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Kim v. Dome Entertainment Ctr, Inc.

F.3d citation not yet available. Case No. 10-10882 (5th Cir. Apr. 9, 2014)
AFFIRMED district court’s ruling that federal law can trump Texas homestead exemptions to force the sale of the debtor’s homestead, notwithstanding the exemption rights of the non-debtor spouse. The Fifth Circuit relied on a 1983 Supreme Court case where it affirmed the forced sale of a Texas homestead to satisfy federal tax liens, even though one spouse was not liable for the underlying taxes. See United States v. Rodgers, 461 U.S. 677 (1983). Here, the Fifth Circuit held that section 363 of the Bankruptcy Code “contains express authorization to sell property of the bankruptcy estate, notwithstanding the fact that a third party may have an interest in that property.” Thus, it was clear under bankruptcy law that the property could be sold, despite the non-debtor spouse’s legitimate homestead exemption rights. The Fifth Circuit found support under Texas law as well. In Benchmark Bank, the Texas Supreme Court affirmed the forced sale by a private bank that loaned money to pay off federal tax liens. There, the Texas Supreme Court acknowledged that the private bank, as subrogee to the IRS’s tax liens, could force the sale, even though one spouse was not liable for the taxes, and even though foreclosure by a subrogee was not expressly enumerated as an exception to Texas homestead protections. The next issue was whether the non-debtor spouse was entitled to compensation for her lost homestead rights. Texas jurisprudence indicated that compensation was necessary for the lost economic interest in the homestead. The Fifth Circuit noted that its holding on this issue was limited to the rare facts of this case—the debtor purchased the house before section 522(p) came into effect under BAPCPA, but the bankruptcy case was commenced during the very small window of time when section 522(p) could apply to homesteads acquired before BAPCPA became effective. After reviewing Texas jurisprudence on the issue, the Fifth Circuit concluded that there was no authority to support the debtor and his spouse’s argument that a homestead right is economically equivalent to all or some fraction of the fair market value of the property itself. “It may be more comfortable and enjoyable to reside in a residence that has a market value of $1,000,000 than to reside in a residence worth $136,875, but the Kims have not provided any argument that addresses these issues. Nor is there any evidence that the Kims’ residence produces income, such as a rural or business homestead might, which could affect the value of homestead rights.” For that reason, the Fifth Circuit held that the debtor’s spouse was not entitled to compensation for the loss of her homestead right in the house, beyond what section 522(p) allows.
Procedural context:
On appeal from the United States District Court for the Northern District of Texas, which affirmed the bankruptcy court’s summary judgment and held that, where section 522(p) is applicable, a non-debtor spouse’s unlimited Texas homestead exemption rights cannot preempt a forced sale of the homestead in bankruptcy, nor do they entitle the non-debtor spouse to compensation for an unconstitutional taking.
The debtor purchased a house in Texas for $1 million while litigation was pending against him in California by Dome Entertainment. He purchased his house before the 2005 BAPCPA provisions became applicable, but Dome ultimately prevailed in the litigation, obtaining a $5 million judgment, and commenced an involuntary bankruptcy petition in 2007—within 1,215 days of the debtor’s acquisition of the new Texas residence. Thus, despite the debtor’s attempt to claim the unlimited homestead exemption under Texas law and section 522(b)(3)(A) of the Bankruptcy Code, the bankruptcy court sustained Dome’s objection under section 522(p), and held that the exemption was limited to $136,875. The debtor then commenced an adversary proceeding, asking the court to determine the extent of his non-debtor spouse’s exemption rights in the house. Dome intervened and filed a cross-motion for summary judgment, asking the bankruptcy court to determine that the non-debtor spouse homestead exemption rights did not preempt a forced sale of the homestead. The bankruptcy court granted Dome’s summary judgment motion, in part, holding that the non-debtor spouse did not have a “separate and distinct exempt homestead interest in the property that would entitle her to compensation or to prevent the sale of the Property.” The district court affirmed, and held further that the non-debtor spouse’s homestead exemption was not a vested property right and that she was not entitled to compensation beyond the applicable statutory cap under section 522(p). The debtor and his wife appealed.
HIGGINBOTHAM, OWEN, and HAYNES. Opinion by Priscilla R. Owen, Circuit Judge.

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