In re McCombs, Case No. 06-35891 (Bankr. S.D. Tex. 12/17/2007)
| Decision Date | 17 December 2007 |
| Docket Number | Adv. No. 07-3043.,Case No. 06-35891. |
| Parties | IN RE: MICHAEL RAY MCCOMBS, CHAPTER 7, Debtor. H.D. SMITH WHOLESALE DRUG CO. Plaintiff, v. MICHAEL RAY MCCOMBS, W. STEVE SMITH, in his capacity as TRUSTEE FOR MICHAEL RAY MCCOMBS, ALICIA ATKINSON MCCOMBS, and INTERNAL REVENUE SERVICE Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
The Debtor's homestead exemption in this case was limited to $125,000.00 by 11 U.S.C. § 522(p). The homestead was sold, resulting in a significant amount of non-exempt proceeds, and the parties to this Adversary Proceeding each claim to be the rightful owner of these proceeds. The Chapter 7 trustee, W. Steve Smith (the Trustee), claims that the homestead was community property which became part of the Debtor's estate—which would make the estate the owner of the non-exempt proceeds. The Debtor's estranged wife, Alicia Atkinson McCombs (Atkinson), claims, among other things, that the homestead was partitioned into her separate property prior to the Debtor filing this Chapter 7 petition—which would make her the owner of the proceeds. Finally, H.D. Smith Wholesale Drug Company (H.D. Smith) claims that its prepetition judgment lien on the Debtor's homestead is valid and enforceable against the remaining proceeds because they lack any homestead protection—which would make H.D. Smith a properly perfected secured creditor and the eventual owner of the proceeds. For the reasons discussed herein, the Court concludes that H.D. Smith's lien is valid and enforceable as to the non-exempt proceeds.
The Court makes the following Findings of Fact and Conclusions of Law under Fed. R. Civ. P. 52 as incorporated by Fed. R. Bankr. P. 7052. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. The Court reserves the right to make any additional Findings and Conclusions as may be necessary or as requested by any party.
1. Less than 1215 days prior to the filing of the Debtor's Chapter 7 case, the Debtor and Atkinson (collectively, the McCombs) purchased two adjoining parcels in Katy, Harris County, Texas. The parcel located at 2402 Ivy Run Court included a house where the McCombs resided (the Property). The adjacent parcel located at 2406 Ivy Run Court was unimproved (the Lot). The McCombs purchased these two parcels with the intent to, and later did, use them collectively as a single homestead.
2. On June 12, 2006, the Debtor executed an untitled document (the Agreement) which begins: "I, Michael McCombs, agree to the following as it pertains to the divorce proceedings from Alicia Anne Atkinson-McCombs."2 The Agreement addresses various divorce-related matters including custody of the McCombs' two children, child support payments, and the division of assets. Paragraph 12 of the Agreement states:
3. In the months preceding the filing of the Debtor's bankruptcy petition, the Debtor and Atkinson discussed the possibility of divorce, and, after the petition date, they did eventually separate. However, the McCombs never initiated a divorce proceeding and remain legally married.
4. Prior to the filing of the Debtor's petition, H.D. Smith obtained a judgment against him in the amount of $538,016.46. By virtue of obtaining this judgment, H.D. Smith has a claim against the Debtor's Chapter 7 estate.
5. On June 29, 2006, H.D. Smith abstracted its judgment, and, on July 7, 2006, recorded its judgment lien in the Official Public Records of Real Property of Harris County, Texas.
6. On November 3, 2006, the Debtor filed his Chapter 7 petition.
7. Sometime after the petition date, the Debtor informed the Trustee that he had entered into a prepetition contract for the sale of the Property but not the Lot.3 Closing on this sale was scheduled for December 11, 2006.
8. On November 21, 2006, the Debtor filed an amended Schedule A disclosing this contract for sale of the Property. [Docket No. 13.] Both the amended and original Schedule A listed the Property as community property with the caveat that "non-debtor spouse will claim full Texas exemption."
9. On November 22, 2006, the Trustee filed his Emergency Application to Retain Broker Nunc Pro Tunc and to Sell Property "As Is" and Free and Clear of All Liens, Claims, Charges, Encumbrances and Interests. [Main Case, Docket No. 9.]
