Kernell Thaw v. Christopher Moser

Case: 14-40108 Document: 00512801023 Page: 1 Date Filed: 10/13/2014
REVISED October 13, 2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 14-40108 United States Court of Appeals
Fifth Circuit
FILED
In the Matter of: STANLEY THAW, October 9, 2014
Lyle W. Cayce
Debtor Clerk
------------------------------
KERNELL THAW,
Appellant
v.
CHRISTOPHER MOSER,
Appellee
Appeal from the United States District Court
for the Eastern District of Texas
Before KING, GRAVES, and HIGGINSON, Circuit Judges.
HIGGINSON, Circuit Judge:
Kernell Thaw (“Kernell”), the non-debtor spouse of Stanley Thaw
(“Stanley”), claims a homestead exemption in property held jointly with
Stanley that is subject to a forced sale in Stanley’s bankruptcy proceedings.
She contends that the sale is a taking under the Fifth Amendment to the
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No. 14-40108
United States Constitution entitling her to just compensation. Because any
potential property interest was acquired after the enactment of the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(“BAPCPA”), there is no taking and we AFFIRM the lower courts.
FACTS AND PROCEEDINGS 1
This appeal arises out of Dr. Stanley Thaw’s bankruptcy. Stanley
married his wife, Kernell Thaw, in 2001. In 2002, Stanley partnered with Dr.
Leslie Schachar to form a medical service company, Theramedics, Inc.
(“Theramedics”), and in 2004 and 2006 Theramedics defaulted on some of its
obligations. Theramedics dissolved soon after its defaults. Schachar
personally paid off some of Theramedics’s debts, and Schachar obtained
assignments of Stanley’s guarantees to pay off the debts. When Schachar
demanded that Stanley pay off his portion, Stanley refused. Schachar sued
Stanley and received a judgment against Stanley in November 2009.
On October 28, 2009, Stanley and Kernell purchased a home for
$1,750,000. On November 1, 2009, Stanley and Kernell executed a Contract
for Deed increasing the price to $2,150,000. In the following months, Stanley
and Kernell made monthly payments on their home that were more than twice
the contractually required amount. On June 27, 2011, Stanley and Kernell
closed on the purchase of the home.
On December 2, 2011, Stanley filed for Chapter 7 bankruptcy protection
and claimed that the home was exempt from the bankruptcy estate under 11
U.S.C. § 522(b). The Chapter 7 trustee objected to Stanley’s exemption and
filed an adversary proceeding against Stanley and Kernell. Stanley
subsequently conceded that his exemption was capped at $146,450 under 11
1 Unless otherwise noted, the facts are taken from the bankruptcy court memorandum
opinion. Neither party challenges any of the bankruptcy court’s factual findings; indeed in
his brief, the trustee adopts verbatim Kernell’s statement of the facts.
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U.S.C. § 522(p). Following a hearing, the bankruptcy court held that Stanley’s
homestead exemption should be further reduced to $0 pursuant to 11 U.S.C.
§ 522(o) because Stanley acted with intent to hinder, delay, and defraud his
creditors by “concoct[ing] an elaborate scheme to funnel non-exempt assets into
his exempt homestead in a way that would be difficult for creditors such as
Schacher [sic] to detect or trace.”
In the bankruptcy court proceeding, Kernell argued that she had a
separate, vested homestead property right that was not subject to the limits of
11 U.S.C. §§ 522(o) and (p). The bankruptcy court held that Kernell, as a non-
debtor, had no “separate and distinct exempt homestead interest in the home
. . . that would allow her to claim a homestead exemption or entitle her to
compensation or prevent the sale of the homestead by the trustee except as set
forth in the Bankruptcy Code.” Therefore, Kernell’s takings claim failed.
Kernell appealed to the district court and the district court affirmed. The
district court reasoned that Kernell had no vested property interest in the
homestead exemption, and therefore there was no unconstitutional taking.
Kernell appeals the district court’s order.
STANDARD OF REVIEW
“This court reviews the decision of a district court, sitting as an appellate
court, by applying the same standards of review to the bankruptcy court's
findings of fact and conclusions of law as applied by the district court.” In re
Whitley, 737 F.3d 980, 985 (5th Cir. 2013) (internal citation omitted). The
bankruptcy court’s findings of fact are reviewed under the clearly erroneous
standard, and questions of law are reviewed de novo. Id. The facts are
undisputed and this case presents only questions of law: whether the trustee
can force a sale of the Thaws’ homestead, and if so, whether the sale constitutes
a taking of Kernell’s homestead interest requiring compensation.
