In re Howard, Bankruptcy No. 7-85-00180.

• Decision Date: 08 September 1986
• Docket Number: Bankruptcy No. 7-85-00180.
• Citation: 65 BR 498
• Parties: In re Bobby G. HOWARD and Peggy Howard, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Texas

65 B.R. 498 (1986)

In re Bobby G. HOWARD and Peggy Howard, Debtors.

Bankruptcy No. 7-85-00180.

United States Bankruptcy Court, W.D. Texas, Midland/Odessa Division.

September 8, 1986.

John C. Steinberger, Kerr, Fitz-Gerald & Kerr, Midland, Tex., for debtors.

Millard O. Anderson, House Counsel, Midland, Tex., for Federal Deposit Ins. Corp.

MEMORANDUM OPINION

JOSEPH C. ELLIOTT, Chief Judge.

The major issue confronting the Court in this Chapter 7 case is whether a debtor, who has claimed a Texas homestead exemption under 11 U.S.C. § 522, may avoid a lien asserted by the Federal Deposit Insurance Corporation on that homestead, on the grounds that the lien is invalid under the Texas homestead laws.

FACTS

The Howards' case is before the Court on the Debtors' Motion to Avoid Liens, which was heard on May 1, 1986. The relevant facts, either stipulated to by the parties or determined from the evidence adduced at the hearing, the Court finds as follows.

The transactions relevant to this case are complex and cover an extended period of time. The Federal Deposit Insurance Corporation (the "FDIC") asserts a claim of $770,000, that it contends is secured by a valid lien on 460.61 acres belonging to the Howards. The 460.61 acres includes 194.71 acres which the Howards claim is their rural homestead and therefore, they assert, the lien is invalid as to the 194.71 acres.

On January 27, 1983, the Howards executed a Correction Deed of Trust in favor of the First National Bank of Midland. The Correction Deed states that it secures "that certain promissory note of even date herewith in the original principal sum of $770,000" and further states that it and the underlying promissory note "are given in renewal, extension and modification . . . of the following described Deeds of Trust and their underlying promissory notes payable to: (a) Eureka Life Insurance Company , (b) Farmers Home Administration , and (c) First National Bank of Midland, Texas."

The nature and origin of the indebtedness and the lien securing it, referred to in the Correction Deed, can be broken down as follows:

(a) The Eureka Life Insurance Co. debt. It is undisputed this was a purchase money loan by Eureka to the Howards, in the original amount of $122,000.00, made on November 21, 1977 and eventually (on October 6, 1981) transferred to the First National Bank of Midland.

The parties have stipulated that the records of the FDIC show a balance of $64,141.28 in principal plus $36,119.33 in accrued interest due and owing on this obligation as of January 15, 1986.

The Debtors also introduced evidence, unchallenged by the FDIC, that the balance of the loan, on the date it was transferred to the First National Bank of Midland, was $64,141.28.

(b) The FHA debt. It is also undisputed this was a purchase money obligation, in the original amount of $82,000.00, incurred by the Howards on November 21, 1977.

The Debtors at the hearing introduced a written Release of the Deed of Trust securing this debt, executed by the FHA on July 21, 1981 and recorded on July 22, 1981, which Release recites that it was given in exchange for full payment of the $82,000 debt.

It is stipulated that the FDIC records show a balance of $22,530.27 in principal plus $13,390.07 in accrued interest on this obligation as of January 15, 1986.

No evidence was presented of the manner and time of acquisition of this debt and lien by the First National Bank of Midland. The Court notes that the Correction Deed was executed more than a year after the Release was recorded.

(c) The First National Bank of Midland debt. This debt is the result of two distinct transactions.

$18,300.00 of the debt was incurred by the Howards on November 21, 1978 in order to make a payment on the Eureka purchase money loan, and was in fact used for that purpose. It is undisputed this portion thus assumes the character of the Eureka obligation, that of a purchase money loan.

The remainder of the FNBM debt is undisputedly not the result of a purchase money loan. The loan, in the original amount of $493,934.78, was made by the First National Bank of Midland to the Howards on or about December 31, 1981.

The present balances of these two loans are not in evidence.

All of the underlying Deeds of Trust and the Correction Deed were properly recorded. The Correction Deed, a printed form prepared by the First National Bank of Midland, contains a representation and warranty by the grantors (the Howards) that the indebtedness described therein "is secured by a valid lien on the aforesaid all 460.61 acres property."

