Summary
finding that "[d]etermination of whether the debtor has an interest in property is made under nonbankruptcy law"
Summary of this case from In re ChesnutOpinion
Bankruptcy No. 98 21403-7, Adversary No. 00-2001, Civil Action No. 2:01-CV-215
October 16, 2001
MEMORANDUM OPINION AND ORDER
This is an appeal from the United States Bankruptcy Court for the Northern District of Texas, Amarillo Division. This Court has jurisdiction of this appeal pursuant to 28 U.S.C. § 158(a).
The Bankruptcy Court found that the land in question, 625 acres out of Section 20, Block 5T, TNO RR Survey, Hansford County, Texas, referred to herein as Section 20, was the sole-management community property of Debtor-Appellant, Willard McCloy. The Court held further that Willard McCloy had the authority to bind the community estate and execute a deed of trust and note against Section 20 while his wife, Beatrice McCloy, was in Chapter 12 Bankruptcy. The Bankruptcy Court found that as a result of a foreclosure on Section 20 by Appellee, Craig Silverthorne, holder of the deed of trust, Section 20 was not owned one-half by Bea McCloy as co-tenant with Craig Silverthorne, but rather the property of Craig Silverthorne.
Finding that Section 20 was the sole-management community property of Willard McCloy, the Bankruptcy Court approved the mediated settlement entered into by Willard McCloy's Bankruptcy Trustee, Kent Ries, and Craig Silverthorne and subsequently dismissed Beatrice McCloy's suit to quiet title in one-half of Section 20.
For the following reasons, the decisions of the Bankruptcy Court are AFFIRMED.
BACKGROUND
Appellants were married prior to 1975, although the exact date is unknown to this Court. After marriage, Appellants began acquiring real property purchased with funds earned during the marriage. Included in those purchases was the land referred to herein as Section 20. Section 20 was purchased in 1975 with funds of the martial estate and a warranty deed to Section 20 was taken in the name of Willard McCloy.
In addition to this community property, each spouse brought certain personal and real, separate property into the marriage. Each spouse ran their own separate cattle and ranching operation on their separate property as well as on the community property.
During the marriage, Willard McCloy incurred debts and liens on his separate property holdings stemming from his farming and ranching operations. In May of 1992, Willard McCloy borrowed the sum of $42,000.00 from Appellee, Craig Silverthorne to pay off debts and judgment liens against those properties. In return, Willard McCloy executed a promissory note in the amount of $42,000.00 to Craig Silverthorne and a deed of trust against 625 acres out of Section 20 to secure the note. For the following two years, Willard McCloy made no payments to Craig Silverthorne on the 1992 note.
On June 1, 1992, Beatrice McCloy filed a petition for Chapter 12 Bankruptcy to protect her separate property land holdings from being foreclosed on by her creditors. The schedule of assets filed in that case list Section 20 as the community property of the McCloys. On March 5, 1997, Beatrice McCloy received her discharge from her Chapter 12 Bankruptcy.
On June 1, 1994, a new note in the amount of $54,685.00 was executed by Willard McCloy to Craig Silverthorne to "refinance" the 1992 note and cover interest that had accrued on the note as well as additional expenses advanced by Mr. Silverthorne. Again, Willard McCloy gave a deed of trust against 625 acres out of Section 20 to secure the note.
Both the 1992 and 1994 notes and deeds of trust were executed solely by Willard McCloy without the joinder or signature of Beatrice McCloy.
Willard McCloy made no payments to Craig Silverthorne on the 1994 note and in October of 1997, Section 20 was foreclosed on by Craig Silverthorne. Following the foreclosure sale, Willard McCloy sued the Silverthornes in Hansford County District Court to set aside the foreclosure for lack of notice.
On December 7, 1998, before a ruling in the suit to set aside the foreclosure, Willard McCloy was placed into involuntary bankruptcy in the above-captioned suit that resulted in the Chapter 7 Bankruptcy wherein Trustee, Kent Ries, was appointed to administer to assets of his estate. At the same time, Beatrice McCloy filed a suit in intervention in the state court proceeding seeking to quiet title in one-half of Section 20 as her separate property based on her belief that Willard McCloy's one-half was now foreclosed on.
