Bankruptcy Judge Barbara J. Houser, the chief bankruptcy judge for Dallas and Fort Worth, used the bankruptcy of billionaire Sam Wyly to put a lid on generous exemptions under Texas law.
In Texas, there is no limit on a homestead exemption, so long as an urban property is no more than 10 acres. Annuities are also entirely exempt.
So far, Wyly’s bankruptcy has been a bust. Judge Houser saddled him with almost $1.1 billion in tax liabilities, on top of more than $125 million plus interest owed to the Securities and Exchange Commission from a judgment in New York. She limited the exemption on his mansion and disallowed his claimed exemption in more than $250 million in annuities.
Wyly purchased a home in 1966 for $150,000. In bankruptcy, he listed the home as exempt and pegged the value above $12 million. The home is on the most prestigious residential street in town, across from the elite Dallas Country Club.
Wyly’s decline and fall began after the Securities and Exchange Commission sued him in federal district court in New York, alleging that he parked assets in offshore trusts since the 1990s and used the trusts to trade secretly in securities of companies where he served on the board of directors. He filed for chapter 11 protection in October 2014, a month after the SEC won a preliminary judgment of almost $200 million for unjust enrichment resulting from violation of securities laws, not for the collection of taxes.
More recently, the New York judge entered judgment against Wyly for about $125 million, plus prejudgment interest. Wyly is appealing to the Second Circuit.
The judgment was not Wyly’s only worry stemming from his SEC troubles. He knew there would be tax liabilities for income uncovered by the SEC. In that respect, the bankruptcy has not been going well for Wyly.
In May, Judge Houser handed down a 427-page opinion on Wyly’s motion to determine his tax liabilities. She entered judgment against Wyly in late June for more than $362 million in underpayment of taxes and interest for 1992 through 2013, more than $317 million for fraud penalties and interest on fraud penalties, plus over $427 million in penalties for failure to file.
Even if his stab at chapter 11 were to fail, Wyly was hoping to emerge a wealthy man given an exemption for his home and annuities he valued at about $250 million. But in Judge Houser’s exemptions opinion on June 29, Wyly lost again.
Although the Texas homestead exemption is unlimited, Section 522(q)(1) of the Bankruptcy Code cuts the exemption to $155,675 for someone “who owes a debt” resulting from “any violation of federal securities laws.” Wyly contended that the limitation does not apply because the SEC judgment is on appeal and was not final when he filed bankruptcy.
Judge Houser disagreed. The contingent claim the SEC had at the time of bankruptcy was enough to invoke the Section 522(q)(1) limitation. Later, she will decide if Wyly can increase the exemption under Section 522(q)(2) to give him enough for the reasonable support of himself and his dependents.
Furthermore, the SEC agreed not to glom Wyly’s home until the New York judgment becomes final after the Second Circuit appeal. If Wyly hits a home run and ends up with no liability, Judge Houser said she would revisit the homestead exemption limitation.
With regard to the $250 million in annuities, Wyly claimed they were exempt under the plain meaning of Texas law, essentially because the creational documents said they are annuities. For Judge Houser, the issue was not so simple.
Judge Houser said that Wyly “did not treat the annuity agreements as true annuities prior to his bankruptcy filing.” Instead, she said he continued his control over the annuities’ investments as though they remained his own property, “to accumulate substantial wealth offshore.” Concluding that they were not true annuities however the documents were written, Judge Houser said that the “annuity obligors were never expected to honor their ‘obligation to pay a stated sum.’”
Citing Fifth Circuit authority, Judge Houser described the result if Texas citizens could employ Wyly’s strategy. She said that someone could establish an onshore or offshore entity that he controls, transfer significant assets to those entities, cause the entities to sign nominal annuity agreements in return for the assets, and “continue to have unfettered access to the transferred assets” while shielding payments from the claims of “lawful creditors.”
Judge Houser said Wyly wanted her to follow the “plain meaning of the statute, while turning a blind eye to his systematic manipulation of the annuity obligors and their assets.”
Bankruptcy Judge Barbara J. Houser, the chief bankruptcy judge for Dallas and Fort Worth, used the bankruptcy of billionaire Sam Wyly to put a lid on generous exemptions under Texas law.