Wiggains v. Reed (In re Wiggains)

• Decision Date: 27 April 2015
• Docket Number: ADVERSARY NO. 14-03064-SGJ,CASE NO. 13-33757-SGJ-7
• Parties: IN RE: JEREMY WIGGAINS, Debtor. TANYA WIGGAINS, Plaintiff, v. DIANE G. REED, CHAPTER 7 TRUSTEE, Defendant.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas

IN RE: JEREMY WIGGAINS, Debtor.TANYA WIGGAINS, Plaintiff, v. DIANE G. REED, CHAPTER 7 TRUSTEE, Defendant.

CASE NO. 13-33757-SGJ-7

ADVERSARY NO. 14-03064-SGJ

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

Entered: April 28, 2015

April 27, 2015

(Chapter 7)

AMENDED¹ MEMORANDUM OPINION AND JUDGMENT: DECLARING MARITAL PARTITION AGREEMENT AVOIDABLE PURSUANT TO SECTION 548(a)(1)(A); AVOIDING SAME; DECLARING BALANCE OF HOMESTEAD NET SALE PROCEEDS IN

EXCESS OF SECTION 522(p) CAP TO BE NONEXEMPT PROPERTY OF THE ESTATE; AND CONSOLIDATING PLAINTIFF'S CONTESTED MATTER INVOLVING SECTION 363(j) INTO ABOVE-REFERENCED ADVERSARY PROCEEDING AND SETTING JULY 1, 2015 EVIDENTIARY HEARING ON SAME

I. Introduction

The above-referenced Adversary Proceeding (herein so called) involves a large and valuable Texas homestead (the "Texas Homestead") formerly owned by the Chapter 7 Debtor (the "Debtor") and his non-debtor spouse (the "Non-Filing Spouse"). The Texas Homestead was sold by a Chapter 7 Trustee (the "Trustee") during the above-referenced bankruptcy case for $3.4 million, netting $568,668.41 of cash proceeds after payment of all liens, claims, and encumbrances (the "Homestead Net Sale Proceeds"). This Adversary Proceeding presents a battle over the Homestead Net Sale Proceeds. The court is reminded of Le Corbusier's saying that "the home should be the treasure chest of living." However, a battle over homestead sale proceeds in a bankruptcy case was surely not what the famous architect had in mind.

In any event, in the days before Congress's enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA")², the disputes presented in this Adversary Proceeding would never have arisen-for the Debtor and the Non-Filing Spouse would have simply been entitled to the entire $568,668.41 of Homestead Net Sale Proceeds without controversy. Why? Because the Debtor elected to exempt the Texas Homestead under the state law of his domicile, pursuant to section 522(b)(3)(A) of the Bankruptcy Code and section 41.001(c) of the Texas Property Code. And Texas State law provides for an essentially unlimited homestead exemption-that is an exemption that is capped only as to acreage allowed(not applicable in the case at bar), and is not limited by dollar value.³ However, in this post-BAPCPA world, there were two events that happened involving the Texas Homestead that are now relevant.

(A) First, the Debtor and the Non-Filing Spouse acquired the Texas Homestead well-within the 1215-day period preceding the date of the filing of the bankruptcy petition (they purchased the Texas Homestead on or about November 27, 2012; the bankruptcy petition date was July 29, 2013).⁴ Thus, pursuant to section 522(p)(1) (A) and (D) of the Bankruptcy Code-the so-called "mansion loophole" enacted as a part of BAPCPA⁵-the Debtor may not exempt more than $155,675 in value on the Texas Homestead. The Debtor agreed early on with the Chapter 7 Bankruptcy Trustee and certain creditors that his homestead exemption would be capped at $130,675.⁶ Moreover, we know from the Fifth Circuit's opinion in Kim v. Dome Entertainment Center, Inc. (In re Kim), 748 F.3d 647 (5th Cir. 2014) that, while spouses who choose to file bankruptcy jointly are entitled to double their homestead exemption,⁷ when only one spouse files bankruptcy, there is not only no doubling of the exemption (i.e., because section 522(m) technically does not apply), but the non-debtor spouse has no per se right to some precise amount of compensation from the trustee above and beyond the section 522(p) cap, simply because the property was also her homestead.⁸

(B) Second, there was another event involving the Texas Homestead that not only distinguishes this case from precedent such as In re Kim⁹ but, ultimately, was the impetus for the filing of this Adversary Proceeding. Specifically, a few hours before the Debtor filed bankruptcy, on July 29, 2013, the Debtor and the Non-Filing Spouse executed and filed in the Dallas County, Texas Property Records a marital property agreement (the "Partition Agreement"),¹⁰ purporting to recharacterize the Texas Homestead from community property to property which was half the Debtor's separate property and half the Non-Filing Spouse's separate property. Thus, the Non-Filing Spouse argues that half of the Texas Homestead never became property of the bankruptcy estate, pursuant to section 541(a)(2) of the Bankruptcy Code, and that she is entitled to half of the $568,668.41 of the Homestead Net Sale Proceeds from the Texas Homestead ($284,334.21)-above and beyond the $130,675 the Debtor was already allowed.

