Fehmel v. Union State Bank , 372 F. App'x 507 ( 2010 )

Case: 08-51281 Document: 00511070289 Page: 1 Date Filed: 04/05/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
April 5, 2010
No. 08-51281 Lyle W. Cayce
Clerk
In the Matter of: FRANK HENRY FEHMEL, JR.; SHARON LEE FEHMEL
Debtors
FRANK HENRY FEHMEL, JR.; SHARON LEE FEHMEL
Appellants
v.
UNION STATE BANK; TEXAS STAR BANK, SSB; CURTIS DURHAM
Appellees
Appeal from the United States District Court
for the Western District of Texas
USDC No. 6:08-cv-00215-WSS
Before GARWOOD, WIENER, and BENAVIDES, Circuit Judges.
PER CURIAM:*
Appellant debtors Frank Henry Fehmel, Jr. and Sharon Lee Fehmel
appeal from the bankruptcy and district courts’ limitation of their homestead
exemption. At issue in this appeal is 11 U.S.C. § 522(p)(1), a Bankruptcy Code
*
Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
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provision that restricts debtors’ ability under state law to exclude the value of
their home from their bankruptcy estate and thus shield assets from creditors.
Under Texas law, debtors may exempt the total value of a designated
“homestead” from their bankruptcy estate. See Tex. Const. art. XVI, § 50; Tex.
Prop. Code Ann. §§ 41.001-.002 (Vernon 2000 & Supp. 2009); In re Blair, 334
B.R. 374, 376 (Bankr. N.D. Tex. 2005). However, § 522(p)(1) of the Bankruptcy
Code partially preempts this unlimited exemption. It provides that when a
debtor elects:
to exempt property under State or local law, a debtor may not
exempt any amount of interest that was acquired by the debtor
during the 1215-day period preceding the date of the filing of the
[bankruptcy] petition that exceeds in the aggregate [$136,875] in
value in . . . real or personal property that the debtor or dependent
of the debtor claims as a homestead.
11 U.S.C. § 522(p)(1)(D) (2006). 1 In other words, § 522(p)(1) caps Texas’s
homestead exemption at $136,875 per debtor for any interest in property
acquired 1,215 or fewer days before the petition date (the “lookback period”).
However, for any interest acquired more than 1,215 days before the petition
date, Texas’s homestead exemption remains unlimited. It is undisputed that the
Fehmels acquired their home during the lookback period.
The Fehmels assert that the bankruptcy court inappropriately curtailed
their homestead exemption by adopting the so-called “title” interpretation of §
522(p)(1). They urge us to break from the bankruptcy court’s reasoning and
adopt what has been called the “equity” interpretation of § 522(p)(1). They argue
that under this interpretation, § 522(p)(1)’s exemption cap would not apply to
any appreciation in the value of their homestead caused by market forces after
1
The original text caps exemptions at $125,000, but the cap was indexed for inflation
and has now been increased to $136,875. See Wallace v. Rogers (In re Rogers), 513 F.3d 212,
217 n.2 (5th Cir. 2008).
2
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they acquired the property. Conversely, appellee Union State Bank 2 argues that
the bankruptcy court correctly adopted the “title” interpretation and thereby
properly applied § 522(p)(1)’s cap to any lookback period appreciation in the
value of the Fehmel’s property. However, we conclude that we need not
presently adopt either the title or equity interpretations of the statute, nor
resolve whether § 522(p)(1)’s cap is applicable to home equity obtained from
market appreciation. Like the district court, we find that even if we were to
assume that the cap does not reach such appreciation, the evidence presented
below does not support granting the Fehmels an exemption any greater than
that afforded them by the bankruptcy court. Consequently, we affirm the
bankruptcy court’s limitation of the Fehmels’ exemption to $273,750.
I.
