The plight of the non-filing spouse who stands to lose an
interest in the homestead is a trap that is easy to overlook. Under 11 U.S.C. Sec.
541(a)(2), when one spouse files bankruptcy, all joint management community
property enters the bankruptcy estate. This means that if the filing spouse
elects not to claim the homestead as exempt in favor of selecting other
property or is subject to a cap, the non-filing spouse may lose her interest in
the property without having any say in the matter.
I have previously written about the Odes Ho Kim
In the Kim case, an involuntary petition was filed against Mr. Kim. The
creditors then sought to impose a cap upon his homestead exemption. Mrs. Kim
intervened asserting that she had an independent interest in the homestead. The
Bankruptcy Court and the District Court ruled that Mr. Kim was subject to a cap
on the homestead exemption and that Mrs. Kim had no separate interest in the
property. If both spouses had filed, they would have been entitled to two times
the amount of the cap. However, with Mrs. Kim sitting outside of bankruptcy,
her interest in the homestead was completely divested by the bankruptcy filing.
Up until this point, the result of the case illustrated
an unfair result for the non-filing spouse, but one which was based on an
arguable reading of the code. However, things got interesting after the case
was appealed to the Fifth Circuit. On September 10, 2010, Pronske & Patel
and Andrews & Kurth appealed the District Court ruling on behalf of the
Kims. The case was argued to Judges Higginbotham, Owens and Haynes on July 8,
2011. Now, almost two years have passed since oral argument without a ruling. According
to the Bar Association for the Fifth Circuit, the case is the oldest bankruptcy
case still under advisement and is the second oldest case of any kind under
While speculation about the reason for the long gestation
of the opinion is not worth much, I will engage in some anyway. Both Judges
Owens and Haynes sat on Texas state benches before being named to the Fifth
Circuit. (Indeed, Judge Owens was on the Texas Supreme Court). Texas has a long
tradition of protecting homestead rights. Additionally, according to a recent
book on the history of the Texas Supreme Court (Haley,The Texas Supreme Court:
A Narrative History 1836-1986, University of Texas Press 2013), Texas
also was also the first state to recognize property rights for married women. It
may be that the judges are struggling with how to reconcile these strong Texas
state law protections with the Bankruptcy law applicable here. It will be
interesting to see how the case is finally resolved.
more at A Texas Bankruptcy Lawyer's Blog
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