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DISCUSSION
I. The Bankruptcy Court’s Authority to Order a Forced Sale
Kernell has no valid objection to the property’s forced sale as ordered by
the bankruptcy court. Section 363 of the Bankruptcy Code sets forth a
procedure by which a trustee may sell property of the estate other than in the
ordinary course of business. 11 U.S.C. § 363. This authorization is not limited
to the situation where the debtor is the only party with an interest in the
property to be sold. See In re Kim, 748 F.3d 647, 654-55 (5th Cir. 2014) (“The
Bankruptcy Code . . . contains express authorization to sell property of the
bankruptcy estate, notwithstanding the fact that a third party may have an
interest in that property.”) (citing 11 U.S.C. § 363). In re Kim upheld a forced
sale under circumstances that are nearly identical to the facts of this case:
where a non-debtor spouse claimed a homestead interest in the property. Id.
at 655 (holding that a non-debtor’s homestead rights do not disturb the
“bankruptcy court’s authority to order a forced sale of the [debtor and non-
debtor spouse’s] residence”). There, this court expounded the “unremarkable
proposition that a right of sale under federal law may be enforced as against a
non-debtor spouse, in spite of the non-debtor spouse’s homestead rights.” Id.
at 656. At oral argument, Kernell’s counsel conceded the bankruptcy court’s
authority to order a forced sale of the property but maintained that such a sale
would constitute a taking under the Fifth Amendment for which Kernell is
entitled to compensation.
II. Kernell Thaw’s Taking Claim
Kernell challenges the bankruptcy court’s decision—and the district
court’s affirmance—that her homestead interest is not a vested property right
and therefore there was not a Fifth Amendment taking from a forced sale of
the property. The trustee contends that the lower courts were correct and that,
since her homestead interest is not a vested economic right, the Takings Clause
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does not entitle her to compensation for the sale of the property. In deciding
this case, neither the district court nor the bankruptcy court had the benefit of
this court’s reasoning in In re Kim, which issued after the lower courts ruled.
Both parties find support for their arguments in In re Kim. In support of
Kernell’s argument, In re Kim clarified that a homestead interest may
constitute a vested property right, and that a non-debtor spouse could be
entitled to compensation from the sale of a property to which a homestead right
attaches. Id. at 661 (“Homestead rights have some value to a spouse, separate
and apart from an ownership interest in the real property on which homestead
rights are impressed.”) (emphasis in original). However, the In re Kim court
placed an important limitation on its holding, one which crucially
distinguishes this case and lends support to the trustee. It noted that:
[T]his constitutional argument is likely limited to cases, like this
one, in which the real property that constituted the homestead was
acquired before the BAPCPA was enacted. The Supreme Court has
indicated that when a federal statute permits a person’s property
to become liable for the debts of another, a Takings Clause
objection could not be successfully interposed if the property
interest “came into being after enactment of the provision.” The
Kims’ residence was purchased before BAPCPA was passed.
Id., 748 F.3d at 657 (emphasis added) (quoting United States v. Rodgers, 461
U.S. 677, 697 n.24 (1983)). Unlike in In re Kim, it is undisputed that the Thaws
purchased their property after BAPCPA was enacted in 2005. 2 This distinction
is dispositive and Kernell may not press a Takings Clause claim under Rodgers
and In re Kim.
2 BAPCPA added the Bankruptcy Code provisions—11 U.S.C. §§ 522(o) and (p)—that
cap and eliminate the homestead interest. Pub.L. No. 109–8, §§ 308, 322, 119 Stat. 23, 81-
82, 96–97 (2005).
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A.
In Rodgers, the Supreme Court analyzed whether § 7403 of the Tax Code
“empowers a federal district court to order the sale of a family home in which
a delinquent taxpayer had an interest at the time he incurred his indebtedness,
but in which the taxpayer’s spouse, who does not owe any of that indebtedness,
also has a separate ‘homestead’ right as defined by Texas law.” Rodgers, 461
U.S. at 680. In analyzing this problem, the Court noted that “[i]f there were
any Takings Clause objection to § 7403, such an objection could not be invoked
on behalf of property interests that came into being after enactment of the
provision. In both cases here, the homestead estates at issue came into being
long after 1868.” Id. at 697 n.24 (internal citations omitted). Although Rodgers
addressed the Tax Code and this case addresses the Bankruptcy Code, the
general constitutional rule is applicable to the same Texas homestead right.
Kernell does not explain, and we can think of no reason, why we should limit
to the Tax Code the Rodgers rule limiting the takings implications of a forced
sale to property interests that were acquired before the regulation went into
effect.
Rodgers relied on United States v. Security Industrial Bank, 459 U.S. 70,
81–82 (1982), which interpreted a provision of the Bankruptcy Code to be
prospective only. In Security Industrial Bank, the Court reasoned, in part, “we
decline to construe the Act in a manner that could in turn call upon the Court
to resolve difficult and sensitive questions arising out of the guarantees of the
takings clause,” id. (internal quotation marks omitted), thereby implying that
prospective application of a bankruptcy rule would avoid a takings problem.
See also In re Thompson, 867 F.2d 416, 422 (7th Cir. 1989) (“The conclusion
that section 522(f), when as here it is applied prospectively, does not violate
the takings clause of the Fifth Amendment is the premise of Security Industrial
Bank, which construed the statute to be applicable only prospectively in order
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to obviate a constitutional question.”); In re Bernier, 176 B.R. 976, 992 (Bankr.
