ORDER SUSTAINING IN PART, OVERRULING IN PART, AND MOOTING IN PART, AMENDED OBJECTION OF JOSE C. RODRIGUEZ, TRUSTEE, TO DEBTOR'S CLAIMS TO EXEMPTIONS (ECF NO. 182), SUSTAINING IN PART, OVERRULING IN PART, MOOTING IN PART, AND DENYING IN PART FIRST, AMENDED OBJECTION OF KEY EQUIPMENT FINANCE TO DEBTOR'S CLAIMS OF EXEMPTIONS (ECF NO. 183), AND SUSTAINING IN PART, AND OVERRULING IN PART SNH NS MTG PROPERTIES 2 TRUST'S AMENDED OBJECTIONS TO THE DEBTOR'S CLAIMS OF EXEMPTIONS (ECF NO. 184)
CRAIG A. GARGOTTA, UNITED STATES BANKRUPTCY JUDGE.
Came on for hearing Amended Objection of Jose C. Rodriguez, Trustee, to Debtor's Claims to Objections (ECF No. 182) ("Trustee's Objection"), First Amended Objections of Key Equipment Finance to Debtor's Claims of Exemptions (ECF No. 183) ("Key's Objection"), and SNH NS MTG Properties 2 Trust's Amended Objections to Debtor's Claims of Exemptions (ECF No. 184) ("SNH's Objection") (collectively, the "Objections"). Steven Jeffrey Cyr ("Debtor") filed Debtor's Response to Objections to Debtor's Exemptions (ECF No. 194) ("Debtor's Response") and LeAnn Cyr, individually and as the wife of Debtor, ("LeAnn") and as Trustee of the Steven and LeAnn Cyr Living Trust filed her Omnibus Response to Objections to Debtor's Exemptions (ECF No. 193) ("LeAnn Cyr's Response"). The Court set the Objections for hearing, the Parties each appeared through counsel and presented argument, and the Court took the matters under advisement. After considering the evidence, arguments made and the briefing of counsel, as well as the file and record in the case, the Court finds that the Trustee's Objection is SUSTAINED IN PART, OVERRULED IN PART, and MOOTED IN PART, Key's Objection is SUSTAINED IN PART, OVERRULED IN PART, MOOTED IN PART, and DENIED IN PART, and SNH's Objection is SUSTAINED IN PART, and OVERRULED IN PART.
This Court has jurisdiction over the Objections pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(A) (administration of the estate) and (B) (allowance or disallowance of claims of exemptions from property of the estate). Venue in this district is proper under 28 U.S.C. §§ 1408 and 1409.
On January 20, 2018 (the "Petition Date"), Debtor filed bankruptcy under chapter 7 of the Bankruptcy Code (ECF No. 1). The Chapter 7 Trustee appointed in this case is Jose C. Rodriguez. Debtor's § 341 meeting was held and concluded on February 15, 2018. On March 5, 2018, Debtor amended his Schedule A/B and Statement of Financial Affairs ("SOFA") (ECF No. 18). On February 7, 2019, Debtor again amended his Schedules A/B and C and his SOFA (ECF No. 185). On the eve of the hearing, February 12, 2019, Debtor
Key noticed the examination of Debtor pursuant to Federal Rule of Bankruptcy Procedure 2004 by Amended Notice dated April 5, 2018. Likewise, Key noticed the examination of LeAnn in her capacity of the Trustee of the Bergerud Heritage Trust ("BHT")
TRIAL AND EXHIBITS
The Court conducted a four-day bench trial on the Objections before taking the matter under advisement. Trial concluded on March 7, 2019, and the Court permitted the Parties to submit written closing arguments by April 1, 2019. The Court admitted Joint Exhibits 1-35,
WITNESSES AND CREDIBILITY
1. Dr. Steven J. Cyr, Debtor
Debtor testified regarding his background. Debtor's father was in the military and, having moved five or six times, he grew up in multiple locations. Debtor lived in San Antonio from the age of six to the age of ten. His father was reassigned to the Philippines where Debtor attended middle school and most of high school on an Air Force base. During his senior year of high school (1988), Debtor's father retired from the United States Air Force (the "Air Force") and Debtor and his family moved back to San Antonio.
Debtor graduated from high school in San Antonio and attended Southwest Texas State University on an academic scholarship. In 1992, Debtor received early acceptance to medical school at the University of Texas Health Science Center, San Antonio and graduated in 1996. Debtor attended medical school on an Air Force scholarship, and upon graduation from medical school, Debtor entered active duty service as a captain and spent fourteen years in the Air Force.
