Viegelahn v. Lopez (In re Lopez)

897 F.3d 663

In the MATTER OF: Manuel Palomera LOPEZ; Dolores Ronquillo Lopez, Debtors

Mary K. Viegelahn, Appellee,

v.Manuel Palomera Lopez; Dolores Ronquillo Lopez, Appellants.

No. 17-50297

United States Court of Appeals, Fifth Circuit.

FILED July 31, 2018

Vanessa DeLeon Guerrero, Attorney, Jessica Lanoue Hanzlik, Office of the Chapter 13 Trustee, San Antonio, TX, for Appellee.

J. Todd Malaise, Malaise Law Firm, San Antonio, TX, for Appellants.

Before KING, ELROD, and GRAVES, Circuit Judges.

JENNIFER WALKER ELROD, Circuit Judge:

In this Chapter 13 bankruptcy case, debtors sold their Texas homestead and did not use the sale proceeds to purchase another home. The debtors later voluntarily dismissed their bankruptcy case. The bankruptcy court determined that the debtors were entitled to the return of the homestead proceeds because they voluntarily dismissed their case. The district court disagreed, concluding that the proceeds should remain with the trustee for distribution to creditors in the dismissed bankruptcy proceeding. Determining that the bankruptcy court’s decision was correct, we REVERSE the judgment of the district court as to the disbursement of the proceeds; AFFIRM the district court’s judgment regarding the debtors' motion to dismiss and the trustee’s motion to modify; and REINSTATE the order of the bankruptcy court directing the trustee to return the homestead proceeds to the debtors.

I.

In 2009, Manuel Palomera Lopez and Dolores Ronquillo Lopez (hereinafter, the Debtors) filed a voluntary petition under Chapter 13 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Texas. In their petition, the Debtors listed a property in San Antonio as their homestead, which they claimed as exempt under 11 U.S.C. § 522(b)(3), the Texas Constitution, and the Texas Property Code. The Debtors proposed a Chapter 13 plan under which they would pay a monthly plan payment of $1,100 for 60 months. The bankruptcy court confirmed the Debtors' plan. The confirmation order provided in part that:

All property of the estate, including ... other property which may become part of the estate during the administration of the case, shall not revest in the Debtor. Such property as may revest in the Debtor shall so revest only upon further Order of the Court or upon dismissal, conversion, or discharge.

In the course of this case, Mary K. Viegelahn, the Standing Chapter 13 Trustee for the Western District of Texas (hereinafter, the Trustee), filed three motions to dismiss. In 2011, the Trustee filed the first motion to dismiss alleging that the Debtors were in arrears with their plan payments, rendering the plan infeasible unless the Debtors cured the arrears or increased the amount of their monthly plan payments. In response, the Debtors filed a motion to modify the plan, stating that they were no longer able to afford the plan payments because Manuel Lopez had been incarcerated for the past ten months and was unable to provide financial assistance. The Debtors also stated that Dolores Lopez "has been working side jobs but her income is insufficient to afford the plan payment." The Debtors proposed to surrender a vehicle to reduce the plan payments and stated that this modification would allow them to successfully complete the plan. The bankruptcy court granted the Debtors' motion to modify and dismissed the Trustee’s motion to dismiss as withdrawn. In 2013, the Trustee filed a second motion to dismiss, alleging that the Debtors had failed to make required plan payments and were in arrears. In response, the Debtors filed a motion to modify the plan, which the bankruptcy court granted. In June 2014, the Trustee filed a third motion to dismiss because of continued failure to make plan payments.

In August 2014, the Debtors filed a nunc pro tunc motion¹ to sell property, through which they sought permission to sell the property designated in their petition as their homestead. In their motion, the Debtors stated that the homestead property was sold in July 2011 on a wrap-around note with a balloon payment. According to the Debtors, Dolores Lopez needed the proceeds to pay for "mandatory eye surgery." In her amended objections to the Debtors' nunc pro tunc motion to sell their homestead, the Trustee questioned why the Debtors did not seek permission from the bankruptcy court to sell their homestead in 2011. The Trustee also emphasized that, under Fifth Circuit precedent in Viegelahn v. Frost (In re Frost) , 744 F.3d 384 (5th Cir. 2014), proceeds from the sale of a homestead become property of the estate if not reinvested in another home within six months. Thus, the Trustee maintained that the Debtors could not use the homestead proceeds for eye surgery even if the surgery was mandatory.