Following a suit by Craig Silverthorne to have Beatrice McCloy removed from possession of Section 20, the Chapter 7 Trustee, Mr. Ries, filed for removal of all pending actions to the Bankruptcy Court, resulting in Adversary No. 00-2001.
A mediated settlement of all claims to Section 20 was conducted between Mr. Ries and Craig Silverthorne, which the Bankruptcy Court approved. The McCloys objected to the mediation and claimed they took no part in any settlement. On March 15, 2001, the Bankruptcy Court issued an Order Granting the Trustee's Motion to Compromise Controversy as to Section 20. In that Order, the Bankruptcy Court also made findings that Section 20 was the sole management community property of Willard McCloy and that Mr. Ries had the authority to release and settle all other suits pending regarding Section 20.
On April 23, 2001, Appellants filed their Notice of Appeal to this Court.
Contentions Before the Bankruptcy Court
Set on the docket in the Bankruptcy Court was the Adversary Complaint, the motion by Mr. Ries to compromise the controversy, and opposition to the compromise, filed by Willard McCloy.
Mr. Ries, the Trustee, argued that he, as trustee for the Bankruptcy estate of Willard McCloy, had the authority to settle all claims relating to Section 20 because it was the sole management community property of Mr. McCloy. He argued that the settlement he entered into with Craig Silverthorne was within his authority pursuant to Section 541 of the Bankruptcy Code. The Bankruptcy Court agreed and affirmed the settlement.
Mr. Ries argued that his authority to settle claims regarding Section 20 was founded in 11 U.S.C. § 541(a)(2)(A),(B) that provides property of a bankruptcy estate includes all interests of the debtor, the debtor's spouse, and community property as of the commencement of the case that is under the sole, legal, or joint management control of the debtor.
Beatrice McCloy argued that while Section 20 was community property, she took no part in signing either the 1992 or the 1994 notes to Craig Silverthorne and since Mr. Silverthorne knew she did not intend to sign on the notes and that because she was involved in a bankruptcy proceeding prior to execution of the 1994 note, she retained a one-half interest in Section 20 following the foreclosure by Craig Silverthorne. The Bankruptcy Court disagreed and said because Section 20 was the sole management community property of Willard McCloy, he had the authority to bind her interest in such land without her joinder.
ISSUES on APPEAL
Appellants, Willard and Beatrice McCloy (McCloy), raise five issues on appeal to this Court. First, Appellants contend that the Bankruptcy Judge erred in finding that the land in question, Section 20, was the sole management community property of Debtor, Willard McCloy. Second, Appellants contend that the Bankruptcy Judge erred in finding that Willard McCloy had the authority to bind the community estate and execute a Deed of Trust on Section 20 to Craig Silverthorne while his wife was in Chapter 12 Bankruptcy. Third, Appellants contend that the Bankruptcy Judge erred in compromising the intervention claim of Beatrice McCloy based on a finding that the instant lawsuit regarding Section 20 belonged to the bankruptcy estate as Section 20 was the sole management community property of Debtor, Willard McCloy. Fourth, Appellants contend that the Bankruptcy Judge erred in finding that Section 20 was not owned one-half by Beatrice McCloy as co-tenant with Craig Silverthorne following the foreclosure. Fifth, Appellant contend that the Bankruptcy Judge erred in approving the compromise negotiated by the Chapter 7 Trustee because it was not supported by the evidence in this case. Also, Appellants claim that the Bankruptcy Judge failed to make sufficient findings of fact relating to ownership of Section 20 and the nature of Beatrice McCloy's ownership in Section 20.
Appellees, Craig Silverthorne, Jean Silverthorne, and the Chapter 7 Trustee, Kent Ries, raise no additional issues on appeal but seek affirmance in this Court of all findings and rulings made by the Bankruptcy Court below.