While in the Air Force, Debtor was stationed in San Antonio. Debtor was a flight
Debtor testified regarding involvement in his family's finances. He also testified about what property he included and did not include on his schedules, and why he filed multiple amendments to his schedules. Debtor testified about his connections to San Antonio and his intent to claim 15 Esquire, San Antonio, Texas ("15 Esquire") as his homestead. Debtor testified regarding communications with a real estate agent related to 15 Esquire and his intentions regarding whether to list 15 Esquire for sale. Debtor also testified regarding the reasons for purchasing 30 Post Shadow, Spring, Texas ("30 Post Shadow") various communications with individuals regarding the purchase of 30 Post Shadow and his plans to practice in Houston. He also testified about various school applications made for his children to attend schools in Houston. Debtor explained why he wanted to practice in Houston and described the difference between the Houston market and San Antonio market as it relates to his profession. Debtor testified as to his monthly income and expenses. He testified about Orthopedic Spine Institute, LLC ("OSI") and SASpine, LLC ("SASpine") and his role in the two entities. Debtor testified about various insurance policies he claimed as exempt. Debtor testified about his personal property, the monetary values he ascribed to such property, and his involvement in the appraisal of his personal property. Debtor also testified regarding his 401(k) and receipt of the 401(k) proceeds. Debtor also testified regarding the Steven & LeAnn Cyr Living Trust (the "Living Trust") and his previous role as a trustee of the Living Trust.
Pending in this Court are three adversary proceedings filed in Debtor's bankruptcy case: (1)
2. LeAnn Cyr
LeAnn is Debtor's wife. LeAnn testified regarding her educational and professional background, including her role at OSI and SASpine. LeAnn confirmed that she does not have a law degree. LeAnn testified regarding the Living Trust and why Debtor resigned as a trustee. She also testified regarding her involvement in the completion of Debtor's bankruptcy schedules. She testified regarding the reasons for the purchase of 30 Post Shadow and various communications related to its purchase. LeAnn testified regarding Debtor's 401(k) plan and receipt of the 401(k) proceeds. LeAnn testified about communications with a real estate agent related to 15 Esquire and her intentions regarding whether to list 15 Esquire for sale. LeAnn testified about various personal financial statements she and Debtor completed during the years of 2014 through 2017. She testified regarding the mortgage on 15 Esquire and the payment of monthly expenses for the Cyr family. She testified regarding her connections to San Antonio and intentions to stay in San Antonio. LeAnn testified regarding her involvement in the appraisal of the personal property located at 15 Esquire.
As previously mentioned, pending in this Court are three adversary proceedings filed in Debtor's bankruptcy case, two of which LeAnn is a named defendant. Based on the nature of the complaints, the Court anticipates that credibility will be a significant factor in determining the merits of the adversary proceedings. Moreover, the issues presented in the Objections can be determined as a matter of law without considering LeAnn's credibility. Therefore, the Court abstains from making a credibility determination of LeAnn at this time.
3. Anthony Vitullo
Anthony Vitullo represented Debtor and LeAnn
4. Norbert Gonzalez
Norbert Gonzalez ("Gonzalez") is the Cyrs' CPA and at times, serves as their attorney regarding corporate matters. Gonzalez also serves as the Trust Advisor for the BHT. Gonzalez testified regarding the formation of OSI and SASpine. Gonzalez also testified regarding his understanding for the reasons that Debtor resigned as trustee of the BHT. The Court finds Gonzalez to be a credible witness.
5. Lillian Putman
Lillian Putman ("Putman") performed an appraisal on Debtor's personal property that Debtor ultimately adopted and used for purposes of assigning values to his personal property exemptions (the "Putman Appraisal"). Putman holds a certified general Texas Appraiser's License. Putman testified regarding her experience at the Cyrs' home when she conducted the appraisal, the process she employed to appraise
I. Legal Analysis
A. Property of the Estate and Exemptions Generally
Under § 541(a), the commencement of a bankruptcy case creates a bankruptcy estate comprising of, among other things, "all legal or equitable interests of the debtor in property as of the commencement of the case." "The debtor may then remove certain types of property from the estate by electing to take advantage of exemptions described in federal or state law."
B. Burden of Proof
A debtor must file a list of property claimed as exempt on the debtor's schedule of assets. Fed. R. Bankr. P. 4003(a). "A party in interest may file an objection to the list of property claimed as exempt within 30 days after the meeting of creditors... is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later. Id. 4003(b). "Unless a party in interest objects, the property claimed as exempt... is exempt" and as a result, the property claimed as exempt is not part of the bankruptcy estate. 11 U.S.C. § 522(l);
In any hearing on an objection to a claim of exemption, "the objecting party has the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr. P. 4003(c). "Such burden is by a preponderance of the evidence."
C. Snap-shot Rule
In determining whether property is exempt, courts consider the law and facts as they existed on the date a debtor filed for bankruptcy.
D. Debtor's Homestead Exemption
1. Debtor did not abandon 15 Esquire because as of the Petition Date, Debtor still resided at 15 Esquire.
a. Factual Findings
On November 12, 2007, Debtor and LeAnn purchased 15 Esquire in their individual capacities. Also on November 12, 2007, Debtor and LeAnn executed a deed of trust in favor of Compass Bank to secure a mortgage loan and promissory note
In November 2017, LeAnn submitted three different enrollment applications to Houston schools for the Cyrs' school-aged children. Around the same time, LeAnn also submitted enrollment applications to schools in San Antonio. Debtor testified that enrollment applications were submitted for schools in both cities because a decision had not yet been made about temporarily moving his family, but not him, to Houston. As of the Petition Date, Debtor, LeAnn and their children lived at 15 Esquire and did so until at least April 20, 2018. Debtor has never moved out of 15 Esquire.
