In Re Deberry: Proceeds From The Post-Petition Sale Of A Homestead Are Exempt From The Texas Proceeds Rule

Case AnalysisGarret Brooks

Lowe v. DeBerry (In re DeBerry), No. 14-5046-CAG, 2015 WL 6528024, at *1 (Bankr. W.D. Tex. Oct. 28, 2015).

Opinion issued Oct. 28, 2015. Westlaw Link.

Written by: Garrett Brooks, Staff Member

Upon filing for Chapter 7 bankruptcy, the debtor claimed his home was exempt property under the Texas constitution and the Texas Property Code.[1] After his initial filings, the debtor motioned to sell the property, which the court granted.[2] However, since the proceeds from the sale were not reinvested into a new homestead property within six months of the sale, thereby violating the Texas Proceeds Rule, the trustee attempted to recover the assets.[3] The debtor claimed the trustee could not recover the homestead sale proceeds because they were not property of debtor’s estate.[4]

The court granted the debtor’s motion for dismissal, finding that proceeds from a post-petition sale of property qualified as a Texas homestead are not subject to the Texas Proceeds Rule.[5] In deciding this case, the court reasoned that if a homestead is held at the time of the petition and properly exempted at the time of the sale, the proceeds are not and cannot become part of the bankruptcy estate.[6] The court further distinguished the case from a Chapter 13 proceeding because in Chapter 7 property of the estate does not include funds acquired post petition.[7] Because the proceeds were never property of the estate, the trustee could not avoid the transfer.[8]

The primary factor in allowing the debtor to keep the sale proceeds is the timing of the sale—here, the sale took place post-petition, which means the property itself was never apart of the estate.[9]  Moving forward, it is important to note that future cases about post-petition sales of properly exempted homesteads in Chapter 7 bankruptcy cases could go either way. Currently, there is no controlling precedent from the Fifth Circuit Court of Appeals, so debtors should still be cautious about not investing proceeds within a six-month period.[10]

[1] Lowe v. DeBerry (In re DeBerry), No. 14-5046-CAG, 2015 WL 6528024, at *1 (Bankr. W.D. Tex. Oct. 28, 2015).

[2] Id.

[3] Id.; see Tex. Prop. Code Ann. § 41.001 (“a 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.”).

[4] In re Deberry, 2015 WL 6528024, at *2.

[5] Id. at *2, *4(the requirement that proceeds from the sale of a homestead must be reinvested into another Texas homestead for the proceeds to be exempt under Tex. Prop. Code Ann. § 41.001(c) is commonly referred to as the “Texas Proceeds Rule”).

[6] Id. at *3. In D’Avila, the court held that once an exemption is granted in a Chapter 7 bankruptcy, the debtor can sell, exempt, or encumber property without involving the bankruptcy court or estate In re D’Avila, 498 B.R. 150, 158 (Bankr. W.D. Tex. 2013).

[7] Id.

[8] Id. at *4.

[9] Id.

[10] The prior case law discussed by the court involved either a debtor in Chapter 13, or Chapter 7 debtors who claimed exempted homestead proceeds at the time of filing, not post petition. Id. at *3.