1 EXEMPT PROPERTY ISSUES Presenter: KATHLEEN A. HURREN, San Antonio Law Office of Kathleen A. Hurren Author: MATIAS EDUARDO GARCIA 3821 Juniper Trace, Suite 108 Austin, TX State Bar of Texas 13 th ANNUAL COLLECTIONS & CREDITORS RIGHTS May 14-15, 2015 Dallas CHAPTER 6
2 Matias Eduardo Garcia LICENSES Admitted to practice, State Bar of Texas, November 1999, License Number: Admitted to practice in the Western District of Texas, August, 2004 Received Mediation Certificate in December 1997 LEGAL EXPERIENCE Barnett & Garcia, PLLC Austin, Texas Shareholder (07/03 present) Represent and defend individual, corporate and financial creditors in litigation, appeals, and alternative dispute forums involving actions for debt, breach of contract, sworn account, DTPA, FDCPA, foreclosure, and fraud. Represent and defend commercial, life, bond and workers compensation insurance carriers in civil litigation, appeals, and alternative dispute forums involving the collection of deductibles, commissions, additional premiums, deceptive insurance practices under Article of the Texas Insurance Code and subrogation claims. Counsel to Special Deputy Receiver, Prime Tempus, Inc., for Vesta and Highlands Insurance in Receivership; Previously Counsel to Special Deputy Receiver, Prime Tempus, Inc., for Colonial Insurance in Receivership. Counsel to Special Deputy Receiver, Resolution Oversight Corporation, for Gramercy in Receivership; Previously Counsel to Special Deputy Receiver, Resolution Oversight Corporation, for Financial Insurance Company of America. Counsel to Special Deputy Receiver, Milford Consulting, LLC, for San Antonio Indemnity Company in Receivership Previously Counsel to Special Deputy Receiver, H. Koehler, Inc., for Universal Insurance Exchange and Special Deputy Receiver, JoAnn Howard & Associates, for Metro West Health Plan, Inc. The Reyes Law Firm Austin, Texas Associate (05/00 07/03) Successfully litigated various cases involving breach of contract, sworn account, DTPA, fraud, foreclosures, and product liability on behalf of individual, corporate and financial creditors. Represented commercial, life, bond and workers compensation insurance companies in the collection of additional premiums, deductibles, commissions and subrogation claims. Managed the litigation and pre-litigation collection of over 10,000 delinquent retail and commercial accounts in the state of Texas on behalf of various individual, corporate and financial creditors. Drafted and advised corporate clients on governance issues, business and financial strategy, and B2B contracts. EDUCATION The University of Texas School of Law J. D. - May 1999 The University of Texas at Austin BBA - Dec MEMBERSHIPS American Inn of Court CXVIII Commercial Law League of America International Association of Commercial Collectors Commercial Collection Agencies of America
3 Austin Bar Association Hispanic Bar Association of Austin PRESENTATIONS Presenter: CLE: Exempt Property (05/01/14) Co-Presenter: CLE: 50 Ways to Lose your Law License (03/04/14) Presenter: CLE: Summary Judgment Proof: Toolkit and Forms (05/01/13) Co-Presenter: CLE: Turning Judgments into Cash (03/26/13) Co-Presenter: CLE: Passing the Paddle: Shifting School Discipline to the Courts (01/08/13) Presenter: CLE: Legislative Update (05/02/12 and 10/11/12) Co-Presenter: CLE: Driven to Distraction (04/10/12) Presenter: CLE: Post Judgment Remedies (04/14/11) Co-Presenter: CLE: Collateral Consequences in Criminal Prosecutions (02/08/11) Presenter: CLE: Exemptions under State Law (09/02/10) Co-Presenter: CLE: Biller - The Ethics of Billing and Collecting Legal Fees (10/12/09) Presenter: CLE: Exempt Property (07/09/09 and 07/16/09) Co-Presenter: CLE: DWI Presenter: CLE: Exempt Property Characterization, Conversion, What s Protected and Isn t Protected (09/11/08, 09/18, 2008 and 10/30/08) Co-Presenter: CLE: The Reporters Privilege (02/13/07) Presenter: CLE: The Care and Feeding of Clients: How to Organize Your Office to Service Your Client Best (08/18/06, 08/25/06 and 09/15/06) Co Presenter: CLE: Pitfalls of Multi-Party Representations: Ethical Dilemmas in Aggregate Settlements (02/08/05) Co-Presenter: Texas Bail Bond Course: Collecting on Bail Bond Debts: Pre and Post Judgment Remedies (11/12/04) Co-Presenter: CLE: The Trials and Tribulations of Pro Bono (04/25/04) Co-Presenter: CLE: American Civil Liberties and the War on Terrorism (02/18/03) PUBLICATIONS COMMUNITY Contributor to Chapter 14 of the Texas Collections Manual Supplement published by the State Bar of Texas expanding the explanation and use of receiverships in collections, including summarizing recent case law developments Travis County Children s Protective Services Board, Board Member and Treasurer Children s Protective Assistance, Inc., Board Member and Treasurer Texas Bar Foundation Fellow Center for Child Protection, Past Board Member Attorney Volunteer for Adoption Day sponsored by the Austin Bar Association, Past
4 Acknowledgment I wish to express my sincere thanks to Roland Rivera, a law student with the University of Texas School of Law, who helped me expand several sections in this paper. I also want to acknowledge Kathleen Hurren, who contributed to the sections on Allowed Liens, Homestead in Qualifying Trust and Tax Foreclosure Proceeds.
