Hawk v. Engelhart (In re Hawk)

• Decision Date: 05 September 2017
• Docket Number: No. 16-20641.,16-20641.
• Citation: 871 F.3d 287
• Parties: In the MATTER OF: Gregory D. HAWK; Marcie H. Hawk, Debtors. Gregory D. Hawk, Appellant, v. Eva S. Engelhart, Chapter 7 Trustee, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

871 F.3d 287

In the MATTER OF: Gregory D. HAWK; Marcie H. Hawk, Debtors.

Gregory D. Hawk, Appellant,

v.Eva S. Engelhart, Chapter 7 Trustee, Appellee.

No. 16-20641.

United States Court of Appeals, Fifth Circuit.

September 5, 2017

William Pimlott Haddock, Houston, TX, for Appellant.

Aaron J. Power, Aaron J. Power, Houston, TX, for Appellee.

Before STEWART, Chief Judge, and WIENER and PRADO, Circuit Judges.

EDWARD C. PRADO, Circuit Judge:

Gregory and Marcie Hawk's petition for panel rehearing is GRANTED, and the opinion previously filed in this case is withdrawn. This opinion is substituted therefor. The Hawks' petition for rehearing en banc is DENIED.

After filing for Chapter 7 bankruptcy, the Hawks claimed an exemption for funds held in an individual retirement account ("IRA"). They sought to exempt the funds from the bankruptcy estate because tax-exempt or tax-deferred assets held in a qualifying retirement account are generally exempt from creditors' claims under Texas law. However, over the course of several months, the Hawks withdrew the funds from the IRA. Texas law provides that amounts distributed from a retirement account remain exempt only if rolled over into another retirement account within sixty days. After withdrawing the funds from the IRA, the Hawks did not roll them over into another qualifying account. Thus, the bankruptcy court held that the funds had lost their exempt status and ordered that the Hawks turn over the funds to the Trustee, Eva Engelhart. The district court upheld the bankruptcy court's decision on appeal. We REVERSE and REMAND.

I. BACKGROUND

On December 15, 2013, the Hawks filed a voluntary bankruptcy petition under Chapter 7 of the Bankruptcy Code. Approximately one month later, the Hawks filed their schedule of assets, which claimed an exemption for funds held in an IRA managed by NFP Securities, Inc. The Hawks claimed that the IRA funds were exempt from creditors' claims under Texas Property Code § 42.0021 and were therefore excluded from the property of the bankruptcy estate under 11 U.S.C. § 522(b). The meeting of creditors was held on March 28, 2014, giving the parties in interest until April 28, 2014, to object to the Hawks' claimed exemptions. See FED. R. BANKR. P . 4003(b)(1). No party in interest objected to the IRA exemption during that time. On April 3, 2014, the Trustee filed a report declaring the estate had no assets available for distribution to the Hawks' creditors and proposing to abandon all nonexempt assets. In May 2014, however, Res–TX One, one of the Hawks' creditors, timely filed an adversary proceeding objecting to the Hawks' discharge.

Meanwhile, between December 11, 2013, and July 14, 2014, the Hawks withdrew all of the funds from the IRA and used most of those funds to pay for living and other expenses. They never deposited the funds into another retirement account. When Res–TX One deposed Mr. Hawk in November 2014, he stated that approximately $30,000 of the liquidated IRA funds remained in his possession and that the funds were "in a shoebox." The Trustee first learned about the liquidated IRA funds from Mr. Hawk's deposition and subsequently demanded that the Hawks give the funds to the estate. After the Hawks refused, the Trustee filed a motion with the bankruptcy court seeking to compel the Hawks to turn over the funds.

Following an evidentiary hearing, the bankruptcy court ordered the Hawks to turn over the funds that were withdrawn from the IRA ($133,434.64 in total). The bankruptcy court concluded that the funds "lost their exempt status" under Texas law because the Hawks "did not roll them over to another individual retirement account within 60 days." The Hawks appealed to the district court, which affirmed the bankruptcy court's decision. This appeal followed.

II. STANDARD OF REVIEW

As a "second review court," "[o]ur review is properly focused on the actions of the bankruptcy court." In re Age Ref., Inc. , 801 F.3d 530, 538 (5th Cir. 2015) (quoting In re T–H New Orleans Ltd. P'ship , 116 F.3d 790, 796 (5th Cir. 1997) ). "We apply the same standard of review to the bankruptcy court's findings of fact and conclusions of law as applied by the district court." In re Pratt , 524 F.3d 580, 584 (5th Cir. 2008). The "[d]etermination [of] whether an exemption from the bankruptcy estate exists is a question of law, which we review de novo. " In re Zibman , 268 F.3d 298, 301 (5th Cir. 2001). "Although we may ‘benefit from the district court's analysis of the issues presented, the amount of persuasive weight, if any, to be accorded the district court's conclusions is entirely subject to our discretion.’ " In re Age Ref. , 801 F.3d at 538 (quoting In re CPDC, Inc. , 337 F.3d 436, 441 (5th Cir. 2003) ).

