Lufkin v. Hastings

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 97-40649
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In The Matter Of: SUSAN NICHOLS HASTINGS;
TOM MARSH HASTINGS,

Debtors.

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DAN W LUFKIN,

Appellant,

v.

SUSAN NICHOLS HASTINGS; TOM MARSH HASTINGS,

Appellees.

_________________________________________________________________

Appeal from the United States District Court
for the Eastern District of Texas
(4:95-CV-23)
_________________________________________________________________
July 23, 1998
Before KING, SMITH, and STEWART, Circuit Judges.

PER CURIAM:*

Defendants-appellants Tom Marsh Hastings and Susan

Nichols Hastings filed a voluntary Chapter 7 bankruptcy petition.

In connection with the bankruptcy proceeding, the Hastings

claimed a homestead exemption as to certain real property under

Texas law. Plaintiff-appellant Dan W. Lufkin filed an adversary

*
Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
proceeding objecting to both the Chapter 7 bankruptcy discharge

and the claimed homestead exemption. The bankruptcy court

entered an order denying the discharge and an order denying

Lufkin’s objection to the homestead exemption. Lufkin appealed

the order denying the objection to the homestead exemption to the

district court. The district court affirmed the bankruptcy

court’s order, and Lufkin now appeals the district court’s

judgment. We affirm.

I. FACTS AND PROCEDURAL HISTORY

In August 1985, plaintiff-appellant Dan W. Lufkin loaned

defendant-appellee Tom Marsh Hastings $75,000. The transaction

was evidenced by a promissory note. On November 1, 1985, Lufkin

loaned Hastings an additional $125,000, and this transaction was

also evidenced by a promissory note. On November 2, 1987, the

two promissory notes memorializing the loans from Lufkin to

Hastings were consolidated into a single promissory note in the

amount of $241,356.16. The November 1987 note was signed by both

Tom Marsh Hastings and Susan Nichols Hastings (collectively

Debtors). When the November 1987 note matured in 1989, Lufkin

and Debtors agreed to extend the maturity date on the note to the

earlier of November 1, 1990 or the date on which Debtors sold a

ranch that they owned known as the Blackjack Property. Debtors

contend, and Lufkin does not dispute, that the Blackjack Property

constituted Debtors’ homestead while they owned it. Lufkin

contends that, as a condition upon his extension of the due date

on the November 1987 note, Debtors agreed to pay the note out of

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the proceeds from the sale of the Blackjack Property. Debtors

deny that they made any such agreement. Debtors did not sell the

Blackjack Property by November 1, 1990, and the November 1987

note therefore matured on that date. Debtors did not pay their

debt to Lufkin.

In 1992, Debtors sold the Blackjack Property in two parcels

to two different buyers. On May 21, 1992, Debtors sold one

parcel of the Blackjack Property to Gary and Shannon Barker for

$182,500. Debtors claim that they received $7,900 from this sale

and that the balance of the proceeds was used to pay closing

costs and to pay lienholders on the Blackjack Property and

judgment creditors of Debtors.

On November 23, 1992, Debtors sold the remainder of the

Blackjack Property to Michael and Deborah Snetzer for $700,000.

Pursuant to the terms of the sale, the Snetzers made a $375,000

down payment and executed a $325,000 real estate lien note (the

Snetzer Note) to Debtors secured by that portion of the Blackjack

Property that Debtors sold to the Snetzers. The Snetzer Note

contained a five-year prohibition on prepayment. Debtors claim

that they received $169,500 of the $375,000 down payment, with

the remainder being used to pay liens, closing costs, and other

costs associated with the sale of the property to the Snetzers.

On March 18, 1993, Lufkin filed suit in state court (the

State Court Lawsuit) to enforce Debtors’ obligation under the

November 1987 promissory note. On May 5, 1993, Debtors filed a

loan application with North Texas Savings & Loan Association

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(North Texas), and, on June 4, 1993, they received a $150,000

construction loan commitment. Lufkin claims that Debtors

misrepresented their financial status in the loan application.

On June 8, 1993, more than six months after the sale of the

Blackjack Property, Debtors borrowed $65,000 from North Texas to

purchase a ranch in North Hemming (the North Hemming Property),

which is the property as to which Debtors claim the disputed

homestead exemption. That same date, Debtors purchased the North

Hemming Property for $100,000, using the loan proceeds and

approximately $35,000 of the cash that they received from the

sale of the second parcel of the Blackjack Property to the

Snetzers.