6 TABLE OF CONTENTS I. INTRODUCTION... 1 II. PROPERTY SUBJECT TO EXECUTION... 1 III. REAL PROPERTY EXEMPTIONS... 1 A. Texas Property Code and Texas Constitution B. Burial Plots C. The Homestead Generally Urban Homestead Business Homestead Rural Homestead Designation of a Homestead Sale of a Judgment Debtor s Homestead Destroying the Homestead Exemption Allowed Liens Homesteads in Qualifying Trust IV. PERSONAL PROPERTY EXEMPTIONS... 5 A. Texas Property Code B. Personal Property Exemption Family Valuation Property C. Wages D. Commissions E. Religious Books and Sacred Texts V. RETIREMENT ACCOUNTS, HEALTH SAVINGS PLANS, AND COLLEGE SAVINGS PLANS A. Retirement Accounts Exemption Requirements B. Health Savings Accounts C. College Savings Plans VI. COMMUNITY PROPERTY A. Texas Family Code B. Generally C. Community Property Presumption D. Community Property Types E. Separate Property VII. CONCLUSION i
8 EXEMPT PROPERTY ISSUES I. INTRODUCTION From its inception, Texas has always been a debtor-friendly state. Exemptions for essential personal property had been part of Spanish and Mexican law in Texas during its infancy. See John Cornyn, The Roots of the Texas Constitution: Settlement to Statehood, 26 TEX. TECH L. REV. 1089, 1187 (1995). By 1786, early Spanish law exempting homes and personal items such as clothing, bedding, arms, working stock and farm implements had become universal. See id. at The legislature of Coahulia y Texas in 1829 protected land grants from enforcement of any prior debt for twelve years and prevented suits for recovery of those debts. See id. at It also exempted lands, farming implements and tools or machinery of one s trade. With its first homestead exemption in 1839 and the first state to include the homestead exemption in its constitution in 1845, Texas was well on its way to securing its legacy as a debtor s haven. See id. Although exemptions can be found in various statutes such as the Texas Insurance Code and Texas Labor Code, this article is intended to provide a brief overview to the general judgment creditor s attorney of the exemptions found in the Texas Property Code and constitution. The practitioner should take careful note to review all statutes, federal and state, for a full comprehensive understanding of a debtor s exemptions. II. PROPERTY SUBJECT TO EXECUTION A judgment debtor s property is subject to levy and execution so long as the property is not exempt by constitution, statute or other rule of law. TEX. CONST. art. XVI, 49-51; TEX. PROP. CODE ; TEX. R. CIV. P III. REAL PROPERTY EXEMPTIONS A. Texas Property Code and Texas Constitution. Sections , , , , and of the Texas Property Code and Section 50 of Article 16 of the Texas Constitution discuss homestead exemptions. Article XVI, Section 50 of the Texas Constitution and Section of the Texas Property Code provide for the homestead exemption with Article XVI, Section 51 of the Texas Constitution and Section of the Texas Property Code providing the number of acres exempt and defining homestead as either rural or urban. Additionally, Section of the Texas Property Code provides for the burial plot exemption. Section of the Texas Property Code governs the temporary renting of a homestead and Section limits how the homestead can be abandoned. Finally, 1 Section legislates how to designate real estate as homestead. B. Burial Plots. [O]ne or more lots used for a place of burial of the dead are exempt from seizure. PROP (a). C. The Homestead. 1. Generally. Homestead rights should be liberally construed. Tolman v. Overstreet, 590 S.W.2d 635, 637 (Tex. Civ. App. Tyler 1979, no writ) (citing Woods v. Alvarado State Bank, 19 S.W.2d 35 (Tex. 1929)). There are no homestead exemptions except those provided by law. Whiteman v. Burkey, 282 S.W. 788, 788 (Tex. 1926). Texas law should be the sole vehicle for determining the type of homestead a debtor possesses exclusive of any common law test. In re Bouchie, 324 F.3d 780, (5th Cir. 2003) (per curiam). 2. Urban Homestead. An urban homestead is one or more contiguous lots totaling no more than ten acres of land together with any improvements. TEX. CONST. art. XVI, 51; PROP (a). Unlike the exemptions for a rural homestead or personal property, the exemption is the same for a family or a single person. TEX. CONST. art. XVI, 51; PROP (a). A homestead is defined as urban if, at the time the designation for homestead is made, the property was: (1) located within the limits of a municipality or its extraterritorial jurisdiction or a platted subdivision; and (2) served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality: (A) electric; (B) natural gas; (C) sewer; (D) storm sewer; and (E) water. PROP (c). 3. Business Homestead. A business homestead is a place in a city, town or village at which a single adult or the head of a family exercises his calling or business and uses the property as his urban home. PROP (a). The practitioner should note that prior to 1999, the Property Code could be interpreted to allow a debtor to exempt a home and a business at separate locations. PROP (a) (amended 1999); In re Jay, 432 F.3d 323,
9 325 (5th Cir. 2005) (discussing the statutory and constitutional change in the meaning of business homestead and its effect). With the addition of the phrase both an urban home and the word contiguous, claiming both an urban residential and urban business should prove difficult if not impossible for a debtor. See In re Julian, 163 B.R. 478, (Bankr. N.D. Tex. 1994); In re Nelson, 134 B.R. 838, 844 (Bankr. N.D. Tex. 1991). 4. Rural Homestead. Both the Texas Constitution and the Texas Property Code distinguish between a family rural homestead and a single person s rural homestead. A brief overview of what constitutes a family is included in this article under Section IV, Subsection B(1). A family is entitled to a rural homestead of one or more parcels of land with improvements totaling no more than 200 acres; whereas a single person who is not a member of a family is entitled to a maximum of 100 acres. Challenges that the distinction violates the equal protection clause have failed. See, e.g., In re Moody, 862 F.2d 1194, 1201 (5th Cir. 1989). A person must use the property for the purpose of a rural home to claim the property as a rural homestead. 5. Designation of a Homestead. a. Statute. Section (c) of the Texas Property Code provides the statutory process for voluntarily designating the homestead. b. Process. To designate a piece of real estate as a homestead, an adult single person or the head of family or spouse must make the designation in an instrument that is signed and acknowledged or... in the manner required for the recording of other instruments and which is filed with the county clerk of the county in which all or part of the property is located. PROP (c). c. Contents of Designation. The designation must contain: (1) a description sufficient to identify the property designated; (2) a statement by the person or persons who executed the instrument that the property is designated as the homestead of the person's family or as the homestead of a single adult person not otherwise entitled to a homestead; (3) the name of the current record title holder of the property; and (4) for a rural homestead, the number of acres designated and, if there is more than one survey, the number of acres in each. PROP (c). d. Changing a Designation. To change the designation of a homestead, a single person 2 or the head of family or spouse must execute and record an instrument in the same manner as prescribed in Section (c). PROP (d). e. Failure to Designate in accordance with Texas Property Code (c). (1) Designation in accordance with a prior law. A voluntary designation of a homestead is valid if performed with an instrument that made a voluntary designation of a homestead in accordance with a prior law on file with a county clerk on September 1, PROP (g). (2) Homestead Tax Exemption. A debtor is considered to have designated a piece of real estate as a homestead if the debtor claims a homestead tax exemption and the real estate is listed as the debtor s residence homestead on the appraisal roll for the appraisal district in which the property is located. PROP (e). (3) Effect on Writ of Execution. If the debtor has not made a voluntary designation of a piece of real estate as a homestead, then the judgment creditor may send the judgment debtor notice stating that if the debtor fails to designate the real property as a homestead in accordance with Texas Property Code sections and , the Court may appoint a commissioner to make the designation with costs taxed to the judgment debtor. PROP A judgment debtor has until 10:00 a.m. on the Monday following the expiration of 20 days to make the designation. PROP The designation contemplated by Section must be filed with the clerk of the court who issued the writ of execution and include a plat. Id. If the judgment debtor fails to make the designation, the Court, upon motion by the judgment creditor within 90 days from the date the writ of execution was issued, shall appoint a commissioner and/or others to make the designation. PROP (a). The commissioner must then file a report designating the homestead with a plat within 60 days of his commission. Id. Any party can challenge the commissioner s findings so long as the challenge is filed prior to a hearing. PROP (b). Within 10 days after the commissioner files his