10. Atkinson contacted the Trustee and informed him that she would object to the sale of the Property unless they could resolve the division of the sale proceeds. The Trustee and Atkinson agreed that the sale would go forward without objection and that the funds would be placed in escrow pending final determination by this Court of their correct distribution.
11. On November 29, 2006, the Court issued an order granting the Trustee's emergency motion to sell the Property. [Main Case, Docket No. 17.] This order stated that "any other liens and/or encumbrances against the Property shall be, and hereby are, transferred to the balance of the Sale Proceeds." Id.
12. On December 12, 2006, the closing on the sale of the Property took place. After satisfying the liens on the Property and paying closing costs and fees, $398,849.03 in proceeds remained.4
13. On February 9, 2007, H.D. Smith filed this adversary proceeding against the Trustee and Atkinson (the Adversary Proceeding). [Docket No. 1.]
14. On March 2, 2007, the Trustee filed his Answer to the Complaint and Counterclaim and Crossclaim. [Docket No. 10.]
15. On March 13, 2007, Atkinson filed her Answer and Counterclaim. [Docket No. 12.]
16. On June 22, 2007, the Court signed a Stipulation and Agreed Order Regarding Objections to Exemption of Real Property. [Main Case, Docket No. 144.] The Order required the Trustee to issue a check made payable to both the Debtor and Atkinson in the amount of $125,000.00, representing the Debtor's maximum allowable homestead exemption pursuant to 11 U.S.C. § 522(p).5 Further, the Order required that any funds in excess of $125,000.00 generated from the sale of the Property or the Lot would be held by the Trustee until the final resolution of this Adversary Proceeding.
17. Out of $398,849.03 remaining from the sale of the Property, the Trustee paid the Debtor his $125,000.00 homestead exemption pursuant to the above-referenced Order. Thus, $264,849.03 from the sale of the Property is still being held in escrow (the Excess Proceeds).
18. On July 1, 2007, H.D. Smith filed its First Amended Complaint to Determine Interests in Real Property and Proceeds of Real Property and to Determine Extent Validity and Priority of Lien, and for Turnover. [Docket No. 30.]
19. On August 15, 2007, H.D. Smith filed its Motion for Summary Judgment [Docket No. 43], and the Trustee filed a Counter Motion for Summary Judgment. [Docket No. 44.]
20. On October 15, 2007, the parties filed a Joint Pre-Trial Statement. [Docket No. 65.]
21. On October 18, 2007, the Court held a hearing on the competing motions for summary judgment. At this hearing, counsel for Atkinson informed the Court that the Trustee had paid the Debtor his $125,000.00 exemption and the Debtor had delivered half of that amount to Atkinson.
22. As of the October 18, 2007 hearing, the Lot was under a contract for sale at approximately $272,000.00, less costs and expenses. If the sale of the Lot closes, those proceeds will become part of the Excess Proceeds.
23. At the conclusion of the October 18, 2007 hearing, the Court took the competing motions for summary judgment under advisement.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 157(a) and 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (K) and (O). Venue is proper pursuant to 28 U.S.C. § 1409.
Federal Rule of Civil Procedure 56(c), made applicable by Federal Rule of Bankruptcy Procedure 7056, provides that a court may grant summary judgment only if there is "no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." The movant bears the initial burden of showing the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The non-movant then must present affirmative evidence showing a genuine issue of material fact. Id.; FED. R. CIV. P. 56(e); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (). The Court must "construe all evidence in the light most favorable to the non-moving party without weighing the evidence, assessing its probative value, or resolving any factual disputes." Williams v. Time Warner Operation, 98 F.3d 179, 181 (5th Cir. 1996).
The Trustee argues that the Property was community property which became part of the Debtor's Chapter 7 estate; and that, after paying the Debtor's $125,000.00 exemption, the remaining Excess Proceeds became non-exempt property of the estate. Atkinson asserts that she is entitled to the entire Excess Proceeds because the Property had become her separate property prepetition because the Debtor either partitioned or gifted the Property to her. In the alternative, Atkinson argues that 11 U.S.C. § 522(p) does not limit her homestead exemption because she did not file a joint petition with...
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