In re Liao

• Decision Date: 15 July 2016
• Docket Number: Case No. 15–36257
• Citation: 553 B.R. 584
• Parties: In re: Howard Liao, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Texas

553 B.R. 584

In re: Howard Liao, Debtor.

Case No. 15–36257

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed July 15, 2016

Margaret Maxwell McClure, Attorney at Law, Houston, TX, for Debtor.

MEMORANDUM OPINION REGARDING THE OBJECTIONS BY SOCA FUNDING, LLC AND THE TRUSTEE TO THE DEBTOR'S CLAIMED HOMESTEAD EXEMPTION

Jeff Bohm, United States Bankruptcy Judge

I. Introduction

In Texas, broad protection is given to homesteads—even if the debtor asserting the homestead exemption has acted in bad faith. In re McDaniel, 70 F.3d 841, 843 (5th Cir.1995). Indeed, the recent Supreme Court decision in Law v. Siegel, ––– U.S. ––––, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014), further insulates misbehaving debtors from losing their homestead exemptions. Yet, such debtors are still not completely immune from a successful attack on their homestead exemptions. The case at bar illustrates why.

The dispute here is between Howard Liao, the debtor (the “Debtor ”), and SOCA Funding, LLC (“SOCA ”). a creditor and party-in-interest in the above-captioned Chapter 7 case; and between the Debtor and Eva Engelhart, the Chapter 7 trustee (the “Trustee ”). The Debtor initiated this case on November 30, 2015. On December 11, 2015, he filed his original schedules, and claimed a homestead exemption in a particular piece of property. [Doc. No. 8]. On January 26, 2016, the Debtor filed amended schedules to change his claimed homestead exemption. [Doc. No. 66]. On March 8, 2016, SOCA filed an objection to the Debtor's claimed exemption. [Doc. No. 99]. This Court held a hearing on this objection on June 8, 2016, and then continued this hearing. On June 13, 2016, the Trustee filed her own objection to the Debtor's claimed exemption, [Doc. No. 141]; and on June 27, 2016, this Court held a simultaneous hearing on both the continued hearing on SOCA's objection and the initial hearing on the Trustee's objection. The Court then took the matter under advisement.

This Court now makes the following Findings of Fact and Conclusions of Law under Federal Rule of Civil Procedure 52, as incorporated into Bankruptcy Rules 7052 and 9014. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such; and to the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such.¹ Further, this Court reserves the right to make additional findings and conclusions as it deems necessary or as requested by any party. For the reasons set forth herein, this Court sustains SOCA's objection and the Trustee's objection.

I. Findings of Fact

1. On August 1, 1988, in Harris County, Texas, the Debtor and his two brothers-in-law and two family friends—Yung Hua Lin, Young–Kai Lin, Kuo Shen Yeh, Fu Kuo Yeh (the “1988 Partners ”)—formed a partnership named Master Investment Group, a Texas General Partnership (the “MIG Pship ”). [Finding of Fact No. 1 in the FOF & COL]. This partnership was memorialized in writing through a partnership agreement signed on December 6, 1989. [Id. ]. The MIG Pship's purpose was to manage, operate and sell the property located 5850, 5860, 5870, and 5880 Ranchester (the “Ranchester Property ”), Harris County, Texas. The Ranchester Property is comprised of various rental properties. [Id. ].

2. In August 1988, the Debtor purchased certain real property located at 3810 Belle Grove Lane, Sugar Land, Texas 77479 (the “Belle Grove Property ”). [Debtor's Ex. No. 5, p. 1, No. 2]; [Hr'g Tr. 27:21–25, June 8, 2016]. At the time the Debtor purchased the Belle Grove Property, he was married, and therefore, this property was community property. [Hr'g Tr. 69:17–25, June 8, 2016]. When the Debtor obtained a divorce in 2002, he paid his ex-wife a certain sum of money in exchange for her interest in the Belle Grove Property. [Hr'g Tr. 69:19–70:15, June 8, 2016]. The deed to the Belle Grove Property has always been in the Debtor's name since the purchase of the property in August 1988. [Hr'g Tr. 69:10–16, June 8, 2016].

3. The Debtor resided at the Belle Grove Property from August 1988 through September 2012. [Hr'g Tr. 84:15–85:1, June 8, 2016].

a. On July 15, 2013, the Debtor, in the capacity as the landlord, entered into a residential lease with Kauther Kateeb Odat (“Odat ”), as the tenant, by which the Debtor leased the Belle Grove Property to Odat. [Trustee's Ex. No. 10]. The lease, effective upon July 15, 2013, was to expire on June 30, 2014, and was to be automatically renewed unless the Debtor or Odat provided the other party with written notice of termination. [Id. ]. Pursuant to the lease, Odat could only use the property as a private residence. [Id. ]. Odat made monthly lease payments to the Debtor from August 10, 2013 through April 15, 2014. [Trustee's Ex. No. 11]. He did not renew this lease.

b. On November 1, 2015, the Debtor, in the capacity as the landlord, entered into a residential lease with Zhuling Gong (“Gong ”), as the tenant, by which the Debtor leased the Belle Grove Property to Gong for a period of two years. [Trustee's Ex. No. 9]; [see Hr'g Tr. 49:16–50:11]. The lease was to be automatically renewed unless the Debtor or Gong provided the other party with written notice of termination. [Trustee's Ex. No. 9]. Pursuant to the lease, Gong could only use the property as a private residence. [Id. ].

