In re Reed
| Decision Date | 13 July 1995 |
| Docket Number | Bankruptcy No. 91-50474. Adv. No. 94-5116. |
| Parties | In re Jerry Lee REED, Debtor. John Patrick LOWE, Trustee for Jerry Lee Reed, Plaintiff, v. Phillip A. YOCHEM, Jr., Trustee, Gray Realty, Brown Beasley & Associates, Thomas B. Ewbank, Jerry Lee Reed and Thomas R. McDade and Dorothy A. McDade, Defendants. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas |
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John Patrick Lowe, Chapter 7 Trustee, Uvalde, TX.
Phillip A. Yochem, Jr., San Antonio, TX, for defendants.
CAME ON for consideration the foregoing matter. John Patrick Lowe, the chapter seven trustee ("Trustee"), has brought this adversary proceeding to avoid postpetition transfers of property of the estate under section 549 of the Bankruptcy Code and for recovery of property under section 550 from Phillip A. Yochem, Gray Realty, Brown Beasley & Associates, Thomas B. Ewbank, Jerry Lee Reed and Thomas R. McDade and Dorothy A. McDade (the "Defendants"). Both parties filed motions for summary judgment, and a hearing was held upon those motions on March 7, 1995. At the close of that hearing, the court took the matter under submission. This memorandum decision and order resolves this matter.
The facts are undisputed. Jerry Lee Reed ("Debtor") filed for chapter 11 relief in February 1991. When the voluntary petition was filed, Debtor and his wife owned a ranch in Bandera County (the "Reed Ranch"). The Debtor claimed the Reed Ranch as his exempt homestead. No one timely objected to the exemption claim during the chapter 11 case.
After the objection period had expired (but still during the chapter 11 case), on May 5, 1992, Debtor and his wife entered into an option agreement to sell the Reed Ranch to one of the Defendants, Thomas B. Ewbank. However, while this option was pending, the Debtor found another buyer and, on August 20, 1992, Debtor and his wife sold the Reed Ranch to William and Willie Dee Bartley, for cash and for a note in the amount of $375,000.00, payable on or before September 30, 1993 ("the Bartley Note"). This is the note at the center of this lawsuit.
The sale of the Reed Ranch generated a number of expenses. The Debtor and his wife needed to obtain a release of the option held by Ewbank, for example, and to that end executed a note in Ewbank's favor in the amount of $81,750.00. They secured this note with a pledge of the Bartley note. They had also incurred real estate commissions to Gray Realty and Brown Beasley & Associates. The Debtor and his wife paid part of these commissions in cash, and executed two unsecured notes for the balance, each in the amount of $11,250.00. To assure that all these notes would be satisfied out of the Bartley Note while protecting their own interest in the balance, the Debtor and his wife placed the Bartley Note into a trust with the Debtor's lawyer, Phillip A. Yochem Jr., for the benefit of all the parties.
On February 16, 1993 (while the Debtor was still in chapter 11), Debtor and his wife purchased a new ranch as their home from Thomas and Dorothy McDade. As part of the purchase price, Debtor and his wife executed a note payable to the McDades in the amount of $583,637.67. The note was secured by a mortgage on the new ranch, as well as by a pledge of the Bartley Note. Phillip A. Yochem was accordingly notified that now, the Bartley Note was to be held in trust for the McDades as well as for the other parties.
The Debtor's chapter 11 case was converted to chapter 7 on May 19, 1993, and John Patrick Lowe was appointed Trustee. On July 27, 1993 (i.e., post-conversion), the Bartleys paid off the Bartley Note. Phillip A. Yochem, who had received its proceeds, then disbursed the monies in accordance with the trust agreement, as follows:
Thomas and Dorothy McDade $167,352.12
Thomas Ewbank $ 82,714
Gray Realty $ 11,250
Brown Beasley & Associates $ 11,250
Phillip Yochem $ 1,360.28
Debtor and his wife $106,574.28
The Debtor received his discharge on December 17, 1993. The Trustee then brought this adversary proceeding to avoid, under section 549(a)1 what he contends were unauthorized transfers of property of the estate postpetition, to wit the payment of the proceeds of the Bartley Note to the named Defendants. The Trustee's position is that the Bartley Note became property of the chapter 11 estate six months following the sale of the Reed Ranch, and part of the chapter 7 estate following conversion. See TEX.PROP.CODE ANN. § 41.001(c) (Vernon Supp.1994); Matter of England, 975 F.2d 1168, 1174 (5th Cir.1992); 11 U.S.C. §§ 348(a), 541(a)(7). He seeks to recover the value of these transfers from the transferees. 11 U.S.C. § 550.
