England v. Federal Deposit Insurance (In Re England)

United States Court of Appeals,
Fifth Circuit.
No. 91–7381.
In the Matter of Wesley R. ENGLAND, Debtor.
Wesley R. ENGLAND, Appellant,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, Abrams Centre National Bank, and J.
Gregg Pritchard, Chapter 7 Trustee in Bankruptcy, etc., Appellees.
Oct. 26, 1992.
Appeal from the United States District Court for the Northern District of Texas.
Before POLITZ, Chief Judge, JOHNSON and JOLLY, Circuit Judges.
JOHNSON, Circuit Judge:
This case calls on the Court to determine whether both a homestead and proceeds from the
sale of a former homestead are exempt under section 41.001 of the Texas Property Code. Wesley
R. England appeals, urging the Court to reverse the Northern District Court's holding that both are
not exempt. Concluding that the language in section 41.001 clearly and unambiguously forbids the
simultaneous exemption of both, we affirm.
I. Facts and Procedural History
For the twenty-seven years prior to October 16, 1990, Wesley R. England ("England" or
"Appellant") and his wife, Virginia, lived in a home in Cedar Hill, Texas, which constituted their
urban homestead.1 On October 16, 1990, England sold this property for $10,000 in cash and a
1
Appellant presently argues that the Cedar Hill home, which included 6.248 acres of land, may
have been a rural homestead, not an urban homestead. However, his counsel was quite clear
before the bankruptcy court, conceding that "the urban homestead, admittedly urban, was in
excess of an acre.... [s]o only one acre of that would be exempt, obviously ..." (Rec.Vol. 3 at
11–12). England's counsel also stated that he did not believe that there was "any dispute that the
... Cedar Hill property was served by all [municipal] utilities." (Rec.Vol. 3 at 30). Further, the
Appellant himself testified that his former homestead was located within the city limits of Cedar
Hill. (Rec.Vol. 3 at 31). Based upon these statements, there can be no question but that the
Cedar Hill property constituted urban, not rural, homestead.
$210,000 Note Receivable (Note). This Note required the buyers to pay Appellant $1843 per month
for thirty-five months, with the balance due on October 16, 1993. England used the proceeds which
he received to pay for improvements on his ranch2 and for living expenses.
Approximately two weeks after closing on the house, England and his wife moved onto their
869 acre ranch near Hico, Texas. Two days after this move, on November 1, 1990, England filed a
petition for relief under Chapter 11 of the Bankruptcy Code. This was later converted to a Chapter
7 proceeding. Based upon 11 U.S.C. § 522(b)(2)(A), England elected to exempt property based
upon Texas law. Among other things, he claimed his ranch as a rural homestead3 and the Note as
proceeds from the sale of homestead, both purportedly exempt property under section 41.001(a) and
(c) of the Texas Property Code. The Federal Deposit Insurance Company and Abrams Centre
National Bank ("creditors"4 ) timely objected, arguing that to allow both exemptions would be
tantamount to allowing the appellant two homestead exemptions. The bankruptcy court and, upon
England's appeal, the district court agreed 141 B.R. 495. Both courts disallowed the exemption of
the proceeds, holding that as presented by England, the proceeds constituted a second homestead,5
something not countenanced by Texas law. England appealed to this Court, urging that we reverse
the holdings of the courts below and hold that both are exempt.
II. Discussion
2
Mr. England testified that he used the funds to improve the ranch in several ways, including
remodeling his house, building two barns, building roads on the ranch, drilling a water well,
digging water tanks, and fencing the entire 869 acre ranch. He stated that the only improvement
which was not fully completed was the completion of a third barn.
3
England claimed the entire 869 acres as his rural homestead. However, the law is indisputably
clear that a rural homestead consists of a maximum of two hundred acres. See TEX.PROP.CODE
ANN. § 41.002 (Vernon Supp.1992).
4
J. Gregg Pritchard is the Chapter 7 Trustee of the bankruptcy estate of the Appellant. He
intervened in this appeal solely to monitor the appeal and to participate as required to protect the
rights and interests of the creditors of the estate.
5
In the interest of clarity, this Court chooses not to characterize the proceeds as homestead.
See infra note 7.
A. Jurisdiction
Each court must be satisfied that it has jurisdiction of each case it considers. Even if the
parties fail to raise the question of subject matter or appellate jurisdiction, the court must do so sua
sponte, if necessary. In re Moody, 849 F.2d 902 (5th Cir.), cert. denied, 488 U.S. 967, 109 S.Ct.
