In Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. Sept. 5, 2017), the Fifth Circuit held that property in an exempt individual retirement account on the filing date does not lose its exempt status if it is converted to nonexempt property after the filing of a chapter 7 petition. In other words, the snapshot rule is a shield for the debtor, not a sword in the hands of a trustee.
In a March 7 opinion, the Fifth Circuit expanded Hawk to cover homesteads, thus allowing a chapter 7 debtor to sell a home after filing but not lose the exemption even if the proceeds were not reinvested in another house.
The debtor, who waived his discharge, owned a home in Texas on the filing date. There were no objections to the claimed homestead exemption. With the bankruptcy court’s approval seven months after filing, the debtor sold his home for $364,000, but he did not reinvest the proceeds in another home within the six-month window in Texas for maintaining an exemption in the proceeds. Instead, the debtor used the proceeds to pay some of his debts.
The chapter 7 trustee mounted an adversary proceeding against the debtor and the recipients of the proceeds, contending that the proceeds belonged to the estate because they lost their exempt status six months after the sale.
The bankruptcy judge ruled that the proceeds were exempt because the home was exempt on the filing date. The district court reversed before the Fifth Circuit decided Hawk, and the debtor appealed.
In the Fifth Circuit, the trustee argued that Hawk was inapplicable because that case involved a retirement account, not a homestead.
In a per curiam opinion on March 7, the Fifth Circuit reversed the district court and reinstated the judgment of the bankruptcy court dismissing the trustee’s lawsuit. The Fifth Circuit saw “no reason why Hawk’s analysis should not also apply to Texas’s homestead exemption.” The court said that the “proceeds” rule under the Texas exemption statute “expands rather than limits the scope of the exemption.”
In terms of policy, the circuit court said that fixing the exemption once and for all on the filing date avoids “the uncertainty that the trustee’s position would inject into the large number of chapter 7 cases that bankruptcy courts confront.”
In Hawk, the three-judge panel on the Fifth Circuit granted rehearing and set aside the opinion it had filed only seven weeks earlier. To read ABI’s discussion, click here.