On May 4, 2005, the Fehmels bought a residence and 150 acres of
surrounding land in Lampasas, Texas for $375,000. They made a down payment
of $73,841.23 and obtained a mortgage of $304,000 to finance the rest of their
purchase. They then moved into the house on the property and, in the years
that followed, made certain improvements, remodeling their new home and
building a barn, workshop, and guest apartment. Appellee Curtis Durham
performed much of the work improving the property, for which the Fehmels paid
him approximately $150,000 and traded him a tractor, the value of which was
not established below. Durham also filed a claim in these proceedings, asserting
that the Fehmels owed him an additional $42,830.87 for his work on the
property. Beyond Durham’s work, the Fehmels made certain improvements
themselves, including $8,000 to $10,000 worth of plumbing work. In its findings
of fact, the bankruptcy court did not determine the total value of all of the
improvements to the Lampasas property, but they appear to have at least cost
2
Appellees Curtis Durham and Texas State Bank have not submitted any briefing nor
participated in this appeal, relying instead on Union State Bank’s position in this case.
3
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approximately $200,830.87.3
Subsequently, on August 28, 2007, the Fehmels filed a voluntary petition
for relief under chapter 7 of the Bankruptcy Code. In the Fehmels’ schedules of
assets and liabilities, they listed the value of the Lampasas property as being
$700,000.4 Consequently, between the date the Fehmels purchased the
Lampasas property and the petition date, the property appreciated in value by
$325,000. The bankruptcy court did not make a specific finding resolving
whether market forces, the Fehmels’ improvements, or some combination of both
were responsible for this appreciation. In their schedules, the Fehmels also
listed mortgage debt on the property totaling $297,811.30.5 As a result, on the
petition date, the Lampasas property had a total equity value of $402,188.70.6
The Fehmels’ 2005 acquisition of the Lampasas property occurred within
the lookback period, thereby arguably limiting their homestead exemption to
$273,750.7 However, in their schedules, the Fehmels claimed an exemption of
$402,188.70, in other words, the total equity value of their homestead. In
response, the chapter 7 trustee and the appellees in this case objected to the
claimed exemption, requesting that it be limited to $273,750.
3
Together, the Fehmels’ payment of $150,000, Durham’s claim of $42,830.87, and
$8,000 of plumbing work amount to $200,830.87.
4
Prior to the petition date, a potential buyer offered the Fehmels $740,000 for the
Lampasas property and certain chattels. Frank Fehmel testified that he believed the value
of the Lampasas property without the chattels to be $700,000.
5
Between the Fehmels’ acquisition of the Lampasas property and the petition date,
they seem to have paid off $6,188.70 of their mortgage.
6
$700,000 less $297,811.30, the remaining value of the Fehmels’ mortgage, is
$402,188.70.
7
Pursuant to 11 U.S.C. § 522(m), the exemption cap established by § 522(p) applies
separately to each debtor, creating a cap of $273,750 for the Fehmels rather than $136,875.
See, e.g., In re Rasmussen, 349 B.R. 747, 755 (Bankr. M.D. Fla. 2006) (concluding that §
522(p)’s exemption cap applies separately to each debtor in joint cases).
4
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The bankruptcy court sustained the objection and limited the Fehmels’
exemption to $273,750. The court reached this decision by adopting what has
been called the “title” interpretation of § 522(p)(1), concluding that the term
“interest” used in the provision refers to title or some ownership interest in
property. See, e.g., In re Greene, 583 F.3d 614, 624-25 (9th Cir. 2009) (adopting
title interpretation); In re Sainlar, 344 B.R. 669, 673 (Bankr. M.D. Fla. 2006)
(same); Blair, 334 B.R. at 376-77 (same). Under the title theory, § 522(p)’s cap
is triggered solely when a debtor acquires an ownership interest in a homestead
within the lookback period. Greene, 583 F.3d at 625; Sainlar, 344 B.R. at 673;
Blair, 334 B.R. at 376-77. Since the Fehmels acquired the Lampasas property
during the lookback period, the bankruptcy court concluded that the cap applied
to the total equity value of the homestead on the petition date.