A real estate agent, Adam Rivera ("Rivera") created a brochure, Le Grande Maison Brochure, and an online tour of 15 Esquire and its adjoining property, 8 Villers St. Paul, San Antonio, Texas ("8 Villers").
b. Parties' Contentions
The Trustee and Key object to Debtor's claim of exemption to 15 Esquire as Debtor's homestead on the grounds that 15 Esquire was abandoned. The Cyrs argue that their continued overt use and occupancy of 15 Esquire on the Petition Date precludes a conclusion that 15 Esquire was abandoned. The Court concludes that, as of the Petition Date, Debtor did not abandon 15 Esquire.
c. Legal Standard
"[H]omesteads are favorites of the law, [and] we must give a liberal construction to the constitutional and statutory provisions that protect homestead exemptions."
"To abandon a homestead, the owner of the property must evince a `present, definite[,] and permanent intent to
Finally, under the snap-shot rule, the Petition Date is the operative date in determining whether a homestead is exempt, and a homestead owned on the date of bankruptcy filing is "subject to an unconditional exemption under Texas law."
The Parties do not dispute that 15 Esquire was at one-point Debtor's homestead. Thus, the issue before the Court is whether Debtor abandoned 15 Esquire. As previously mentioned, Key and the Trustee have the burden of proving that Debtor and LeAnn discontinued the use of 15 Esquire and manifested an intent to permanently abandon 15 Esquire. Key directs the Court to evidence that Debtor manifested an intent to permanently abandon 15 Esquire,
Additionally, the purchase of 30 Post Shadow did not constitute abandonment of 15 Esquire. In December 2017, 30 Post
2. When Debtor transferred 15 Esquire to the Living Trust, 15 Esquire lost its exemption status.
a. Factual Findings
On September 12, 2014, Debtor and LeAnn created the Living Trust which named Debtor and LeAnn as Trustmakers,
Debtor and LeAnn in their individual capacities are solely liable for the monthly payments on the 15 Esquire Mortgage.
The Living Trust was created as part of the Cyrs' estate tax planning. As such, the Living Trust makes several references to the Internal Revenue Code and Treasury Regulations. The Living Trust makes no references to the Texas Property Code.
b. Parties' Contentions
SNH argues that Debtor lost his homestead exemption under the Texas Property Code when the Cyrs transferred 15 Esquire to the Living Trust because the Living Trust does not constitute a "qualifying trust" under subsections 41.0021(a)(1) of the Texas Property Code (the "Qualifying Trust Provision"). Debtor contends that the Living Trust does satisfy the requirements under the Qualifying Trust Provision and therefore 15 Esquire remains exempt from the claims of creditors.
Prior to the enactment of the section 41.0021 of the Texas Property Code, an individual lost his or her homestead protection when a person transferred a homestead to a living trust by warranty deed because the transfer of the homestead constituted a transfer of legal title. Bill Analysis, Tex. H.B. 3767, 81st Leg., R.S. (2009). Section 41.0021 of the Texas Property Code was enacted to counter that result by allowing a trustee to transfer, by warranty deed, real property designated as a homestead into a "qualifying trust" without affecting the homestead designation of the property. Id. Specifically, section 42.001 of the Texas Property Code provides that "[p]roperty that a settlor or beneficiary occupies and uses in a manner described by this subchapter and in which the settlor or beneficiary owns a beneficial interest through a qualifying trust is considered the homestead of the settlor or beneficiary under Section 50, Article XVI, Texas Constitution, and Section 41.001." Tex. Prop. Code § 41.0021(b) (emphasis added). A "qualifying trust"
Id. at 41.0021(a). Therefore, when a homestead is transferred to a living trust, that homestead does not lose its exempt status and remains protected from the claims of creditors if the homestead is transferred to a qualifying trust. As Debtor and LeAnn
i. The Cyrs do not have the right to revoke the Living Trust without the consent of another person because the Living Trust authorizes the Cyrs to revoke the Living Trust only when the Cyrs act jointly.
SNH first contends that the Living Trust is not a qualifying trust because the Living Trust does not allow either LeAnn or Debtor the right to revoke the Living Trust without the consent of the other. Stated differently, SNH contends that the Revocation requires that a settlor or beneficiary of the trust be able to revoke the trust without the consent of any other person, including the consent of a co-settlor or co-beneficiary. Conversely, Debtor argues that the Living Trust satisfies the Revocation Provision because as settlors of the Living Trust, LeAnn and Debtor have the ability to revoke the Living Trust without any other person's consent. The Court concludes that the Living Trust does not allow either Debtor or LeAnn to revoke the Living Trust without the consent of another person.
When construing Texas statutes, courts must "ascertain and give effect to the [Texas] Legislature's intent as expressed by the statute's language."
Section 41 of the Texas Property Code does not define "person." Chapter 311 of the Government Code (the "Code Construction Act"), however, broadly defines "person" to include "corporation[s], organization[s], government[s] or governmental subdivision[s] or [agencies], business trust[s], estate[s], trust, partnership[s], association[s], and any other legal [entities]." Tex. Gov't Code § 311.005(2).