493, 102 L.Ed.2d 530 (1988). The bankruptcy judge's order disallowing exemption of the proceeds
clearly did not dispose of England's entire bankruptcy case. We must therefore determine whether
this Court has appellate jurisdiction over that order.
Jurisdiction over bankruptcy cases arises from 28 U.S.C. § 158(d), which grants courts of
appeals appellate jurisdiction over "all final decisions, judgments, orders, and decrees" of bankruptcy
judges. District courts also have appellate jurisdiction over bankruptcy cases; however, their
jurisdiction includes interlocutory orders and decrees on which the court has granted leave to appeal.
28 U.S.C. § 158(a). Although the district court did not grant England leave to appeal this case, that
court did not discuss the finality of the bankruptcy court's order.
The Supreme Court has defined final judgment, as used in 28 U.S.C. § 1291, as a decision
which "ends the litigation on the merits and leaves nothing for the court to do but execute the
judgment." Firestone Tire and Rubber Co. v. Risjord, 449 U.S. 368, 373–74, 101 S.Ct. 669,
672–73, 66 L.Ed.2d 571 (1981) (quoting Coopers and Lybrand v. Livesay, 437 U.S. 463, 467, 98
S.Ct. 2454, 2456, 57 L.Ed.2d 351 (1978)). The Supreme Court has not defined final judgment with
respect to section 158.
However, a determination that appellate jurisdiction arises only when the bankruptcy judge
enters an order which ends the entire bankruptcy case, leaving nothing for the court to do but execute
the judgment, would substantially frustrate the bankruptcy system. This is so particularly when, as
here, one independent decision materially affects the rest of the bankruptcy proceedings. Separate
and discrete orders in many bankruptcy proceedings determine the extent of the bankruptcy estate
and influence creditors to expend or not to expend effort to recover monies due them. The reversal
of such an order would waste exorbitant amounts of time, money, and labor and would likely require
parties to start the entire bankruptcy process anew. This potential waste of judicial and other
reso urces has influenced this Court and other courts of appeals to view finality in bankruptcy
proceedings in a more practical and less technical light. See In re Moody, 849 F.2d 902, 904 (5th
Cir.), cert. denied, 488 U.S. 967, 109 S.Ct. 493, 102 L.Ed.2d 530 (1988); In re Brayshaw, 912 F.2d
1255, 1256 (10th Cir.1990); In re Apex Oil Co., 884 F.2d 343, 347 (8th Cir.1989); In re Cottrell,
876 F.2d 540, 541 (6th Cir.1989); F/S Airlease II, Inc. v. Simon, 844 F.2d 99, 103–04 (3d Cir.),
cert. denied, 488 U.S. 852, 109 S.Ct. 137, 102 L.Ed.2d 110 (1988); In re Charter Co., 778 F.2d
617, 621 (11th Cir.1985); Sumy v. Schlossberg, 777 F.2d 921, 923 (4th Cir.1985). But see In re
Wisz, 778 F.2d 762, 763–64 (11th Cir.1985). The Court has determined that an order which ends
a discrete judicial unit in the larger case concludes a bankruptcy proceeding and is a final judgment
for the purposes of section 158(d). In re Moody, 849 F.2d 902, 904 (5th Cir.1988); In re Moody,
817 F.2d 365, 368 (5th Cir.1987). Finality in bankruptcy cases is contingent upon the conclusion of
an adversarial proceeding within the bankruptcy case, rather than the conclusion of the entire
litigation. In re Louisiana World Exposition, Inc., 832 F.2d 1391 (5th Cir.1987).
Other courts have explicitly held that the grant or denial of an exemption in a bankruptcy
proceeding is a final order under section 158(d). In re Brayshaw, 912 F.2d 1255, 1256 (10th
Cir.1990); Sumy, 777 F.2d at 923; In re Jones, 768 F.2d 923, 925–26 n. 3 (7th Cir.1985); In re
White, 727 F.2d 884, 886 (9th Cir.1984); John T. Mather Memorial Hospital, Inc. v. Pearl, 723
F.2d 193, 194 n. 1 (2d Cir.1983).6 Although this Court has reviewed a district court's determination
that certain property was exempt in a bankruptcy proceeding, it has not expressly held that such an
order is final. There was an implicit finding that the bankruptcy court's order was final. In re Dyke,
943 F.2d 1435 (5th Cir.1991). That which In re Dyke implied, the Court now holds: An order which
6
Although In re White and Mather Memorial Hospital were decided prior to the enactment of
§ 158, we find the analysis in those cases persuasive.
grants or denies an exemption will be deemed a final order for the purposes of 28 U.S.C. § 158(d).
