U.S.

BankruptcyCourtOpinions

INRE:SHANKLES(Bankr.E.D.Tex.9232013)
INREMARYHARPSHANKLES,Debtor.THEFIRSTBANKOFROXTON,TEXASf/k/a
SECURITYBANKOFWHITESBORO,Plaintiff,vs.MARYHARPSHANKLES,Defendant,
vs.MARKA.WEISBART,CHAPTER7TRUSTEE,Intervenor.
CaseNo.1143075(Chapter7),AdversaryNo.124012,AdversaryNo.114217
UnitedStatesBankruptcyCourt,E.D.Texas
September23,2013.

FINDINGSOFFACTANDCONCLUSIONSOFLAW
BrendaT.Rhoades,BankruptcyJudge
Inthisconsolidatedadversaryproceeding,[fn1]theplaintiffisseekinga
declarationthatithasavalidandenforceablelienagainstthe
debtordefendant'shome.Theplaintiffisalsoseekinganondischargeable
judgmentagainstthedebtordefendantbasedonclaimsofactualfraudand
falsepretenses,11U.S.C.523(a)(2)(A),andtheuseofamateriallyfalse
financialstatementinconnectionwithahomeequityloanapplication,
Page2
11U.S.C.523(a)(2)(B).Thechapter7trusteehasintervenedinthis
proceedingandseeksajudgmentavoidingtheplaintiff'slienonthe
debtordefendant'shomeanddisallowinganyunsecuredclaimbytheplaintiff
againstthebankruptcyestate.TheCourtexercisesitscorejurisdiction
overthismatter,see28U.S.C.157(b)(2)(B),(C),(I),(K),andmakesthe
followingfindingsoffactandconclusionsoflaw,seeFED.R.BANKR.P.7052.
SUMMARYOFTHEDISPUTE
Theplaintiffinthiscaseisabankthatclaimstoholdamortgageonthe
debtor'shomeandthesurrounding10acres.Thenatureofthedebtor's
interestinherhomesteadhasbeenthesubjectofdisputeintheunderlying
bankruptcycase.Followingacontestedhearinginthebankruptcycase,the
Courtconcludedthatthedebtordidnotobtainaneconomicinterestinthe
homesteadwhenshefraudulentlyforgedawillthatpurportedtobequeathher
husband'sseparateinterestinvariousproperties,includingthehomestead,
toherself.TheCourtfoundthatshedidnotobtainaneconomicinterestin
herhomesteaduntilsheenteredintoasettlementagreementwithher
deceasedhusband'schildrenthattransferredthepropertytoher.TheCourt,
therefore,concludedthatthedebtor'sinterestinthehomesteadwascapped
by522(p)(1),becausesheacquiredtheeconomicinterestwithin1,215days
ofherinitiationofbankruptcy.
Thebankobtaineditslienonthedebtor'shomeaftersheforgedthewill,
butbeforethesettlementagreementtransferringtitletothehometothe
debtor.Thesettlementagreementpurportedtopreservethebank'slienon
theproperty.Thedebtorsubsequentlyfailedtomakepaymentstothebankas
andwhendue.Shenonethelessopposesthebank'seffortstoforecloseonits
interestinherhome,arguingthatifshedidnotownaneconomicinterest
inthehomewhenshesoughtahomeequityloanfromthe
Page3
bank,thenthebankcouldnothaveobtainedasecuredinterestinit.If
thisCourtdoesnotfindthatthedebtor'sfraudandforgeryresultsina
mortgagefreehouse,thedebtoralternativelyarguesthatthebank'slienis
invalidbecausethebankfailedtocomplywithalloftherequirementsfora
homeequityloanunderTexaslaw.
Thechapter7trusteehasintervenedinthisadversaryproceeding.His
interestsaregenerallyalignedwiththedebtor.Thetrusteeseekstoset
asidethebank'slienonthedebtor'shome,whichthisCourthasdetermined
isexemptfromthedebtor'screditorsonlyuptothecappedamountof
$146,450,therebyincreasingthepoolofassetsinthebankruptcyestate
availablefordistribution.Thechapter7trusteealsoseekstodisallowthe
bank'sclaimsforadistributionfromthedebtor'sbankruptcyestate.