The Revocation Provision begins by identifying which persons the trust instrument must expressly provide rights to—the settlor or beneficiary—and then states that the trust instrument must provide that a settlor or beneficiary of the trust instrument has the right to revoke the trust instrument without the consent of another person. Unless otherwise indicated, general words, such as the term "person," should be afforded their "full and fair scope[,] .... and should not be arbitrarily limited." ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXAS 101 (2012). "[T]he presumed point of using general words is to produce general coverage—not to leave room for courts to recognize ad hoc exceptions." Id. "It is true that a literal meaning is more readily discernable when the provisions are concrete and specific than when they are abstract and general, and one is right to hesitate and ponder before deciding that a specific factual situation falls within the coverage of a general provision." Id. "But in the end, general words are general words and they must be given general effect." Id.
"Person" is a general term, and according to its applicable statutory definition and plain and common meaning, the term is broad. There are no circumstances or conditions indicating that the Court should not afford the term its full and fair scope. Moreover, the specific use of the terms "settlor" and "beneficiary" immediately before the use of the term "person" further suggests to the Court that the term "person" should be treated generally and not arbitrarily limited to all other persons except for co-settlors and co-beneficiaries. See id. at 170 ("[W]here a document has used one term in one place and a materially different term in another, the presumption is that the different term denotes a different idea. If it says land in one place and real estate later, the second provision presumably includes improvements as well as raw land." (emphasis in original)). Logically, it follows that for purposes of the Revocation Provision, "person" includes all human beings with rights and duties, including other settlors or beneficiaries of the same trust instrument.
Here, § 1.04(b) of the Living Trust provides in relevant part:
(Joint Exhibit 3, § 1.04(b)). The Living Trust authorizes Debtor and LeAnn to revoke the Living Trust, but only when acting jointly. In other words, neither Debtor nor LeAnn are authorized revoke the Living Trust individually and can only do so with each other's consent. Because the Revocation Provision requires that the Living Trust expressly provide either
The Texas Trust Code (the "Trust Code") is a title under the Property Code and serves as the governing authority for the Living Trust; therefore, the Court must consider the Revocation Provision in relation to the Trust Code. See
The Cyrs argue that the Texas Property Code does not require that there be only one settlor that has the right to revoke the trust without the consent of another person nor does it provide that a trust may have only one settlor. The Cyrs are effectively advocating that an exception should be made to the Revocation Provision for trusts containing multiple settlors. The Court cannot ignore the plain language of the statute and it is not this Court's function or within this Court's power to improve or change the law. SCALIA & GARNER, supra at 93. Nor should this Court add "unprovided-for exceptions to a text." Id. "[I]f the Congress [had] intended to provide additional exceptions, it would have done so in clear language. Id. (citing
Debtor submits that he executed a durable, general, power of attorney in favor of LeAnn to allow her to act for him, as his representative, and therefore LeAnn individually can revoke the Living Trust. This evidence, however, is irrelevant to the Court's analysis as the Qualifying Trust Provision only contemplates what the trust instrument states. Prop. Code § 42.001(b) (defining "qualifying trust" according to what the trust instrument provides). Here, the Living Trust expressly requires that the Cyrs have the right to revoke the Living Trust only when acting jointly. Moreover, the Debtor does not direct the Court to any provision in the Living Trust, and the Court cannot locate such a provision, which incorporates or references the durable, general power of attorney referenced by Debtor.
Finally, Debtor contends that if the Court adopts SNH's position, the Court's holding would effectively mean that if there are multiple settlors of a revocable
The Court is aware that "[b]ecause homesteads are favorites of [Texas] law, we must give a liberal construction to the constitutional and statutory provisions that protect homestead exemptions."
ii. The Living Trust does not provide that Debtor or LeAnn, as settlors or beneficiaries of the Living Trust, have the right to the right to exercise an inter vivos general power of appointment over 15 Esquire.
SNH submits that no provision in the the Living Trust grants either Debtor or LeAnn the right to exercise an inter vivos general power of appointment over 15 Esquire. The Cyrs contend that LeAnn has the power of appointment over 15 Esquire under § 1.04(c) of the Living Trust. The Court concludes § 1.04(c) of the Living Trust does not grant such general power of appointment.
Section 1.04(c) provides:
(Exhibit 3, § 1.04(c)). Section 1.04(c) of the Living Trust addresses addition and removal of trust property, allowing Debtor and LeAnn to act individually with regards to the addition of property and jointly with regards to the removal of community property. Section 1.04(c) also allows Debtor and LeAnn to act individually with respect to separate property. The Parties do not dispute that 15 Esquire is community property.
A power of appointment is "the authority to appoint or designate the recipient of property, to invade or consume property, to alter, amend, or revoke an instrument under which an estate or trust is created or held, and to terminate a right or interest under an estate or trust, and any authority remaining after a partial release of a power." Tex. Prop. Code § 181.001(2); In other words, "[a] power of appointment is a power of disposition given to a person over property not his own, by someone who directs the mode in which that power shall be exercised by a particular instrument."
RESTATEMENT (FIRST) OF PROPERTY § 318 illus. 1 (AM. LAW INST. 1940).
