Debtors who sell their exempt homestead and lose the exemption because they do not reinvest the proceeds in another home are nonetheless entitled to retain the proceeds on dismissal of their chapter 13 case, the Fifth Circuit held.
The debtors confirmed a chapter 13 plan calling for payments of $1,100 a month for 60 months. About two years into the plan, they sold their exempt home without court authorization. Two years later, they sought approval of the sale. Because they had not reinvested the proceeds in another home within six months, the net proceeds of more than $40,000 had lost their exempt status under Texas law.
The bankruptcy judge gave the debtors a choice. They could remain in chapter 13 and use about half of the proceeds for needed medical care, but the other half would go to the trustee for distribution to creditors. Or, the bankruptcy judge said, they could dismiss the case and retain the proceeds, but they would not receive a discharge. Meanwhile, the bankruptcy judge approved the sale nunc pro tunc but directed the trustee to hold the proceeds for the time being.
The debtors took the second option and filed a motion to dismiss voluntarily. In response, the chapter 13 trustee argued that the debtors’ failure to obtain court approval before the sale showed bad faith, constituting “cause” for overriding the presumption in Section 349(b) and blocking the proceeds from revesting in the debtors.
As it now turns out, Chief Bankruptcy Judge Ronald B. King got it right. He dismissed the chapter 13 case without prejudice, found no “cause” for overriding Section 349(b), and directed that the proceeds be turned over to the debtors after deducting the trustee’s commissions.
The trustee appealed and won. The district court found “cause” under Section 349(b) to order the proceeds distributed to creditors under the plan.
Circuit Judge Jennifer Walker Elrod reversed the district court in an opinion on July 31 and reinstated the result reached by Bankruptcy Judge King.
Noting that chapter 13 is voluntary, Judge Elrod held that that “proceeds from post-petition sales of a debtor’s exempt homestead generally must be returned to the debtor upon voluntary dismissal.” Alluding to Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015), she said the Supreme Court firmly rejected the suggestion that a confirmed chapter 13 plan gives creditors a vested right to funds held by a trustee. The trustee who lost in Judge Elrod’s opinion was the same chapter 13 trustee who lost in Harris.
Besides misreading Section 349(b), Judge Elrod said the decision in district court was “untenable” because it called for “distributing funds to creditors pursuant to a chapter 13 plan when that plan itself is defunct and the case is over.”
Although the Bankruptcy Code does not define “cause,” Judge Elrod said there was no error, “clear or otherwise,” to override the bankruptcy judge’s conclusion that there was no cause to overcome the presumption in Section 349(b) directing the remaining proceeds to the debtors. Buttressing the bankruptcy judge’s findings, she said that the debtors had made plan payments for four years.