Davis, Matter of, 95-11112

• Decision Date: 12 February 1997
• Docket Number: No. 95-11112,95-11112
• Citation: 105 F.3d 1017
• Parties: , 37 Collier Bankr.Cas.2d 735, 30 Bankr.Ct.Dec. 585, Bankr. L. Rep. P 77,277, 11 Tex.Bankr.Ct.Rep. 100 In the Matter of Thomas Cullen DAVIS and Karen Joyce Davis, Debtors. Sandra DAVIS, Appellant, v. Thomas Cullen DAVIS, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1017

105 F.3d 1017

65 USLW 2540, 37 Collier Bankr.Cas.2d 735,

30 Bankr.Ct.Dec. 585,

Bankr. L. Rep. P 77,277, 11 Tex.Bankr.Ct.Rep. 100

In the Matter of Thomas Cullen DAVIS and Karen Joyce Davis, Debtors Sandra DAVIS, Appellant, v. Thomas Cullen DAVIS, Appellee.

No. 95-11112.

United States Court of Appeals Fifth Circuit.

Feb. 12, 1997.

St. Clair Newbern, III, Fort Worth, TX, for appellant.

Ronald Ray Payne, Hesse & Jones, Dallas, TX, for appellee.

Appeals from the United States District Court for the Northern District of Texas.

Before DUHE and DENNIS, Circuit Judges, and DUVAL ¹, District Judge.

DENNIS, Circuit Judge:

As a general rule the Bankruptcy Code provides that property exempted from the estate is not liable for any of the debtor's prepetition debts. 11 USC § 522. The basic question in this case is whether § 522(c)(1) creates an exception which authorizes the seizure of exempted property to collect nondischargeable debts owed to the debtor's former spouse for alimony, maintenance, and child support. The bankruptcy and district courts held that a judicial lien securing such a debt against exempted property is nonavoidable but that the former spouse may not levy upon the exempted property to pay the debt. We vacate the judgments and remand the case to the bankruptcy court for further proceedings. The Bankruptcy Code provides that an individual debtor may elect to exempt from property of the estate any property that is exempt under state, local, and nonbankruptcy federal law, § 522(b); and that property so exempted is not liable during or after the case for any debt of the debtor that arose, or is treated as if it had arisen, before the commencement of the case, except, inter alia, any debt to a former spouse for alimony, maintenance, or child support. §§ 522(c)(1) & 523(a)(5). The text, purpose and history of § 522(c)(1) indicate that it creates an exception to § 522 that enables the former spouse of a debtor to levy upon the debtor's otherwise exempt property to enforce payment of alimony, maintenance, and child support debts.

Background

Appellant Sandra Davis (Sandra) and her former husband, Thomas Cullen Davis (Thomas), the debtor in bankruptcy, were divorced in 1968. Pursuant to their property settlement, support and child custody agreement, and divorce judgment, Thomas agreed to make monthly payments to Sandra through January 1, 1991, and thereafter to pay her other sums subject to certain contingencies. Thomas made all payments until he filed bankruptcy in 1987. In 1979 Thomas married Karen Joyce Davis, also a debtor in this action. In 1984 Thomas acquired the property that he claims as his homestead. The property is unencumbered and valued at $500,000.

Thomas and Karen filed a voluntary chapter 7 petition in 1987, which was converted to a chapter 11 case. They elected to exempt from the estate property that was exempt under the state homestead exemption laws.

In an adversary bankruptcy court proceeding, Thomas sought a determination that his indebtedness pursuant to the property settlement agreement and divorce Judgment was dischargeable. Sandra counterclaimed, asserting that the indebtedness was nondischargeable under § 523(a)(5). In 1991 the parties compromised and acceded to a final consent judgment by the bankruptcy court declaring the debt to be for nondischargeable alimony, maintenance, and child support under § 523(a)(5) and awarding Sandra a principal sum of $250,000 plus $50,000 in attorney's fees.

Sandra moved in bankruptcy court for turnover relief ordering Thomas to execute a warranty deed conveying the homestead to her because she was otherwise unable to enforce the judgment. After a hearing, the bankruptcy court concluded that Sandra could not levy upon Thomas's exempted homestead property to collect her judgment for alimony, maintenance, and child support, holding that the Bankruptcy Code does not preempt the state constitutional homestead exemption law. In re Davis, 170 B.R. 892, 898 (Bankr.N.D.Tex.1994). The bankruptcy court also held that Sandra was not entitled to turnover relief on state law grounds. We pretermit discussion of that issue, however, because it is rendered moot by our disposition of this case. Sandra appealed. The district court affirmed. In re Davis, 188 B.R. 544 (N.D.Tex.1995). Sandra appealed to this court.