The bankruptcy court approved the Debtors' nunc pro tunc motion to sell their homestead. However, the court ordered that the net proceeds from the sale of the homestead—after all claims secured by liens on the property, ad valorem taxes, and closing costs had been satisfied—be submitted to the Trustee. The Trustee then filed a motion to modify the plan, asserting that the net sale proceeds must be disbursed to creditors.

In response to the Trustee’s pending third motion to dismiss, the Debtors filed a motion to modify the plan. The Debtors stated that they had fallen behind in their plan payments because Manuel Lopez was no longer in the United States and had been unable to remit money for the plan payment and because Dolores Lopez had been sick and had not been receiving enough income to remit the plan payment. They also stated that Dolores Lopez was scheduled for eye surgery that would cost approximately $20,000. Noting that they were over $4,000 in arrears, the Debtors proposed remitting a lump sum of the net proceeds from the sale of their homestead less Dolores Lopez’s medical costs related to her eye surgery.

In December 2014, the bankruptcy court held a hearing on the Trustee’s third motion to dismiss the case for failure to make plan payments. At the close of the hearing, the bankruptcy court indicated that it would allow Dolores Lopez to pay her eye surgery bills from the net sale proceeds, stating "and then the rest of it’s going to come in. Unless [Dolores Lopez] wants to dismiss the case. If she wants to dismiss the case, she can keep it all, but then she won't have a discharge. So, that’s the trade-off. " (emphasis added). Later that month, Independence Title Company delivered $42,148.58 from the sale of the homestead to the Trustee. A month later, the Debtors—choosing a solution that the bankruptcy court said was available—filed a motion to voluntarily dismiss their Chapter 13 case.

The Trustee filed objections to the Debtors' motion to dismiss. In her amended objections, the Trustee asserted that the bankruptcy court should deny the motion in part because the Debtors sought dismissal in bad faith. The only evidence of bad faith that the Trustee alleged was that "[t]he Debtors initially sold property of the estate without court authority[ ] and did so approximately three ... years ago," and that the Debtors "now seek to dismiss this case and retain a ‘windfall’ at the expense of their unpaid creditors." The Trustee also maintained that "cause" existed under 11 U.S.C. § 349(b) to keep the homestead proceeds from returning to the Debtors. Thus, the Trustee requested that the bankruptcy court deny the Debtors' motion to dismiss and grant the Trustee’s motion to modify or, if the case was dismissed, find "cause" to order that funds held by the Trustee—i.e. , the $42,148.58 in net sale proceeds plus all plan receipts not yet distributed—be disbursed to the Debtors' creditors.

In February 2015, the bankruptcy court held a hearing on the Trustee’s motion to dismiss, the Trustee’s motion to modify the plan, and the Debtors' motion to dismiss. The court inquired as to why the Debtors had sold their homestead without first obtaining court approval. Counsel for the Debtors responded:

I don't know, Judge. [Dolores Lopez] basically was told by a realtor or some third party that she could sell it. If you remember, her husband got deported to Mexico. And they were having trouble funding the plan, funding the house payment. And then they decided that a way to solve that problem was to sell the house, get some money.

Counsel for the Debtors also clarified that after Dolores Lopez sold the home, she began receiving payments on the wrap-around note. Those payments were somewhat greater than the payments that she continued to make on the first lien note on the home, allowing her to use the difference for expenses, including plan payments. When the balloon payment became due, it appears that Dolores Lopez stopped receiving payments on the wrap-around note, preventing her from continuing to make plan payments.

The bankruptcy court granted the Debtors' motion to voluntarily dismiss their case. The court stated that "[a]lthough Dolores Ronquillo Lopez sold her homestead without prior approval of the Court, the Court does not find cause for conversion to Chapter 7 or for an involuntary modification of the Chapter 13 Plan." Moreover, the bankruptcy court ordered that the funds from the sale of the homestead be transferred from the Trustee to Dolores Lopez after payment of the Trustee’s commission. The bankruptcy court also entered orders dismissing as moot the Trustee’s third motion to dismiss and the Trustee’s motion to modify.

The Trustee appealed to the district court. The district court determined that the homestead proceeds should be distributed to the creditors under the Chapter 13 plan—even though the plan was now defunct. Moreover, the district court held that, even if the proceeds would ordinarily vest in the Debtors upon dismissal, "cause" existed under 11 U.S.C. § 349(b) to order that the proceeds be distributed to the creditors. The district court then entered an order that: (1) affirmed the bankruptcy court’s order dismissing as moot ...