homeequityloanunderTexaslaw.
Thechapter7trusteehasintervenedinthisadversaryproceeding.His
interestsaregenerallyalignedwiththedebtor.Thetrusteeseekstoset
asidethebank'slienonthedebtor'shome,whichthisCourthasdetermined
isexemptfromthedebtor'screditorsonlyuptothecappedamountof
$146,450,therebyincreasingthepoolofassetsinthebankruptcyestate
availablefordistribution.Thechapter7trusteealsoseekstodisallowthe
bank'sclaimsforadistributionfromthedebtor'sbankruptcyestate.
Thebankseeksadeclaratoryjudgmentunder28U.S.C.2201thatithasa
validandenforceablelienon10acresofthedebtor'shomestead.Thebank
seeksanondischargeablejudgmentforitsdebt,interest,legalfeesand
costsassecuredagainsttherealproperty.[fn2]Thebankalsorequeststhat
theCourtlifttheautomaticstaysothatitcanforecloseonthedebtor's
homesteadinsatisfactionofthejudgment.
FINDINGSOFFACT
A.TheParties
1.TheplaintiffisTheFirstBank,Roxton,Texas,formerlyknownas
SecurityBankofWhitesboro.
2.ThedebtordefendantisMaryHarpShankles.
3.TheintervenorisMarkWeisbart,actingastrusteeoftheDebtor's
bankruptcyestateunderchapter7oftheBankruptcyCode.
Page4
B.TheDebtor'sAcquisitionofherHomestead
4.Whenthedebtormarriedherhusband,heownednumerousrealproperties,
includingapproximately180acresknownas7782PlainviewRoadinSherman,
GraysonCounty,Texas.
5.Thedebtorandherhusbandlivedat7782PlainviewRoadthroughout
theirmarriage.
6.Thedebtor'shusbanddiedattheirhomeonJanuary14,2004.
7.AtsomepointinoraroundJanuary2004,thedebtorsignedher
husband'snametoawilldatedJanuary14,2004.Thesignaturewasnot
witnessed.Thedebtorlaterobtainedanotarizationandthesignatureof
individualswhoclaimedtohavewitnessedthesigningofthewill.
8.Afterherhusband'sdeath,thedebtorsubmittedforprobatethewill
thatherhusbandpurportedlysignedonJanuary14,2004.Thewillnamedthe
debtorasthesoleindependentexecutorandbequeathedherhusband's
separatepropertyinterestintheirhomestead,aswellashisseparate
interestinnumerousotherpropertieshehadacquiredpriortotheir
marriage,tothedebtor.
9.Thedebtor'shusbandhadchildrenfromapriormarriage.Thechildren
contestedtheprobateofthe2004will.
10.InSeptember2004,thechildrenfiledaNoticeofLisPendensinthe
realpropertyrecordsofGraysonCounty,Texas,wherethedebtor'shomestead
islocated.Thelispendensadvisedofthelitigationinprobatecourt.
11.Thedebtor,actingunderherauthorityasindependentexecutorunder
theforgedwill,deededthehomesteadtoherself.
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12.Thelitigationintheprobatecourtwentonforyears.Thedebtor
beganexperiencingfinancialdifficulties.
C.TheHomeEquityLoan
13.Forallof2006,the180acresoflandat7782PlainviewRoadwas
designatedintherecordsoftheGraysonCountyCentralAppraisalDistrict
asproperty119289,withtwoacresclassedasresidentialand178acresin
variousclassesofagriculturaluse,including35acresdesignatedas
"AverageCrop,"anadditional14.24acresdesignatedas"AverageCrop,"44.4
acresdesignatedas"MarginalCrop,"10.52acresdesignatedas"Pasture,"
and74.06acresdesignatedas"PoorPasture."
14.AccordingtotherecordsoftheGraysonCountyAppraisalDistrict,the

13.Forallof2006,the180acresoflandat7782PlainviewRoadwas
designatedintherecordsoftheGraysonCountyCentralAppraisalDistrict
asproperty119289,withtwoacresclassedasresidentialand178acresin
variousclassesofagriculturaluse,including35acresdesignatedas
"AverageCrop,"anadditional14.24acresdesignatedas"AverageCrop,"44.4
acresdesignatedas"MarginalCrop,"10.52acresdesignatedas"Pasture,"
and74.06acresdesignatedas"PoorPasture."
14.AccordingtotherecordsoftheGraysonCountyAppraisalDistrict,the
tworesidentialacreswerethe"homesite."
15.OnMay4,2007,thedebtorsignedaformrequestingremovalofthe
agriculturalexemptiondesignationoneightacresofpropertynumber119289.
Nothingintheformdesignatedwhichofthe178acresofagricultural
propertyweretheeightaffectedacres.Accordingly,theappraisaldistrict
removedtheagriculturalexemptiononeightacresofpropertydesignatedas
"PoorPasture"inordertominimizethetaximpactonthedebtor.Nothingin
therecordsoftheGraysonCountyAppraisalDistrictrevealswhicheightof
the74.06of"PoorPasture"acreswerereclassified.
16.InlateMay2007,thedebtorapproachedthebankaboutahomeequity
loan.ThedebtorsignedapersonalfinancialstatementdatedMay31,2007,
inwhichshelistedallofthepropertyshehaddeededtoherselfasthe
executorofthe2004will.Shetoldthebankofficerthatherhusbandhad
passedaway.Intheapplication,sheanswered
Page6
"yes"whenaskedwhethertherewaslitigationpendingagainsther.Thebank
officerdidnotinquireastothenatureofthelitigation.
17.Thebankreviewedthedebtor'screditreportaswellasanappraisal
ofthehomesteadpropertyindeterminingwhethertomakeahomeequityloan
tothedebtor.
18.Thebankwasawarethatsomeofthedebtor'shomesteadwasdesignated
intherealpropertyrecordsasexemptagriculturalproperty.
19.InJune2007,thebankagreedtoloanthedebtor$175,000tobe
securedby10acresofrealpropertylocatedat7782PlainviewRoadin
Sherman,GraysonCounty,Texas.
20.InJune2007,CoxLandSurveyingCompanysurveyeda10acre
rectangulartractoutofthe180acresat7782PlainviewRoad.Thetractis
approximately370feetwideby1200feetlong.ThesurveywasdatedJune27,
2007.This10acretractisthesubjectofthehomeequityloan.
21.TheloanclosingtookplaceonJune27,2007,atthetitleofficeof
SecurityTitleInc.inSherman,Texas.
22.Attheclosing,thedebtorexecutedaTexasHomeEquityPromissory
Note("Note")intheoriginalprincipalamountof$175,000datedJune27,
2007.TheNotewaspayabletoSecurityBankofWhitesboro.
23.Attheclosing,theDebtorexecutedaTexasHomeEquitySecurity
Instrument("SecurityInstrument")thatwaslaterrecordedatNo.00016262,
Volume4280,Page88oftheOfficialPublicRecordsofGraysonCounty,
Texas.ThelegaldescriptiontothepropertyintheSecurityInstrumentwas
thesamedescriptionontheCoxsurvey.
Page7
24.Attheclosing,thedebtorexecutedaTexasHomeEquityBorrower
AffidavitandAgreement(the"Affidavit").Thedebtorstatedinthe
Affidavitthatthe10acreswasthedebtor'shomesteadandwasnot
designatedforagriculturaluse.
D.TheSettlement
25.OnoraboutAugust21,2009,thedebtorenteredintoasettlement
agreementwiththechildrenofDouglasShanklesresolvingthewillcontest.
26.Pursuanttothesettlementagreement,thepartiesagreedtoadmitto
probateawilldatedJuly8,1993,whichwillwasadmittedtoprobatebythe
GraysonCountyCourtatLawonDecember12,2008.
27.The1993willprovided,withrespecttothePlainviewRoadproperty,
thatthehomeandsurroundingfiveacreswouldbegivenintrusttoMary
HarpShankles,astrusteeandasbeneficiaryforlife.Theremaining175
acreswerewilledtoagenerationskippingtrustforthebenefitofDouglas'
childrenandgrandchildren,togetherwithallotherrealpropertythat

