In re Montemayor: Selling Home Post Petition and Applying Proceeds to New Property under The Texas homestaed Exemption

Case AnalysisKenny Chan

Romo v. Montemayor (In re Montemayor), 545 B.R. 684 (Bankr. S.D. Tex. Mar. 9, 2016).
Opinion issued: Mar. 09, 2016. WestLaw Link
Written by: Kenny Chan, Staff Member

A debtor claimed a homestead exemption on his chapter 7 filings, and the trustee did not object. The debtor then sold his homestead post-petition, and purchased a vacant lot to construct a home on, which he planned to use as his homestead. The sale proceeds were placed into a bank account so the debtor could later use them, along with financing, for the home construction. But, the debtor encountered difficulty in obtaining financing without a discharge, so the lot remained vacant and the proceeds remained in the account after the six-month statutory period to reinvest provided by Texas Property Code § 41.001(c) lapsed. The Chapter 7 trustee then sought to have the proceeds turned over to the estate. The trustee claimed the debtor should not receive an extension beyond the statutory six-month provision just because of the inability to secure financing.

The trustee based his argument on the Firth Circuit’s precedent established by In re Frost, which was a Chapter 13 case finding proceeds to be subject to pre-petition creditor claims if not reinvested. *  The trustee claimed a debtor, regardless of the chapter, “must maintain any qualifications for an exemption throughout the pendency of the bankruptcy case or risk the loss of the claimed exemption.” The court rejected this argument, finding In re Frost to be factually distinguishable.

The court determined the debtor qualified for the homestead exemption under § 41.001(a). In the court’s view, despite violating § 41 of the Texas Property Code, the debtor “ha[d] taken substantial steps and evinced a clear intent to make the New Property his new Texas homestead.” Although all the proceeds were not fully invested, the debtor partially invested them by purchasing the lot. Furthermore, because the debtor sold his homestead, the exemption from the effect of the six-month rule became final when the trustee failed to lodge a timely objection upon the exemption claim.

The court addressed how filing a bankruptcy petition will “cut off pre-petition unsecured creditors from seeking relief against those exempt assets.” It is important to note that the factors the court specifically addressed when it found the new property and remaining proceeds were exempt from claims: the debtor properly filed motions, the debtor purchased the property, the debtor attempted to obtain financing, and the trustee did not object to the original homestead claim.

* See Viegelahn v. Frost (In re Frost), 744 F.3d 384, 386 (5th Cir. 2014) (holding the “proceeds from post-certification sale of exempted homestead under Texas law that had not been reinvested within six months reverted to estate.”).