Hardage v. Herring Nat. Bank, 87-1578

• Decision Date: 22 February 1988
• Docket Number: No. 87-1578,87-1578
• Citation: 837 F.2d 1319
• Parties: Bankr. L. Rep. P 72,206 In the Matter of Michael Don HARDAGE, Appellant, v. HERRING NATIONAL BANK, Appellee. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1319

837 F.2d 1319

Bankr. L. Rep. P 72,206

In the Matter of Michael Don HARDAGE, Appellant, v. HERRING NATIONAL BANK, Appellee.

No. 87-1578

Summary Calendar.

United States Court of Appeals Fifth Circuit.

Feb. 22, 1988.

Marc McBeath, Harris & McBeath, Abilene, Tex., for appellant.

Jeff Johnson, Abilene, Tex., for appellee.

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

Before GEE, GARWOOD and JONES, Circuit Judges.

GARWOOD, Circuit Judge:

In this Chapter 7 proceeding the bankruptcy trustee sold to appellee Herring National Bank (the Bank) the bankruptcy estate's interest in an unexempted, immature cotton crop planted by the debtor, appellant Michael Don Hardage (Hardage). After the sale, Hardage attempted to claim the cotton as exempt. The bankruptcy court disallowed the exemption and entered a personal judgment against Hardage and in favor of the Bank based on estimates of the value of the mature cotton. The district court affirmed, Hardage appeals, and we reverse and remand.

Facts and Proceedings Below

During the end of June 1986, Hardage planted cotton on approximately one hundred sixty-six acres of land in Wilbarger County, Texas. Sixty-eight acres of the cotton were planted on a one hundred thirty-three acre tract of land that Hardage owned; ninety-eight acres were planted on land that he leased from his aunt, the Mueller Place, apparently for the standard rental of one-fourth of the harvested crop. It is the Mueller Place cotton that gives rise to the present controversy.

On July 8, 1986, Hardage filed a petition for relief under Chapter 7 of the Bankruptcy Code. He designated his one hundred thirty-three acre tract as an exempt homestead pursuant to 11 U.S.C. Sec. 522(b); Tex. Const. art. XVI, Secs. 50, 51; Tex.Prop.Code Ann. Secs. 41.001(a)(1), .002(a) (Vernon 1984). He did not, however, claim any portion of the Mueller Place cotton as exempt, and his schedule of assets did not mention the Mueller Place cotton and showed no unexempt assets of any value. At the initial creditors meeting, the Bank, which was one of the main creditors, inquired about the Mueller Place lease. Hardage responded that the lease had "almost no value."

The Bank subsequently inspected the lease, determined that the immature cotton had value, and offered the trustee $500 for the estate's interest in the cotton. The trustee notified the interested parties of his intent to sell the estate's interest in the Mueller Place cotton. At the sale, Hardage bid in excess of $500 but less than the winning bid of $2,150 tendered by the Bank. The trustee executed a "Bill of Sale" on November 6, 1986, that purported to sell, without any warranties, "[a]ll of the estate's interest in the Debtor's 1986 farming crop, crop proceeds and all other appurtenances thereto."

Four days later Hardage filed an amendment to his schedule of exempt property, claiming a further homestead exemption on sixty-seven acres of the ninety-eight acres of cotton planted on the Mueller Place. ¹ He estimated that the sixty-seven acres of cotton, which he previously estimated to be worthless, had a value of $4,000. He also moved for a determination of the estate's interest in the crop. He estimated that it would be ready for harvest on December 15. The bankruptcy court held a hearing on Hardage's motion on December 1, 1986, and ordered Hardage to submit documentation showing his expenses and receipts. Hardage submitted a brief and some documentation on December 24, 1986. He argued that the Bank "stands in the shoes of the Trustee" and that if the bankruptcy court allowed the exemption, he should receive the proceeds from the sale of the mature cotton. He did not provide receipts or other documentation showing the sale price of the cotton because, despite his earlier prediction that the cotton would be ready for harvest in December, he did not harvest it until the middle of February 1987. However, he did not explain to the bankruptcy court why he did not provide the receipts.

The bankruptcy court, entered its memorandum and order on February 4, 1987, In re Hardage, 69 B.R. 681 (Bankr.N.D.Tex.1987). The court denied the exemption for the sixty-seven acres of Mueller Place cotton. The bankruptcy court reasoned that when the Bank purchased the unexempted cotton, it was the property of the estate and therefore could be sold by the trustee. Finding that the Bank had detrimentally relied on Hardage's original exemptions schedule when purchasing the cotton, the bankruptcy court held that under In re Williamson, 804 F.2d 1355 (5th Cir.1986), it could not allow Hardage to amend his exemptions. Turning to the problem of valuation, the court ruled that because Hardage's "brief does not contain full information and is not intelligible," it would determine the cotton's value based on the Projections of Expenses and Crop Proceeds of the Agricultural Stabilization and Conservation Service (ASCS), which Hardage submitted. Using those figures and allowing only Hardage's post-petition expenses, the bankruptcy court determined that the Bank was entitled to $4,165 ($42.50 x 98 acres) for the cotton. The court also ruled that the Bank was entitled to 98/166 of the federal government agency Payment-in-Kind payments. The bankruptcy court entered judgment on its findings, including a personal judgment against Hardage and in favor of the Bank on the $4,165 finding.