Standard of Review

This appeal presents solely legal questions which this court reviews de novo. Henderson v. Belknap (Matter of Henderson), 18 F.3d 1305, 1307 (5th Cir.) (citing Haber Oil Co. v. Swinehart (In re Haber Oil Co.), 12 F.3d 426, 434 (5th Cir.1994)), cert. denied, 513 U.S. 1014, 115 S.Ct. 573, 130 L.Ed.2d 490 (1994).

Discussion

The commencement of a voluntary bankruptcy case creates an estate comprised of legal and equitable interests of the debtor in property, wherever located and by whomever held. § 541. Generally, an individual debtor may exempt property from the estate that falls within one of two exemptible categories referred to by the Bankruptcy Code in § 522(b): (1) a category of eleven classes of property specified by the Bankruptcy Code itself in § 522(d); and (2) a category comprised of "any property that is exempt under [nonbankruptcy] Federal law ... or State or local law....". § 522(b)(2)(A). In exempting property from the estate, the debtor must use either the first, or in the alternative, the second category. If the state law that is applicable to the debtor specifically does not authorize this election, however, that state "opts out" of the § 522(d) list. When a state opts out, its debtors are limited to the exemptions provided by the second category, i.e., by nonbankruptcy federal, state and local law. See Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 1835, 114 L.Ed.2d 350 (1991). In the present case, Thomas and Karen, his present co-debtor spouse, chose to have the homestead property exempted from the estate under the second category, which uses state, local and nonbankruptcy federal law to identify and quantify the property to be exempted. § 522(b)(2)(A).

Property that is properly exempted under § 522 is, as a general rule, immunized by § 522(c) against liability for prebankruptcy debts. Owen v. Owen, Id. There are, however, several significant exceptions. Section 522(c) reads, in pertinent part, as follows:

(c) 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 the case, except--

(1) a debt of a kind specified in section 523(a)(1) or 523(a)(5) of this title;

(2) a debt secured by a lien that is--

(A)(i) [ & ii] [not avoided or void under specified provisions of this title]; or

(B) a tax lien, notice of which is properly filed; or (3) a debt of a kind specified in section 523(a)(4) or 523(a)(6) of this title owed by an institution affiliated party of an insured depository institution to a Federal depository institutions regulatory agency acting in its capacity as conservator, receiver, or liquidating agent for such institution.

The debts excepted from the protection of § 522(c), for which exempted property remains liable, are: (1) nondischargeable debts for alimony, maintenance, and child support, § 523(a)(5), and taxes, § 523(a)(1); (2) valid liens that may not be avoided under the trustee's powers and certain tax liens in exempt property that are not affected by the bankruptcy; and (3) nondischargeable debts for fraud and willful injury owed to a federal depository institutions regulatory agency acting as a conservator, receiver, or liquidating agent under §§ 523(a)(4) & (6). The debt at issue in the present case is a debt of a kind specified in § 523(a)(5), which makes nondischargeable any debt "to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record ... or property settlement agreement...." Id. Accordingly, property that is exempted under § 522 and therefore immune from all other liability, nonetheless remains liable for and may be seized to pay alimony, maintenance, and child support debts and other obligations excepted from § 522(c) protection. See Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 1835, 114 L.Ed.2d 350 (1991) ("Property that is properly exempted under § 522 is (with some exceptions) immunized against liability for prebankruptcy debts.") (emphasis added); Walters v. U.S. Nat. Bank of Johnstown, 879 F.2d 95, 97 (3d Cir.1989) (tax and alimony and child support debts "are neither dischargeable nor exemptible."); Resnick, Weintraub & Resnick Bankruptcy Law Manual p 4.08 at 4-54 (4th ed. 1996) ("Exempt property may be seized to pay nondischargeable tax liabilities and obligations to pay alimony, maintenance, or support."); Epstein et. al., Bankruptcy, § 8-1 n. 17 (1992) ("Exemptions are not effective, however, with respect to two types of nondischargeable debts: tax debts and debts for alimony, maintenance, or child support."); Campbell et al., Creditors' Rights Handbook, A Guide to the Debtor-Creditor Relationship, § 20.03 (1993) ("Exempt property may be used to satisfy certain tax debts or for obligations for child support or alimony."); Epstein & Nickles, Debt, Bankruptcy, Article 9 and Related Laws, 759 (1994) ("After bankruptcy, creditors with domestic claims excepted from discharge by section 523(a)(5) will have recourse to exempt property.").

This reading is in accord with the legislative history of § 522(c). Referring to that section the Senate report, with which the House report is virtually identical, reads:

Subsection (c) insulates exempt property from prepetition claims other than tax claims (whether or not dischargeable), and other than alimony, maintenance, or support claims that are excepted from discharge. The...