5th Circuit Bankruptcy Summary: In re Mark Alan Frost, No. 12-50811 (5th Cir. March 5, 2014)
Debtor Mark Alan Frost filed bankruptcy, claimed his homestead as exempt and then sold it. Texas law provides that, to maintain homestead protection, a homeowner must reinvest sale proceeds in another homestead within six months. Frost failed to do that. The Bankruptcy Court held that the funds therefore were non-exempt and should be returned to the estate for distribution to creditors. The District Court affirmed. On appeal to the Fifth Circuit, Frost argued that his homestead exemption is determined as of the petition date according to the well-accepted “snapshot rule.” Generally speaking, the snapshot rule holds that all exemptions are determined at the time the bankruptcy petition is filed, and that they do not change due to subsequent events. Frost also pointed to Bankruptcy Code section 522(c) to support this argument. Section 522(c) provides: “Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose, or that is determined under section 502 of this title as if such debt had arisen, before the commencement of the case . . . .” Frost also attempted to distinguish his case from the facts in In re Zibman, 268 F.3d 298 (5th Cir. 2001), where the court held that proceeds were not exempt related to a pre-petition sale of the homestead.
The Fifth Circuit affirmed the District Court on the grounds that the “essential element” of the exemption must remain in effect even during the pendency of the bankruptcy case. Further, “a change in character of the property that eliminates an element required for the exemption voids the exemption, even if the bankruptcy proceedings have already begun.” That was the holding in Zibman – that section 522(c) does not prevent exempt property from losing its exempt status – and the court held in Frost that it remains true whether the change in character occurred pre-petition or post-petition.