B. Homestead and Proceeds Exemption
1. Standard of Review
The determination of whether both homestead and proceeds of former homestead are exempt
is a question of law, which this Court reviews de novo. Frame v. S–H, Inc., 967 F.2d 194, 202 (5th
Cir.1992).
2. Proceeds of Former Homestead
From the beginning of Texas' statehood in 1845, its constitutions have provided homestead
protection to its residents. See TEX. CONST. of 1845, art. VII, § 22. The first constitution, as well
as those which followed it, protected homestead from forced sale for the payment of debts, except
in specific circumstances which are not relevant in this case. In 1897, the legislature passed article
2396, a predecessor to section 41.001, which also protected proceeds from the sale of a homestead7
from creditors ("proceeds exemption statute"). The Texas Legislature amended the proceeds
exemption statute in 1985.8 That statute, section 41.001 of the Texas Property Code, presently reads:
(a) A homestead and one or more lots used for a place of burial of the dead are exempt from
seizure for the claims of creditors except for encumbrances properly fixed on homestead
property.
(b) Encumbrances may be properly fixed on homestead property for:
(1) purchase money;
(2) taxes on the property; or
7
Homestead interests exist in real property. Cocke v. Conquest, 120 Tex. 43, 52, 35 S.W.2d
673, 678 (1931). See also TEX.PROP.CODE ANN. § 41.002 (Vernon Supp.1992) (urban
homestead consists of one acre of land; rural homestead consists of not more than two hundred
acres). Proceeds are personal property, and cannot be homestead. We therefore disapprove of
the district court's determination and the creditors' argument that the exemption of proceeds and
homestead is tantamount to the exemption of two homesteads.
8
The legislature has re-enacted or amended the statute several times since its initial enactment
in 1897.
(3) work and material used in constructing improvements on the property if contracted
for in writing before the material is furnished or the labor is performed and in a manner
required for the conveyance of a homestead, with joinder of both spouses if the homestead
claimant is married.
(c) The homestead claimant's proceeds of a sale of a homestead are not subject to seizure for
a creditor's claim for six months after the date of sale.
TEX.PROP.CODE ANN. § 41.001 (Vernon Supp.1992).
The creditors argue that sections (a), (b), and (c) of the statute are disjunctive, allowing the
exemption of homestead or proceeds, but not both. England argues that the sections are conjunctive
such that the statute clearly and unambiguously exempts homestead in section (a) and proceeds in
section (c). He asseverates that construing the statute to exempt both the homestead and the
proceeds is consistent with the legislature's intent that courts liberally construe homestead laws, "even
if the results are personally distasteful." No Texas court has answered this question, so this Court
ventures out into uncharted territory in determining whether section 41.001 may be construed to
exempt both a homestead and proceeds of a former homestead simultaneously.
a. Interpretation of Section 41.001
The first step in interpreting the meaning of a statute is to review its language. Courts must
adhere to the plain language of the law unless doing so demonstrably conflicts with the intentions of
the drafters. In re Meyerland Co., 960 F.2d 512, 516 (5th Cir.1992) (quoting Griffin v. Oceanic
Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 3250, 73 L.Ed.2d 973 (1982)).
The language in section 41.001(c) is clear regarding proceeds of homestead: When one sells
his homestead, the proceeds from that sale are exempt. However, when one acquires a new
homestead after the sale of his previous homestead, he abandons the previous homestead, changing
its character to former homestead.9 Weaver v. Nugent, 72 Tex. 272, 277, 10 S.W. 458, 460 (1888).
9
While the sale of homestead is abandonment which technically renders the property former
homestead, it is clear that the legislature intended that that type of abandonment trigger the
protection afforded in § 41.001. See Ingram v. Summers, 29 S.W.2d 447 (Tex.Civ.App.—El
Therefore, the pertinent question this Court must answer is whether the proceeds of the sale of
former homestead are exempt under section 41.001. We find that they are not.