D. Conn. 1995) (noting that in Security Industrial Bank, the Court “assum[ed]
that there was no unconstitutional taking effected by § 522(f) as to liens created
after the effective date of the statute”). Accordingly, In re Kim’s endorsement
of the Rodgers footnote is supported by substantial authority and applies in
this case.
B.
While Kernell does not argue that the Rodgers rule should not apply in
the bankruptcy area, she contends that Rodgers does not extend so far as to
permit an existing statutory regime that provides for the “gratuitous
confiscation” of property. Rodgers, 461 U.S. at 697 (“Admittedly, if § 7403
allowed for the gratuitous confiscation of one’s property interests in order to
satisfy another person’s tax indebtedness, such a provision might pose
significant difficulties under the Due Process Clause of the Fifth
Amendment.”). First, Rodgers said only that a gratuitous confiscation might
pose a Takings Clause problem, not that it would always constitute a taking.
Second, Kernell does not argue how a forced sale in this case would be a
“gratuitous confiscation.” She presents a hypothetical in which a property in
which a delinquent taxpayer has a one percent interest is seized in order to
pay that taxpayer’s liability. Kernell avers that this “seizure” of the other 99-
percent owner’s interest would clearly be an unconstitutional taking even if
the property was purchased after the enactment of the statute authorizing
such a sale. We disagree. In Rodgers, there was no takings problem because
the relevant Tax Code provision provided for compensation “by requiring that
the court distribute the proceeds of the sale according to the findings of the
court in respect to the interests of the parties and of the United States.” Id. at
697 (internal quotation marks and citations omitted). These provisions would
similarly operate in Kernell’s hypothetical to afford the non-delinquent owner
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compensation for the seizure. Similarly, here, the Bankruptcy Code is
designed to minimize takings concerns. Section 363, the provision under which
the property is to be sold, contains protection for non-debtor spouses. Like the
Tax Code provision that the Rodgers court found militated against a
“gratuitous confiscation,” Section 363(j) directs the trustee to apportion and
distribute the proceeds of the sale to the non-debtor spouse and to the estate.
11 U.S.C. § 363(j). In addition, Section 363(i) gives non-debtor spouses a right
of first refusal to purchase the property. 11 U.S.C. § 363(i). These safeguards
show that a forced sale here will not be a gratuitous confiscation.
Kernell also contends that the fact that BAPCPA existed at the time the
Thaws acquired the property should be just one factor in determining whether
a taking has occurred. According to Kernell, Palazzolo v. Rhode Island, 533
U.S. 606, 626 (2001), retreated from the rule announced in Rodgers. In
Palazzolo, the Court rejected the argument that “by prospective legislation the
State can shape and define property rights and reasonable investment-backed
expectations, and subsequent owners cannot claim any injury from lost value,”
and cautioned that “[w]ere we to accept [an absolute rule], the postenactment
transfer of title would absolve the State of its obligation to defend any action
restricting land use, no matter how extreme or unreasonable.” Id. at 627. The
Court recognized that “[t]he Takings Clause . . . in certain circumstances allows
a landowner to assert that a particular exercise of the State’s regulatory power
is so unreasonable or onerous as to compel compensation.” Id.Palazzolo’s narrow exception has no application here. Kernell does not
connect the “certain circumstances” identified in Palazzolo to the Bankruptcy
Code provisions at issue here. She does not argue that the sale of her interest
in the property is “so unreasonable or onerous as to compel compensation,” id.,so the trustee’s actions do not fall within any limit imposed by Palazzolo. Just
as the Bankruptcy Code protects a non-debtor from gratuitous confiscation, it
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makes the sale of the property not “so unreasonable or onerous as to compel
compensation.” Moreover, the forced sale will not disturb Kernell’s
investment-backed expectations. See Palazzolo, 533 U.S. at 617 (considering,
in determining whether a taking occurred, “the extent to which the regulation
interferes with reasonable investment-backed expectations”). Since BAPCPA
was in effect before the Thaws purchased the property, and because the Thaws
purchased the property after they had knowledge of the judgment against
Stanley, Kernell was on constructive notice of how the Bankruptcy Code would
operate in the event of Stanley’s bankruptcy. In sum, the sale of the property
is neither a “gratuitous confiscation” nor “so unreasonable or onerous as to
compel compensation.”
CONCLUSION
For the foregoing reasons, we hold that the forced sale of the property by
operation of § 363 does not constitute a taking of Kernell Thaw’s homestead
interest. The Thaws acquired the property after the enactment of BAPCPA,
there is no “gratuitous confiscation,” and the sale is not “so unreasonable or
onerous as to compel compensation.” Accordingly, § 363 governs the
distribution, if any, due to Kernell. 3 Since we have the benefit of considering
In re Kim, our reasoning is different from the lower courts, but we may affirm
on any ground supported by the record. See Moncrief Oil Int’l. Inc. v. OAO
Gazprom, 481 F.3d 309, 311 (5th Cir. 2007). The district court is AFFIRMED.
3 We will not issue an advisory opinion on how Section 363 should apply to apportion
any sale proceeds in this case.
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