STANDARD of REVIEW
This Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158. Upon appeal, Bankruptcy Rule 8013 provides that findings of fact made by the Bankruptcy Court shall not be set aside unless clearly erroneous. Legal questions and conclusions of law are subject to a de novo review. See Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1307 (5th Cir. 1985); In re Missionary Baptist Foundation of America, 712 F.2d 206, 209 (5th Cir. 1983). The same de novo standard of review is used in reviewing mixed questions of law and fact. See Pebble Beach Co. v. Golforms, Inc., 155 F.3d 526, 537 (5th Cir. 1998).Under the clearly erroneous standard of review, if there are two coherent and facially plausible views of testimonial evidence, and one is adopted, and it is not contradicted by extrinsic evidence, the finding can virtually never be clearly erroneous. See Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 575-576, 105 S.Ct. 1504, 1512, 84 L.Ed.2d 518 (1985). "A finding of fact is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with a firm and definite conviction that a mistake has been committed." Missionary Baptist, supra, 712 F.2d at 209; citing U.S. v. U.S. Gypsum Co., 333 U.S. 364, 395, S.Ct. 525, 542, 92 L.Ed. 746(1948).
"When a finding of fact is premised on an improper legal standard, or a proper one improperly applied, that finding loses the insulation of the clearly erroneous rule." Missionary Baptist, supra, 712 F.2d at 209; citing Smith v. Hightower, 693 F.2d 359 (5th Cir. 1982).
DISCUSSION and ANALYSIS
Appellants have made attacks on the findings of fact and law made by the Bankruptcy Court.
A. Characterization of Section 20
The Bankruptcy Court found that Section 20 was the sole-management community property of Willard McCloy. This Court will conduct a de novo review of that finding.State law determines the classification of the property as separate or community. See In re Bishop College, Debtor; Salisbury v. Ameritrust Texas, N.A., 151 B.R. 394, 398 (N.D.Tex. 1993). Under Texas law, property possessed by either spouse during or on dissolution of marriage is presumed to be community property and clear and convincing evidence is required to establish otherwise. See Tex.Fam. Code Ann. § 3.003(a),(b) (Vernon 1998). Property is presumed to be subject to the sole-management, control, and disposition of a spouse if it is held in that spouse's name. See Tex.Fam. Code Ann. § 3.104(a) (Vernon 1998).
In the court below, there was testimony by both Willard and Beatrice McCloy that Section 20 was purchased during their marriage, with funds earned by the community, and that the deed to Section 20 was taken solely in the name of Willard McCloy. There is no evidence in the record to establish that Section 20 was anything but the community property of Willard and Beatrice McCloy or that Section 20 was not subject to the sole-management of Willard McCloy.
Appellants fail to support their argument that Section 20 is not the sole-management community property of Willard McCloy, instead they focus on the Chapter 12 Bankruptcy of Mrs. McCloy and the effect it had on Willard McCloy's power to encumber it. Appellant's argument does not address the characterization of Section 20 and none of the cases cited in Appellant's Brief can be read for the proposition that Section 20 is anything but the sole-management community property of Willard McCloy.
By way of example, Appellants cite Uvalde Rock Asphalt Co. v. Hightower, 140 Tex. 200, 166 S.W.2d 681, 683 (Tex. Comm'n App. 1942, opinion adopted), in support of their argument that the Bankruptcy Court mischaracterized Section 20. The Uvalde opinion stands however, for the rule of law that where property has been designated as the homestead of the marital couple, the joinder of the non-signing spouse is required before one spouse may execute a note and deed of trust against the property. Id. at 683. The case at bar does not deal with Section 20 as the homestead of the McCloys because such election to treat Section 20 as homestead has never been made.
Appellants also rely on the case of Trimble v. Whitson, (Tex.Civ.App.-Waco 1994), but have failed to include a cite to the case. The case, as cited by Appellants, is of no support to their claim of mischaracterization as the case is cited for the proposition that once a note is executed, any changing of the material terms of that note may act to release the guarantor from the liability.