10 report, either party may request a hearing to confirm, reject, or modify the report. Id. At the hearing, the Court may order the sale of the excess. Id. 6. Sale of a Judgment Debtor s Homestead. a. Partial Release. A judgment lien attaches to all of a judgment debtor s nonexempt real property in the county of recordation. PROP In 2007, the legislature amended section to provide that an abstract does not attach to exempt property for abstracts recorded on or after September 1, 2007, the effective date of the Act. Id. Although an abstract does not create an enforceable lien on a judgment debtor s homestead, it can still cast a cloud on the title. Tarrant Bank v. Miller, 833 S.W.2d 666, 667 (Tex. App. Eastland 1992, writ denied). A judgment creditor may be liable for actual and exemplary damages if it refuses to release the lien. Id. at 669. b. Homestead Affidavit in lieu of a Partial Release. In 2007, the legislature also provided a mechanism for the judgment debtor to file a Homestead Affidavit as a Release of Judgment so long as the judgment debtor complied with Section This process is only applicable to abstracts recorded and indexed after September 1, PROP c. Acquisition of a Homestead Prior to Sale. Acquisition of a new homestead prior to selling the first homestead destroys the exemption. In re England, 975 F.2d 1168, 1173 (5th Cir. 1992). When a debtor buys a second residence before selling the original homestead, the effect is to render all proceeds of the sale of the original homestead nonexempt. In re Fehmel, No FRM, 2008 WL , at *10 (Bankr. W.D. Tex. May 22, 2008). c. Proceeds. i. Sale Proceeds. The proceeds of a judgment debtor s homestead are exempt for six months after the sale date or until a new homestead is acquired. PROP (c); see Davis v. Davis, (In re Davis), 170 F.3d 475, 483, 494 n.10 (5th Cir. 1999). If all the proceeds are not used for a new homestead, the excess is not exempt. Davis 170 F.3d at 483, n.10.; In re England, 975 F.2d at 1175 (5th Cir. 1992); In re Evans, ii. B.R. 261, 264 (Bankr. S.D. Tex 1991). As a result, the debtor is free to use the proceeds for any purpose during the six month exemption period, including paying other debts, making new purchases, or giving the money away. Tax Foreclosure Proceeds. If a property sells at a tax foreclosure sale, and if the property is not exempt, the San Antonio Court of Appeals has held that the excess funds derived from the tax foreclosure sale could be awarded to a judgment creditor. Lares v. Garza, 2004 Tex. App. Lexis 2561 (Tex. App. - San Antonio 2004) d. Tolling of Six Month Period. It is important to note that the six month period may be tolled when the proceeds are in dispute and rendered unavailable to the homestead claimant, in situations such as when the creditor ties up the homestead proceeds in litigation until the expiration of the exemption period. This type of action would be in violation of the spirit of the statute, designed to protect the proceeds of a homestead sale for the sixth month period following the sale. 7. Destroying the Homestead Exemption. a. Abandonment. Real estate exempt as a homestead can lose its exemption if the claimant abandons his or her intent to occupy the property as his or her homestead. McFarland v. Rousseau, 667 S.W.2d 929, 931 (Tex. App. Corpus Christi 1984, no writ). Abandonment is an affirmative defense. Denmon v. Atlas Leasing L.L.C., 285 S.W.3d 591, 596 (Tex. App. Dallas 2009, no pet.). The creditor carries the burden of proving that the debtor abandoned the homestead. McFarland, 667 S.W.2d at 931. In order to prove abandonment, the practitioner must prove: (1) the debtor discontinued use of the tract by overt acts and (2) the debtor intended to permanently abandon the tract as the homestead. Driver v. Conley, 320 S.W.3d 516, 519 (Tex. App. Texarkana 2010, pet. denied). It is important to note that the burden to prove abandonment is heavy and once acquired, homestead rights are not easily lost. In re Estate of Casida, 13 S.W.3d 519, 521 (Tex. App. Beaumont 2000, no pet.); Conley, 320 S.W.3d at 519. As a result, the
11 evidence must be so convincing as to make the abandonment undeniably clear and beyond almost the shadow of reasonable ground of dispute. Conley, 320 S.W.3d at 519. Two of the issues that are often litigated when abandonment is claimed revolve around intent and whether the abandonment was voluntary. i. Voluntary. The abandonment of the homestead must be voluntary. See Taylor v. Mosty Bros. Nursery, Inc., 777 S.W.2d 568, 569 (Tex. App. San Antonio 1989, no writ) (husband executed an unconditional deed to his wife and left the state). However, an act of necessity is not a voluntary abandonment of the homestead. Florey v. Estate of McConnell, 212 S.W.3d 439, (Tex. App. Austin 2006, pet. denied). As well, physical absence alone does not necessarily establish abandonment. See Kendall Builders, Inc. v. Chesson, 149 S.W.3d 796, 808 (Tex. App. Austin 2004, pet. denied) ( One does not necessarily abandon a homestead merely by changing residence. ). The physical absence must be accompanied by an intention not to use the home again to constitute abandonment. Id.; see In re Leonard, 194 B.R. 807, 810 (Bankr. N.D. Tex. 1996) ( [I]n cases of physical absence, the lack of definite intention of not to return and use and occupy such homestead is the controlling fact. ). The Leonard Court made it a point to note that a temporary renting of a homestead does not change the homestead characteristic. 194 B.R. at 810 (reasoning that a debtor that has not lived in the residence for over three years did not intend an abandonment.) ii. Intent. In situations in which physical absence from the property is shown, the issue centers on intent. Pierce v. Wash. Mut. Bank, 226 S.W.3d 711, 715 (Tex. App. Tyler 2007, pet. denied). As a result, abandonment requires proof there was never an intent to return, use, or occupy the property as homestead. Florey, 212 S.W.3d at 444. The intent not to return must be present, definite, and permanent. Union Square Fed. Credit Union v. Clay, Nos CV, CV, 2009 WL , 4 at *12 n. 80 (Tex. App. Fort Worth April 23, 2009). That intent not to return can be formed at the time of discontinued use or afterwards. See Coury v. Prot, 85 F.3d 244, 254 (5th Cir. 1996). b. Rental. Temporary renting of a homestead does not change its homestead character if the homestead claimant has not acquired another homestead. PROP Drake Interiors, L.L.C. v. Thomas, 433, 848 (Tex. App. Houston [14th Dist] 2014, no pet.) ( Merely changing residences is not an abandonment of the homestead.... Nor does temporary renting of the homestead constitute abandonment. ) Renting property is ultimately determined by the question of whether the income is for helping the comfort and/or convenience of the debtor s property. In re Norra, 421 B.R. 782, (Bankr. S.D. Tex. 2009). c. Death. In some situations, the homestead may be terminated by the death of the homestead claimant. Id. An interest in real estate vests immediately in the beneficiary upon the death of a homestead claimant subject to payment of the debts of the decedent. Therefore, a property filed abstract by a diligent creditor who properly records an abstract in the county the property resides will create a lien on that property. Notwithstanding, the death of the homestead claimant will not terminate the family homestead if (1) the estate is insolvent and (2) the claimant is survived by a spouse, minor child, or unmarried adult child remaining with the family. Nat l Union Fire Ins. Co. v. Olson, 920 S.W.2d 458, 461 (Tex. App. Austin 1996, no writ). Once these conditions are satisfied, the homestead will descend to those entitled to inherit it, unburdened by the claims of any creditors (except for constitutionally permissible claims). Id. Keep in mind that beyond the previously listed conditions, homestead rights cannot be inherited. George v. Taylor, 296 S.W.2d 620, (Tex. Civ. App. Fort Worth 1956, writ ref d n.r.e.). However, minor children and surviving spouses are protected. Id.; TEX. CONST. art. XVI, 52; TEX. PROB. CODE 271(a)(2). Effective January 1, 2014, the Estates Code Section provides that a homesteads isn t liable if the descendent was survived by a spouse or minor child except for certain debts.
