Thursday, February 16, 2017

The Unassailability of a Perfect Metaphor

By Steve Stapleton

While the Fifth Circuit Court of Appeals declined the opportunity to add to the metaphorical lexicon, their holding was nevertheless clear: pigs get fat, hogs get slaughtered.

The Fifth Circuit was faced with a simple set of facts.*1  Mr. Wiggains was facing extraordinary difficulties in his business.  He and his wife, several months before, had purchased a large home, made improvements, and were now desirous of selling it in an attempt to recover the equity.  To capitalize on that plan, they sought advice of counsel who instructed them to partition the home between themselves, file personal bankruptcy for Mr. Wiggains alone – the day after the execution of the partition agreement – and then sell the house, pocketing the ultimately realized proceeds of $568,668.41, $130,675 *2 to be apportioned to Mr. Wiggains in satisfaction of his homestead exemption under Texas law and the remainder to Mrs. Wiggains.*3  The partitioning agreement would theoretically preserve Mrs. Wiggains’ homestead interest.    

Mr. Wiggains argued that his “sole intent” in entering into the partition agreement with his wife was to protect his wife’s interest in the home; he denied he intended to divest any creditor of their rights. Neither the bankruptcy court in avoiding the partition agreement nor the Fifth Circuit in affirming the bankruptcy court appreciated the distinction, however. The bankruptcy court characterized Mr. Wiggains’ intent as “gamesmanship,” stating that his “articulated intent to preserve for his family as much money as possible is the same as an intent to shield as much money as possible from creditors….”  The Fifth Circuit ultimately agreed thus declining the opportunity to add their own descriptive metaphor, adding that were Mr. Wiggains’ intent to prevail, it “would lay waste to the provisions of the Bankruptcy Code involved here.”

The opinion is worth reading for those faced with a need to preserve homestead exemptions in a bankruptcy context.  But there are several takeaways:  

First, under section 548(a)(1)(A), a bankruptcy trustee may avoid any pre-petition transfer of assets by a debtor “that was made or incurred on or within 2 years before the date of the filing of the [bankruptcy] petition” if the debtor made the transfer “with actual intent to hinder, delay, or defraud” any past or future creditor.  The phrase “hinder, delay or defraud” is phrased in the disjunctive and each portends a separate state of mind; thus, each stands as independently actionable under the Bankruptcy Code. It therefore matters little that there was no intent to defraud *4 if the intent was to hinder or delay. If the intent is to preserve a home’s value for the benefit of a non-debtor spouse, such intent “evince[es] … [a] strategic decision to place a portion of [the debtor’s] assets beyond the reach of creditors.”  The difference between attempting to “preserve value from a home for the non-debtor spouse [is] not legally independent from the intent to hinder and delay….”

Second, while the concept of “homestead” under Texas law is broad and is a constitutionally protected right, that protection does not embrace an economic interest.  The homestead interest protects legal security, not economic rights.  Thus, a spouse has only a possessory interest in a homestead, not an economic interest.

Third, the non-debtor spouse is not entitled to compensation beyond the statutory cap of the bankrupt spouse’s homestead exemption.  As the partition agreement here was avoided as a fraudulent transfer, for Mrs. Wiggains to claim entitlement to more than the statutory cap enjoyed by her husband, she might have filed for bankruptcy protection as well, as a hedge of sorts against a finding of fraudulent transfer.  Having failed to do so, she is entitled to nothing more than her husband’s statutory entitlement.

*1.  Matter of Jeremy Wiggains (Wiggains v. Reed), No. 15-11249 (5th Cir., February 14, 2017).

*2.  Because the home was acquired within 1215 days of bankruptcy, Mr. Wiggains’ equity in the homestead was capped at $130,675 as required by the Bankruptcy Code.

*3.  Mrs. Wiggains offered expert testimony, which the bankruptcy court found irrelevant, that she was entitled to ninety-five percent of the remainder.

*4.  Here, the bankruptcy trustee stipulated there was no intent to defraud.

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