 315 (1883), and its progeny. ⁵

In Eylar, the court considered the homestead claim of J.F. Eylar and his wife, who conveyed their saddle shop and residence by general warranty deed to O.A. Eylar in return for consideration recited as $500. In fact, however, the consideration paid by O.A. Eylar was not $500, but instead took the form of the repayment of J.F. Eylar's debts to one Shelton and one Padgitt. The Eylars, therefore, claimed that the conveyance made to O.A. Eylar was in reality and by agreement a mortgage; they gave O.A. Eylar a deed to hold as collateral in exchange for O.A.'s consolidation and repayment of J.F.'s debts.

Meanwhile, O.A. conveyed the property to his mother, Ann Eylar, in return for promissory notes totaling $500. It was against Ann whom J.F. Eylar and his wife asserted their homestead claim, and it was Ann who successfully claimed her status as an innocent purchaser. The court held that while the Eylars' continued possession of the property was sufficient, as it is in all cases, to put purchasers on inquiry notice,

[w]e are of the opinion, under the facts of this case that a purchaser from O.A. Eylar was not bound to inquire of the appellees [J.F. Eylar and wife] what right they had in the land; that the inquiry was sufficiently prosecuted; prosecuted as far as a prudent man, having a due regard to the rights of others, and to his own protection, would be bound to prosecute it, when he looked to the record and there found that O.A. Eylar was declared by the very persons in possession to be the true and absolute owner of the land.

Id. at 320.

However, the court made much of the peculiar facts of the case, especially Ann Eylar's ignorance of the scheme, arranged between J.F. Eylar and O.A. Eylar, to repay Padgitt and Shelton. It observed that J.F. Eylar and his wife paid rent to O.A. Eylar and then...