On July 29, 1993, Debtors waived their right to a prepayment

penalty upon the refinancing of the Snetzer Note. On August 6,

1993, Debtors sold the Snetzer Note to S.T.M. Mortgage Company,

and they received approximately $313,000 from the refinancing.

Debtors paid the closing costs of the refinancing out of the

proceeds from the sale of the note. They also purchased a

$50,000 certificate of deposit which they pledged to North Texas

as collateral for their construction loan. Debtors deposited the

remaining $263,000 from the sale of the Snetzer Note in a

construction account. Debtors used the $263,000 plus $120,000

from the down payment that the Snetzers had paid them for the

Blackjack Property to build improvements on the North Hemming

Property.

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 In September 1993, Lufkin filed a motion for summary

judgment in the State Court Lawsuit, and the state district court

granted him partial summary judgment at a hearing on October 28,

1993. A hearing on the remainder of the summary judgment issues

was set for December 9, 1993. On December 8, 1993, Debtors

turned over the $50,000 certificate of deposit to North Texas to

pay down the construction loan. On December 9, 1993,

approximately three hours before the scheduled summary judgment

hearing in the State Court Lawsuit, Debtors filed their Chapter 7

bankruptcy petition.

In their bankruptcy schedules, Debtors asserted that the

North Hemming Property was covered by the homestead exemption

pursuant to Chapter 41 of the Texas Property Code. Lufkin and

the bankruptcy trustee filed objections to this claimed

exemption. Additionally, Lufkin filed an adversary proceeding

objecting to Debtors’ discharge under 11 U.S.C. § 727 on the

ground that Debtors transferred substantially all of their assets

prior to bankruptcy with the actual intent to hinder, delay, or

defraud Lufkin. On November 16, 1994, the adversary complaint

and the objections of Lufkin and the bankruptcy trustee to

Debtors’ homestead exemption were tried to the bankruptcy court.

The bankruptcy court concluded that Debtors had made

transfers of property, including transfers of nonexempt property

into the North Hemming Property, with the actual intent to

hinder, delay, and defraud Lufkin. Specifically, the bankruptcy

court determined that Debtors realized that they had no viable

5
defense in the State Court Lawsuit and that they accelerated the

conversion of their assets after the state district court granted

Lufkin partial summary judgment. The bankruptcy court therefore

denied Debtors’ discharge pursuant to § 727. However, the

bankruptcy court denied the objections of Lufkin and the

bankruptcy trustee regarding Debtors’ claimed homestead exemption

for the North Hemming Property. Lufkin and the trustee timely

appealed the bankruptcy court’s denial of their objections to the

district court, and the district court affirmed the order of the

bankruptcy court denying the objections.

II. STANDARD OF REVIEW

We review findings of fact by the bankruptcy court under

the clearly erroneous standard and review issues of law de novo.

Henderson v. Belknap (In re Henderson), 18 F.3d 1305, 1307 (5th

Cir. 1994); Haber Oil Co. v. Swinehart (In re Haber Oil Co.), 12

F.3d 426, 434 (5th Cir. 1994).

III. DISCUSSION

Lufkin contends that Debtors are not entitled under Texas

law to claim a homestead exemption for the North Hemming Property

because, as the bankruptcy court found, they obtained the

property in an attempt to defraud him. We disagree.

The homestead exemption provision of the Texas Constitution

provides as follows:

The homestead of a family, or of a single adult person,
shall be, and is hereby protected from forced sale, for
the payment of all debts except for the purchase money
thereof, or a part of such purchase money, the taxes
due thereon, . . . or for work and material used in
constructing improvements thereon . . . . No mortgage,

6
 trust deed, or other lien on the homestead shall ever
be valid, except for a debt described by this section .
. . . A purchaser or lender for value without actual
knowledge may conclusively rely on an affidavit that
designates other property as the homestead of the
affiant and that states that the property to be
conveyed or encumbered is not the homestead of the
affiant.