12 d. Fraudulent Transfer of Homestead. A transfer to shield a homestead from creditors that is not intended to pass title is void. Hughes v. Parmer, 164 S.W.2d 576, 577 (Tex. Civ. App. Austin 1942, no writ); Moody, 862 F.2d at 1199; Perry, 289 B.R. at 865. A void transfer cannot constitute an abandonment of homestead rights. Perry, 862 F.2d at 865; McGahey v. Ford, 563 S.W.2d 857, 861 (Tex. Civ. App. Fort Worth 1978, writ ref d n.r.e.). The rationale cited for this rule is that the law has already removed the homestead property from the creditors reach thereby failing to deprive a creditor of any rights in the property despite the characterization of the transfer. Duran v. Henderson, 71 S.W.3d 833, 843 (Tex. App. Texarkana 2002, pet. denied). However, the same Court in Duran noted if the original owner ceased to use the land for a homestead after the sham transaction, the property could be available to creditors. Id. 8. Allowed Liens. The three encumbrances allowed to be placed on a homestead according to the Texas Constitution are: (1) purchase money; (2) taxes on property; and (3) work and material used in constructing improvements on the property if contracted for in accordance with Chapter 53 of the Texas Property Code. In addition to the constitutional encumbrances, Texas allows additional encumbrances based on (1) an owelty of partition imposed against the entirety of the property by a court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division on an award of a family homestead in a divorce proceeding; [(2)] the refinance of a lien against a homestead, including a federal tax lien resulting from the tax debt of both spouses, if the homestead is a family homestead or from the tax debt of the owner ; (3) home equity loan; and (4) a reverse mortgage that meets the requirements of Section 50(a)(6), Article XVI, Texas Constitution or Sections 50(k)-(p), Article XVI, Texas Constitution, respectively. 9. Homesteads in Qualifying Trust. Section of the Texas Property Code, which was added in 2009, protects a homestead that is transferred into a Qualifying Trust. Qualifying Trust is defined in Section of (a) of the Texas Property Code (c) provides that a married person who transfers property to the trustee of a qualifying trust must comply with the requirements relating to the joinder of the person s spouse as provided by Chapter 5 of the Family Code. This section applies to transfers effective on or after September 1, A transfer prior to September 1, 2009 is subject to the law in effect at the time of the transfer. Acts 2009, 81 st Leg., Ch. 984 (H.B. 3767), Section 2 IV. PERSONAL PROPERTY EXEMPTIONS A. Texas Property Code. The statutes in the Texas Property Code that discuss personal property exemptions are Sections , , , and Section (a) provides for the exemption and defines the property contemplated by the exemption. Sections (b) (e), and provide additional exemptions separate and in addition to the exemption provided by Section Finally, Section controls how property is designated when the property value exceeds the exemption allowed by Sections and (a). B. Personal Property Exemption. Section (a) of the Texas Property Code exempts from garnishment, attachment, execution, or other seizure any (1) property provided for a family that has an aggregate fair market value of not more than $60,000 exclusive of the amount of any liens, security interests or other charges encumbering the property; or (2) property owned by a single adult who is not a member of a family and has an aggregate fair market value of not more than $30,000, exclusive of the amount of any liens, security interests or other charges encumbering the property. If the personal property exceeds the number or amount allowed under Section and the debtor can be found in the county where the property is located, the officer making the levy shall ask the debtor to designate the personal property to be levied. PROP (a). If the debtor cannot be found or if the debtor does not within a reasonable time make a designation, the officer shall make the designation. Id. If the personal property exceeds the aggregate amount allowed under Section , the debtor may designate the personal property to be levied. PROP (b). If the debtor does not within a reasonable time make a designation, the court shall make the designation once it is requested. Id. In construing Section , this author has focused on three words in the statute that have been the subject of various litigation, i.e. the definition of family, valuation, and property. 5
13 1. Family. For the purposes of construing the term family, family may consist of something less than the traditional husband-wife, wife-mother and children living together under the same roof. In re Evans, 25 B.R. 105, 107 (Bankr.N.D.Tex. 1982). Since Roco v. Green, 50 Tex. 483, (1878), Texas courts have held 1) that the family relation is one of status, not of mere contract, 2) that the head of the family must have a legal or moral obligation to support the other members, and 3) that there must be a corresponding state of dependence on the part of the other members for this support. See Henry S. Miller Co. v. Shoaf, 434 S.W.2d 243, (Tex.Civ.App. Eastland 1968, writ ref d n.r.e.) (holding an adult daughter living with older mother was a family); Cent. Life Assurance Soc y v. Gray, 32 S.W.2d 259, 260 (Tex.Civ.App. Waco 1930, writ ref d) (holding brother and sister constituted a family); Zielinski v. Hill, 972 F.2d 116, (5th Cir. 1992) (per curiam) (affirming judgment where lower court found debtor, adult daughter and granddaughter to be a family); In re Leva, 96 B.R. 723, (Bankr. W.D. Tex. 1989) (ruling debtor s relationship with girlfriend and her son was a family). i. Effect of Marriage, Divorce, and Death on Family Status a. Marriage. A family unit can only have one homestead at a time. Denmon, 285 S.W.3d at 596. As a result, a married man and woman cannot maintain individual homesteads during the marriage. Id. b. Divorce. If a divorce occurs, there would consequently be two heads of a family that could each claim a homestead. Patterson v. First Nat'l Bank of Lake Jackson, 921 S.W.2d 240, 246 (Tex. App. Houston [1st Dist.] 1995, no writ). It is important to remember that a separate homestead cannot be claimed until a final and enforceable divorce decree has been entered. Denmon, 285 S.W.3d at 596. The divorce decree is final when a court makes an official announcement either in writing or in open court. In re Dawson, 266 B.R. 355, 359, n.3 (Bankr. N.D. Tex. 2001). Only until the divorce decree has been finalized does the family relationship terminate. Id. at 359. c. Death. When a marriage is terminated by the death of one spouse, the family status of the surviving spouse is not terminated. Border v. McDaniel (In re 6 McDaniel), 70 F.3d 841, 844 (5th Cir. 1995). As a result, the surviving spouse has the same homestead rights that both spouses had prior to the death of one of the spouses. Majeski v. Estate of Majeski, 163 S.W.3d 102, 107 (Tex. App. Austin 2005, no pet.). 