Written by: Robert DeMarco

Back around January 6, 2015, I appeared in Bankruptcy Court representing a chapter 7 trustee to argue that monies withdrawn from an Individual Retirement Account during the pendency of the case became property of the bankruptcy estate because they were never reinvested in a qualified retirement account. In preparing for that hearing I found it necessary to review the history and background of In re Frost, 744 F.3d 384 (5th Cir. 2014). My summation of that history follows.

Background

Mark Alan Frost (“Frost” or “Debtor”) filed a chapter 13 bankruptcy case on November 30, 2009, in the Western District of Texas. The bankruptcy case was assigned to Chief Bankruptcy Judge Ronald B. King. Also on November 30, 2009, Frost filed his chapter 13 plan, which plan comported with the chapter 13 form plan utilized in the Western District of Texas.

Frost owned his homestead located in Cibolo (the “Homestead”), Texas and estimated its value at $257,000.00 [Doc. Entry No. 01, Schedule A]. The City of Cibolo, Guadalupe County, and Schertz/Cibolo ISD each had ad valorem tax liens against the Homestead in the aggregate amount of $5,403.83 [Doc. Entry No. 01, Schedule D]. Litton Loan Servicing held the first mortgage on the Homestead and was owed $94,380.00. Id.

Frost, on March 3, 2010, filed Debtor’s Motion to Sell Real Property Free and Clear of All Lien and Interests [Doc. Entry No. 17] (the “Sale Motion”). The Sale Motion requested authority from the Bankruptcy Court to sell the Homestead for $257,000.00. After accounting for closing costs, including sales commissions, and the payment of all secured claims, the Debtor estimated there would be net sales proceeds of $131,489.00.

The Chapter 13 Trustee filed an objection to the Sale Motion [Doc. Entry No. 21] on March 23, 2010. The Chapter 13 Trustee objected on the basis of Texas Property Code sections 41.001.002. The Chapter 13 Trustee contended that if the Debtor did not use the net sales proceeds to purchase a new homestead within 6 months from the sale of the Homestead, the Debtor was required to use the net sales proceeds to increase the chapter 13 plan base.

The Bankruptcy Court, on March 26, 2010, entered its Order Granting Debtor’s Motion to Sell Real Property Free and Clear of All Liens and Interests [Doc. Entry No. 23] (the “Sale Order”). The Sale Order authorized the sale of the Homestead, but required the net sales proceeds be deposited with the Chapter 13 Trustee pending further orders regarding the validity, priority and extent of any remaining liens or interests not paid and released at the closing.

Frost filed amended schedules with the Bankruptcy Court on May 24, 2010. The amended schedules appear to be intended to: (1) address changes in the Debtor’s budget; and (2) more accurately reflect the amount of debt secured by the Homestead. The ad valorem tax liens were increased to $7,369.00 [Doc. Entry No. 39, Schedule D] and the debt owed to Litton Loan Servicing was increased to $99,261.01 [Doc. Entry No. 39, Schedule D] for a total of $106,630.01 [Doc. Entry No. 39, Schedule A].

Frost also filed an amended chapter 13 plan on May 24, 2010 [Doc. Entry No. 41]. The plan still provided for direct payments to Litton Loan Servicing, but provided for no payments through the plan to the ad valorem taxing authorities.

On November 21, 2010, Frost filed another set of amended schedules [Doc. Entry No. 53]. This second set of amended schedules appear to be filed in order to reflect the disposition of the Homestead. The amended schedule A, instead of reflecting the value of the Homestead, now reflected the net sales proceeds received from the sale of the Homestead. The amount listed on the amended schedule A is $81,108.67. Likewise, on November 21, 2010, Frost filed a second amended chapter 13 plan [Doc. Entry No. 54].

The confirmation hearing on the second amended chapter 13 plan was held on December 16, 2010. While the confirmation hearing was eventually continued to January 27, 2011 [Doc. Entry No. 62], the Bankruptcy Court, after having taken evidence, entered an Interim Order Granting Partial Disbursement of Proceeds of Sale of Real Property Free and Clear of All Liens and Interests [Doc. Entry No. 65] on January 3, 2011 (the “Partial Disbursement Order”). The Bankruptcy Court found the Chapter 13 Trustee was holding in trust the sum of $81,108.67 as proceeds from the sale of the Homestead and that no sum greater than $41,108.67 would be necessary to fund the 100% of the second amended chapter 13 plan. Partial Disbursement Order, page 1. In light of those findings, the Bankruptcy Court authorized the Chapter 13 Trustee to release $40,000.00 to the Debtor free and clear of all liens, claims and interests. Partial Disbursement Order, page 2.

The hearings concerning confirmation and the disposition of the remaining net sales proceeds still held in trust by the Chapter 13 Trustee took place on January 27, 2011. Nonetheless, no orders were entered until several months later. On May 11, 2011, the Bankruptcy Court entered a Final Order Regarding Trustee’s Objection to Debtor’s Motion to Sell Real Property Free and Clear of All Liens and Interests Filed March 3, 2010 [Doc. Entry No. 67] (the “Final Sale Order”). On May 20, 2011, the Bankruptcy Court entered an Order Confirming Debtor’s [Second Amended] Chapter 13 Plan [Doc. Entry No. 69], which Order specifically incorporated the Final Sale Order.

The Final Sale Order provided that the Debtor had 6 months to reinvest the net Homestead sales proceeds in a new homestead. Further, the Final Sale Order tolled the start date of the six month clock as the Debtor did not have control over the subject proceeds for an extended period of time after Homestead sale date. As such, the six month clock started to run on January 27, 2011. Lastly, the Final Sale Order ordered the sum of $23,000.00 to be added to the chapter 13 plan base because the Debtor elected to not reinvest $23,000.00 of the net Homestead sales proceeds in a new homestead.

The Final Sale Order was appealed to the United States District Court [Doc. Entry No. 74] on June 18, 2011. The District Court affirmed the Bankruptcy Court’s Final Sale Order on July 13, 2012 [Doc. Entry No. 117].