The Cyrs contend that § 1.04(c) constitutes a general power of appointment because it grants the Cyrs the right to remove 15 Esquire from the Living Trust thereby giving them unrestricted authority over what happens to 15 Esquire. A power of appointment dictates the disposition of certain property and creates interests in appointees.
iii. The Living Trust does not provide that Debtor and LeAnn can live at 15 Esquire
at no cost and therefore, does not constitute a qualifying trust on that basis.
SNH argues that the Living Trust does not satisfy the No-Cost Provision because the language contained in the Living Trust grants LeAnn and Debtor the right
The Tax Code exempts from taxation a residence homestead that an owner uses as his home, even where the home is "owned by one or more individuals, either directly or through a beneficial interest in a qualifying trust." Tex. Tax. Code Ann. § 11.13(a) and (j). For purposes of the Tax Code, a
Id. at 11.13(j) (emphasis added). The Qualifying Trust Provision, however, exempts a homestead from being subject to the claims of creditors where the homestead is transferred to a "qualifying trust." Prop. Code § 41.0021(b). For purposes of the Property Code, a trust can qualify as a qualifying trust in one of three ways, including when the trust instrument provides that a settlor or beneficiary of the trust has the right to "use and occupy the residential property as the settlor's or beneficiary's principal residence at no cost to the settlor or beneficiary, other than payment of taxes and other costs and expenses specified in the instrument or court order...." Id. at 41.0021(a)(1)(C) (emphasis added). The Tax Code and the No-Cost Provision differ in that the Tax Code requires that the trust document allow a trustor or beneficiary to use and occupy the residence rent free and without charge, while the No-Cost Provision requires that the trust instrument allow a settlor or beneficiary use and occupy the residence at no cost.
(Joint Exhibit 3, § 1.06).
The phrases "rent-free and without charge" and "at no cost," are not statutorily defined, and indeed, should be construed according to the rules of grammar and common usage "unless a contrary intention is apparent from the context or unless such a construction leads to absurd results."
Here, § 1.06 of the Living Trust permits Debtor and LeAnn the right to live at 15 Esquire "rent free and without charge." For a trust instrument to satisfy the No Cost Provision, the trust instrument must state that Debtor and LeAnn have the right to live at 15 Esquire "at no cost." As previously explained "at no cost" is broader than "rent free and without charge" and conceivably includes costs and expenses other than those related to rent. Therefore, while § 1.06 of the Living Trust may be sufficient to satisfy the requirements of a qualifying trust under the Tax Code, this language does not satisfy the No Cost Provision of the Property Code.
This holding also comports with the presumption that "[a]ll statutes are presumed to be enacted by the legislature with full knowledge of the existing condition of the law and with reference to it."
The plain language of the competing provisions is clear, and the Court has employed well-settled doctrines of statutory construction to interpret the provisions. While the Court's holding may not be ideal to the Cyrs' present circumstances, it is certainly not absurd. Both definitions of "qualifying trust" were in effect in 2014 when the Cyrs created the Living Trust and transferred 15 Esquire to the Living Trust. This is not a situation where the Tax Code was in effect, but the Qualifying Trust Provision was not in effect at the time the Living Trust was created. Moreover, the evidence is clear that the Living Trust was created as part of the Cyrs' estate tax planning. These intentions are clearly manifested not only by LeAnn's testimony, but by the multiple references to the Internal Revenue Code and the Treasury Regulations in the Living Trust.
Based on the foregoing analysis, the Court concludes that the Living Trust does not satisfy any of the three requirements under the Qualifying Trust Provision. As such, SNH's Objection on this basis is sustained.
E. Debtor's interest in the OSI 401(k) is exempt because on the Petition Date, Debtor had a right to assets held in or a right to receive payments from the OSI 401(k).
1. Factual Findings
OSI was the former entity that Debtor practiced under from 2005 through late 2017. OSI offered a 401(k) plan to its employees. Debtor claimed an exemption as to his 401(k) account with OSI (the "OSI 401(k)") in the amount of $216,170.82.
On November 29, 2017, Debtor sent a letter to Retirement Plan Consultants requesting a "complete termination of [OSI's] 401(k) plan currently held with Retirement Plan Consultants and the Plan Custodian TD Ameritrade Trust Company." (Joint Exhibit 8). The letter also stated "[t]he effective date of the plan termination and no further contributions will be made to the 401(k) plan effective December 31, 2017[sic?]." On December 27, 2017, Elizabeth Knight, OSI's Practice Administrator, signed and returned a Plan Termination Authorization Form terminating the service agreements between OSI's 401(k) Plan and Retirement Plan Consultants (the "Termination Request"). On January 17, 2018, LeAnn submitted, with Debtor's authorization, a Distribution Request Form (1) requesting a 100% withdrawal from Debtor's interest in the OSI 401(k), (2) waiving the 30-day waiting period permitted to consider the election of his withdrawal, and (3) directing that income tax be withheld from his distribution (the "Withdrawal Request"). Debtor also testified he did not have an intent to invest the OSI 401(k) proceeds into another 401(k), IRA, or other tax-exempt retirement plan.