The Trustee's case stands or falls on his contention that the Bartley Note was property of the estate when the transfers of the note proceeds were made out of the trust by Mr. Yochem. No one disputes that the transfers were made postpetition, and without authorization either by any provision of the Bankruptcy Code, or by the bankruptcy court. The Defendants only contend that the Bartley Note and its proceeds were never property of the estate, so that section 549(a) was never implicated. The case turns, then, on whether the Defendants are right.
The commencement of a bankruptcy case creates a bankruptcy estate.2 11 U.S.C. § 541(a). The property which makes up this "estate" is defined by the several subsections (1)-(7) of section 541(a). Two of these subsections, (a)(1) and (a)(2) say that all property interests belonging to the debtor at the time of filing become property of the estate. 11 U.S.C. § 541(a)(1), (2). These two subsections do not apply to this case, because neither the Bartley Note nor its proceeds even existed at the commencement of the case.
As a general rule, property acquired by the debtor postpetition does not become property of the estate. 4 KING, COLLIER ON BANKRUPTCY ¶ 541.05 (15th ed. 1994). There are certain exceptions, however. For example, interests inherited by the debtor within the 180 days after the bankruptcy come into the estate. 11 U.S.C. § 541(a)(5)(A). Similarly, property acquired by the debtor as a result of a property settlement in a divorce or as the beneficiary of a life insurance policy become estate property. 11 U.S.C. § 541(a)(5)(B), (C). Proceeds, product, offspring, rents or profits of or from property of the estate themselves also become property of the estate. 11 U.S.C. § 541(a)(6).3 Finally, "any interest in property that the estate acquires after the commencement of the case" becomes "property of the estate." 11 U.S.C. § 541(a)(7).
Only the last two of these provisions could conceivably come into play in this case. Both the Bartley Note and its proceeds were generated by the disposition of the Debtor's homestead. Absent bankruptcy, under state law, these proceeds would have ceased to be exempt six months thereafter.4See Matter of England, 975 F.2d 1168, 1174 (5th Cir. 1992). Conceivably, these proceeds might be the "proceeds . . . of or from property of the estate," under section 541(a)(6). Alternatively, they might if they are deemed to be property acquired by the estate, then become property of the estate under subsection (a)(7). We turn to each of these possibilities next.
When a debtor files for bankruptcy, all of the debtor's property becomes property of the estate. 11 U.S.C. § 541(a)(1), (a)(2). This necessarily includes any property which the debtor intends to claim as exempt under section 522.5 Taylor v. Freeland & Kronz, 503 U.S. 638, 641, 112 S.Ct. 1644, 1647, 118 L.Ed.2d 280 (1992). Unless the debtor takes affirmative steps to claim property as exempt, the property will remain in the estate. See Hardage v. Herring Nat. Bank, 837 F.2d 1319, 1322 (5th Cir.1988).6 By the same token, if the debtor claims property as exempt in his schedules, then interested parties must affirmatively object within thirty days of the first meeting of creditors, or the property will be deemed exempt. 11 U.S.C. § 522(l); FED.R.BANKR.P. 4003; Taylor supra, 503 U.S. at 642, 112 S.Ct. at 1648. This result will follow regardless whether the debtor had even a colorable statutory basis for claiming the exemption. Id.
The proper date for determining whether an exemption exists is, in the usual case, the date of filing of the bankruptcy petition. Owen v. Owen, 500 U.S. 305, 314 n. 6, 111 S.Ct. 1833, 1838 n. 6, 114 L.Ed.2d 350 (1991). White v. Stump, 266 U.S. 310, 313, 45 S.Ct. 103, 104, 69 L.Ed. 301 (1924); Armstrong v. Peterson (In re Peterson), 897 F.2d 935, 937 (8th Cir.1990); Stinson v. Williamson (Matter of Williamson), 804 F.2d 1355, 1359 (5th Cir.1986); Mansell v. Carroll, 379 F.2d 682, 684 (10th Cir.1967); In re Combs, 166 B.R. 417, 418-19 (Bankr.N.D.Cal.1994). The Trustee admits that the Debtor's original homestead was itself exempt property for bankruptcy purposes, because the Debtor properly claimed the exemption in his chapter 11 schedules and no party timely objected. 11 U.S.C. § 522(l); Taylor, supra. The Trustee argues however that the postpetition transformation of this otherwise exempt homestead property into proceeds which would have become nonexempt under state law during the chapter 11 case must mean that these proceeds then became property of the estate.
The majority of courts, however, hold that a postpetition change in the character of property properly claimed as exempt will not change the status of that property, relying on the principle that once property is exempt, it is exempt forever and nothing occurring postpetition can change that fact. Peterson, 897 F.2d at 937 (...
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