None of the documents reflect any designation of homestead by the Howards, and the Bank never requested one. On July 2, 1985, the Howards executed and recorded a Designation of Homestead, and claim therein 200 acres, consisting of a 5.29 acre tract and the 194.71 acre tract in issue here. It is undisputed that the 5.29 acres on which the Howards reside is and always has been their homestead, that this property is not included in the 460.61 acres referred to in the Correction Deed and is separated from the 194.71 acres also claimed as homestead. It is also undisputed that the Howards have been, at all relevant times, openly and continuously farming the 194.71 acres.

On or about October 14, 1983, the First National Bank of Midland was declared insolvent and the acting Comptroller of the Currency appointed the FDIC Receiver of the failed bank pursuant to 12 U.S.C. §§ 191 and 1821.

The FDIC as Receiver then entered into a Purchase and Assumption transaction whereby it sold certain assets and transferred certain liabilities to Republic Bank First National Midland, pursuant to 12 U.S.C. § 1823(c)(2)(A). Certain assets not sold to RepublicBank First National Midland were sold to the FDIC in its corporate capacity.

An Order approving the sale of assets and transfer of liabilities was entered in Cause No. MO 83-CA-174 in the United States District Court for the Western District of Texas.

Among the assets sold to the FDIC in its corporate capacity were the Note and Deed of Trust made the subject of this complaint.

The FDIC in its corporate capacity gave value for the Note and Deed of Trust in question.

The record in the case shows that on July 11, 1985, the Howards filed Chapter 7 and in their Schedules have claimed 200 acres, including the 194.71 acres covered by the Correction Deed, as exempt under the laws of the State of Texas. No objections to this exemption have been filed. On November 14, 1985, the Howards filed their Motion to Avoid Liens. The Motion was heard on May 1, 1986 and the Court took the matter under advisement to consider the evidence and briefs filed by the parties.

DISCUSSION AND CONCLUSIONS OF LAW

Does State or Federal Law Apply?

The Howards contend that the lien granted in the Correction Deed of Trust held by the FDIC is invalid as to that portion attributable to the note to the First National Bank of Midland in the original principal amount of $493,934.78. The homestead laws of Texas clearly support this argument.

The Texas Constitution provides, in pertinent part:

Sec. 50. The homestead of a family, or of a single adult person shall be, and is hereby protected from forced sale for payment of all debts except for the purchase money thereof, or a part of such purchase money, the taxes due thereon, or for work and material used in constructing improvements thereon . . . No mortgage, trust deed, or other lien on the homestead shall ever be valid, except for the purchase money therefor, or improvements made thereon, as hereinbefore provided . . .

Tex. Const. art XVI, § 50.

A homestead may consist of "one or more parcels of real property, including improvements, that is not in a city, town or village and that totals not more than 200 acres for a family." Tex.Prop.Code Ann. § 41.001 (Vernon 1984). The parcels comprising a rural homestead need not be contiguous, or connected to the tract upon which the dwelling place is situated. Rancho Oil Co. v. Powell, 142 Tex. 63, 175 S.W.2d 960 (1943). No written designation of homestead is required. See Tex.Prop. Code Ann. § 41.022 (Vernon 1984) (claimant "may voluntarily designate" rural homestead).

In the instant case, it is stipulated that the $493,934.78 obligation to the Bank is not for purchase money, taxes or improvements and the Howards claim no more than 200 acres as their homestead. That they claim more than one parcel and did not designate their homestead until after the Deed was executed does not, under Texas law, affect their homestead claim. Clearly, to the extent it secures the $493,934.78 note to the Bank, the lien would be invalid as to the 194.71 acres claimed as homestead, if the lien were still in the hands of the Bank and Texas law applied. The FDIC argues, however, that the result should be different because it, not the Bank, is now the holder of the lien.

The FDIC is a successor in interest to the First National Bank of Midland, by virtue of its having purchased the Correction Deed of Trust and the underlying note under a Purchase and Assumption Agreement authorized under 12 U.S.C. § 1823. As a general rule, when a party becomes a successor in interest through legal process, that party's interest is subject to whatever defense the obligor has against its predecessor in interest. Charter Executive Center Ltd. v. Federal Deposit Insurance Corp. (In re Charter Executive Center Ltd.), 34 B.R. 131, 134 (Bankr.M.D.Fla. 1983).

However, in the instant case the FDIC is a party to the suit in its capacity as corporate insurer of the Bank. See Gunter v. Hutcheson, 674 F.2d 862 (11th Cir.), cert. denied 459 U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982) (for a comprehensive discussion of the distinctive roles of the FDIC as receiver and as corporate insurer) hereinafter cited as Gunter. The FDIC as corporate insurer takes on greater rights than those of its predecessor, the Bank. See Jeter v. Seminole State National Bank (In re Jeter), 48 B.R....