TD Ameritrade issued Debtor a check dated February 21, 2018 in the amount of $162,642.97 (Joint Exhibit 12) (the "First Check"). The First Check expired on its own terms, and subsequently, TD Ameritrade issued Debtor a second check dated May 22, 2018 (the "Second Check"). LeAnn received both the First Check and the Second Check, however, neither Debtor nor LeAnn cashed, deposited, or reinvested either check.
2. Parties' Contentions
The Objectors argue that Debtor's claimed exemption in the OSI 401(k) is not exempt because Debtor took all necessary steps to obtain a distribution from the OSI 401(k), including terminating the OSI 401(k) and requesting a withdrawal, prior to the Petition Date and did not subsequently reinvest the distribution in a qualifying retirement account. The Objectors also argue that the fact Debtor did not receive the First Check until after the Petition Date and that Debtor failed to cash or deposit either the First Check or Second Check has no bearing on the exemption analysis because as of the Petition Date, Debtor was owed and entitled to the OSI 401(k) proceeds.
Debtor argues that the Objectors do not meet their burden to show that the OSI 401(k) is not a properly claimed exemption because under application of the snap-shot rule, there is no evidence that as of the Petition Date, Debtor did anything other than request the termination of his 401(k) plan. As a result, because the OSI 401(k) funds were undistributed on the Petition Date, Debtor was not required to reinvest the 401(k) Proceeds within the sixty-days required under the Texas Property Code for the exemption to remain available.
The issue before the Court is whether a debtor who requests a withdrawal of funds from a retirement account prior to filing bankruptcy, receives the funds post-petition, and neither intends to reinvest nor actually reinvests those funds into another retirement account within sixty
In Texas, "a person's right to the assets held in or to receive payments [under a 401(k)] is exempt from attachment, execution and seizure for the satisfaction of debts ...." Tex. Prop. Code § 42.0021(a). "Amounts distributed from a [401(k)] ... entitled to an exemption ... are not subject to seizure for a creditor's claim for 60 days after the date of distribution...." Id. at .0021(c). "[T]he essential element of an exemption must continue in effect even during the pendency of a bankruptcy case."
Here, LeAnn, on Debtor's behalf, exercised Debtor's right to the assets held in or to receive payments under the OSI 401(k) account by submitting the Withdrawal Request on January 17, 2018—three days before the Petition Date. The Withdrawal Request, however, did not eliminate Debtor's right to assets held in or to receive payments in Debtor's interest in the OSI 401(k) and therefore, Debtor's claimed exemption in the OSI 401(k) plan was unconditionally exempt on the Petition Date and not subject to the sixty-day reinvestment requirement. In other words, even though Debtor terminated the OSI 401(k) plan and submitted the Withdrawal Request pre-petition, on the Petition Date, Debtor's claimed exemption in the OSI 401(k) plan was unconditionally exempt because Debtor still maintained a right to assets held in or to receive payments from his 401(k).
The Objectors argue that because Debtor took all necessary steps to obtain a distribution from the OSI 401(k) prior to the Petition Date and did not subsequently reinvest the distribution in a qualifying retirement account within the 60-day statutory period, Debtor's claimed exemption in the OSI 401(k) is not valid. Stated differently, but for the delay of the party distributing the First Check, Debtor would have been in possession of and entitled to the First Check prior to the Petition Date, and therefore, Debtor's interest in the claimed exemption would be conditionally exempt.
Whether Debtor took all necessary steps to obtain a distribution cannot be determined prospectively. In other words, whether Debtor took all necessary steps to receive the First Check was unknown on the Petition Date and could not be definitively determined until Debtor received the First Check or upon notice from TD Ameritrade of any deficiencies in the Withdrawal Request. This underscores the logic (whether intended or not) on conditioning the sixty-day reinvestment period on the date of distribution as opposed to the date of withdrawal because if the requested withdrawal was deficient, or additional steps had to be taken for a claimant to receive the actual distribution, a claimant would not otherwise get the benefit of the full sixty-day reinvestment period. Moreover, even given a satisfactory withdrawal request, the amount of time it takes to process a requested withdrawal and issue a distribution from a 401(k) account is not necessarily in the control of the claimant.
As the Parties are aware, the Fifth Circuit recently held that "funds withdrawn from an exempted retirement account after the filing of a Chapter 7 bankruptcy do not lose their exempt status even if the money is not redeposited in a similar account within 60 days pursuant to Texas's proceeds rule."
At first blush, this Court's holding appears to conflict with
Objectors liken the facts before the Court to the result under § 541(a)(6) which includes in the bankruptcy estate "proceeds, product, offspring, rents, or profits of or from property of the estate[.]" The Court understands the analogy in principle, but finds the reference misplaced. Section 541 identifies which property becomes property of the estate. Whether the funds distributed from Debtor's OSI 401(k) are exempt and therefore property of the estate is a function Texas-state law, regardless of the principles enunciated in the Bankruptcy Code.
