Garcia v. Bassel

• Decision Date: 02 April 2014
• Docket Number: Civil Action No. 4:13–cv–958–O.
• Citation: 507 B.R. 907
• Parties: Osman Javier GARCIA and Elia Mercedez Martinez, Appellants, v. Pamela A. BASSEL, Standing Chapter 13 Trustee, Appellee.
• Court: U.S. District Court — Northern District of Texas

507 B.R. 907

Osman Javier GARCIA and Elia Mercedez Martinez, Appellants,

v.Pamela A. BASSEL, Standing Chapter 13 Trustee, Appellee.

Civil Action No. 4:13–cv–958–O.

United States District Court,

N.D. Texas,

Fort Worth Division.

Signed April 2, 2014.

Patrick D. West, Law Office of Patrick D. West, Fort Worth, TX, for Appellants.

Jason P. Miller, Pamela Arnold Bassel, Fort Worth, TX, for Appellee.

MEMORANDUM OPINION AND ORDER

REED O'CONNOR, District Judge.

This is an appeal from the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division, denying Appellants' proposed modification of their Chapter 13 plan. Before the Court are the briefs of Osman Javier Garcia and Elia Mercedez Martinez (collectively, “Appellants”) and Standing Chapter 13 Trustee Pamela A. Bassell (“Appellee”). Having reviewed the parties' briefs, the record in this case, and the applicable law, the Court finds that the Bankruptcy Court's holdings should be and are hereby AFFIRMED.

I.

Appellants filed a Chapter 13 voluntary petition on February 28, 2011. R. vol. 2 (Pet.), at 72, ECF No. 1–2. Appellants claimed their homestead as exempt under Texas law. Id. (Schedule C), at 94. There was no objection to Appellants' homestead exemption, and their Chapter 13 plan was confirmed on July 13, 2011. Id. (Order Confirmation) at 135–38. Thereafter, Appellants filed an application to sell their homestead, which was granted on November 5, 2013. Id. (Appl.), at 152–156; id. (Order), at 174–75. After Appellants sold their homestead, they sought to modify their Chapter 13 plan. Id. (Modification), at 185–88. Appellants' modification would allow Appellants to retain the proceeds from the sale of their homestead. The Appellee objected to Appellants' modification contending it was not proposed in good faith under 11 U.S.C. § 1325(a)(3), and that it did not meet the “best interest of the creditors test” under 11 U.S.C. § 1325(a)(4) because the plan did not provide for the distribution of the homestead proceeds to Appellants' unsecured creditors. Id. (Trustee's Am. Objection), at 191.

Ultimately, the Bankruptcy Court denied the modification concluding that the homestead proceeds lost their exempt status when the Appellants failed to reinvest the proceeds in a new homestead within six months. See In re Garcia, 499 B.R. 506, 510–14 (Bankr.N.D.Tex.2013)¹. Accordingly, under the § 1325(a)(4) hypothetical liquidation test, the proceeds should be distributed to Appellants' unsecured creditors. Because the modification did not provide for such a distribution, the Bankruptcy Court concluded that the proposed modification failed to satisfy § 1325(a)(4).

Appellants now appeal the Bankruptcy Court's denial of their modification. See id. (Notice of Appeal), 37–38. The central issues on appeal are: (1) whether the proceeds from the sale of Appellants' homestead were non-exempt, and thereby subject to distribution to Appellants' creditors, when the six-month exemption period set forth in Texas Property Code § 41.001(c) expired; and (2) whether the doctrine of res judicata prevented Appellee from objecting to Appellants' retention of the proceeds after six months when Appellee failed to object to Appellants' motion to sell their homestead. See generally Appellant's Br. 5–13, ECF No. 4.

Appellants filed their brief on January 16, 2014, and Appellee filed her brief in response on February 11, 2014 (ECF Nos. 4 & 7). Appellants did not file a reply brief. The Court also ordered the parties to file supplemental briefs addressing the recent Fifth Circuit case, In re Frost, 744 F.3d 384 (5th Cir.2014), which the parties did on March 21, 2014 (ECF Nos. 10 & 11). Accordingly, this matter has been fully briefed and is ripe for determination. The Court has jurisdiction over this appeal under 28 U.S.C. § 158(a)(1) and reviews the Bankruptcy Court's factual findings for clear error and its conclusions of law and mixed questions of fact and law de novo. In re Mercer, 246 F.3d 391, 402 (5th Cir.2001) (citing Randall & Blake, Inc. v. Evans (Matter of Canion), 196 F.3d 579, 584 (5th Cir.1999)).

II.

This appeal turns on the intersect between the Bankruptcy Code and the Texas exemption scheme. Accordingly, a brief summary of the applicable law follows.

