Tuesday, November 15, 2011

Texas Homestead Claim Fails To Fully Protect Sale Proceeds For Homeowner Who Unloaded Moldy Home Onto Unwitting Homebuying Couple

The following facts have been taken from a recent court ruling from a U.S. Bankruptcy Court in Dallas, Texas:

  • Home seller, Chastain, sells home to a homebuying couple, netting Chastain $482,718.14 in cash which she deposited in her bank accounts.

  • Later that month, Chastain used $72,028.39 of this amount for a down payment and closing costs on another home, financed the balance with a $161,000 mortgage, and subsequently used about $80,000 of the remaining cash to remodel and improve the new home.

  • Later that year, Chastain used some of the remaining proceeds to pay off her $161,000 mortgage.

  • Concurrently with the foregoing, the unwitting couple discovered that the home Chastain unloaded on them was a mold trap, that Chastain knew about it, and that she did nothing to disclose that fact to them.

  • The unwitting couple then obtained a judgment against Chastain for approximately $200,000, plus pre-judgment and post-judgment interest, plus costs of the damages lawsuit they brought against Chastain over the sale of the moldy home.

  • Chastain then filed for bankruptcy.

  • She sought to dodge the liability of the debt represented by the unwitting couple's judgment, and attempted to invoke the provisions of the Texas homestead exemption law to protect the loot she scored from the dirty deed she perpetrated on the unwitting couple from the claims of her creditors.

After taking testimony, the court sorted out this mess by ruling as follows:

  1. Upon Chastain's acquisition of the replacement home as her homestead within weeks of the sale of her moldy home, using $72,028.39 for the downpayment, the remaining proceeds of the sale of the home unloaded onto the unwitting couple—$410,689.75—immediately lost its homestead protection, even though the six-month transfer period allowed under Texas law had not expired. In re England, 975 F.2d 1168, 1174 (5th Cir. 1992); In re Presto, 376 B.R. 554 (Bankr. S. D. Tex. 2007).

  2. The $200, 000 judgment owed by Chastain to her two victims is a debt nondischargeable in bankruptcy, pursuant to the provisions of 11 U.S.C. § 523(a)(2)(A), in Chastain's bankruptcy case, because it is a debt that is the result of Chastain obtaining money from the unwitting couple based upon false pretenses, false representations, fraudulent omissions, and actual fraud concerning the condition of the moldy home.

  3. With regard to Chastain's expenditures of $80,000 in home improvements and $161,000 to pay off the mortgage used to financed her replacement home, the court believed that these expenditures constituted a conversion of nonexempt property into exempt property—spent to hinder and delay the unwitting couple in the collection of their judgment and, consequently, ruled that the value of Chastain's homestead exemption from creditors' claims for her replacement homestead must be reduced by $241,000 ($161K + $80K).

For the ruling, see In re Chastain, Case No. 10-37341-SGJ, Adversary No.: 11-03164-SGL (Bankr. N.D. Tex., Dallas Div. October 28, 2011).

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