Summary of a Recent
Judicial Development in
Bankruptcy

Sale of Property to Corporation or Operation
of a Business Thereon Does Not Destroy
Homestead Exemption

Joshua Thomas Crain
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Perry, 345 F.3d 303 (5th Cir. 2003), the United States Court of Appeals for the Fifth Circuit held that a bankruptcy court erred in holding that debtors could not claim a homestead exemption for their 26-acre tract because it had been sold to their wholly-owned corporation or because a business was operated thereon.

Author's note: Although Perry did not specifically involve agriculture-related bankruptcy proceedings, it is nonetheless a case holding that may be applicable in certain agricultural bankruptcies.

Background

Debtors Robert and Estella Perry operated a mobile home park on a 26-acre tract of land they purchased in 1980. See id. The debtors lived behind the mobile home park office and convenience store in a 1.34 acre plot located within the 26-acre tract. See id. Eventually, the debtors purchased an adjoining 59-acre tract. See id. In 1985 the debtors incorporated their business as American Campgrounds, Inc. See id. Also in 1985, the debtors conveyed the 26-acre tract of land to the corporation in exchange for all of its stock. See id.

The corporation subsequently applied for a $127,000 loan from The Bank and Trust, S.S.B. (bank) which was approved and secured by the 26-acre tract. See id. In 1993 the debtors individually refinanced the loan for $178,000. See id. This was also secured by the 26-acre tract. See id. There had been no reconveyance of the 26-acre tract to the debtors, but the debtors executed an affidavit that declared American Campgrounds, Inc. defunct. See id. The debtors indicated that they had assumed all of the corporation's assets and liabilities. See id. In 1996 the debtors filed a homestead designation covering the 26-acre tract. See id. On March 21, 2000 the debtors filed for bankruptcy under Chapter 7 of the bankruptcy code. See id. The debtors claimed an exemption for the 26-acre tract and the 59-acre tract as their homestead. See id.

Arguments

Creditors Dennie and Ellen Dearing objected to the claimed exemption by the debtors on the grounds that American Campgrounds, Inc. was the owner of the 26-acre tract. See id. The judgment creditors argued that when the debtors conveyed the 26-acre tract to the corporation, the property lost its homestead character. See id. They argued that the title was then vested in the corporation and thus subject to the debts of the corporation. See id. The debtors argued, however, that the transfer of the 26-acre tract to the corporation was done solely to obtain the $127,000 loan, which violated the Texas Constitution and was thus a "pretended" sale and therefore void. See id.

Analysis and Holdings

The court first explained that Texas law provides for a homestead exemption of up to 200 rural acres and that the homestead exemption may be lost only by death, abandonment, or alienation. See id. The court also explained that a debtor need not own property in fee simple in order to claim a homestead exemption. See id.

The court noted that title to the 26-acre tract was in the corporation at the time the bankruptcy was filed and that because the debtors continued to live on the property, they maintained a possessory interest in the property. See id. The court stated that the debtors' interest in the property is a tenancy-at-will due to the transfer of the 26-acre tract to the corporation and that the debtors' homestead interest would only survive at the discretion of the fee title owner. See id. The court determined, therefore, that the debtors would remain on the 26-acre tract at the permission of the corporation. See id. The court concluded that the debtors were allowed to claim a homestead exemption to the extent of their possessory interest as a tenant at will. See id.

The court then addressed the holding by the bankruptcy court that a business may not be operated on a homestead. See id. The court stated that the bankruptcy court relied upon precedent that was not persuasive and determined that the operation of a business on a homestead did not destroy a homestead exemption in that property. See id.

The case was decided on September 4, 2003; this summary was posted Nov. 9, 2004.