In re Saldana

• Decision Date: 22 May 2015
• Docket Number: CASE NO. 13–34861–SGJ–7
• Parties: In re : Gonzalo Saldana, Debtor.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas

531 B.R. 141

In re : Gonzalo Saldana, Debtor.

CASE NO. 13–34861–SGJ–7

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Signed May 22, 2015

Nathan M. Nichols, Rosa R. Orenstein, Orenstein Law Group, P.C., Dallas, TX, Carol Lynn Wolfram, Law Office of Carol Lynn Wolfram, Denton, TX, for Debtor.

MEMORANDUM OPINION AND ORDER: (A) SUSTAINING IN PART AND OVERRULING IN PART TRUSTEE'S OBJECTIONS [DE ## 246 & 313]¹ TO DEBTOR'S CLAIM OF RURAL HOMESTEAD EXEMPTION, AS AMENDED; AND (B) SHIFTING CERTAIN ATTORNEY'S FEES TO DEBTOR AND DEBTOR'S COUNSEL, PURSUANT TO SECTION 105(A) OF THE BANKRUPTCY CODE AND THE ORDER TO SHOW CAUSE [DE # 308]

STACEY G. JERNIGAN, United States Bankruptcy Judge

I. INTRODUCTION

This Memorandum Opinion and Order is issued in a contested matter involving a Chapter 7 Debtor with hundreds of acres of real property who—very late in his bankruptcy case—changed his strategy regarding which of his multiple properties he would claim as his exempt, Texas rural homestead. First (for 15 months), the Debtor claimed four, noncontiguous parcels of real property in Navarro County, Texas, as his exempt homestead (the so-called “French Properties”—as later herein described). Then, more than three months after receiving objections to his homestead exemption from the Chapter 7 Trustee and his former spouse (the largest creditor in his bankruptcy case), the Debtor (mid-way through a hearing on their objections), announced that he would exercise his right to amend his exemptions,² and would claim: (a) two different parcels of real property in Freestone County, Texas that he had been both residing on and using for business purposes as his exempt homestead (hereinafter defined as the “Business Properties—60 Acres”),³ along with (b) one of the four parcels that he had originally claimed as part of his exempt homestead (hereinafter defined as “Parcel 4 of the French Properties”). The most difficult questions presented in this contested matter are: (a) whether the Debtor's late-in-the-game amendment of his homestead exemption crossed the line between zealous advocacy into bad faith pettifoggery; and (b) does the Supreme Court's reasoning in Law v. Si e gel⁴ preclude a bankruptcy court from applying equitable doctrines to disallow a debtor's otherwise valid exemption claim. The court ultimately rules herein that the objections to the amended homestead exemption are sustained in part and overruled in part. Specifically, the court is allowing on the merits the Debtor's amended homestead exemption as to the “Business Properties—60 Acres” but is not allowing on the merits the homestead exemption as to the non-contiguous “Parcel 4 of the French Properties.” However, the court also rules that Law v. Siegel: (a) does, in fact, generally preclude a bankruptcy court from disallowing a debtor's otherwise valid exemption claim based on bad faith or other equitable considerations; and (b) does not, in fact, denude a bankruptcy court of its essential “authority to respond to debtor misconduct”⁵ associated with exemptions by imposing meaningful sanctions. Accordingly, pursuant to this court's inherent power to sanction, under section 105(a) of the Bankruptcy Code (as later explained herein), the court is further ordering that the Debtor and Debtor's counsel reimburse: (a) the Trustee and his counsel for $25,245 in total fees, and (b) his former wife, Estela, and her counsel for $5,109.50 in total fees—all of which the court determines to have been incurred as a result of the Debtor's bad faith actions in abruptly amending his homestead exemption only after the Trustee, Estela, and this court had expended significant resources in preparing for a contested hearing that should have never gone forward.⁶

I. JURISDICTION

Bankruptcy subject matter jurisdiction exists in this contested matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding, pursuant to 28 U.S.C. § 157(b)(2)(A), (B), and (O), and, thus, the bankruptcy court has statutory authority to enter a final order. Moreover, the court has determined that it has Constitutional authority to enter a final order in this matter as well, since it involves a dispute that can only arise in a bankruptcy case.⁷ Venue is proper before this court, pursuant to 28 U.S.C. §§ 1408 and 1409. This Memorandum Opinion constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052, as incorporated into contested matters, pursuant to Federal Rule of Bankruptcy Procedure 9014. Where appropriate, a finding of fact should be construed as a conclusion of law and vice versa.

