In re Stanford, CASE NO. 16–11384–TMD

• Decision Date: 28 June 2017
• Docket Number: CASE NO. 16–11384–TMD
• Citation: 573 B.R. 205
• Parties: IN RE: Frederick Leland STANFORD, Deborah Lynn Stanford, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Texas

573 B.R. 205

IN RE: Frederick Leland STANFORD, Deborah Lynn Stanford, Debtors.

CASE NO. 16–11384–TMD

United States Bankruptcy Court, W.D. Texas, Austin Division.

Signed June 28, 2017

Michael V. Baumer, Austin, TX, for Debtors.

MEMORANDUM OPINION

TONY M. DAVIS, UNITED STATES BANKRUPTCY JUDGE

The dispute that arose from the complicated facts in play here is primarily decided by well-established Texas law, under which a creditor's pre-existing judgment lien cannot attach to a judgment debtor's subsequently acquired property that is contemporaneously designated as a homestead.

I. BACKGROUND AND FACTS

In 1977, Frederick Stanford's parents, Earl and Dorothy Seay, purchased a 4.01 acre vacant tract of land located in Williamson County, Texas.¹ They built a house on the property and moved in shortly thereafter.² Dorothy Seay continued to reside on the property until her death in 2000,³ when she left her 1/2 undivided interest to six heirs.⁴ Mr. Stanford, one of the six heirs, inherited an undivided 1/12th non-possessory interest, subject to a life estate.⁵

A little more than eight years later, Natural Fruit Corporation ("NFC") obtained a judgment against Mr. Stanford,⁶ and attempted to enforce its judgment.⁷ NFC filed an abstract of judgment, but its collection efforts were not successful.⁸ NFC persisted by serving post-judgment interrogatories on Mr. Stanford in 2009 to find out, among other things, whether Mr. Stanford owned any property.⁹ In his responses, Mr. Stanford failed to inform NFC of his inheritance when he provided sworn answers denying ownership or any beneficial interest in any real property.¹⁰

In 2012, Earl Seay died and bequeathed his 1/2 interest in the property to Janis Audrey Seay, Mr. Seay's then surviving spouse.¹¹ Two years later, Janis Seay died and her 1/2 interest vested in her four children from a prior marriage.¹² Mr. Stanford now owned an interest in the property along with nine other individuals:¹³

                Frederick Leland Stanford      1/12th
                Dorothy Lynn Stanford          1/12th
                Debby Kaye Stanford Miller     1/12th
                Charlotte Lee Fogle            1/12th
                Debora Sue Webb                1/12th
                Michael Earl Seay              1/12th
                Paul Buschow                   1.5/12th
                Joni Buschow                   1.5/12th
                Monte Buschow                  1.5/12th
                Heather Owens                  1.5/12th
                                               ________
                                               12/12th
                

This led to an approximately two-year long ownership dispute involving the inheritance claims among and against the heirs of Dorothy Seay, Janis Seay, and Earl Seay.¹⁴

Meanwhile, the property suffered from substantial deferred maintenance and was burdened with unpaid property taxes.¹⁵ In 2016, the heirs faced a looming tax foreclosure sale, which motivated them to find a resolution.¹⁶ A mutual release and settlement agreement (the "Homestead Agreement") memorialized this resolution and was signed by all parties less than a month before the scheduled tax sale.¹⁷ All heirs were represented by counsel and the essential terms of the Homestead Agreement directed the following:

1. Upon full execution of this [Homestead] Agreement, Paul Buschow, Independent Executor of the Estate of Janis Audrey Seay, will transfer all of the Janis Seay beneficiaries' interest in the Property to Mr. Frederick Leland Stanford and/or assigns via deed signed by Mr. Buschow, as Independent Executor of the Estate of Janis Audrey Seay;

2. Debora Sue Webb will transfer her interest in the Property to Mr. Frederick Leland Stanford and/or assigns via deed signed by Debora Sue Webb.

3. Mr. Frederick Leland Stanford will be responsible for resolving all outstanding taxes owed to taxing authorities;

4. Within 5 business days after full execution of this [Homestead] Agreement, Mr. Stanford will pay to the Independent Executor or the cause of the Independent Executor of the Estate of Janis Audrey Seay the amount of $40,000.00.

5. Upon sale of the Property, Mr. Fredrick Leland Stanford and/or assigns will pay $6,000.00 to Debora Sue Webb;

6. Upon sale of the Property, Mr. Frederick Leland Stanford will pay Debby Kaye Stanford–Miller the amount of $8,112.23 as reimbursement of legal fees paid by her for the Estate of Earl Seay.

7. Within 5 business days after full execution of this [Homestead] Agreement, Mr. Frederick Leland Stanford and/or assigns will pay $5,000.00 to Michael Earl Seay.