26.Pursuanttothesettlementagreement,thepartiesagreedtoadmitto
probateawilldatedJuly8,1993,whichwillwasadmittedtoprobatebythe
GraysonCountyCourtatLawonDecember12,2008.
27.The1993willprovided,withrespecttothePlainviewRoadproperty,
thatthehomeandsurroundingfiveacreswouldbegivenintrusttoMary
HarpShankles,astrusteeandasbeneficiaryforlife.Theremaining175
acreswerewilledtoagenerationskippingtrustforthebenefitofDouglas'
childrenandgrandchildren,togetherwithallotherrealpropertythat
Douglasownedatdeath.Thetrusteesofthegenerationskippingtrustwere
tobeDouglas'children.
28.Thesettlementagreementmodifiedthetermsofthe1993will.Under
thesettlementagreement,thedebtorreceivedownershipoftheentire
180acretract.Theagreementstatedthatthetransfertothedebtorwas
subjecttothebank'slienontheproperty.Thesettlementagreementalso
releasedthelispendensandprovidedthatthedebtor'spriordeedofthe
180acretracttoherselfwasvoidabinitio.
E.TheBankruptcy
29.Thedebtorfailedtomakehermortgagepaymentstothebankasand
whendue.OnAugust5,2011,thebankinitiatedforeclosureproceedings
againstthedebtorin
Page8
aTexasstatecourt.Thedebtoropposedthebank'sapplicationfor
foreclosureby,amongotherthings,denyingthatthebankhadcompliedwith
alloftherequirementsoftheTexasConstitution.
30.OnOctober5,2011,thedebtorfiledforbankruptcyunderchapter11
oftheBankruptcyCode.Thedebtorremovedthependingstatecourt
foreclosureactiontothisCourt.
31.Thebankmovedforrelieffromtheautomaticstayimposedby362(a)
oftheBankruptcyCodeandrequestedthattheCourtremandtheforeclosure
actionbacktostatecourt.TheCourtdeniedthebank'smotiontoremand.
Withrespecttothebank'smotionforrelieffromthestay,theCourt
enteredanorderonJanuary12,2012,continuingthestayandrequiringthat
thedebtormaintaininsuranceandpayadvaloremtaxes.
32.Thebankfiledanadversarycomplaintobjectingtothedischargeablity
ofthedebtor'sobligationstothebankpursuantto
11U.S.C.523(a)(2)(A)and(B)oftheBankruptcyCode.Thedebtor
respondedandraisednumerousaffirmativedefensesandcounterclaims,
includingacounterclaimforadeclaratoryjudgmentthatthebankhadnot
compliedwiththeTexasConstitution.Thepartiessubsequentlyrequestedand
obtainedanorderfromthisCourtconsolidatingtheforeclosureproceeding
andthedischargeabilityproceedingforpurposesoftrial.
33.Thedebtor'schapter11casewasconvertedtochapter7onFebruary
29,2012.Thechapter7trusteeintervenedintheadversaryproceedingand
filedacounterclaimagainstthebank.Thetrusteeseekstoestablishthat,
becausetheagriculturalexemptionwasnotremovedfromallofthetenacres
inwhichthebank
Page9
obtainedasecuredinterest,thebank'shomeequityloanviolatedtheTexas
Constitution,andthebank'slienontheentiretenacresisinvalidand
ineffective.Thetrusteealsoseekstodisallowthebank'sunsecuredclaim
againstthedebtor'sbankruptcyestate.
34.Inherbankruptcyschedules,thedebtorlisted7782PlainviewRoadas
herexempthomestead.Severalcreditors(attorneyswhorepresentedthe
debtorinthewillcontest)objectedtotheclaimedexemption.[fn3]
35.OnSeptember24,2012,theCourtenteredamemorandumopinion
regardingtheobjectionstothedebtor'shomesteadexemption.TheCourtmade
thefollowingfindingsoffactwithrespecttoownershipofthe180acresof
realproperty:
DouglasShankles,theDebtor'sdeceasedhusband,acquiredthereal
propertylocatedat7782PlainviewRoadin1977and1978.TheDebtor
marriedDouglasin1992,andtheylivedat7782PlainviewRoad
duringtheirmarriage.Theydidnothaveanychildren.Douglas,
however,hadchildrenfromapriormarriage.
Douglaswasdiagnosedwithcancerin2003,andhediedathomeon
January14,2004.OnFebruary14,2004,theDebtorfiledan
"ApplicationforProbateofWilldatedJanuary14,2004"inGrayson
County,Texas.Althoughthewillpurportedtohavebeensignedby

