Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Sept. 6 — A Chapter 7 debtor who withdrew more than $129,000 in exempt retirement funds after no one objected to his claimed exemption must turn over that money to the bankruptcy trustee, a district court in Texas held Aug. 29 ( Hawk v. Engelhart (In re Hawk), 2016 BL 280924, S.D. Tex., No. H-15-914, 8/29/16 ).
Judge Melinda Harmon of the U.S. District Court for the Southern District of Texas concluded, on an issue of first impression, that the Fifth Circuit's holding in Viegelahn v. Frost (In re Frost), 744 F.3d 384 (5th Cir. 2014) (26 BBLR 390, 3/20/14) , requires debtors withdrawing funds from their exempt Individual Retirement Accounts (IRAs) to roll over those funds into another exempt IRA account within 60 days under Texas Property Code 42.0021(c) to retain their exemption from the bankruptcy estate and creditors.
In Frost, because a debtor sold his homestead and did not reinvest the proceeds in another homestead within six months, under Texas law, the proceeds were no longer exempt from the estate, the court said.
The court agreed with the bankruptcy court's reasoning and analogy of this case with Frost, and held that a debtor has a “continuing duty to maintain the status quo of exempt property during the pendency of the bankruptcy case.” Funds that were removed from an exempt IRA account during the pendency of the bankruptcy estate for living expenses automatically became property of the bankruptcy estate once they lost their exempt status under state law when debtor Gregory Hawk failed to meet the state law's 60-day reinvestment requirement, the court said.
Hawk elected to exempt two IRA accounts totaling approximately $164,900 under Texas Property Code Ann. § 42.0021(a), when he filed for Chapter 7 protection. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors.
The trustee filed a “no asset” case report and proposed abandoning all assets not claimed as exempt. The debtor then withdrew all of the funds in one IRA account but didn't reinvest or “roll over” any of them into a new exempt IRA account but used the money to pay for living expenses.
The bankruptcy court concluded that because the funds weren't reinvested within 60 days of being withdrawn, they became non-exempt and property of the bankruptcy estate which the trustee was entitled to distribute to creditors.
The district court affirmed the bankruptcy's court's ruling.
William P. Haddock, Houston, represented debtors Gregory D. Hawk, also known as Greg Hawk, and Marcie H. Hawk, also known as Marcie Ruelle Hawk, Marcie H. Hawk; John F. Higgins, IV, and Aaron J. Power, Porter Hedges LLP, Houston, represented appellee Chapter 7 Trustee Eva S. Engelhart.
To contact the reporter on this story: Diane Davis in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jay Horowitz at email@example.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)