8. Michael Earl Seay will transfer his interest in the property to Mr. Frederick Leland Stanford and/or assigns via deed by Mr. Michael Earl Seay, individually, and Mr. Michael Earl Seay as the Executor of the estate of Earl Henry Seay. [Emphasis added].¹⁸

Six days after the Homestead Agreement was signed, the Stanfords took physical possession of the property.¹⁹ They owned no other property and their intent was to claim the property as their homestead until it sold.²⁰ Three deeds that together conveyed an 8/12th interest to Mrs. Stanford were executed between late February and early March.²¹ These deeds designated the 8/12th interest as Mrs. Stanford's "sole and separate property" and were recorded three months later.²² Mr. Stanford, along with the other owners,²³ listed the property for sale in March 2016 and a sale contract was entered on May 2016.²⁴

NFC learned about the potential sale of the property a few weeks later when it received a letter and enclosed affidavit titled "Homestead Affidavit as Release of Judgment lien."²⁵ NFC then renewed its collection efforts which led to multiple state court proceedings including the issuance of a constable's deed that purported to convey the property to NFC.²⁶ (The constable's deed was set aside in state court.)²⁷ All state court proceedings were stayed when the Stanfords (Frederick and Deborah Lynn) filed for relief under Chapter 7 of the Bankruptcy Code in November 2016.²⁸ The Stanfords listed the property as their homestead on their bankruptcy schedules.²⁹ NFC objected to the Stanfords' homestead claim.³⁰ It also sought relief from the stay in order to continue state court litigation in which NFC contested the ownership of the property and the Stanfords' homestead claim.³¹

On April 20, 2017, the parties presented arguments, testimony, and other evidence related to NFC's objection to the homestead claim and its motion to lift the automatic stay. The parties agree NFC's lien has attached to Mr. Stanford's 1/12th interest, but disagree about whether NFC's lien attached to the 8/12th interest.³²

II. ANALYSIS

A. The Stanfords established the property as their homestead.

The Stanfords carried the initial burden to establish the homestead character of the property,³³ by proving: (1) overt acts of homestead usage; and (2) an intent to claim the land as a homestead.³⁴ As mentioned above, Mr. Stanford testified that the risk of losing the property due to a looming tax sale motivated the heirs to resolve their disputes.³⁵ The heirs agreed that the Stanfords would make the property their homestead until the property sold.³⁶ Given the pending tax sale, the Homestead Agreement makes sense because the "age 65 or older" exemption³⁷ would enable the Stanfords to file a tax deferral and immediately stop the tax sale.³⁸ Stopping the tax sale would protect against foreclosure and enable the Stanfords and Mr. Stanford's sisters (who hold the remaining 3/12th interest) to keep the property.³⁹ Thus, the premise and purpose of the settlement contained in the Homestead Agreement was that the Stanfords would claim the property as their homestead.

Mr. Stanford's unconverted testimony establishes the property was intended to be, quickly became, and continues to be their homestead.⁴⁰ It is undisputed that the Stanfords moved in less than a week after the Homestead Agreement was reached.⁴¹ Additionally, Mr. Stanford testified that the Stanfords took physical possession of the property and planned to live there until the property sold.⁴² Mr. Stanford explained that they sought to sell the property and use sale proceeds to purchase a new homestead because the property required a level of maintenance and repair that overwhelmed them.⁴³ And there was additional evidence of their intent to claim the property as their homestead. First, the Stanfords filed an "Application for Residence Homestead Exemption" ("Homestead Application") with Williamson Central Appraisal District.⁴⁴ Second, the Stanfords designated the property as their homestead on their bankruptcy schedules.⁴⁵

NFC briefly argued that the Stanfords' intent to sell the property prevents the Stanfords from properly claiming it as their homestead.⁴⁶ But this argument fails because under Texas law the Stanfords' intent to sell the property can coexist with an intent to occupy the property as their homestead.⁴⁷

NFC contends that the Stanfords did not properly complete the Homestead Application because it listed the owners as "Seay, Michael E & Debora Webb Et Al."⁴⁸ Mr. Stanford explained that he inquired about the way ownership was depicted on the Homestead Application and was told that the "et al" signaled that the property was held by other owners, including the Stanfords.⁴⁹ NFC did not rebut this testimony. Nor did it dispute that the Williamson Central Appraisal District granted the Homestead Application. NFC's primary arguments were that: (1) a subsequently acquired homestead is subject to a pre-existing abstract of judgment; and (2) its lien attached prior to the homestead claim because the Stanfords did not timely occupy the property and file their homestead application.

1. NFC's judgment lien does not attach to the Stanfords' homestead.

NFC claims the Texas Supreme Court has established that the timing of its lien renders its lien superior to any subsequent homestead claim.⁵⁰ NFC mistakenly relies on Gage v. Neblett⁵¹ for the premise that "a pre-existing abstract of judgment trumps a subsequent homestead."⁵² While Gage supports attachment of the lien to Mr. Stanford's 1/12th interest, a point already conceded, it is not...