2. Valuation. Personal property exemption is to be valued on the basis of fair market value and not on the basis of the debtor s equity in the property. In re Barnett, 33 B.R. 70, 72 (Bankr. N.D. Tex. 1983). In In re Shurley, 163 B.R. 286, 291 (Bankr. W.D. Tex. 1993) (quoting In re Markowitz Bldg. Co., 84 B.R. 484, 487 (Bankr. N.D. Ohio 1988)), the Court stated that the fair market value was the price which a willing seller under no compulsion to sell, and a willing buyer under no compulsion to buy, would agree upon after the property has been exposed to the market for a reasonable amount of time. To determine the fair market value, courts consider all evidence produced by both parties, but that merely guides the court in its determination. Shurley, 163 B.R. at 291. So, a debtor s valuation and the actual purchase price will constitute some evidence of value, but that in itself is not sufficient in determining the proper valuation given to a piece of personal property. Id. The scales are tipped in favor of the debtors; the objecting party cannot carry its burden of proof merely by impeaching the Debtors valuation. Id. The debtors do not have to prove that their valuation of the property is correct. Id. 3. Property. Property is defined by Section of the Texas Property Code. Section provides that the following personal property is exempt in accordance with the aggregate limitations provided in : (1) home furnishings, including family heirlooms; (2) provisions for consumption; (3) farming or ranching vehicles and implements; (4) tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession; (5) wearing apparel; (6) jewelry not to exceed 25 percent of the aggregate limitations prescribed by Section (a); (7) two firearms; (8) athletic and sporting equipment, including bicycles; (9) a two-wheeled, three-wheeled, or fourwheeled motor vehicle for each member of a
14 family or single adult who holds a driver s license or who does not hold a driver s license but who relies on another person to operate the vehicle for the benefit of the nonlicensed person; (10) the following animals and forage on hand for their consumption: (A) two horses, mules, or donkeys and a saddle, blanket, and bridle for each; (B) 12 head of cattle; (C) 60 head of other types of livestock; and (D) 120 fowl; and (11) household pets. This subsection will focus on three exemptions that are frequently encountered when levying against an individual: tools of trade, athletic and sporting equipment, and vehicles and watercrafts. a. Tools of Trade. Section (a)(4) exempts tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession. The requirements to obtain an exemption under this section are laid out in a three part test in In re Fehmel, 2008 WL at *4. First, the items in question must qualify as tools, equipment, books, apparatus, boats, or motor vehicles. Id. Second, the debtor must actually be engaged in a trade or profession. Id. Finally, the tools must actually be used in the trade. Id. 1. Engaged in Trade or Profession. Courts construe the trade or profession requirement to include any legitimate self-employment. In re Legg, 164 B.R. 69, 73 (Bankr. N.D. Tex. 1994). Factors to consider are whether the debtor reports any income from the purported trade or profession, how often he engages in the purported trade or profession, whether the debtor clearly intends to continue the purported trade or profession, and whether the debtor has other employment. See, e.g., Fehmel, 2008 WL at *5 (denying exemption because debtor had no income from using the items and also had outside employment); Hrncirik v. Farmers Nat l Bank of Seymour, 138 B.R. 835, (Bankr. N.D. Tex. 1992) (denying exemption because debtor had scaled back farm operations 7 and demonstrated no intent to continue farming). The statute does not explicitly require the debtor to be self-employed, but at least one case has denied an exemption where the debtor was not self-employed. In re Erwin, 199 B.R. 628, 631 (Bankr. S.D. Tex. 1996). In denying the debtor s claim to exempt his 1988 Ford Crown Victoria, the Erwin court considered, among other things, that the debtor was employed by Harris County, even though he used the car in his job as a constable. Id. 2. Must Be Used in Trade. Items which cannot or merely are not being used in the debtor s trade or profession cannot qualify for the tools of trade exemption. Willis v. Morris, 1 S.W. 799, 803 (1886) (holding that when a mechanic abandons his trade, his tools are no longer exempt from execution); Fehmel, 2008 WL at *5 (denying exemption because debtor was not using the items in any trade or profession); Hrncirik, 138 B.R. at (denying exemption on farm equipment because it was rarely used and debtor expressed no intent to resume farming operations); In re Hernandez, 131 B.R. 61, 63 (Bankr. W.D. Tex. 1991) (denying exemption on wrecked pick-up truck because it could not be used in the debtor s trade). Courts will also consider whether the item is used with sufficient regularity in the debtor s trade to indicate actual use. See, e.g., Liebman v. Grand, 981 S.W.2d 426, 434 (Tex.App. El Paso 1998, no pet.) (denying exemption of sailboat for sailboat instructor where he had had only one student and the student did not pay for the lessons); Goffney v. Prime Bank, 2002 WL , *4 (Tex. App. Houston [14 th Dist.] 2002, no pet.) (not designated for publication) (denying exemption on certificates of deposit assigned to the sheriff as security for bail by debtor, a criminal attorney, because she only used them four times in five years and could not use them at all as long as the judgment remained valid against her); but see In re Nash, 142 B.R. 148, 152 (Bankr. N.D. Tex. 1992) (holding that after 1991 amendments to (a)(4), it is no longer necessary to
15 show tractors were in regular use to be exempt under Texas law), superseded on other grounds by statute, as stated in Legg, 164 B.R. at Note that it has been held that the quantity of each item and its use for private family matters is not a relevant consideration in deciding whether items qualify as exempt tools of the trade. In re Baldowski, 191 B.R. 102, 106 (Bankr. N.D. Tex. 1996). 3. Qualifies as a Tool. By far the most difficult aspect of applying the tools of trade exemption, the practitioner must finally determine whether the item qualifies as a tool of trade. Courts have historically split between a restrictive view and a liberal view of what constitutes a tool of trade. The restrictive view initially limited the definition of tools of trade to simple implements or minor machinery used by hand. See, e.g., Willis, 1 S.W. at 803 (holding that the large and expensive machinery used to manufacture cotton gins was not exempt); Comer v. Powell, 189 S.W. 88, 91 (Tex. Civ. App. Amarillo 1916, no writ hist.) (holding that a thrashing outfit was not exempt); McMillan v. Dean, 174 S.W.2d 737, 740 (Tex. Civ. App. Austin 1943, writ ref d w.o. merit) (holding that large, motor propelled trucks and trailers were not exempt). The liberal view, citing the Texas policy to construe exemption statutes liberally, included any item that was used in the debtor s trade, regardless of its cost, size, or power source. See, e.g., Green v. Raymond, 58 Tex. 80, 84 (1882) (holding that printing press, type, and cases used in printing office were exempt); McBrayer v. Cravens, Dargan, & Roberts, 265 S.W. 694, 694 (Tex. Comm n App. 1924, opinion adopted) (holding that books, rugs, and office furniture of attorney were exempt). The Texas Legislature made changes to the exemption statute in 1973 and 1991 that have caused courts to shift their focus from the character of the item itself to how it is used in the debtor s trade or profession. First, in 1973, the Legislature revised the statute to include equipment and boats, to exempt items used in the trade instead of those belonging to the trade, and to impose a monetary limit of $30, for a single person. England v. First Nat l Bank (In re England), 22 B.R. 389, (Bankr. N.D. Tex. 1982). The changes were interpreted as a legislative intent to include more property under the tools