propertylocatedat7782PlainviewRoadin1977and1978.TheDebtor
marriedDouglasin1992,andtheylivedat7782PlainviewRoad
duringtheirmarriage.Theydidnothaveanychildren.Douglas,
however,hadchildrenfromapriormarriage.
Douglaswasdiagnosedwithcancerin2003,andhediedathomeon
January14,2004.OnFebruary14,2004,theDebtorfiledan
"ApplicationforProbateofWilldatedJanuary14,2004"inGrayson
County,Texas.Althoughthewillpurportedtohavebeensignedby
Douglasonthedayofhisdeath,Douglaswasincapableofreviewing
orsigninganydocumentsthatday.
AtthehearingbeforethisCourt,theDebtorinitiallytestified
thatthewrongdatewasonthewill,andDouglasactuallysignedit
inthehospitalseveraldaysbeforehisdeath.Thewill,however,
statesthatitwaswitnessedandnotarizedonJanuary14,2004.The
Debtoreventuallyadmittedonthewitnessstandthatshesignedthe
willforDouglasonsomedateotherthanthedatethewillwas
purportedlywitnessedandnotarized.TheDebtorfurtheradmitted
thatthenotarywasnotpresentwhenshesignedthewill.TheDebtor
thereaftersubmittedanapplicationtothestatecourtrequesting
thatthefraudulentandforgedwillbeadmittedforprobate.
ThewilltheDebtorsignedforDouglasappointedheras
independentexecutorofDouglas'probateestate.Douglas'children
challengedtheauthenticityofthe2004willaswellasseveral
otherwillsand
Page10
agreementstheDebtorproduced.Duringthependencyofthewill
contest,theDebtortransferredDouglas'separatepropertyto
herself,includingthepropertyat7782PlainviewRoad,byexecuting
deedsandotherinstruments.
TheDebtoreventuallywithdrewthe2004willfromprobate.In
addition,theDebtoreventuallyenteredintoasettlementwhereby
allparties,includingtheDebtor,generallyagreedthatanyandall
deedsorotherinstrumentsofconveyanceexecutedbytheDebtorfor
thepurposeoftransferringtherealpropertyinterestsownedby
Douglaswere"cancelled,rescinded,revoked,andrenderednulland
voidabinitio...."
The2004willwasfraudulentandforgedwhenmade.TheDebtor's
forgeryofDouglas'signatureonthe2004willwasabundantlyclear
fromhertestimonyattheexemptionhearing.Thewillwasfraudulent
sinceshesignedthewillforherhusband,thenotarywasnot
present,thedateofthewillisincorrect,anditisnotclearwhen
thewitnessessignedthewill.
36.ThedebtorisappealingtheCourt'sdecisionregardingherclaimed
exemption.
CONCLUSIONSOFLAW
A.ValidityofthePlaintiff'sLien
1.Thevalidityofthebank'slienonthedebtor'shomesteadisdisputed
inthisadversaryproceeding.ArticleXVI,Section50oftheTexas
Constitutionandsections41.001,etseq.oftheTexasPropertyCodegovern
thevalidityofliensthatmaybeenforcedagainstTexasrealpropertythat
qualifiesasahomestead.
2.NoncompliancewiththerequirementsoftheTexasConstitutionrenders
liensvoidable,notvoid.SeePriesterv.JPMorganChaseBank,N.A.,
708F.3d667,674675(5thCir.2013).Thepartyseekingtoinvalidatea
lienonahomesteadbasedonnoncompliancewiththeTexasConstitutionbears
theburdenofproof.SeeInreChambers,419B.R.652,671(Bankr.E.D.Tex.
2009)
Page11
1.TheCourt'sPriorRuling
3.Asaninitialmatter,thedebtorarguesthatthebankdidnotobtainan
enforceablelienonherhomesteadbecause,asthisCourtpreviouslyfound
andconcluded,theforgedwilldidnotprovideherwithaneconomicinterest
intheproperty.[fn4]Thebankcontendsthatthedebtor'sargumentisbarred
bytheafteracquiredtitledoctrine.
4.Undertheafteracquiredtitledoctrine,"whenoneconveyslandby
warrantyoftitle,orinsuchamannerastobeestoppedtodisputethe