Just as the former homestead loses its homestead character when its owner abandons it, so
the proceeds of the sale of that former homestead lose their homestead character and become
proceeds of former homestead. Texas law has consistently distinguished homestead from former
homestead and has done so for well over a century. Texas does not and has never afforded owners
of former homestead the rights of homestead claimants. Marler v. Handy, 88 Tex. 421, 427–28, 31
S.W. 636, 639 (1895); Weaver, 72 Tex. at 277, 10 S.W. at 460; Reece v. Renfro, 68 Tex. 192, 194,
4 S.W. 545, 546–47 (1887); Allison v. Shilling, 27 Tex. 450, 455–56 (1864). Owners of abandoned
homestead have no rights in their former homest ead, and there are no hindrances to the seizure
thereof. Allison, 27 Tex. at 455–56.
Because the distinction between homestead and former homestead is so clear, we believe the
drafters of the exempt ion statute would have unambiguously mandated that proceeds of both be
exempt, if that indeed is what they intended.10 See Herman Iken and Co. v. Olenick, 42 Tex. 195,
Paso 1930). This Court's use of the terms "abandonment" and "former homestead" does not
encompass homestead abandoned merely by sale. As used in this opinion, the terms mean
abandonment by the acquisition of another homestead. See infra slip op. p. 607 (discussion of
Ingram v. Summers ).
10
During oral arguments, counsel for Mr. England asserted that the legislature may have
intended that both homestead and the proceeds be simultaneously exempt so that the claimant
could have a source of income. However, the Supreme Court addressed such an issue in 1875.
The court determined that
[t]o exempt property, not in fact a part of the homestead, because it will be a
source of income from which a support for the family may be drawn ... may be also
an income much beyond that of even a majority of the most affluent class of our
city population. A construction of the constitutional exemption ... which would
lead to such results, or afford the means of such fraudulent practices against honest
creditors cannot be sanctioned, unless imperatively demanded by the plain and
unmistakable language in which it is expressed.
Herman Iken and Co. v. Olenick, 42 Tex. 195, 200 (1875). In 1897, the legislature
answered by enacting a plain, unmistakable statute which exempted the proceeds of the
sale of homestead, not former homestead. To follow the Texas Supreme Court's decision,
200 (1875). However, they did not do so, and we find that the plain language of section 41.001(c)
clearly and unambiguously exempts only the proceeds of the sale of homestead. Only during the six
months following the sale of a homestead when a claimant has not acquired another homestead do
claimants have any protected rights in homestead sale proceeds. See Ingram v. Summers, 29 S.W.2d
447 (Tex.Civ.App.—El Paso 1930). The sale of the homestead instantly activates the protection of
the proceeds exemption statute and shelters the proceeds for up to six months. However, the
acquisition of another homestead during that six month period instantly changes the prior homestead
to former homestead and deactivates the proceeds exemption statute such that the proceeds of the
former homestead are no longer exempt. Here, England's Hico ranch designation automatically
terminated his right to exempt the proceeds and triggered his right to exempt the new homestead.
b. Texas Case Law and Legislative History
The Court's construction of section 41.001 is entirely consistent with the legislative intent and
Texas case law. In enacting the present version of the proceeds exemption statute and other
homestead laws, the Texas legislature asserted that their intent was to codify case law on homestead.
SENATE COMM. ON STATE AFFAIRS, BILL ANALYSIS, Tex.S.B. 1232, 69th Leg., R.S. (1985); Debate
on Tex.S.B. 1232 on the Floor of the House of Representatives, 69th Leg., R.S. (May 17, 1985)
(tape available from the Office of the House Committee Coordinator).
Texas cases have consistently held that the fundamental purpose of the Texas homestead laws
is to secure a place of residence against financial disaster. Cocke v. Conquest, 120 Tex. 43, 53, 35
S.W.2d 673, 678 (1931); Herman Iken and Co., 42 Tex. at 198 ("The leading and fundamental idea
connected with a homestead is unquestionably associated with that of a place of residence for the
family, where the independence and security of a home may be enjoyed, without danger of its loss,
or harassment and disturbance by reason of the improvidence or misfortune of the head or any other
a court cannot sanction a construction of § 41.001 which exempts proceeds of former
homestead absent clear and unambiguous language which so requires.