of trade exemption while safeguarding creditors by establishing a monetary limit to the exemptions that could be taken. Id.; Baldowski, 191 B.R. at Nonetheless, courts were still split over whether the item had to be peculiarly essential to the trade or merely necessary to continue the trade or profession in the same manner as previously practiced. See, e.g., Segraves v. Weitzel, 734 S.W.2d 773, (Tex. App. Fort Worth 1987, writ ref d n.r.e.); England, 22 B.R. at 391. The Segraves court applied the more restrictive view and denied an exemption for desks, a storage cabinet, chairs, a lamp, a file cabinet, and other general office furnishings, reasoning that a tool must be peculiarly essential to the use of said trade or profession and not merely of general value and use in setting up a business. Segraves, 734 S.W.2d at ; see also In re Weiss, 92 B.R. 677, 679 (Bankr. N.D. Tex. 1988) (holding that trailers were of general value but were not peculiarly adapted to the business of a custom harvester and thus not exempt); In re Leva, 96 B.R. 723, 739 (Bankr. W.D. Tex. 1989) (holding that a mobile phone and hand-held recorder were not peculiarly adapted to businessman s trade or profession); In re Swift, 124 B.R. 475, (Bankr. W.D. Tex. 1991) (holding that typewriters, desks, chairs, paintings, cabinets, a fax machine, calculators, a copier, and a phone system were not peculiarly adapted to insurance business and were therefore not exempt, even though the items were necessary to run an insurance business productively); Hrncirik, 138 B.R. at 840 (holding that a pick-up truck was non-exempt because it was not peculiarly adapted or essential to farming operations, but of general value only); cf. Nash, 142 B.R. at 152 (holding that farm tractors are peculiarly 8
16 adapted to the trade of farming, and thus exempt as tool of trade for farmer). Courts espousing the more liberal view considered whether the item was necessary to carry on the debtor s business in the same manner as he had before. See, e.g., England, 22 B.R. at 391 (holding that 5-1/2 ton automatic screw machine necessary for debtor s business was exempt); Hernandez, 131 B.R. at 63 (holding that trailers were exempt because even though they were not peculiarly adapted to debtor s paving business, they were required for his business to operate); In re Neal, 140 B.R. 634, (Bankr. W.D. Tex. 1992) (holding computer to be exempt even though it was not peculiarly adapted to computer-aided drafting and scanning service because it was necessary to run debtor s software to generate engineering drawings and schematics); Baldowski, 191 B.R. at 106 (holding that booths, cash register, plates, platters, knives, forks, spoons, tables, chairs, and glasses are all exempt for restaurant operator because they are necessary to carry on a restaurant business). In 1991, the Legislature removed the requirement that tools of the trade be reasonably necessary for the family and added motor vehicles. See Baldowski, 191 B.R. at 106; Legg, 164 B.R. at The Legg court construed the deletion of reasonably necessary as a legislative endorsement of the more liberal view that an item did not have to be peculiarly adapted to the trade or profession. 164 B.R. at (holding that a front-end loader, Mack truck, radio tower, and flatbed trailer to be exempt because they were necessary to the debtor s fertilizer business). Since then, courts appear to have widely adopted the somewhat hybrid view, now known as the use test and first set forth in Meritz v. Palmer, 266 F.2d 265, 268 (5th Cir. 1959): that an item need be fairly belonging to or usable in the [debtor s] trade, but that items of mere general value and use in the trade and profession, such as office furnishings, are not exempt. See, e.g., Erwin, 199 B.R. at (holding that motor vehicle was of mere general value to 9 debtor s work as a constable); Liebman, 981 S.W.2d at 434 (concluding that sailboat was not fairly belonging to or usable in debtor s trade as an electrical engineer, despite debtor s testimony that he entertained potential clients on it); Goffney, 2002 WL at *4 (certificates of deposit were of general value to attorney s practice of law and thus were not exempt). One place the peculiarly adapted test survives intact, however, is with motor vehicles. Reasoning that a motor vehicle could be fairly belonging or usable in almost any trade or profession, courts have maintained that in order to fall under the tools of trade exemption, a motor vehicle must be peculiarly adapted to the debtor s business. See, e.g., In re Juhasz, 208 B.R. 32, 35 (Bankr. S.D. Tex. 1995); Erwin, 199 B.R. at 631. The debtor in Juhasz was in the business of selling jewelry and used his vehicle (a 1986 Porsche 944 Turbo) to deliver goods, call on customers, and to conduct appraisals. Juhasz, 208 B.R. at 35. The court concluded that because there was no special modification of the car that adapted it for particular use as a delivery vehicle, the vehicle could not be exempted as a tool of trade. Id. The Erwin court was even harsher, holding that a constable s car was not particularly adapted to his trade even though it had emergency lights, a spotlight, and communications equipment, because the constable testified that any car, even a rental car, could be used, that he used the car for personal purposes, and that he received a car allowance from his employer based on his use of the vehicle for professional purposes. 199 B.R. at 631. So it appears that the courts will look for some sort of modification that makes a vehicle both specifically adapted for and unique to a debtor s trade or profession before granting an exemption on a motor vehicle as a tool of trade. B. Athletic and sporting equipment vs. Watercrafts. Watercrafts, such as boats and jet skis, are not considered athletic and sport equipment and are therefore non-exempt. In re Gibson, 69 B.R. 534, 535 (Bankr. N.D.Tex. 1987)
17 (1968 power boat is non-exempt); In re Griffin, 139 B.R. 415, 417 (Bankr. W.D. Tex. 1992) (sailboat is non-exempt); Norris v. Thompson, 215 S.W.3d 851, 859 (Tex. 2007) (68 yacht is non-exempt); In re Payton, 73 B.R. 31, 33 (Bankr. W.D. Tex. 1987) (boat is not a sporting good); In re Cypert, 8 B.R. 449, (Bankr. N.D. Tex. 1987) (Glass Par fishing boat is non-exempt); Hickey v. Couchman, 797 S.W.2d 103, 110 (Tex. App. Corpus Christi 1990, writ denied); In re Crockett, 158 F.3d 332, (5th Cir. 1998) (jet ski is non-exempt). As a general rule, if it floats on the waterway and has a means of propulsion independent from human power, it will probably not qualify as sports equipment. Crockett, 158 F.3d at C. Vehicles. Each member of a family or a single adult who holds a driver s license or who does not hold a driver s license but who relies on another person to operate the vehicle for his or her benefit is entitled to a two, three or four wheeled motor vehicle. PROP (a)(9). C. Wages. Section (b) excludes current wages for personal services. In Brink v. Ayre, 855 S.W.2d 44, 45 (Tex.App. Houston [14 th Dist.] 1993, no writ) (citing Brasher v. Carnation Co., 92 S.W.2d 573 (Tex.Civ.App. Austin 1936, writ dism d), the court upheld that current wages imply a master-servant relationship and not an independent contractor relationship. See In re Perciavalle, 92 B.R. 688, 691 (Bankr. WD. Tex. 1988) (monies received not exempt because general agent and district agent for insurance company was independent contractor); In re Martin, 117 B.R. 243, 246 (Bankr. N.D. Tex. 1990) (monies received not exempt because business consultant was independent contractor) (citing Hennigan