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Smith v. HD Smith Wholesale Drug Co. (In re McCombs)

In re McCombs, --- F.3d ----, 2011 WL 4553052 (5th Cir. Oct. 4, 2011)
The Fifth Circuit Court of Appeals (the "Circuit Court") ruled that: (1) pursuant to state law, the judgment creditor (H.D. Smith Wholesale Drug Co.) lacked an enforceable lien against the debtor's (Michael McCombs) homestead at the time the debtor filed bankruptcy; (2) the homestead cap provided for in Section 522(p) did not act "to convert the [judgment creditor's] lien from its previously unenforceable status to an enforceable status" and instead increased "the size of the bankruptcy estate available to creditors"; and (3) as a case of first impression, "the rules regarding preservation of issues on appeal...apply with equal force regardless of [the travel of the appeal]," such that the appellant-non-debtor-spouse (Alicia Atkinson McCombs) was limited, on direct appeal to the Circuit Court, to the statement of issues filed "in anticipation of an appeal to the district court before the direct appeal was certified" in determining whether she had preserved for appeal issues and arguments that were contained within her appellate brief.
Procedural context:
The Circuit Court granted leave to appeal following the United States Bankruptcy Court for the Southern District of Texas's (the "Bankruptcy Court") certification of the case for direct appeal. On appeal, the bankruptcy trustee (W. Steve Smith) and non-debtor-spouse argued that the Bankruptcy Court erred in granting summary judgment to the judgment creditor based upon its finding that the creditor "had an enforceable lien against the proceeds of the sale of the debtor's homestead property in excess of the $125,000 homestead exemption." The Circuit Court reversed and remanded the case for further proceedings. Other issues raised by the non-debtor-spouse on appeal were not considered as she had failed to "preserve [the issues] for appeal by including them in her statement of issues."
The debtor and non-debtor-spouse purchased a home and adjoining vacant lot in 2004. A judgment creditor obtained a judgment against the debtor in 2006 in the amount of $538,016.46 and filed an abstract of judgment in the appropriate county's real property records. Thereafter, the debtor filed a voluntary bankruptcy petition under Chapter 7, listing the home and vacant lot as community property and claiming a homestead exemption therein. The home and vacant lot were sold and, after payment of a mortgage, expenses, and $125,000 (the amount of the homestead exemption) to the debtor and non-debtor-spouse, the sale netted excess proceeds totaling $514,095.08. The judgment creditor filed an adversary proceeding against the bankruptcy trustee and the non-debtor-spouse wherein the creditor claimed it was entitled to the entire excess proceeds of the sale in satisfaction of its lien. The non-debtor-spouse claimed "that (1) the property had been partitioned or gifted, (2) her homestead rights trump[ed] the dollar limit in [Section] 522(p), (3) she was entitled to compensation for the homestead right, and (4) failure to compensate her for the homestead right was an unconstitutional taking." She argued that "she [had] an independent right to assert protection above that which [the debtor] claimed in the bankruptcy based on the Texas laws governing homesteads" and "that, if she [could not] assert her homestead right, she [was] entitled to compensation for a loss of that right...[or] there [would] have been an unconstitutional taking of her property." The Trustee argued that the judgment creditor did not have an enforceable lien against the excess proceeds and that the bankruptcy estate was entitled to the proceeds. He also claimed that enforcement of the lien violated Sections 362 and 549. In granting summary judgment to the judgment creditor, the Bankruptcy Court rejected the claims of the non-debtor-spouse and the trustee. The Bankruptcy Court found that: (1) the judgment creditor's lien "attached to the homestead and was perfected prior to [the debtor's] bankruptcy filing"; (2) "because the Bankruptcy Code limited the homestead exemption, [the judgment creditor] obtained the right to enforce the lien after the homestead limit was applied"; and (3) " the right to enforce the lien did not violate the automatic stay or the prohibition against post-petition transfers." The trustee and the non-debtor-spouse appealed the ruling.
Owen, Haynes

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