1.TheCourt'sPriorRuling
3.Asaninitialmatter,thedebtorarguesthatthebankdidnotobtainan
enforceablelienonherhomesteadbecause,asthisCourtpreviouslyfound
andconcluded,theforgedwilldidnotprovideherwithaneconomicinterest
intheproperty.[fn4]Thebankcontendsthatthedebtor'sargumentisbarred
bytheafteracquiredtitledoctrine.
4.Undertheafteracquiredtitledoctrine,"whenoneconveyslandby
warrantyoftitle,orinsuchamannerastobeestoppedtodisputethe
titleofhisgrantee,atitlesubsequentlyacquiredtothatlandwillpass
eoinstantetohiswarrantee,bindingboththewarrantorandhisheirsand
subsequentpurchasersfromeither."HoustonFirstAmericanSav.v.Musick,
650S.W.2d764,770(Tex.1983)(citingCaswellv.LlanoOilCo.,
120Tex.139,36S.W.2d208,211(Tex.1931)).Theafteracquiredtitle
doctrineappliestoliensonhomesteads.SeeDominguezv.Castaneda,
163S.W.3d318(Tex.App.ElPaso2005).
5.Here,thedebtorrequestedandreceivedaloantobesecuredbywhat
sherepresentedtothebankwasherfeesimpleinterestin10acresofher
homestead.Thedebtorsubsequentlyresolvedadisputeoverherownership
interestinherhomestead,amongotherthings,inasettlementwithher
deceasedhusband'schildren.Thesettlement
Page12
specificallysoughttopreservethebank'slienonherhomesteadwhile
voidingthedebtor'spriorattempttodeedthepropertytoherselfunderthe
forgedwill.Thesettlementagreement,havingvoidedthedebtor'sdeedof
thepropertytoherselfabinitio,providedthedebtorwithanewdeedto
theproperty.
6.Thedebtorcausedthedisputeoverherownershipofthehomesteadby
forgingherhusband'swill.Thecircumstancessurroundingherconveyanceof
alienonthehomesteadtothebank,andhersettlementwithherdeceased
husband'sheirs,giverisetotheafteracquiredtitledoctrine.Thedebtor
isbarredfromseekingtodefeatthebank'sinterestinherhomesteadby
arguingthat,whensheenteredintothehomeequityloan,shehadnotitle.
See,e.g.,C.D.ShamburgerLumberCo.v.Bredthauer,62S.W.2d603,605
(Tex.Civ.App.FortWorth1933)Bengev.Scharbauer,254S.W.2d236
(Tex.Civ.App.ElPaso1952),affirmed259S.W.2d166,168(1953).
2.TheTexasConstitution
7.Next,thedebtorandthechapter7trusteeseektoestablishthatthe
bankdidnotobtainanenforceablelienonthedebtor'shomestead,because
thehomeequityloanviolatedtheTexasConstitution.Thebankrespondsthe
residualfouryearstatuteoflimitationbarsthedebtorandthechapter7
trusteefromseekingtoinvalidateitslienundertheTexasConstitution.
SeeTEX.CIV.PRAC.&REM.CODE16.051
a.WhethertheConstitutionalChallengeIsBarredByLimitations
8.TheFifthCircuitrecentlyappliedafouryearstatuteoflimitations
toactionsseekingtoavoidliensbasedoninfirmitiesundersection
50(a)(6)oftheTexasConstitution.SeePriester708F.3dat674675.
Page13
9.Here,thedebtorobtainedahomeequityloanfromthebankinJune
2007.ThebankinitiatedaforeclosureproceedinginstatecourtinAugust
2011.InherresponsetotheapplicationforforeclosureinSeptember2011,
thedebtordeniedthatthebankhadcompliedwiththeapplicableprovisions
oftheTexasConstitutionandwasentitledtoforeclosure.Thedebtorfiled
abankruptcypetitioninOctober2011andremovedtheforeclosureactionto
thisCourt.
10.InJanuary2012,thebankfiledasecuredclaimintheamountof
approximately$171,600againstthedebtor'sbankruptcyestate.Inaddition,
inJanuary2012,thebankinitiatedanadversarycomplaintagainstthe
debtorseekinganondischargeablejudgmentagainstherintheprinciple
amountof$175,000plusinterestanditsreasonableattorneys'fees.The
debtor'sanswertotheadversarycomplaintonceagainchallengedthebank's
compliancewiththeTexasConstitution.
11.Afterthedebtor'scaseconvertedtochapter7,thechapter7trustee
intervenedintheconsolidatedadversaryproceeding.Thetrustee,likethe
debtor,assertedacounterclaimthatchallengedthebank'scompliancewith
theTexasConstitution.
12.Thedeadlineforfilingacauseofactiondependsonwhetherthe
actionisfiledasacounterclaimorasaseparateactionforaffirmative

debtor'sanswertotheadversarycomplaintonceagainchallengedthebank's
compliancewiththeTexasConstitution.
11.Afterthedebtor'scaseconvertedtochapter7,thechapter7trustee
intervenedintheconsolidatedadversaryproceeding.Thetrustee,likethe
debtor,assertedacounterclaimthatchallengedthebank'scompliancewith
theTexasConstitution.
12.Thedeadlineforfilingacauseofactiondependsonwhetherthe
actionisfiledasacounterclaimorasaseparateactionforaffirmative
relief.UnderTexaslaw,apartymayfileacounterclaimeventhough,asa
separateaction,itwouldbebarredbylimitationssolongasthe
counterclaimarisesoutofthesametransactionoroccurrencethatisthe
basisofthelawsuit.SeeTEX.CIV.PRAC.&REM.CODE16.069(a).The
purposeofsection16.069"istopreventaplaintifffromwaitinguntilthe
adversary'svalidclaimarisingfromthesametransactionwasbarredby
limitationsbeforeasserting
Page14
hisownclaim."Wellsv.Dotson,261S.W.3d275,281(Tex.App.Tyler
2008,nopet.)(citingHobbsTrailersv.J.T.ArnettGrainCo.,
560S.W.2d85,8889(Tex.1977)).
13.Texascourts"applyalogicalrelationshiptesttodeterminewhether
counterclaimsariseoutofthesametransactionoroccurrence."Commint
TechnicalServs.,Inc.v.Quickel,314S.W.3d646,653(Tex.App.Houston
[14thDist.]2010,nopet.)(citingJackH.Brown&Co.v.Nw.SignCo.,
718S.W.2d397,400(Tex.App.Dallas1986,writref'dn.r.e.)).The
logicalrelationshiptestismetwhenthesamefactsaresignificantand
logicallyrelevanttobothclaims.CommintTechnicalServs.,
314S.W.3dat653.Thereisnologicalrelationshipwhennoneofthesame
factsarerelevanttobothclaims.Id.
14.Here,thecounterclaimschallengingthevalidityofthebank'slien
undertheTexasConstitutionarelogicallyrelatedtothebank'saction
seekingtohaveitsclaimliquidatedbythisCourt,determined
nondischargeable,andtheautomaticstayliftedsothatthebankcanenforce
theCourt'sjudgmentbyforeclosingonthedebtor'shome.[fn5]Thedebtor
andtrusteearechallengingthevalidityoftheverytransactionthatgave
risetothedebtthebankisseekingtoenforce.Eitherthefactsshowthat
thebankhasavalidlienandisentitledtoforeclose,asthebankclaims,
orthefactsshowthatbankdoesnothaveavalidlienandisnotentitled
toforeclose,asthedebtorandtrusteecounterclaim.
15.Thedebtorandthechapter7trusteearenotseekinganaffirmative
recoveryfromthebank.Theircounterclaimsaredefensiveinnature.They
areseeking
Page15
topreventthebankfromforeclosingonthedebtor'shomeand,totheextent
thebankholdsanunsecuredclaim,collectingtheunsecuredclaimfromthe
bankruptcyestate.
16.TheCourt,therefore,concludesthatthestatuteoflimitationsupon
whichthebankreliesdoesnotbarthedebtorortrusteefromchallenging
thebank'sclaimorlien.Moreover,astatuteoflimitationgenerallydoes
notbaradefendantfromassertinganintrinsicallydefensiveclaimwhich,
ifsuccessful,willoperateasanabatementeitherwhollyorpartiallyof
theamountclaimed.See,e.g.,SmallwoodvSinger,823S.W.2d319(Tex.App.
Texarkana1991,nowrit).
b.WhethertheHomeEquityLoanViolated50(a)(6)(I)oftheTexas
Constitution
17.Asrelevanttothisproceeding,theTexasConstitutionprohibits
"homesteadpropertydesignatedforagriculturaluseasprovidedbystatutes
governingpropertytax"frombeingpledgedtosecureahomeequityloan
unlesstheproperty"isusedprimarilyfortheproductionofmilk."TEX.
CONST.art.XVI,50(a)(6)(I).
18.Thedebtor'shomesteadqualifiedasruralhomesteadpropertyatall
relevanttimesunderTexaslaw.Thepropertyrecordsreflectthateightof
the10acresinwhichthebankclaimsasecuredinterestweredesignatedfor
agriculturaluseatthetimeofclosing.Thedebtor'shomesteadpropertywas
notbeingusedprimarilyfortheproductionofmilk.
19.Thus,thehomeequityloaninthiscaseviolatedsection50(a)(6)(I)
oftheTexasConstitutionbygrantingthebankasecuredinterestin
propertydesignatedforagriculturaluse.
Page16