Chapter 13 of the Bankruptcy Code allows individuals with regular income to adjust their debts by making payments to both secured and unsecured creditors over an extended period of time pursuant to a payment plan. See 8 Collier on Bankruptcy ¶ 1300.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). In a Chapter 13 proceeding, a trustee is appointed who, among other duties, collects payments from the debtor to disburse to the creditors. See11 U.S.C. § 1302; In re Maddox, 15 F.3d 1347, 1355 (5th Cir.1994). Only the debtor may file the payment plan with the bankruptcy court, and the plan is capped at three or five years. See11 U.S.C. § 1321; id. § 1322(d). After conducting a hearing, the bankruptcy court must confirm the plan if it meets all the criteria of § 1325(a), except as provided in § 1325(b). See11 U.S.C. § 1325; 8 Collier on Bankruptcy ¶ 1325.01.

After confirmation, and at any time before the completion of the plan, the debtor may ask the bankruptcy court to modify the plan. 11 U.S.C. § 1329. If, after notice and hearing, the bankruptcy court determines that the modification complies with Chapter 13, the modified plan controls. See id.; 8 Collier on Bankruptcy ¶ 1329.02. If the modification does not comply with § 1325, the bankruptcy court may deny the modification. See11 U.S.C. § 1329(b)(1). The § 1325(a) requirement at issue in this case is the best interest of the creditors test. See11 U.S.C. § 1325(a)(4). This section protects creditors with allowed unsecured claims by requiring the plan to distribute property in an amount not less than the amount that would be distributed if the debtor's estate was liquidated under Chapter 7.²See11 U.S.C. § 1325(a)(4); 8 Collier on Bankruptcy¶ 1325.05. In short, creditors with allowed unsecured claims may be no worse off under Chapter 13 than they would be under Chapter 7.

Although this appeal arises from a Chapter 13 proceeding, § 1325(a)(4) requires the Court to look to Chapter 7 in determining whether the Chapter 13 plan or modification adequately provides for the unsecured creditors. The commencement of a bankruptcy proceeding—regardless of the Chapter—creates an estate that is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a). In Chapter 7, the debtor's non-exempt assets—property of the estate under § 541(a)—are liquidated and distributed to the creditors. See 6 Collier on Bankruptcy ¶ 700.01. Thus, if an asset is exempt, it is not subject to the hypothetical liquidation test of § 1325(a)(4).

Under § 522 of the Bankruptcy Code, unless a state has opted out of the federal exemptions, a debtor may chose between the exemptions of its state or those set forth in § 522(d).³ Appellants elected the Texas exemptions. R. vol. 2 (Schedule C), at 94, ECF No. 1–2. A debtor may not pick and choose among state and federal exemptions; rather, the debtor must elect either the federal or the state exemption scheme in its entirety. See In re Bradley, 960 F.2d 502, 506 n. 2 (5th Cir.1992) (citing In re Dyke, 943 F.2d 1435, 1438 (5th Cir.1991)).

The relevant Texas exemptions are found in Chapters 41 and 42 of the Texas Property Code. Both Chapter 41 and the Texas constitution address the homestead exemption. Tex. Prop.Code Ann. §§ 41.001–.024; Tex. Const. art. XVI, § 50. In Texas, unlike the federal scheme, the homestead itself is exempt, with no limit on the debtor's equity interest. CompareTex. Prop.Code Ann. § 41.001(a) (“A homestead and one or more lots used for a place of burial of the dead are exempt from seizure for the claims of creditors except for encumbrances properly fixed on homestead property.”), with § 11 U.S.C. 522(d)(1) (exempting “[t]he debtor's aggregate interest, not to exceed $22,9751 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence”). Additionally, the proceeds from the sale of the homestead are exempt for six months after the sale. Tex. Prop.Code Ann. § 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.”). Thus, the proceeds exemption is a disappearing exemption of a fixed duration. Once the six months expire, debtors must rely on a different exemption to protect any proceeds from the sale of their homestead from their creditors.⁴

III.

Appellants contend the Bankruptcy Court erred in denying their proposed plan modification for failing to meet the § 1325(a)(4) best interest of the creditors test. The Bankruptcy Court concluded that the modification would distribute property in an amount less than what would be distributed if the Appellants' estate was liquidated under Chapter 7 because the homestead proceeds had lost their exempt status and, therefore, would be distributed under a hypothetical liquidation. Because Appellants' modification would allow Appellants to retain the proceeds, it failed to satisfy § 1325(a)(4). Thus, the central issue on appeal is whether Appellants' homestead proceeds lost their exempt status because Appellants did not reinvest the proceeds in a new homestead within six months.⁵ Within this issue, Appellants raise two arguments: (1) exemptions are determined solely by the facts that existed on the date of the petition and (2) exemptions are not re-evaluated when a Chapter 13 plan is modified. See generally Appellants' Br. 5–12, ECF No. 4. Both arguments are foreclosed by a recent decision of the United States Court of Appeals for the Fifth Circuit.

In In re Frost, the Fifth Circuit held that if a Chapter 13 debtor sells his homestead before or after confirmation of the plan...