This Adversary Proceeding was commenced with the Non-Filing Spouse's filing of a complaint ("Complaint") against the Trustee, seeking a declaratory judgment, pursuant to 28 U.S.C. § 2201, as to the relative rights between her and the Trustee concerning the Homestead Net Sale Proceeds, by virtue of the Partition Agreement. The Trustee responded with an answer and counterclaims ("Answer and Counterclaims") of fraudulent transfer against the Non-FilingSpouse¹¹-asserting that the Debtor's entry into the Partition Agreement immediately prior to the bankruptcy filing (purporting to recharacterize the Texas Homestead from community property into one-half his separate property and one-half her separate property) constituted a voidable transaction committed with an actual intent to hinder and delay creditors, pursuant to section 548(a)(1)(A) of the Bankruptcy Code¹² and pursuant to section 24.005(a)(1) of the Texas Business & Commerce Code (TUFTA), which is available to the Trustee pursuant to section 544 (b) of the Bankruptcy Code.¹³

In summary, this Adversary Proceeding is ultimately about whether: (a) an otherwise valid marital partition agreement, (b) executed on the eve of a husband's bankruptcy case, (c) that purports to recharacterize a community property Texas homestead into one-half husband's separate property and one-half wife's separate property, (d) when such homestead will be subject to the section 522(p) cap in the husband's bankruptcy case, (e) can effectively deprive the bankruptcy estate from realizing half of the net proceeds from the sale of the homestead, or, rather (f) can the marital partition agreement be avoided if it is found to have been made with actual intent to hinder or delay creditors, and if it had the effect of depriving the creditors of part of what would have been available to them pursuant to sections 541(a)(2) and 522(p) and possibly even section 363(j) of the Bankruptcy Code?¹⁴

The court has determined that it has subject matter jurisdiction over this Adversary Proceeding pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (C), (H), and (O). The bankruptcy court additionally believes that it has Constitutional authority to enter a final judgment in this Adversary Proceeding, considering the holdings of Stern v. Marshall¹⁵ and Executive Benefits.¹⁶ Although a review of the Claims Register in this case does not reflect that the Non-Filing Spouse filed any proof of claim in the underlying bankruptcy case, she has essentially made a claim against the estate through the filing of the Adversary Proceeding in which she asserts an interest in the Homestead Net Sale Proceeds;¹⁷ moreover, the Trustee's fraudulent transfer claims are essentially intertwined with and constitute a defense against the Non-Filing Spouse's claims. Additionally, this is a dispute that could only arise in a bankruptcy case.

The court held a trial on the Complaint and Answer and Counterclaims on October 21, 2014 (the "Trial").¹⁸ The parties submitted certain post-Trial legal briefing thereafter.¹⁹ The court has concluded that the Partition Agreement constituted a fraudulent transfer, pursuant to section 548(a)(1)(A) of the Bankruptcy Code, entered into with the actual intent to delay and hinder creditors, which, if not avoided, has the effect of depriving the creditors of the bankruptcy estate of as much as $284,334.21 of value to which they would have otherwise been entitled.²⁰This Memorandum Opinion constitutes the court's findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014. Where appropriate, a finding of fact will be construed as a conclusion of law and vice versa.

II. Findings of Fact

A. Plaintiff's Family Background

Plaintiff, the Non-Filing Spouse, is the spouse of Jeremy Wiggains (the "Debtor"), debtor in the above-referenced bankruptcy case (the "Bankruptcy Case"), which was filed on July 29, 2013 (the "Petition Date").²¹ The Non-Filing Spouse and Debtor lived together as a married couple since 2007; together they have three young children.²² Prior to the Bankruptcy Case, the Non-Filing Spouse worked as a homemaker.²³ During the relevant time period, Debtor owned a local automobile dealership in the Dallas/Fort Worth area named Straight Line Automotive Group, LLC ("SLAG"), as well as other similar companies.²⁴ SLAG also filed a Chapter 7 bankruptcy petition on July 13, 2013, and its bankruptcy case is pending.²⁵

B. Acquisition of the Texas Homestead

On or about November 27, 2012, less than 1,215 days prior to the Petition Date, Debtor and the Non-Filing Spouse acquired an interest in the property located at 6520 Northaven Road,Dallas, Texas 75230 (the "Texas Homestead"), which Debtor and the Non-Filing Spouse claim was their homestead as of the Petition Date, without evidence or dispute to the contrary.²⁶ The Texas Homestead and proceeds from its sale are at the core of this dispute. Debtor and the Non-Filing Spouse purchased the Texas Homestead as an investment, with the intent to make money from its sale.²⁷ The Non-Filing Spouse and Debtor²⁸ performed valuable improvements to the Texas Homestead in the months leading up to the Bankruptcy Case, including adding a home theatre and light fixtures, vaulting a ceiling in the...