the10acresinwhichthebankclaimsasecuredinterestweredesignatedfor
agriculturaluseatthetimeofclosing.Thedebtor'shomesteadpropertywas
notbeingusedprimarilyfortheproductionofmilk.
19.Thus,thehomeequityloaninthiscaseviolatedsection50(a)(6)(I)
oftheTexasConstitutionbygrantingthebankasecuredinterestin
propertydesignatedforagriculturaluse.
Page16
c.TheTexasForfeitureProvision
20.Whenahomeequityloanviolatesthetermsofsection50(a)(6),
section50(a)(6)(Q)(x)oftheTexasConstitutiongenerallyprovidesthatthe
lenderforfeitstheprincipalandinterest.
21.Thereislimitedcaselawapplyingtheforfeitureprovisionstoa
violationofsection50(a)(6)(I)oftheTexasConstitution.Oneofthefew
casesinterpretingtheagriculturalusedesignationinthehomeequityloan
contextheldthatincludingagriculturalusedesignatedpropertyinvalidated
theentireloan.SeeLaSalleBankNat'lAss'nv.White,217S.W.3d573,577
(Tex.App.SanAntonio2006),reversedinpartonothergrounds,Bank
Nat'lAss'nv.White,246S.W.3d616(Tex.2007).
22.Althoughthehomeequityloaninthiscaseviolatedthe
agriculturaluseprovisioninsection50(a)(6)(I),thebankpointsoutthat
thedebtorsignedanaffidavitstatingthatthe10acressheofferedas
collateraltothebankwasnotdesignatedforagriculturaluse.TheTexas
Constitutiondoesnotincludeanyprovisionallowingalenderto
conclusivelyrelyonsuchanaffidavitinthecontextofthe
agriculturalusedesignation.Furthermore,asageneralrule,lendersmay
notrelyonanestoppeldefensetosecurealienonahomestead.SeeSmith
v.JPMorganChaseBank,825F.Supp.2d859,862(S.D.Tex.2011)(quoting
TexasLand&LoanCo.v.Blalock,13S.W.12,13(Tex.1890)).
23.Theagriculturalusedesignationofthedebtor'shomesteadwasa
matterofpublicrecord.Thebankdidnotobtainasurveyofthe10acresin
whichitsoughttoobtainasecuredinterest,andforwhichitneededthe
debtortoremovetheagriculturalexemption,untilafterthedebtorhad
requestedtheremovaloftheagriculturalexemption.
Page17
Thebank,havingfailedtoexerciseduediligence,maynotrelyuponthe
debtor'saffidavitthatincorrectlystatesthatthe10acresdescribedin
theCoxsurveywerenotdesignatedasexemptagriculturalproperty.
24.Thebank'slienonthe10acresisinvalid,ineffective,and
unenforceablebecausesuchpropertyispartofthedebtor'sruralhomestead
andthebankdidnotcomplywithalloftherequirementsimposedbythe
TexasConstitutionformakinghomeequityloansinAugust2009(oratany
timethereafter)thedateonwhichthisCourthasfoundthatthedebtor
acquiredaneconomicinterestinsuchproperty.
25.Thedefectinthehomeequityloanisincurableandthebank'slienis
voidundersection50(a)(6)(Q)ofarticleXVIoftheTexasConstitution.
Alternatively,evenifacurewerepossible,thebankmadenoefforttocure
anyviolationsofthehomeequitylendingprovisionsoftheTexas
Constitutionwithinthe60dayperiodprovidedbyArticleXVI,Section
50(a)(6)(Q)(x).
3.PersonalLiability
26.Section50(a)(6)(C)oftheTexasConstitutionprovidesthatthereis
norecourseforpersonalliabilityagainsteachownerandthespouseofeach
owner,unlesstheownerorspouseobtainedtheextensionofcreditbyactual
fraud.Inthiscase,thedebtordidnotcommitactualfraudinconnection
withthehomeequityloan,asdiscussedbelow,andisnotpersonallyliable
tothebank.
27.Foralltheforegoingreasons,thebank'sclaimsagainstthedebtor
andherbankruptcyestatearedisallowedintheirentirety.[fn6]
Page18
B.Dischargeability
28.AlthoughtheCourthasconcludedthatthebankdoesnothaveaclaim
againstthebankruptcyestate,theCourtwillanalyzethebank'srequestfor
ajudgmentofnondischargeabilityinordertoprovidethepartieswitha
fullanalysis.Inparticular,thebankseeksajudgmentthatthedebtor's
obligationstoitarenondischargeableinbankruptcypursuantto

