A debtor cannot claim a homestead exemption in property that a trustee recovered as a fraudulent transfer because the transfer was only voidable, not void.
Bankruptcy Judge Marvin Isgur dealt with a debtor who deserved little sympathy on equitable grounds, even if the law were on the debtor’s side, which it wasn’t.
Before marriage, a woman owned a home. After marriage, she transferred the home to her husband and herself, as joint owners. Two years later, they divorced.
In the divorce settlement, the husband transferred his interest to his former wife and soon thereafter filed bankruptcy. The husband/debtor contended that he continued to live in the house despite the divorce and the transfer.
The husband’s trustee sued, arguing that the divorce was a sham. Although the jury returned a verdict finding that the transfer was fraudulent, the wife and the trustee settled before judgment was entered in the fraudulent transfer suit. In the settlement, the wife transferred her interest in the home to the trustee for benefit of the estate.
Having amended his schedules, the husband claimed a homestead exemption in the house that the trustee recovered. Judge Isgur denied the exemption.
To begin with, Judge Isgur said the so-called snapshot rule would only permit the debtor to claim exemptions that could have existed on the filing date. Citing the Fifth Circuit’s Frost decision, he said that exemptions “cannot change due to subsequent events.”
The husband also contended that he could claim an exemption because the transfer was void ab initio. He was wrong about that too, for two reasons.
First, there was never a fraudulent transfer judgment. Rather, the wife transferred the property to the trustee for the benefit of the estate, so the former husband never regained title and the ability to claim a homestead exemption.
Second, Judge Isgur cited authorities for the proposition that a fraudulent transfer is voidable, not void. Furthermore, the voidable transfer remained valid as against the husband, who was the transferor. Under Texas law, the judge said, a transfer is “voidable only for the benefit of defrauded creditors.”
Thus, the debtor/husband could not claim any benefit from recovery of a fraudulent transfer.