In Wiggains v. Reed (In re Wiggains),[1] the Fifth Circuit limited an individual debtor’s Texas homestead exemption claims to $130,675.00[2] under 11 U.S.C. § 522(p), and denied the non-filing spouse’s requests for additional compensation under § 363(h) and (j) of the Bankruptcy Code, where a pre-petition marital partition agreement filed hours before the bankruptcy case was avoided as a fraudulent transfer under § 548. The court determined the non-filing wife’s interest in the community homestead to be property of the bankruptcy estate subject to § 522(p) limitations, disallowing any compensation for her half-interest in homestead net sales proceeds. The Fifth Circuit found that § 363(h) provides no relief to a non-filing spouse since the entire community homestead is brought into the bankruptcy estate ruling that § 363(j) is not applicable to community property interests. Citing, Kim v. Dome Entm’t Ctr., Inc. (In re Kim),[3] and, Thaw v. Moser (In re Thaw),[4] the court determined that § 522(m) does not provide a non-filing spouse additional homestead allowance(s) above amounts allocated to a debtor under § 522(p) in a community property state.
BACKGROUND
Debtor Wiggains’ homestead interests were acquired after the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), and within the 1,215-day period set forth in § 522(p) of the Bankruptcy Code, making the $160,075.00 exemption cap applicable. Before filing, Wiggains and his wife attempted to segregate the wife’s homestead interest through a marital partition agreement, otherwise lawful under Texas law, which would have the effect of re-characterizing the community property homestead interest into the husband’s and wife’s separate property, with each owning a one-half undivided separate property interest. In Kim, the Fifth Circuit held that spouses within a jointly filed bankruptcy case are each entitled homestead exemptions under § 522, but that § 522(m) does not apply where only one spouse seeks protection under the Bankruptcy Code, limiting the exemption allowance to the filing spouse. Wiggains entered the marital partition agreement immediately prior to the bankruptcy intending to re-characterize Texas homestead law from an undivided interest in community property to separate property half owned by debtor and half by a non-filing spouse, arguably removing the non-filing spouse's interest from the estate and preserving the non-filing spouse's half of the homestead net sales proceeds for her use and benefit.
Following the Trustee’s objection to exemptions and complaint to avoid the marital property agreement, the bankruptcy court found the marital partition agreement to have been entered with actual intent to delay and hinder creditors, having the effect of depriving creditors of the bankruptcy estate half of the net proceeds from the homestead to which they would otherwise been entitled. The wife’s testimony confirmed the marital partition agreement had been filed within an hour of the bankruptcy case, and that it was made with knowledge and reason to believe that equity existed and was intended for the specific purpose of excluding one-half sales proceeds from the bankruptcy estate. She rationalized her actions noting her husband’s business obligations were not hers, and that her interest in the homestead was exempt from pre-petition creditors under Texas law.
The Bankruptcy Court and the Fifth Circuit recognized that all property possessed by a spouse during the marriage constitutes community property, unless clear and convincing evidence proves its separate nature. Here, the Wiggains were married in 2007 and acquired the homestead during the course of marriage on November 27, 2012, creating no doubt of its community character. Consequently, the marital partition agreement effectuated a transfer under federal law of an interest in property of the estate. Non-filing spouses’ contentions that mere re-characterizations of interest in marital property are permitted under Art. XVI of the Texas Constitution did not overcome the effect or intent of the conveyance, citing, In re Hinsley,[5] which holds that otherwise-lawful partition agreements may be avoided, since a “transfer” is broadly defined under federal law to include each mode of disposing of or parting with property. Based on the Bankruptcy Code’s expansive “transfer” definition and precedential decisions, the court reasoned that partition agreements re-characterizing community property into separate property may constitute transfers. Here the exclusion of half of the Texas homestead from the bankruptcy estate under the marital partition agreement would cause the full balance of homestead sales proceeds to be unavailable to creditors and diminish estate’s resources. Accordingly the marital partition agreement constituted an avoidable transfer under § 548(a)(1).
Next focusing on § 363(h) and (j) of the Bankruptcy Code, the Court disallowed non-fling spouse’s requests for additional consideration beyond that allowed her husband under § 522(p). Since § 541(a)(2) causes the entire community homestead to be brought into the bankruptcy estate, and § 363(h) does not apply to community property, the non-filing spouse is provided no rights to compensation. The court reasoned that a community property homestead interest provides “protective legal security rather than vested economical rights.”
Citing prior decisions, the Fifth Circuit determined post-BAPCPA homestead purchasers are foreclosed from asserting a “Taking Clause-Type Constitutional Argument,” since sales proceeds were apportioned between creditors and non-filing spouse under § 363(j) and because § 363(i) provides non-filing spouses with a right of first refusal – finding those “safeguards” to be sufficient to protect a sale from becoming a “gratuitous confiscation.”
Finally, the Court determined that § 363(j) does not entitle a non-filing spouse in a community property state to a portion of net sales proceeds as compensation for her separate homestead interest. Agreeing with trustee’s arguments that § 363(j) is inapplicable because predicate subsections (g) or (h) have no reference to community property homestead interests, the court ruled that § 363(j) does not apply to a non-filing spouse’s interest in the sales of a community property homestead.
CONCLUSION
Lawful marital partition agreements may be avoided under bankruptcy fraudulent-transfer provisions. Non-filing spouses are not entitled to additional homestead exemption allowances under § 522(m), and § 363(g) and (h) do not provide means for additional compensation to non-filing spouses upon the sale by trustee of a community property homestead.
[1] 15-11249 (5th Cir., February 14, 2017), 2017 WL 598507.
[2] Wiggains agreed with trustee to reduce the §522(p) homestead allowance to $130,675, following the trustee’s objection to exemptions
[3] 748 F.3d 647, 657 (5th Cir. 2014).
[4] 769 F.3d 361 (5th Cir. 2014).
[5] 201 F.3d 638 (5th Cir. 2000).