II. FINDINGS OF FACT

1. On September 23, 2013, Gonzalo Saldana (the “Debtor” or “Mr. Saldana”) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, Case No. 13–34861 (the “Bankruptcy Case”). At the time of the filing, the Debtor owned and operated a large tree-farming business known as Mexia Nursery & Tree Farm, Inc. (“Mexia Nursery”) and also owned a separate business that was no longer operating known as Mexia Tire Company, LLC (“Mexia Tire”). The two business entities each filed voluntary petitions for relief under Chapter 11 at the same time as the Debtor. Initially, all three cases were administratively consolidated. After several months of attempting to reorganize, the Debtor and the businesses are now in Chapter 7 liquidation cases.⁸ John H. Litzler (the “Trustee”) was appointed as the Chapter 7 Trustee of the Debtor's Bankruptcy Case and continues to serve in that capacity. The two business entities each have their own, separate Chapter 7 trustees.

2. Although there was uncertainty at the commencement of the three cases regarding the amount of claims that would be asserted against the Debtor, the largest creditor in the Debtor's case, by far, has turned out to be his former wife of 39 years, Estela B. Saldana (“Estela”), who asserts a claim against him in excess of $2.5 million as a result of a prepetition Divorce Decree entered by the 13th Judicial District Court of Navarro County, Texas, on October 12, 2011 (the “Divorce Decree”).⁹ There were fifteen proofs of claim filed in the Debtor's case: (a) ten of which were filed by property taxing authorities; (b) one of which was Estela's; (c) two filed by financial institutions; (d) one relating to a credit card; and (e) one by a utility. The total dollar amount of the proofs of claim filed was $2,721,831.68, and Estela's claim was $2,551,568.41 of this amount. Thus, there are $170,263.20 of “other” prepetition creditors in the Debtor's case, besides Estela. Restated, Estela asserts 93.74% of the prepetition claims in this case and the other creditors assert 6.26% of the prepetition claims.

3. The Debtor had numerous parcels of real property at the time he filed bankruptcy in several counties, including Navarro, Limestone, Henderson, and Freestone Counties (the “Real Property”). The Divorce Decree stated that Estela was granted an equitable lien in the Real Property as security for the monetary award granted to her in the Divorce Decree.

4. On September 25, 2013, the Debtor filed his Original Schedules in the Bankruptcy Case.¹⁰ On June 2, 2014, the Debtor filed his Amended Schedules A, H and E.¹¹ On August 19, 2014, the Debtor filed his Amended Schedules in connection with the conversion of his case, in which the Debtor amended Schedules A and B.¹² The Debtor listed the current value of all of his Real Property at $1,255,490 in his Amended Schedules.

5. Despite the various amendments to his Bankruptcy Schedules, the Debtor consistently—for the first 15–plus months of his case—claimed on his Schedule C, as his exempt homestead under Texas law,¹³ four separate parcels of his Real Property, which he valued at $401,952.72 (the “Homestead Exemption”):

• .50 AC, TRACT 5A, A–10021; D.D. ANDERSON ABST. AKA 14469 STATE HIGHWAY 14, WORTHAM, TEXAS, NAVARRO COUNTY (“Parcel 1—the Homesite”);

• 22.706 ACRES, TRACT 6, A 10021; D.D. ANDERSON ABST. AKA STATE HIGHWAY 14, WORTHAM, TEXAS, NAVARRO COUNTY (“Parcel 2”);

• 48.30 ACRES MORE OR LESS, TRACT A–10021 D.D.ANDERSON ABSTRACT, NAVARRO COUNTY, TEXAS AKA STATE HWY 14, WORTHAM, TEXAS (“Parcel 3”); and

• 141.24 ACRES, TRACT 2, A–10415; HT & B RR CO.ABST., AKA STATE HWY 14, WORTHAM, TEXAS, NAVARRO COUNTY (“Parcel 4”)

(Parcel 1—the Homesite, Parcel 2, Parcel 3, and Parcel 4 will collectively be referred to as the “French Properties”).

6. On September 26, 2014, the Trustee filed his Objection to Exemptions, which included an objection to the Debtor asserting a Homestead Exemption in the French Properties (the “Original Objection to Exemptions”).¹⁴ In the Original Objection to Exemptions, the Trustee objected to the Debtor's Homestead Exemption on the following bases: (a) the Debtor did not have a present right to occupy Parcel 1—the Homesite on the French Properties pursuant to the Divorce Decree (the Debtor had, at best, a future interest in Parcel 1—the Homesite, which did not entitle him to homestead protection in that property);¹⁵ (b) as the Debtor had no present right in Parcel 1—the Homesite and, in fact, he was not using any of the four parcels of the French Properties as a residence, the Debtor did not have the right to claim any of the other French Properties (which were non-contiguous tracts) as part of a Homestead Exemption (“for non-contiguous tracts to qualify as part of a rural homestead, one of the tracts must be used as a residence and the other tract must be used for the comfort, convenience or support of the family”)¹⁶ ; (c) the Debtor was attempting to exceed the 200 acres permitted by Texas statute for a homestead¹⁷ (the four Parcels added up to 212.746 of total acreage) and, therefore, any amount in excess of 200 acres should not be exempt; and (d) Estela held an equitable lien against the French Properties which might further impair the Debtor's asserted exemptions.¹⁸ On October 28, 2014, Estela filed a Joinder in the Trustee's Original...