This Court does not agree that the findings of the court below as to the characterization of Section 20 were in error.
B. Willard McCloy's Power to Encumber Section 20
Appellants argue that because Beatrice McCloy was involved in a pending Chapter 12 Bankruptcy proceeding, Willard McCloy had no authority to encumber community assets such as Section 20. Appellants argue that when Willard McCloy executed the 1994 note and deed of trust against Section 20 to secure the note, the "automatic stay" of the Bankruptcy Code was already in effect and such prevented Willard McCloy from encumbering assets included in Beatrice McCloy's bankruptcy estate. This Court will conduct a de novo review of that finding.
Determination of whether the debtor has an interest in property is made under nonbankruptcy law. See Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Section 541 of the Bankruptcy Code defines what assets and interests are included in the debtor's bankruptcy estate. Section 541(a)(1) includes any rights and interests of the debtor in real property.
Section 541(a)(2) governs the extent to which community property passes to the bankruptcy estate of the debtor spouse. To the extent that community property is subject to equal or joint management and control by the spouses, a petition by one spouse alone passes all of such community property, plus community property under the sole control of the debtor spouse, to the estate pursuant to Section 541(a)(2)(A). See 11 U.S.C. § 541 (a).
On the other hand, the only property of either spouse which is not included in the estate is the separate property of the nondebtor spouse and the community property under the sole-management and control of the nondebtor spouse, to the extent it is not liable for the claims against the debtor. See Ragan v. Commissioner, 135 F.3d 329 (5th Cir. 1998); see also Collier on Bankruptcy § 541.14[2] at 541-27, 28.
It is important to note that although Appellants claim the 1997 foreclosure was on the note and deed of trust executed in 1994, there would be a similar outcome under the 1992 note because in 1992, Beatrice McCloy was not in bankruptcy and there would be no question that Willard McCloy had the authority to encumber Section 20. More importantly, Section 20 was never liable for any claims made by Craig Silverthorne against Beatrice McCloy because, as the record indicates and Appellants argue, Beatrice McCloy never personally signed the deed of trust or notes against Section 20 and thus she was not liable as a signor pursuant to Texas Business Commerce Code § 3.401 (Vernon 1999) nor was Craig Silverthorne listed as a creditor of Beatrice McCloy on her Chapter 12 schedule of creditors.
Appellants argue that the effect of Section 541 is to terminate the right of the nondebtor spouse, such as Willard McCloy, to manage and control community property. While that is a true statement, it applies only to assets that are actually included in the debtor's bankruptcy estate. As mentioned above, because the deed to Section 20 was taken solely in the name of Willard McCloy and there is no evidence to show otherwise, there is a presumption that Section 20 was the sole-management community property of Willard McCloy and thus not included in the bankruptcy estate of Beatrice McCloy pursuant to Ragan v. Commissioner.
Because Section 20 would not be included in the bankruptcy estate of Beatrice McCloy, Willard McCloy retained the authority to manage and control it. The Court does not believe that the findings of the court below were in error on this point.
C. Beatrice McCloy's Intervention Claim
Following the foreclosure in 1997 by Craig Silverthorne, Beatrice McCloy filed an intervention to quiet title in one-half of Section 20. Beatrice McCloy argued that Willard McCloy lost his one-half interest in Section 20 following the foreclosure and she sought to recover the one-half that she now owned as her separate property as co-tenant with Craig Silverthorne.
The intervention was to quiet title in her name and stop Willard McCloy's Chapter 7 Trustee, Kent Ries, from settling or disposing of the remaining portion of Section 20 because according to her, Willard McCloy's bankruptcy estate did not contain any interest in Section 20 following the foreclosure. The court below approved the Trustee's compromise and dismissed the intervention.
On appeal, Beatrice McCloy argues that the court below erred in allowing Willard McCloy's Trustee to compromise her interest in Section 20 pursuant to Section 541. The settlement entered into by the Trustee and Craig Silverthorne gave Craig Silverthorne full ownership of Section 20 in exchange for a $10,000 payment to the McCloys. The court below approved the compromise based on a finding that Section 20 was the sole-management community property of Willard McCloy that was included in his bankruptcy estate and thus his Trustee had the power to settle claims to it.