Page18
B.Dischargeability
28.AlthoughtheCourthasconcludedthatthebankdoesnothaveaclaim
againstthebankruptcyestate,theCourtwillanalyzethebank'srequestfor
ajudgmentofnondischargeabilityinordertoprovidethepartieswitha
fullanalysis.Inparticular,thebankseeksajudgmentthatthedebtor's
obligationstoitarenondischargeableinbankruptcypursuantto
523(a)(2)(A)or(B).
a.ActualFraud,FalsePretenses,FalseRepresentation
29.Section523(a)(2)(A)oftheBankruptcyCodeprovidesthat:
adischargeunder727ofthistitledoesnotdischargean
individualdebtorfromanydebtformoney,property,orservices,.
..totheextentobtainedbyfalsepretenses,afalse
representation,oractualfraud,otherthanastatementrespecting
thedebtor'soraninsider'sfinancialcondition,
11U.S.C.523(a)(2)(A).

30.Section523(a)(2)(A)encompassessimilarbutdistinctcausesof
action.Althoughothercircuitshaveappliedauniformstandardtoall
523(a)(2)(A)actions,theFifthCircuithasdistinguishedtheelementsof
"actualfraud"andof"falsepretensesandfalserepresentations."
RecoverEdgeL.P.v.Pentecost,44F.3d1284,1291(5thCir.1995).
31.Forthedebtor'srepresentationstothebanktoconstitutefalse
pretensesorfalserepresentation,thebankmustprovethatthedebtortold:
"(1)aknowingandfraudulentfalsehood(2)describingpastorcurrent
facts(3)thatwasrelieduponbytheotherparty."InreAllison,
960F.2d481,483(5thCir.1992).[fn7]
Page19
32.Forthedebtor'srepresentationstothebanktoconstituteactual
fraud,thebankmustshowthat:"(1)theDebtormaderepresentations(2)
thatatthetimetheyweremade,Debtorknewtobefalse(3)theDebtor
madetherepresentationswiththeintentionandpurposetodeceivethe
creditor(4)thecreditorreliedonsuchrepresentationsand(5)the
creditorsustainedlossesasaproximatecauseoftherepresentations."
RecoverEdge44F.3dat1293.
33.Here,thebankarguesthatthedebtorknowinglymisrepresentedtothe
bankthatthecollateralsecuringtheloanwasnotdesignatedas
agriculturalpropertyandthatshewouldfilewiththecountyarevocation
ofanydesignationofthecollateralasagriculturalproperty.
34.Withrespecttothedebtor'sstatementthatthe10acresthatshe
offeredtothebankascollateralwasnotdesignatedasexemptagricultural
property,thebankhasfailedtoshowthatthedebtorknewthisstatementto
befalse.Thedebtorhadrequestedthatthecountyremovetheagricultural
exemptionfromeightacresofherpropertysothatatotalof10acreswould
notbedesignatedforagriculturaluse.Thecountycompliedwiththe
debtor'srequest.
35.Thebankobtainedasurveyofthe10acresuponwhichitintendedto
takealienafterthedebtorrequestedremovaloftheagricultural
exemption.Atthetimeofclosing,thedebtorwasunawarethattheacreage
redesignatedbythecountydidnotmatchthe10acressecuringthehome
equityloan.
36.Theclassificationofthepropertyasagriculturalwasamatterof
publicrecord.Becausethepublicrecordwasavailableforthebankto
reviewatanytime,andbecausethebankdidnotobtainasurveyofthe10
acresinwhichitsoughtalienuntil
Page20
afterthedebtorrequestedremovaloftheagriculturalexemption,thebank
didnotreasonablyrelyonthedebtor'saffidavitstatingthatthe10acres
wasnotdesignatedasexemptagriculturalproperty.
37.Thedebtor'sstatementofherfutureintenttoremoveanyagricultural
exemption,eveniffalse,failstosatisfytheabovestatedrequirementsof
523(a)(2)(A).
38.TheCourt,therefore,concludesthatthebankhasfailedtoestablish
anondischargeableclaimforfraud,falsepretenses,orfalse