III. DISCUSSION

Under 11 U.S.C. § 541(a), the commencement of a bankruptcy case creates a bankruptcy estate comprising, among other things, "all legal or equitable interests of the debtor in property as of the commencement of the case." The debtor may then remove certain types of property from the estate by electing to take advantage of the exemptions described in federal or state law. 11 U.S.C. § 522(b). "An exemption is an interest withdrawn from the estate (and hence from the creditors) for the benefit of the debtor." Owen v. Owen , 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991). To claim exemptions, the debtor must file a list of property claimed as exempt on the schedule of assets. 11 U.S.C. § 522(l ) ; FED. R. BANKR. P. 4003(a). A party in interest may then "file an objection to the list of property claimed as exempt within 30 days after the meeting of creditors ... or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later." FED. R. BANKR. P. 4003(b)(1). "Unless a party in interest objects, the property claimed as exempt on such list is exempt." 11 U.S.C. § 522(l ). "Anything properly exempted passes through bankruptcy; the rest goes to the creditors." Payne v. Wood , 775 F.2d 202, 204 (7th Cir. 1985).

This court has not previously addressed whether a debtor who withdraws funds from a retirement account and does not deposit the funds into another retirement account within sixty days loses the exemption pursuant to Texas law. However, the parties direct us to this court's case law regarding Texas homesteads. Indeed, there are clear parallels between the Texas statutes governing retirement accounts and those governing homesteads. Texas Property Code § 42.0021(a) states:

[A] person's right to the assets held in ... an individual retirement account ... is exempt from attachment, execution, and seizure for the satisfaction of debts to the extent the ... account is exempt from federal income tax, or to the extent federal income tax on the person's interest is deferred until actual payment of benefits to the person....

TEX. PROP. CODE § 42.0021(a). Section 42.0021(c) in turn provides that amounts distributed from an exempt retirement account "are not subject to seizure for a creditor's claim for 60 days after the date of distribution if the amounts qualify as a nontaxable rollover contribution." TEX. PROP. CODE § 42.0021(c). Similarly, Texas Property Code § 41.001(a) indicates that a homestead is "exempt from seizure for the claims of creditors except for encumbrances properly fixed on homestead property." TEX. PROP. CODE § 41.001(a). Section 41.001(c) explains that the "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." TEX. PROP. CODE § 41.001(c).

A. The Snapshot Rule

To understand this court's case law on Texas homesteads, it is helpful to first provide some background on the so-called snapshot rule. In White v. Stump , a debtor filed for bankruptcy, and his wife later sought a homestead exemption for the land where the debtor and his family resided. 266 U.S. 310, 310–11, 45 S.Ct. 103, 69 L.Ed. 301 (1924). The Supreme Court noted that "[t]he laws of the state of Idaho, where the land is situate, provide for a homestead exemption, but only where a declaration that the land is both occupied and claimed as a homestead is made and filed." Id. at 311, 45 S.Ct. 103. State law provided that until the landowner filed such a declaration, "the land is subject to execution and attachment like other land; and where a levy is affected while the land is in that condition the subsequent making and filing of a declaration neither avoids the levy nor prevents a sale under it." Id. The Supreme Court explained that "the state laws existing when the petition is filed [are] the measure of the right to exemptions." Id. at 312, 45 S.Ct. 103. Moreover, the date of filing is the point at which "the status and rights of the bankrupt, the creditors and the trustee ... are fixed." Id. at 313, 45 S.Ct. 103. Thus, the debtor was not entitled to a homestead exemption because the land "was subject to levy and sale" under state law when the debtor filed his bankruptcy petition. Id. at 314, 45 S.Ct. 103. This approach of looking to the state law in effect at the time of filing came to be known as the "snapshot" rule. See In re Zibman , 268 F.3d at 303.

Two decades later, the Supreme Court expanded the snapshot rule in Myers v. Matley , 318 U.S. 622, 628, 63 S.Ct. 780, 87 L.Ed. 1043 (1943). The debtor in that case consented to an involuntary bankruptcy petition filed against him. Id. at 623, 63 S.Ct. 780. A month later, the debtor's wife filed a declaration with a Nevada county recorder claiming a tract of land listed in the debtor's bankruptcy schedules as a homestead and then filed a petition with the bankruptcy court claiming the land as exempt. Id. at 623–24, 63 S.Ct. 780. In contrast to the Idaho state law applicable in White , however, Nevada law provided that a debtor was entitled to an exemption so long as a homestead declaration was filed "at any time before actual sale under execution." Id. at 626–27, 63 S.Ct. 780. The Supreme Court explained that "under the law...