member of the family. It is a secure asylum of which the family cannot be deprived by creditors.");
Allison v. Shilling, 27 Tex. 450, 455 (1864). See also Woodward v. Sanger Bros., 246 F. 777, 780
(5th Cir.1917), cert. denied, 246 U.S. 674, 38 S.Ct. 425, 62 L.Ed. 932 (1918) (This Court asserted
that "[a] fundamental ideal involved [in the homestead laws] is a place of residence."). The
homestead laws not only have beneficent purposes, but they also are designed to support the public
policy of preventing homelessness among Texas residents. Cocke, 120 Tex. at 52, 35 S.W.2d at 678;
Woods v. Alvarado State Bank, 118 Tex. 586, 595, 19 S.W.2d 35, 38 (1929).
However, prior to the 1897 proceeds exemption statute, those who voluntarily sold their
homestead with the intention of investing the sale proceeds in another homestead were faced with the
possibility of losing all of the proceeds to creditors. For when exempt property was voluntarily sold
or exchanged, the proceeds were not exempt. Kirby v. Giddings, 75 Tex. 679, 13 S.W. 27 (1890).
This rule was harsh and inconsistent with the purposes of the homestead laws, and many people were
rendered homeless because of it. See Kirby v. Giddings, 75 Tex. 679, 13 S.W. 27 (1890); Mann v.
Kelsey, 71 Tex. 609, 12 S.W. 43 (1888); Whittenberg v. Lloyd, 49 Tex. 633 (1878).
The Texas legislature responded, recognizing that there would be times when people would
need to sell their homestead. It therefore passed the proceeds exemption statute "to preserve the
homestead protection afforded by the Texas Constitution in such cases by exempting sale proceeds
from creditors' claims for six months." Taylor v. Mosty Bros. Nursery, Inc., 777 S.W.2d 568, 570
(Tex.App.—San Antonio 1989). The object of the proceeds exemption statute was solely to allow
the claimant to invest the proceeds in another homestead, not to protect the proceeds, in and of
themselves.11 Gaddy v. First National Bank, 283 S.W. 277, 280 (Tex.Civ.App.–Beaumont 1926).
11
England urges the Court to find that "investment in homestead" equates to improvement of
homestead. However, a review of Texas cases which used the terms invest or reinvest in
homestead reveals that the courts used those terms to mean "purchase" or "acquire." See e.g.
Kirby v. Giddings, 75 Tex. 679, 13 S.W. 27 (1890); Blum v. Light, 81 Tex. 414, 16 S.W. 1090(1891); Freiberg, Klein and Co. v. Walzem, 85 Tex. 264, 20 S.W. 60 (1892); Cameron v.
Gebhard, 85 Tex. 610, 22 S.W. 1033 (1893); Stallings v. Hullum, 89 Tex. 431, 35 S.W. 2(1896).
See also Taylor, 777 S.W.2d at 570 ("The six-month provision was enacted in order that the
proceeds might be reinvested in another homestead").
The court in Ingram v. Summers delineated the extent of the proceeds exemption. 29 S.W.2d
447 (Tex.Civ.App.—El Paso 1930). In dicta, the court stated that certain actions of a claimant could
waive the right to exempt homestead proceeds. The court stated that if the claimant abandoned the
homestead, the exemption statute would not apply and the proceeds would be subject to garnishment.
Id. at 449. While the court held that abandonment of the homestead by sale did not waive the
proceeds exemption, it intimated that abandonment in any other manner is incompatible with and not
covered by the exemption statute. Id. at 449–50. Indubitably, abandonment by the acquisition of
another homestead is one way a claimant forfeits his or her rights to exempt sale proceeds of the
former homestead.
In light of the plain language of section 41.001, the legislative intent, and Texas case law, this
Court holds that when one abandons a homestead by acquiring another homestead, the proceeds of
the former homestead are not covered by section 41.001 and are therefore not exempt.
III. Conclusion
Had Mr. England not claimed his ranch as homestead, the proceeds from the Cedar Hill
property would be exempt under section 41.001(c) of the Texas Property Code. However, both
cannot be exempt at the same time. Although homestead laws were designed to secure to residents
homes which creditors cannot seize, the legislature did not intend that the laws be extended to
jeopardize the rights of others. Herman Iken and Co. v. Olenick, 42 Tex. 195, 201 (1875); Allison
v. Shilling, 27 Tex. 450, 455 (1864). The judgment of the court below is therefore AFFIRMED.