Two weeks later, Hardage moved to clarify the bankruptcy court's order. He claimed that he had not been able to sell the cotton crop for the amounts projected by the ASCS. He also requested the bankruptcy court to redetermine the amount to which the Bank was entitled in light of the rental due his aunt. The bankruptcy court denied his motion, not addressing this latter argument and finding that his attempt to show the actual purchase price was tardy. Hardage subsequently filed a motion to reconsider in which he explained that he did not harvest the Mueller Place cotton until after the bankruptcy court entered its judgment based upon the ASCS projections. He did not explain why he had not included this pertinent information in his earlier brief and motion. We assume that this motion was denied, although the record does not expressly reflect whether the bankruptcy court ruled on it.

Hardage then appealed to the district court. The district court affirmed on the basis of the bankruptcy court's reasoning. This appeal followed.

Discussion

Hardage builds his argument on two uncontested holdings of the bankruptcy court. First, under Texas law he could claim sixty-seven acres of Mueller Place cotton as part of his exempt homestead. Second, he had the right to amend his schedule of exemptions "at any time before the case is closed." Bankr.Proc.R. 1009. See In re Williamson, 804 F.2d 1355, 1358 (5th Cir.1986). Hardage argues that the bankruptcy court, therefore, erred in not allowing his amended exemption. He implies but does not expressly argue that if the bankruptcy court had allowed the amendment, he could keep the proceeds from the February sale of sixty-seven acres of the mature Mueller Place cotton.

Hardage, however, misunderstands the effect of his delay in amending his schedule of exemptions. Because Hardage had not yet claimed the exemption, the immature Mueller Place cotton was the property of the estate when the bankruptcy trustee sold it to the Bank. 11 U.S.C. Secs. 522(b), 541(a)(1). See Matter of Goff, 706 F.2d 574, 578-79 (5th Cir.1983); Payne v. Wood, 775 F.2d 202, 204 (7th Cir.1985), cert. denied 475 U.S. 1085, 106 S.Ct. 1466, 89 L.Ed.2d 722 (1986). See generally 4 Collier on Bankruptcy p 541.02 (15th ed. 1987). The trustee clearly was empowered to sell the property of the estate. 11 U.S.C. Secs. 363(b), (c), 704(1). "Once the property enters the estate, it does not matter whether the property changes form." Payne, 775 F.2d at 204 (citing 11 U.S.C. Secs. 541(a)(6)). In Payne, for example, the court held that the insurance proceeds from destroyed, unexempted household items, which perhaps originally could have been exempted, were the property of the bankruptcy estate. Here, once the bankruptcy trustee sold the immature Mueller Place cotton to the Bank, the proceeds of the sale, not the cotton, were the property of the estate. It is against those proceeds that Hardage must make his exemption claim unless the trustee was required to avoid the sale to the Bank.

Hardage has offered no reason other than his exemption claim to justify avoiding the sale. He has not challenged the adequacy of the sale price and nothing in the record suggests that the Bank was other than a good faith purchaser. See In re Willemain, 764 F.2d 1019, 1023 (4th Cir.1985) (for the purposes of the Bankruptcy Code, a "good faith purchaser" is "one who purchases the assets for value, in good faith, and without notice of adverse claims") (citations omitted). Thus, the Bankruptcy Code would not have specifically required or authorized the trustee to avoid the sale. 11 U.S.C. Sec. 363(n) (collusive bidding); see also 11 U.S.C. Sec. 549 (avoidance of post-petition transfers). Moreover, even if the bankruptcy court could have exercised its broad equitable powers to avoid the sale, ² the equities favor the Bank. In addition to the Bank's bona fides, the bankruptcy court found that the Bank purchased the immature cotton in reliance on Hardage's original exemption claim. Nothing in the record suggests that this finding is erroneous. What the record does plainly suggest is that Hardage attempted to conceal the Mueller Place cotton. In such circumstances, equity will not countenance depriving the Bank of the benefit of the bargain after it has invested its time and money. ³ Thus, we hold that the Bank is entitled to the proceeds of the sale--apparently made in mid-February 1987--of the Mueller Place cotton less appropriate expenses and charges. ⁴

Having so held, we nonetheless must reverse the district court's...