TEX. CONST. art. 16, § 50 (amended 1998). In interpreting and

applying Texas’s homestead exemption, this court has made the

following observation:

Because homesteads are favorites of the law, we must
give a liberal construction to the constitutional and
statutory provisions that protect homestead exemptions.
Indeed, we must uphold and enforce the Texas homestead
laws even though in so doing we might unwittingly
assist a dishonest debtor in wrongfully defeating his
creditor.

Bradley v. Pacific Southwest Bank (In re Bradley), 960 F.2d 502,

507 (5th Cir. 1992) (citations and internal quotation marks

omitted). We have further noted that “Texas’ constitutional and

statutory protection of the homestead is absolute. The intent of

the debtor is irrelevant to the scope of his homestead exemption

under Texas law.” Smith v. Moody (In re Moody), 862 F.2d 1194,

1197-98 (5th Cir. 1989). Additionally, Texas courts have held

that “[f]oreclosure of the homestead is permitted only in the

instances specifically listed in the constitution.” Boudreaux

Civic Ass'n v. Cox, 882 S.W.2d 543, 547 (Tex. App.--Houston [1st

Dist.] 1994, no writ).

Lufkin argues, however, that, under Texas law, equitable

remedies will preclude a dishonest debtor from obtaining the

benefit of the homestead exemption and that Texas courts would

afford such remedies in this case. In support of this

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contention, Lufkin relies upon two general classes of Texas

cases. First, he cites a number of cases in which Texas courts

have utilized equitable remedies to preclude a landowner from

benefiting from the homestead exemption when the landowner uses

wrongfully acquired nonexempt funds to acquire, improve, or pay

down debt on a homestead. See Bransom v. Standard Hardware Inc.,

874 S.W.2d 919, 928-29 (Tex. App.--Fort Worth 1994, writ denied)

(upholding a constructive trust on the proceeds of the sale of a

homestead where the homestead owner had used embezzled funds to

pay down her mortgage on her homestead); Baucum v. Texam Oil

Corp., 423 S.W.2d 434, 442 (Tex. Civ. App.--El Paso 1967, writ

ref’d n.r.e.) (noting that holding homestead property in a

constructive trust constitutes an appropriate remedy where the

owner used fraudulently obtained funds to purchase it); Bush v.

Gaffney, 84 S.W.2d 759, 762 (Tex. Civ. App.--San Antonio 1935, no

writ) (denying a homestead exemption to the extent necessary to

satisfy a constructive trust imposed in favor of an individual

whom the homestead owner fraudulently induced to purchase land);

First State Bank v. Zelesky, 262 S.W. 190, 192 (Tex. Civ. App.--

Galveston 1924, no writ) (denying a homestead exemption where the

property was acquired with embezzled funds); Smith v. Green, 243

S.W. 1006, 1008 (Tex. App.--Amarillo 1922, writ ref’d) (denying a

homestead exemption to the extent necessary to satisfy a

constructive trust in favor of the homestead owner’s partner

because the homestead owner built the homestead using partnership

funds).

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 Second, Lufkin relies upon cases where this court and Texas

courts have used equitable remedies in circumstances in which

homestead owners misrepresent the homestead character of their

homesteads and thereby induce third parties to lend them money

secured by liens on the homestead. See RepublicBank, Lubbock,

N.A. v. Daves (In re Daves), 770 F.2d 1363, 1367 n.5 (5th Cir.

1985) (noting that a constructive trust may be imposed based upon

“a misrepresentation or fraud related to a factual matter which

would affect the creditor’s knowledge or understanding of whether

a particular property was properly claimed as homestead.”);

Goodrich v. Second Nat’l Bank, 151 S.W.2d 276, 279-80 (Tex. Civ.

App.--Beaumont 1941, writ ref’d) (holding that, where the

homestead owner caused a third party to create a lien on his

homestead by hiding the homestead character of the property

through a sham transaction, the homestead owner was estopped from

asserting the homestead exemption as to the innocent purchaser of

the note secured by the lien on his homestead).

The cases upon which Lufkin relies are entirely inapposite.

First, as Debtors point out, they did not wrongfully obtain the

funds used to purchase the North Hemming Property; rather, they

purchased it with the proceeds from the sale of their prior

homestead.1 Second, Lufkin makes no contention that Debtors

1
We note that the proceeds from the sale of a Texas
homestead retain their homestead character for six months after
the sale. See TEX. PROP. CODE ANN. § 41.001(c) (Vernon Supp.
1998). Thus, for the time period beginning six months after the
sale of the Blackjack property and continuing until the Debtors
reinvested the funds from the sale in a new homestead, the funds
were subject to attachment to satisfy Lufkin’s claim.