On appeal, the district court affirmed the bankruptcy court, but under a
different rationale. The district court noted that certain courts have found that
the term “interest” in § 522(p)(1) refers to equity. See, e.g., Parks v. Anderson,
406 B.R. 79, 95 (D. Kan. 2009) (adopting equity interpretation); Rasmussen, 349
B.R. at 756 (same). Under this “equity” interpretation, § 522(p)’s cap is triggered
by the acquisition of equity in homestead property during the lookback period,
even for property originally acquired before the lookback period. See Rogers, 513
F.3d at 222 n.8 (5th Cir. 2008) (explaining that “[t]he date of acquisition of title
is irrelevant for purposes of the equity definition”); Parks, 406 B.R. at 86, 95;
Rasmussen, 349 B.R. at 756, 757 n.5. Notably, courts adopting the equity theory
have drawn a distinction between active and passive acquisition of equity during
the lookback period; they have concluded that obtaining equity actively falls
under § 522(p)(1)’s cap, while obtaining it passively does not. One court has
described the distinction between active and passive acquisition of equity as
follows:
[A] debtor may acquire or obtain equity either by making a down
5
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payment, by paying down the mortgage, or by appreciation due to
market conditions. The first two methods of acquiring equity
require active conduct on the part of the debtor—payment of money.
The third, appreciation, is passive, requiring no active conduct.
Rasmussen, 349 B.R. at 757. Consequently, under the equity theory, the
appreciation in the value of the Fehmels’ property could be excluded from §
522(p)(1)’s cap, if it were passively acquired.
However, the district court concluded that it could affirm the bankruptcy
court without formally adopting either the title or equity interpretation, as even
under the equity theory, the Fehmels were only entitled to an exemption of
$273,750. The court found that the $325,000 appreciation in the value of the
Lampasas property was likely attributable to the Fehmels’ active investments
improving the property. See Rogers, 513 F.3d at 222 (assuming that equity
acquired due to improving property would be subject to cap); In re Presto, 376
B.R. 554, 581-82 (Bankr. S.D. Tex. 2007) (holding that equity acquired due to
improving property is subject to cap). Therefore, since the appreciation in the
value of the Fehmels’ homestead was not due to passive market appreciation, the
court held that the appreciation was subject to § 522(p)(1)’s cap on exemptions.
The present appeal followed.
II.
“The bankruptcy court’s findings of fact are subject to clearly erroneous
review, while its conclusions of law are reviewed de novo.” Rogers, 513 F.3d at
216. The parties do not contest any of the bankruptcy court’s specific findings
of fact, which we have described in the preceding section.
We conclude that the bankruptcy court and district court did not err in
limiting the Fehmels’ exemption to $273,750. Like the district court, we reach
this conclusion without adopting either the title or equity interpretations of the
6
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statute.8 Even if we were to assume that § 522(p)(1)’s cap only applies to actively
acquired equity, and not to equity passively obtained from market appreciation,
the bankruptcy court’s findings of fact do not show that the Fehmels would be
entitled to an exemption any greater than $273,750.
Under Fed. R. Bankr. P. 4003(c), “the objecting party has the burden of
proving that the exemptions are not properly claimed.” Objectors “must
establish that the exemption is improper by a preponderance of the evidence.”
Presto, 376 B.R. at 563. The Ninth Circuit has described the burden shifting
framework created by Rule 4003(c) in the following terms:
A claimed exemption is presumptively valid. . . . Once an exemption
has been claimed, it is the objecting party’s burden . . . to prove that
the exemption is not properly claimed. Initially, this means that the
objecting party has the burden of production and the burden of
persuasion. The objecting party must produce evidence to rebut the
presumptively valid exemption. If the objecting party can produce
evidence to rebut the exemption, the burden of production then
shifts to the debtor to come forward with unequivocal evidence to
demonstrate that the exemption is proper. The burden of
persuasion, however, always remains with the objecting party.
Carter v. Anderson (In re Carter), 182 F.3d 1027, 1029 n.3 (9th Cir. 1999)
(internal quotation marks and citations removed); see also Pequeno v. Schmidt,
307 B.R. 568, 584 (S.D. Tex. 2004) (describing burden shifting process), aff’d, 126
F. App’x 158 (5th Cir. 2005).
In this case, the unchallenged findings of fact show that under the equity
interpretation of § 522(p)(1), the Fehmels would not be entitled to their claimed
exemption of $402,188.70, the full equity value of their homestead. At the very
least, the Fehmels actively acquired approximately $278,019.57 of the equity in
8
Similarly, in Wallace v. Rogers (In re Rogers), we also passed on an opportunity to
adopt either the title or equity interpretations of § 522(p)(1), finding that it was unnecessary
to the resolution of the case before us at that time. 513 F.3d at 222-23.
