Wednesday, October 12, 2011

5th Circuit Tells Judgment Creditor To 'Take A Hike!' Improper Attempt To Snatch Bankrupt Debtor's Home Sale Proceeds Violates Texas Homestead Law

Bloomberg Businessweek reports:

  • A creditor with a pre-bankruptcy judgment lien doesn't automatically have a secured claim in proceeds from the sale of a homestead in excess of the homestead exemption, the U.S. Court of Appeals in New Orleans ruled on Oct. 4.

  • The case involved an individual saddled with a pre- bankruptcy judgment for $538,000. The judgment was recorded before bankruptcy and became a lien on the home. After bankruptcy, the owner sold the homestead with approval from the court and the Chapter 7 trustee, generating over $500,000 in proceeds in excess of the mortgage.

  • The judgment creditor claimed to have a valid lien in the net proceeds in excess of the $125,000 limitation on the homestead exemption in Section 522(p) of the Bankruptcy Code.

  • Circuit Judge Priscilla R. Owen rejected the argument. She read from Texas law where a judgment lien creditor cannot enforce a lien against a homestead. Therefore, Owen said that the lien likewise was unenforceable against the property after bankruptcy.

  • She explained that Section 522(p) limits the amount of a bankrupt's exempt interest in property. The section “does not speak” to the judgment creditor's interest in the property.

  • Owen ruled that the lienholder “does not have a right specifically enforceable in the excess proceeds.” Nonetheless, Owen said that the appeals court was not ruling on whether the creditor “has an otherwise enforceable interest in the estate.” The case was returned to the bankruptcy court for further proceedings.

Source: Homestead Limit Doesn't Make Judgment Enforceable (2nd story from the bottom).

For the ruling, see In re McCombs, 08-20171, (5th Cir. October 4, 2011).

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