However, Gong never moved into the Belle Grove Property. [See Hr'g Tr. 50:5–11, June 8, 2016].

c. The Debtor has always maintained the utilities in his name, except when he leased the Belle Grove Property to Odat from July of 2013 to June of 2014. [Trustee's Ex. No. 13]; [Hr'g Tr. 53:5–54:5, June 8, 2016].

d. In 2013, 2014, and 2015—despite not using the Belle Grove Property as his principal residence—the Debtor received a lower real property tax rate for the property by representing that the Belle Grove Property was his homestead. [Hr'g Tr. 85:2–86:2, June 8, 2016].

4. On July 20, 2000, the Debtor and his three siblings in Taiwan—Shu Hua Liao, Kotatsu Yasukawa, and Ho Chang Liao (the “Siblings ”)—executed a Trust Agreement (the “July 20 Trust Agreement ”). [Finding of Fact No. 2 in the FOF & COL]. According to the Debtor, the July 20 Trust Agreement reflects his intent—and the intent of the Siblings—for all four of them to be partners in the MIG Pship. [Id. ].

5. On January 8, 2003, the Debtor and the Siblings executed an Addendum to the July 20 Trust Agreement. [Finding of Fact No. 3 in the FOF & COL]. According to the Debtor, the Addendum is “a kind of announcer. In my family this is the percentage of share for every member.” [Id. ]. Stated otherwise, this Addendum is further evidence that, in the Debtor's mind, the Siblings were partners of the MIG Pship in 2003, and that each of them have a definite percentage of ownership in this partnership. [Id. ]. Moreover, the Addendum gave the Debtor 45% of all income generated by the Ranchester Property “on an annual basis upon [the Siblings'] approval and discretion.” [Id. ]. The Debtor was given this 45% income interest by the Siblings because he was managing the Ranchester Property. [Id. ].

6. On or about February 20, 2003, the Debtor bought out the partnership interests of the MIG Pship owned by the 1988 Partners (i.e. two brothers-in-law and two family friends). [Finding of Fact No. 4 in the FOF & COL]. The Debtor was able to buy out their interests through cash infusions received from the Siblings. According to the Debtor, the Siblings wired the funds necessary to buy out the 1988 Partners. [Id. ]. Upon receipt of their cash payments, the 1988 Partners assigned their respective interests in the MIG Pship to the Debtor. [Id. ]. Consequently, as of February 20, 2003, the 1988 Partners no longer had any interest in the MIG Pship. [Id. ].

7. Also, on or about February 20, 2003, the Debtor purchased the Ranchester Property from the MIG Pship, and he was able to do so, in part, by obtaining financing from Texas First National Bank. [Finding of Fact No. 5 in the FOF & COL].

8. On May 21, 2007, a judgment was entered against the Debtor by the District Court of Clark County, Nevada in favor of Mandalay Corp. dba Mandalay Bay Resort and Casino and Treasure Island Corp. (“Mandalay ”) for $419,694.06 (the “Judgment ”). [Finding of Fact No. 6 in the FOF & COL]. At the hearing held in this Court on March 4, 2016 on SOCA's motions to convert, the Debtor admitted that the Judgment arose from his gambling:

Q: This is for your personal gambling debts, two gambling debts, right?

A: Yes, sir.

[Id. ].

9. Mandalay filed an Abstract of Judgment in Fort Bend County, Texas. [Finding of Fact No. 7 in the FOF & COL]. This Abstract of Judgment expressly references the Judgment, and expressly refers to the Debtor as the name of the defendant against whom the Judgment was taken. [Id. ].

10. On August 30, 2012, Farid and Asha Virani conveyed 6 Elderberry Tree, Sugar Land, Texas 77489 (the “Elderberry Property ”) to the Debtor for the sum of $950,000.00. [Finding of Fact No. 8 in the FOF & COL]. The Debtor's siblings contributed $190,000.00 of the purchase price, and the MIG Pship contributed approximately $260,000.00 of the purchase price. [Id. ]. Although the deed to the Elderberry Property was initially put in the Debtor's name, this property was eventually conveyed to and titled in the name of the MIG Pship. [Findings of Fact Nos. 8 & 17 in the FOF & COL].

11. There is no question that there is equity in the Elderberry Property. According to Schedule A filed by the Debtor on December 11, 2015 in this case, the value of this property as of November 30, 2015 was $1,106,000.00, and the amount of the first lien held by Golden National Bank was $432,484.54. [Doc. No. 8, p. 2 of 44]. According to this same Schedule A, there are ad valorum tax liens owing of $12,139.54. [Id. at p. 8 of 44]. Thus, the amount of equity totals $661,375.92.

12. In September 2012, the Debtor moved out of the Belle Grove Property and into the Elderberry Property. [Hr'g Tr. 61:6–19, June 8, 2016]. The...