F. Debtor's Personal Property
1. Debtor should be afforded a personal property exemption in the amount of $100,000 under subsection 42.001(a)(1) of the Texas Property Code.
a. Factual Findings
Debtor and LeAnn were married in 1999 and continue to be married as of present. Together, they have four children—a 16-year-old daughter, 13-year-old son, 8-year-old son, and a 3-year old daughter. Debtor's Schedule I represents that he receives $0.00 in income but receives monthly contributions from LeAnn
b. Parties' Contentions
Key and the Trustee argue that Debtor's personal property exemption should be limited to $50,000 under subsection 42.001(a)(2) rather than $100,000 under subsection 42.001(a)(1) of the Texas Property Code because Debtor is not head of household. Neither Debtor's Response nor Debtor's Closing Arguments address the merits of this argument.
Article XVI, section 49 of the Texas Constitution granted the Legislature the power to create statutory exemptions from
Tex. Prop. Code § 42.001(a).
For purposes of a homestead exemption, Texas Courts use a three-part test to determine whether a homestead claimant is a single adult or the head of a family: "(1) the relation is one of social status, not of mere contract, (2) there is a legal or moral obligation on the head to support the other members, and (3) there is a corresponding state of dependence existing on part of the other members for their support."
Even if the
2. The value of Debtor's personal property exemptions are deemed valid as Key and Trustee did not meet their burden.
a. Factual Findings
Debtor claimed the full value of exempt property afforded by section 42.001 and 42.002 of the Texas Property Code. Specifically, Debtor claimed as exempt household goods and furnishings, clothing, piano, bicycles, a stroller, wedding rings, watches, two firearms, an outdoor swing and play set, and a basketball hoop. Debtor did not have any involvement in ascribing the values of any property identified on his Schedule C, other than to adopt and use the values assigned to such property by Putman.
Putman valued the personal property at what she termed "liquidation value" and testified that she based the values on her knowledge and experience. Putman explained that she was attempting to get the cash equivalency of the values of the furniture and items in the Cyrs' home. She testified that in determining the appropriate values, she used variables or comparable values from local consignment stores, the internet, and various upscale second-hand stores. Putman testified that there could be differences of opinion between appraisers on the value ascribed to the items in her report. She also stated that as of the date of the hearing should could not give a fair market valuation of the property.
Putman testified that she included appraised all items in 15 Esquire other than items owned by LeAnn and items belonging to the Cyrs' children. Putman testified that at the request of Debtor's counsel, she valued a collection of Spurs' jerseys, basketballs, and action figurines that were in the minor son's bedroom and the daughter's bedroom, along with a student piano used by a minor child. Putman testified that the household furnishings are approximately ten years old and Indonesian made to look elegant but not a collectible. In ascribing those values, she used the values that she sees in a consignment store knowing what an approximate price in her opinion would be at an estate sale. Putman testified that the electronic equipment in the media room (a projector, television, and sound system) was approximately ten years old and obsolete.
b. Parties' Contentions
Key asserts that the stated method of the valuation offered by Debtor is a liquidation value intended to artificially diminish the claimed value of the property sought to be exempted and therefore Debtor's claimed exemptions should be denied. In other words, Debtor has undervalued his exempt property. Alternatively, and additionally, Key argues that the exemptions should be denied to the extent that the amount actually listed for each such item in each such category by Debtor is less than fair market value of the subject asset and the Trustee should be permitted to take into the assets of the estate the difference between the listed value and the fair market value. Stated differently, the exemption should be denied in the amount that reflects the difference between the fair market value and listed value and upon reappraisal of the property by the Trustee, all of the value in excess of that set forth in the Putman Appraisal should be property of the estate.
For purposes of exemptions, the Bankruptcy Code defines "value" to mean "fair market value as of the date of the filing of the petition [.]" 11 U.S.C. § 522(a)(2). "Fair market value" means "the price which a willing seller under no compulsion to sell, and a willing buyer under no compulsion to buy, would agree upon after the property has been exposed to the market for a reasonable amount of time."
Here, Debtor valued his personal property exemptions based on the values ascribed in Putman's Appraisal. Key and the Trustee contend that such values are liquidation values and not fair market values and therefore, the exemption should be denied. Key and the Trustee, however, provide no competent evidence that affirmatively demonstrates that a fair market value for Debtor's personal property exemptions is higher than the value claimed by Debtor. "To deny a debtor an exemption which is based upon a dollar limitation, the objecting party cannot carry its burden of proof by merely impeaching the Debtor's valuation."
Key asks, "additionally and alternatively," to deny Debtor's claimed exemptions to the extent that the amount actually listed for each item in each category by the Debtor is less than fair market value of the subject asset and the Trustee should be permitted to take into the assets of the estate the difference between the listed value and the fair market value. While Key is not clear how this will be accomplished, such a request at this stage in Debtor's bankruptcy case is inappropriate. All of Debtor's creditors had opportunity to object to Debtor's exemptions, which the Objectors did. None of the Objectors, however, have provided competent evidence ascribing a higher value to Debtor's claim of exemptions. Allowing such relief permits the Trustee a second opportunity to evaluate the value of Debtor's personal property and object to Debtor's exemptions.
G. The Lincoln Policies are not property of the estate and therefore cannot be exempted in Debtor's bankruptcy.
1. Factual Findings
On September 12, 2014, Debtor created the Steven Jeffrey Cyr Life Insurance Trust (the "ILIT"), naming LeAnn as the trustee. Also on September 12, 2014, two Lincoln Benefit Life Insurance Policies (the "Lincoln Policies") which were transferred and assigned to the ILIT.