7
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the Lampasas property: $71,000 from their down payment,9 $6,188.70 from
their mortgage payments, and $200,830.87 from the cost of their improvements.
Under the equity interpretation, all of this actively acquired equity would be
capped at $273,750, demonstrating that the Fehmels clearly have no right to
exempt the full equity value of the Lampasas property from their estate.10
However, it is probable that the Fehmels actively acquired far more than
$278,019.57 of the equity in their homestead: The extensive improvements to
the Lampasas property more likely than not acted synergistically to increase its
value by more than their cost. We conclude that Union State Bank has satisfied
its burden by pointing to this evidence demonstrating that the Fehmels’
exemption was improperly claimed. As such, this evidence is sufficient to shift
the burden of production to the Fehmels “to come forward with unequivocal
evidence to demonstrate that [their] exemption is proper.” Carter, 182 F.3d at1029 n.3. However, they have made no such showing.11 Given the extensive
improvements made to the Lampasas property and the Fehmels’ failure to meet
their burden of production,12 we find that all of the appreciation was attributable
9
The bankruptcy court found that the Fehmels made a down payment of $73,841.23.
However, they took out a mortgage of $304,000 on the property, larger than was necessary to
finance the rest of its purchase price of $375,000. Consequently, when the Fehmels took title
to the Lampasas property, they only had equity in their property of $71,000, not $73,841.23.
10
If the Fehmels acquired $278,019.57 of the equity in their homestead actively, and
such equity is capped at $273,750, then at the very least, $4,269.57 of the Fehmels’ exemption
would be improperly claimed.
11
For example, the Fehmels likely could have introduced evidence showing whether
similar properties in Lampasas appreciated during the same period without any
improvements.
12
We note that this case bears some resemblance to the many cases where courts have
reviewed debtors’ exemption of the proceeds of settlement agreements from their bankruptcy
estates. In such cases, courts have held that debtors do not have the initial burden of breaking
down these awards into exempt proceeds for bodily injury and nonexempt proceeds for pain
and suffering. See, e.g., In re Harrington, 306 B.R. 172, 183 (Bankr. E.D. Tex. 2003) (holding
that objector “cannot escape the burden of proof assigned to an objecting party under Rule
8
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to the Fehmels’ improvements,13 and thus is actively acquired home equity
subject to the statute’s $273,750 cap.
III.
Accordingly, we AFFIRM the bankruptcy and district courts’ limitation of
the Fehmels’ homestead exemption to $273,750.14
4003(c) because the exemption claim relates to a settlement agreement which fails to allocate
damages into specific categories of recovery”); Lester v. Storey (In re Lester), 141 B.R. 157, 162
(S.D. Ohio 1991) (holding that “the burden of proof is initially placed upon the [objector] with
respect to any objections he files, and . . . this burden does not shift to the Debtor merely upon
a showing that the Debtor has failed to allocate the personal injury settlement into its various
component parts”). In this case, the Fehmels’ decision to claim the total equity value of their
homestead as exempt, without breaking down actively from passively acquired equity, has not
shifted the burden to them to demonstrate the validity of their exemption. Instead, the
bankruptcy court’s findings of fact have demonstrated by a preponderance that the Fehmels’
exemption was improperly claimed.
13
Admittedly, the bankruptcy court’s findings of fact may not clearly and convincingly
demonstrate that all appreciation in the value of the Lampasas property was attributable to
the Fehmels’ improvements. However, Union State Bank has only needed to show that the
Fehmels’ exemption is improper by a preponderance of the evidence. See Kelley v. Locke (In
re Kelley), 300 B.R. 11, 16-17 (B.A.P. 9th Cir. 2003) (explaining that preponderance standard
is satisfied when “proposition is more likely true than not” (quoting United States ex rel.
Farmers Home Admin. v. Arnold & Baker Farms (In re Arnold & Baker Farms), 177 B.R. 648,
654 (B.A.P. 9th Cir. 1994)). Union State Bank has met this burden.
14
The bankruptcy court granted the Fehmels an exemption of $273,750, in addition to
any post-petition principal reduction for the mortgage on the Lampasas property. Union State
Bank has not challenged this portion of the bankruptcy court’s order, and we have not
reviewed it on this appeal.
9