v. Hennigan, 666 S.W.2d 322, 324 (Tex. App. Houston [14 th Dist.] 1984, writ ref d n.r.e.)); DeVore v. Central Bank & Trust, 908 S.W. 2d 605, 610 (Tex.App. Fort Worth 1995, no writ) (monies received not exempt because attorney was independent contractor). Texas courts have consistently held that, once received by the debtor, wages, paychecks, retirement checks and other similar assets lost their current wage status and were no longer exempt. Brink, 855 S.W.2d at 45; Schmerbeck v. River Oaks Bank, 786 S.W.2d 521, 522 (Tex.App. Texarkana 1990, no writ); Barlow v. Lane, 745 S.W.2d 451, (Tex.App. Waco 1988, writ denied). In 1989, the Texas legislature amended Texas Civil Practice and Remedies Code section and added subsection 10 (f) preventing courts from entering or enforcing an order that requires the turnover of proceeds of or the disbursement of property exempt under any statute, including Section See Burns v. Miller, Hiersche, Martens & Hayward, P.C., 948 S.W.2d 317, (Tex.App Dallas 1997, writ denied) (discussing (f)); cf. Leibman v. Grand, 981 S.W.2d 426, 435 (Tex.App. El Paso 1998, no pet.) (refusing to exempt proceeds from sale of exempt property where funds were held for several months and subsequently used to purchase an exempt annuity). D. Commissions. Unpaid commission for personal services not to exceed 25 percent of the aggregate limitations prescribed by subsection (a) of of the Texas Property Code are exempt from seizure and included in the aggregate. The exemption is applied to each commission payment instead of applying it once to the sum of the commission payment. Mass. Mut. Life Ins. Co. v. Shoemaker, 849 F. Supp. 30, 33 (S.D. Tex. 1994). E. Religious Books and Sacred Texts. In 2007, the Texas legislature passed amended Section and added subsection (e) exempting religious bibles or other books containing sacred writings from the the aggregate limitations prescribed by Section (a) of the Texas Property Code. (House: Yeas 145, Nays 0, 2 present, not voting; Senate: Yeas 144, Nays 0, 1 present, not voting). V. RETIREMENT ACCOUNTS, HEALTH SAVINGS PLANS, AND COLLEGE SAVINGS PLANS A. Retirement Accounts. 1. Exemption. Section provides an exemption for various types of retirement accounts. An analysis of this section is incomplete without an analysis of the Internal Revenue Code. Should a practitioner encounter a debtor with a retirement account that he or she finds suspect, he or she should be cautioned to read Section in conjunction with the Internal Revenue Code. A careful examination should ensue as to how the retirement account was created, how the retirement account has been maintained, and how the retirement account has been used. According to Section , the following items, whether vested or not, are exempt so long as the plan, contract, or account qualifies under the applicable provisions of the Internal Revenue Code of 1986 and subsequent amendments thereto: 1. Stock bonus, pension, annuity, deferred compensation, profit-sharing, or similar plan, including a retirement plan for self-employed
18 individuals, and under any annuity or similar contract purchased with assets distributed from that type of plan and under any retirement annuity or account described by section 403(b) or 408 A of the Internal Revenue Code of 1986 and subsequent amendments thereto; 2. an individual retirement account; 3. an individual retirement annuity; and, 4. rights to payments or assets held in government of church contracts pursuant to the federal Employee Retirement Income Security Act of Requirements. In order to claim the exemption, the plan, contract or account must be qualified under the applicable provisions of the Internal Revenue Code of 1986 and subsequent amendments. However, a plan that has been deemed structurally qualified upon its creation by the IRS but abused by a debtor rendering it operationally unqualified loses its exempt status. In re Jarboe, 365 B.R. 717, 722 (Bankr.SD.Tex. 2007) (citing In re Plunk, 481 F.3d 302, ). Additionally, contributions, along with any accrued earnings, in excess of the allowable amounts prescribed under the applicable provision of the Internal Revenue Code of 1986 are generally not exempt. PROP (b). B. Health Savings Accounts. Health Savings Accounts as described by section 223 of the Internal Revenue Code of 1986 and subsequent amendments thereto are exempt in the same manner retirement accounts are exempt. PROP (a). C. College Savings Plans. College Savings Plans as described by Section of the Texas Property Code are exempt. It is the author s understanding that College Savings Plans are designed to help families save for college expenses by offering potential tax-deferred growth and tax-free withdrawals for qualified educational expenses such as tuition, fees, certain room and board expenses, textbooks, supplies and equipment required for school. The Texas Comptroller maintains a website at VI. COMMUNITY PROPERTY A. Texas Family Code. Marital property in Texas is divided into three categories: separate property, sole management community property and joint management community property. Sections 3.201, and of the Texas Family Code discuss spousal liability and the 11 availability of community and separate property to satisfy liabilities. Specifically, Section of the Texas Family Code provides when a spouse is liable for the debts of the other spouse. Section discusses when community and separate property can be used to satisfy a debt and Section discusses the order in which community and separate property is subject to the execution and/or sale to satisfy a judgment. B. Generally. If a judgment is against both spouses, all property, joint management and separate, is available to satisfy a judgment unless it is exempt by some other rule of law. TEX. FAM. CODE 3.202(a); Cockerham v. Cockerham, 527 S.W.2d 162, 172 (Tex. 1975) (although the marital property liability statute at issue in Cockerham has since been amended, the amendment was only stylistic and not substantive). C. Community Property Presumption. It is presumed that property possessed by either spouse during the marriage is community property; clear and convincing evidence that the property is separate is needed to overcome the presumption of community property. TEX. FAM. CODE To satisfy the burden that an item of property is the separate property of one spouse, the spouse must trace and clearly identify property claimed as separate property. Moroch v. Collins, 174 S.W.3d 849, 856 (Tex. App. Dallas, 2005, pet. denied). Tracing involves establishing the separate origin of the property through evidence showing the time and means by which the spouse originally obtained possession of the property. Id. at The classification of the property is determined by the time and circumstances of its acquisition. Leighton v. Leighton, 921 S.W.2d 365, 367 (Tex. App. Houston [1st Dist.] 1996, no writ). This is a difficult burden to sustain. Moroch, 174 S.W.3d at 856. Any doubt as to the property s characterization should be resolved in favor of the community estate. Graves v. Tomlinson, 329 S.W.3d 128, 139 (Tex. App. Houston [14th Dist.] 2010, pet. denied). The spouses can agree that property that would be classified as joint management community property will instead be classified otherwise. TEX. FAM. CODE (b), (c); see LeBlanc v. Waller, 603 S.W.2d 265, 267 (Tex. App. Houston [14th Dist.] 1980, no writ) (holding that an oral agreement to divide the estate fell within the other agreement provision because the legislature chose to remove the requirement that the agreement be in writing).