2. Parties' Contentions
Key, the Trustee, and Debtor all agree that the Lincoln Policies are owned by the
"Property that is properly exempted under § 522 is (with some exceptions) immunized against liability for prebankruptcy debts."
Here, Key, the Trustee, and Debtor all agree that the Lincoln Policies are owned by the ILIT, not Debtor, and therefore the Lincoln Policies are not property of the estate. Because the Lincoln Policies are not property of the estate, they cannot be exempted under § 522. As such, the Court concludes that the Lincoln Policies are not exempt under § 522.
Debtor also contends that the Lincoln Policies are not subject to the claims of creditors. Whether the Lincoln Policies are subject to the claims of creditors is not before the Court and therefore the Court takes no position on this argument.
H. Trustee and Key have not met their burden in proving that the VGLI is owned by a third party; therefore, the VGLI is a proper claim of exemption.
1. Factual Findings
Debtor obtained the Veterans Government Life Insurance Policy (the "VGLI") while he served active duty in the United States Military.
2. Parties' Contentions
Key contends that the VGLI is an asset owned by a third party and therefore not a valid claim of exemption. Debtor contends that Debtor owns the VGLI and therefore the VGLI is a proper claim of exemption.
Key, as the objecting party, has "the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr. P. 4003(c). "Such burden is by a preponderance of the evidence."
Here, Key has not met their burden. Admitted into evidence is Joint Exhibit 34 which is documentation regarding the VGLI, none of which identifies an owner of the VGLI. The documentation evidencing an election to to participate in the VGLI was completed by Debtor and identifies Debtor as service-member obtaining coverage. There is no evidence identifying anyone other than Debtor as the owner of the VGLI. As such, the Court concludes that Key has not met its burden and therefore, the VGLI is a properly claimed exemption.
I. The USAA Policy is not property of the estate and therefore cannot be exempted in Debtor's bankruptcy.
1. Factual Findings
The USAA Universal Life Policy (the "USAA Policy") identifies LeAnn as the owner of the policy and Debtor as the insured. (Joint Exhibit 34).
2. Parties' Contentions
Key asserts that the USAA Policy is owned by a third party and therefore not a proper claim of exemption.
For the reasons above, because the USAA Policy is owned by LeAnn, and not Debtor, the USAA Policy would not otherwise constitute property of the estate and therefore is not a valid exemption.
J. Whether the OSI office equipment and furnishings are properly claimed exemptions is moot.
Key and the Trustee objected to Debtor's claimed exemption in OSI office equipment and furnishings on the basis that the property was not owned by Debtor. Subsequent to the filing of the Objections, Debtor amended his schedules to remove any claimed exemption in these assets. As such, Key and the Trustee's objections to the OSI office equipment and furnishings are moot.
K. Whether the OSI exercise and fitness equipment are properly claimed exemptions is moot.
Key and the Trustee objected to Debtor's claimed exemption in OSI exercise and fitness equipment on the basis that the property was not owned by Debtor. Subsequent to the filing of the Objections, Debtor amended his schedules to remove any claimed exemption in these assets. As such, Key and the Trustee's objections to the OSI exercise and fitness equipment are moot.
L. Bad faith is not a proper basis for precluding subsequent amendments to exemptions.
Key and the Trustee ask the Court to deny Debtor any further opportunity to schedule and exempt any community property, whether under the joint control of sole control of the Debtor on the bases that Debtor engaged in bad faith by (1) intentionally concealing assets and (2) undervaluing assets.
A debtor may amend his schedules, including his schedule of exemptions, "as a matter of course at any time before the case is closed." Fed. R. Bankr. P. 1009(a). Prior to
M. Key does not provide a basis for ordering an inspection of Debtor's property.
Key asks the Court to direct Debtor and LeAnn to permit the Trustee to conduct a thorough inspection of 15 Esquire and 30 Post Shadow, inclusive of all safes, closets, drawers and adjacent buildings and inventory all of the personal property located therein. Key also requests that the Court direct Debtor and his non-filing spouse to permit the Trustee to conduct a thorough inspection of each storage unit under the control of the Debtor and/or the Debtor's non-filing spouse wherever located. Key does not explain a reason for such inspection and without more information, the Court cannot properly grant such relief. As such, Key's request for an inspection is denied without prejudice.
For the aforementioned reasons, the Court concludes the following:
IT IS THEREFORE ORDERED the Amended Objection of Jose C. Rodriguez, Trustee, to Debtor's Claims of Objections (ECF No. 182) is SUSTAINED IN PART, OVERRULED IN PART, and MOOTED IN PART,
IT IS FURTHER ORDERED THAT First Amended Objections of Key Equipment Finance to Debtor's Claims of Exemptions (ECF No. 183) is SUSTAINED IN PART, OVERRULED IN PART, MOOTED IN PART, and DENIED IN PART.
IT IS FURTHER ORDERED that SNH NS MTG Properties 2 Trust's Amended Objections to Debtor's Claims of Exemptions (ECF No. 184) is SUSTAINED IN PART and OVERRULED IN PART.