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induced him to loan them money by misrepresenting the homestead

character of the Blackjack Property, which was Debtors’ homestead

at the time that Lufkin made the loan giving rise to the debt at

issue here.

Lufkin contends that Debtors purchased the North Hemming

Property with fraudulently obtained funds to the extent that they

acquired the property in part with funds obtained after

submitting a fraudulent loan application to North Texas. This

argument is unavailing. While Debtors’ fraud in the loan

application at most provides North Texas with a remedy against

them (a matter we need not decide), it has absolutely no bearing

on the validity of Debtors’ homestead exemption as to Lufkin

because Debtors did not fraudulently obtain the funds used to

purchase or improve their homestead from Lufkin. Lufkin’s

further argument that Debtors would not have been able to shelter

all of their assets in the North Hemming Property but for their

fraud on North Texas is unpersuasive. First, it appears that

Debtors could have paid for the North Hemming Property and the

improvements thereon entirely out of the proceeds from the sale

of the Blackjack Property. Second, even if this were not true,

Debtors could have prejudiced Lufkin to the same extent by simply

purchasing a less expensive homestead that nonetheless consumed

all of the proceeds from the sale of the Blackjack Property. Any

fraud perpetrated by Debtors on North Texas had no detrimental

impact on Lufkin.

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 The factual scenario in this case is analogous to that

addressed in Driskill v. Reed (In re Reed), 12 B.R. 41 (Bankr.

N.D. Tex. 1981). In that case, the debtor used nonexempt assets

to pay down the mortgage on his existing homestead and to pay off

a home improvement loan that he had taken out to pay for

improvements to his homestead. See id. at 42. The bankruptcy

court determined that, while this action constituted a basis for

denying the debtor’s discharge in bankruptcy,2 it did not provide

a basis for concluding that the debtor forfeited his homestead

exemption. See id. at 43-44.3

The result in Reed is consistent with Texas’s statutory and

constitutional scheme regarding real and personal property

exemptions. Sections 42.001 and 42.002 of the Texas Property

Code exempt certain personal property from garnishment,

attachment, or execution by creditors. See TEX. PROP. CODE ANN.

§§ 42.001, 42.002 (Vernon Supp. 1998). However, § 42.004 of the

Property Code provides that,

[i]f a person uses the property not exempt under this
chapter to acquire, obtain an interest in, make
improvement to, or pay an indebtedness on personal
property which would be exempt under this chapter with

2
The bankruptcy court denied the debtors’ discharge in
another proceeding. See First Tex. Sav. Ass’n v. Reed (In re
Reed), 11 B.R. 683 (Bankr. N.D. Tex. 1981), aff’d 700 F.2d 986
(5th Cir. 1983).
3
Lufkin attempts to distinguish Reed on the basis that, in
that case, the debtor used nonexempt assets to pay down a
mortgage on his existing homestead, whereas, in this case,
Debtors used nonexempt assets to purchase a new homestead. Given
that the effect on the ability of creditors to satisfy their
claims against the debtor in both scenarios is identical, this is
a meaningless distinction.

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 the intent to defraud, delay, or hinder an interested
person from obtaining that to which the interested
person is or may be entitled, the property, interest,
or improvement acquired is not exempt from seizure for
the satisfaction of liabilities.

Id. § 42.004. The Property Code contains no similar provision

regarding the use of nonexempt property to acquire or improve the

debtor’s homestead. One can assume from this omission that the

Texas legislature either did not desire to adopt such a provision

or that it lacked the constitutional authority to do so in light

of the broad homestead protections afforded by § 50 of article 16

of the Texas Constitution. In either event, no statutory,

constitutional, or equitable authority exists for any conclusion

in this case other than that the North Hemming Property is exempt

from attachment to satisfy Lufkin’s claim against Debtors.

III. CONCLUSION

For the foregoing reasons, we AFFIRM the judgment of the

district court affirming the bankruptcy court’s order denying

Lufkin’s objection to Debtors’ claimed homestead exemption.

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