As noted above, this Court finds that Section 20 was the sole-management community property of Willard McCloy. This Court further finds that as such, the Chapter 12 Bankruptcy of Beatrice McCloy had no effect on his rights to encumber Section 20, which he did by way of the 1992 and 1994 notes and deeds of trust. The court below correctly held that any cause of action regarding the compromise of the settlement belonged to the estate of Willard McCloy and not Beatrice McCloy.
D. Beatrice McCloy as Co-Tenant with Craig Silverthorne
Beatrice McCloy argues that following the 1997 foreclosure on Section 20 by Craig Silverthorne, she became a co-tenant with Mr. Silverthorne in Section 20. As support for this position, Appellants argue that Texas law recognizes an exception to the general rule that the spouse who holds title to community property can encumber that property.
This exception comes from Williams v. Portland State Bank, 514 S.W.2d 124 (Civ.App.-Beaumont 1974), writ dism'd, and it states that when a creditor has actual knowledge that a spouse refuses to convey her community interest, then the conveying spouse only conveys his or her one-half community interest.
In Williams the court was dealing with a deed to property that was taken in the name of both spouses. Id. at 125. Secondly, the court in Williams found that the non-conveying spouse made her intent not to sign the deed known to the president of the defendant bank prior to the signing. Id. With those two findings, the court found that the non-conveyancing spouse retained her one-half interest as co-tenant with the bank. Id. at 126.
The case at bar is distinguishable from Williams for two reasons. First, as evidenced by the trial court record, the deed to Section 20 was taken solely in the name of Willard McCloy. Thus, a third person, such as Craig Silverthorne, that dealt with Willard McCloy is entitled to rely, as against the other spouse or anyone claiming from that spouse, on that spouse's authority absent notice of his lack thereof. See Tex.Fam. Code Ann. § 3.104(b)(2)(A),(B) (Vernon 1998).
During his testimony in the court below, Mr. Silverthorne testified that from the time he made the initial loan in 1992 and received the deed of trust until the time he foreclosed in 1997, he never had any notice of a claim or interest in Section 20 by Beatrice McCloy. Beatrice McCloy testified that on one occasion, Mr. Silverthorne took them both out to eat and that he often called the house looking for Willard. Mrs. McCloy testified that she knew the negotiations included Section 20 but there is no testimony that she ever told anyone that she refused to sign the deed of trust. Her testimony only states that at no time did Mr. Silverthorne ever ask her to sign the notes or deeds of trust. This supports the conclusion that Craig Silverthorne was dealing with Willard McCloy regarding Section 20 as the sole manager thereof with no knowledge of Mrs. McCloy's interest or claim.
E. Allowance of the Compromise
Appellants argue that the settlement entered into by Kent Ries is objectionable because there insufficient evidence to support a showing that Section 20 was included in the bankruptcy estate of Willard McCloy. Because this point was discussed in C. above, there is no need to readdress the issue here. The compromise was not error.
F. Findings of Fact Relating to Ownership of Section 20
Appellants argue that the court below failed to make sufficient findings of fact relating to the ownership of Section 20 and the nature of Beatrice McCloy's ownership therein. While the court below did not set forth it's findings of fact as they related to these points, this Court concludes, after a complete review of the record below, that such findings were not clearly erroneous.
Given these findings, the court below did not err in finding that Section 20 was the sole-management community property of Willard McCloy, of which he had the power to bind by way of a deed of trust to Craig Silverthorne. Furthermore, the findings that Beatrice McCloy was not a co-tenant with Craig Silverthorne is supported by the record. The Bankruptcy Court made sufficient findings of fact and therefore, the decisions of the Bankruptcy Court are AFFIRMED.
CONCLUSION
The ruling of the Court below is AFFIRMED in all respects.
It is SO ORDERED.