19 D. Community Property Types. Community property consists of the property, other than separate property, acquired by either spouse during marriage. TEX. FAM. CODE The availability of community property to satisfy a debt depends on its classification as either sole management community property or joint management community property. 1. Sole Management Community Property. A debtor spouse s sole management community property is subject to the liabilities incurred by the debtor before or during the marriage, TEX. FAM. CODE 3.202(c) except that a spouse s sole management community property is not subject to: (1) any liabilities that the other spouse incurred before marriage; or (2) any nontortious liabilities that the other spouse incurs during marriage. Id (b). However, all community property, including the non-debtor spouse s sole management community property, is subject to tortious liability of either spouse incurred during the marriage. Id (d). Sole management community property is that property which, although acquired during the marriage, would have belonged to that spouse if single. Douglas v. Delp, 987 S.W.2d 879, 883 (Tex. 1999). Such property includes: (1) personal earnings; (2) revenue from separate property; (3) recoveries for personal injuries; and (4) the increase and mutations of, and the revenue from, all property subject to the spouse s sole management, control, and disposition. TEX. FAM. CODE 3.102(a). For example, in Montemayor v. Ortiz, 208 S.W.3d 627 (Tex. App. Corpus Christi 2006, pet. denied), the underlying judgment against the debtor husband was one for debt rather than tort. The Court found that the non-debtor wife s business remained under her sole management and control; and the debtor husband had no input in the business s management or operations. Id. at As a result, the Court held that the business was the sole management community property of the wife and thus was not subject to the nontortious debts of the husband. Id. at 645. For a discussion of when a nondebtor spouse s sole management community property is available to satisfy the other spouse s tort liability, see James W. Paulsen, The Unsecured Texas Creditor s Post- Divorce Claim to Former Community 12 Property, 63 BAYLOR L.REV. 781, 788 (2011). 2. Joint Management Community Property. Under TEX FAM. CODE 3.202(c) and (d), joint management community property is subject to liabilities incurred by that spouse either before or during the marriage. Joint management community property can be characterized as sole management property commingled beyond segregation or community property of unprovable origin. James W. Paulsen, The Unsecured Texas Creditor s Post-Divorce Claim to Former Community Property, 63 Baylor L.Rev. 781, 787 (2011). [C]ommunity property that is jointly managed cannot belong to one spouse and not the other. If one spouse incurs a nontortious liability before or during marriage, the entire joint management community property may be reached to satisfy the liability. Drake Interiors, L.L.C. v. Thomas, 433 S.W.3d 841, 850 (Tex. App. Houston [14th Dist.] 2014, no pet.). In Drake, the creditor was able to reach jointly managed community property, a townhome, to satisfy a debt incurred prior to marriage, even though the property was jointly managed by the non-debtor wife. Id. at 849. The wife s interest in the joint management community property could be reached to satisfy her husband s liabilities. Id. The non-debtor spouse did not need to be named in the earlier lawsuit for the creditor to reach the jointly managed community property. Id.; see also Nelson v. Citizens Bank & Trust Co. of Baytown, Tex., 881 S.W.2d 128, 131 (Tex. App. Houston [1st Dist.] 1994, no writ) (although non-debtor wife was not personally liable for husband s debt from promissory note, her interest in their jointly managed community property was subject to the debt). Under Texas law, the non-debtor spouse does have a one-half ownership interest in the couple s community property. U.S. v. Loftis, 607 F.3d 173, 178 (5th Cir. 2010). But, that ownership interest does not define what community assets may be seized by [the debtor spouse s] creditors, a question that is determined by reference to whether the community assets are solely or jointly controlled. Id. Under Section 3.202(c), the government was able to garnish a wife s onehalf interest in jointly managed community property to satisfy the debts of her husband; thus, the entirety of the couple s jointly managed community property was subject to
20 garnishment. Id. at 176, 178; see also Genheimer v. Kneisley, 778 S.W.2d 138, 140 (Tex. App Texarkana 1989, no writ) (abstract of judgment against debtor spouse constituted a valid lien against the entirety of the jointly held community property). E. Separate Property. All property owned or claimed before marriage, and property acquired during marriage by gift, devise, or descent is considered separate property of that spouse. TEX. CONST. art. XVI, 15. Only the debtor s separate property is subject to liabilities; separate property belonging to the debtor s spouse is not available. FAM (a). In other words, one spouse s separate property cannot be used to satisfy a judgment against the other spouse, unless both spouses are personally liable under another rule of law. Id. The non-debtor spouse s separate property is safe from seizure, even when the debtor spouse commits a tort during the marriage. VII. CONCLUSION Despite the various flags flown over Texas, Texas has never wavered in its protection of debtors. No one, especially the collection attorney on a contingency, is interested in a paper judgment. It is the author s belief that a judgment only wins you the battle and collection wins you the war. The vigilant judgment creditor represented by its zealous advocate should look behind any suspicious transactions. A complete examination of such transactions coupled with an understanding of exemption limits are invaluable if one is to have a successful collections practice. 13