afterthedebtorrequestedremovaloftheagriculturalexemption,thebank
didnotreasonablyrelyonthedebtor'saffidavitstatingthatthe10acres
wasnotdesignatedasexemptagriculturalproperty.
37.Thedebtor'sstatementofherfutureintenttoremoveanyagricultural
exemption,eveniffalse,failstosatisfytheabovestatedrequirementsof
523(a)(2)(A).
38.TheCourt,therefore,concludesthatthebankhasfailedtoestablish
anondischargeableclaimforfraud,falsepretenses,orfalse
representation.
b.MateriallyFalseWrittenStatement
39.Thebankalsoarguesthatthedebtorinducedthebanktoloanher
moneybasedonawrittenfinancialstatementthatcontainedfalse
informationabouthernetworthandwithrespecttoherownershipofassets.
Thebankarguesthatthedebtor'swrittenstatementswerefalse,becausethe
debtorknewshehadforgedherdeceasedhusband'swillthroughwhichshe
obtainedtitletothepropertyshelistedasherassets.
40.Inordertoprevailonitsclaimunder523(a)(2)(B),thebankmust
provefourelementsbyapreponderanceoftheevidence.Norrisv.First
Nat'lBank(InreNorris),70F.3d27,29(5thCir.1995).Adebtwillbe
nondischargeabletotheextentitisobtainedbytheuseofawritten
statement:
(i)thatismateriallyfalse
(ii)respectingthedebtor'soraninsider'sfinancialcondition
(iii)onwhichthecreditortowhomthedebtorisliableforsuch
creditreasonablyreliedand
(iv)thatthedebtorcausedtobemadeorpublishedwithintentto
deceive.
Id.seealsoGen.Elec.CapitalCorp.v.Acosta(InreAcosta),
406F.3d367,374(5thCir.2005).
Page21
41.Astatementismateriallyfalseifit"paintsasubstantially
untruthfulpictureofafinancialconditionbymisrepresentinginformation
ofthetypewhichwouldnormallyaffectthedecisiontograntcredit."
Jordanv.Se.Nat'lBank(InreJordan),927F.2d221,224(5thCir.1991)
seealsoInreNorris,70F.3dat30n.10.
42.Theterm"financialcondition"asusedin523(a)(2)(B)(ii),means
"thegeneraloverallfinancialconditionofanentityorindividual[.]"In
reBandi,683F3d671,676(5thCir.2012).
43.Under523(a)(2)(B),..."intenttodeceivemaybeinferredfrom
useofafalsefinancialstatement."InreYoung,995F.2d547,549(5th
Cir.1993).Ajudgemaylookatthetotalityofthecircumstancesandinfer
anintenttodeceivewhen"[r]ecklessdisregardforthetruthorfalsityof
astatementcombinedwiththesheermagnitudeoftheresultant
misrepresentationmaycombine"toproducesuchaninference.InreNorris,
70F.3dat31n.12(quotingInreMiller,39F.3d301,305(11thCir.
1994)).44.Here,thedebtor'sfinancialstatementsincludedassetsthatshe
transferredtoherselfundertheauthoritygrantedtoherbyawillshe
forgedandsubmittedforprobate.Thedebtorlaterenteredintoasettlement
inwhichsheagreedthatthetransfersshemadetoherselfwouldbevoidab
initio.Nonetheless,atthetimeshecompletedthefinancialstatement,she
heldrecordtitletotheassetslistedinherfinancialstatement.Her
settlementwithherdeceased'shusband'sheirscuredtheproblemwithtitle
aspreviouslydiscussed.
45.Althoughtherewasnowayforthebanktoknowthatthedebtorhad
fraudulentlytransferredassetstoherself,thedebtor'sactionswerethe
subjectoflitigationatthetimeshesoughtahomeequityloanfromthe
bank.Thedebtordisclosed
Page22
tothebankthatlitigationwaspendingagainsther.Thebankfailedtolook
foralispendensortoinquireastothenatureofthelitigationand,
thereby,appriseitselfofthedispute.Evenifthedebtor'sfinancial
statementswerefalsebecausetheyincludedillgottengains,thebankdid
notjustifiablyorreasonablyrelyonherstatements.
46.TheCourt,therefore,concludesthatthebankhasfailedtoestablish

subjectoflitigationatthetimeshesoughtahomeequityloanfromthe
bank.Thedebtordisclosed
Page22
tothebankthatlitigationwaspendingagainsther.Thebankfailedtolook
foralispendensortoinquireastothenatureofthelitigationand,
thereby,appriseitselfofthedispute.Evenifthedebtor'sfinancial
statementswerefalsebecausetheyincludedillgottengains,thebankdid
notjustifiablyorreasonablyrelyonherstatements.
46.TheCourt,therefore,concludesthatthebankhasfailedtoestablish
anondischargeableclaimunder523(a)(2)(B).
CONCLUSION
47.Foralltheforegoingreasons,theCourtconcludesthatthehome
equityloanviolatedtheTexasConstitutionand,therefore,thebank'slien
onthedebtor'shomeisinvalidandunenforceable.TheCourtfurther
concludesthatthedebtorisnotpersonallyliabletothebank,andevenif
shewere,thebank'sclaimagainstherwouldbedischargeableinbankruptcy.
48.TheCourtwillenteraseparatejudgmentconsistentwiththese
findingsoffactandconclusionsoflaw.
[fn1]Theplaintiffinitiatedaforeclosureactionagainstthedebtorprior
tothedebtor'sbankruptcy,whichthedebtorremovedtothisCourt.The
Courtassignedtheforeclosureactionadversaryproceedingnumber114217.
Inaddition,duringthependencyofthedebtor'sbankruptcycase,the
plaintiffinitiatedanadversaryproceeding,whichtheCourtassignednumber
124012,seekinganondischargeablejudgmentagainstthedebtor.TheCourt
consolidatedthedischargeabilityproceedingwiththeforeclosureactionand
triedtheactionstogether.

[fn2]Section727(b)providesthatabankruptcydischargeunder727(a)
dischargesadebtorfromallprepetitiondebtsexcepttotheextenta
bankruptcycourtdeterminesthataparticulardebtisnondischargeableunder
523(a).

[fn3]Thevalidityofthebank'slienwasnotatissueintheexemption
proceeding.Rather,theissuefortheCourttodecidewaswhetherthe
debtor'sinterestinherhomesteadwasexemptfromhercreditorsunderTexas
lawandtheapplicableprovisionsoftheBankruptcyCode.

[fn4]Alternatively,thebankcontendsthatitisentitledtothestatusof
abonafidemortgagee,whichisentitledtothesameprotectionasabona
fidepurchaser.Undersection13.001oftheTexasPropertyCode,alender
canbeabonafidemortgageeifthelendertakesalieningoodfaith,for
valuableconsideration,andwithoutactualorconstructivenoticeof
outstandingclaims.See,e.g.,HoustonFirstAm.Sav.v.Musick,
650S.W.2d764,769(Tex.1983)Gordyv.Morton,624S.W.2d705,707(Tex.
App.Houston[14thDist.]1981,nowrit).Abankischargedwithnoticeof
allfactsthatmighthavebeendiscoveredbyadiligentinquiry,ifthe
recitalsofaninstrumentordocumentinthechainoftitlearesufficient
toputitoninquiry.Seegenerally2TEX.PRAC.GUIDEREALTRANS.11:93
(collectingauthority).Inthiscase,thebankknewlitigationwaspending
againstthedebtor.Thebankdidnotinquireaboutthenatureofthepending
litigation,andthebankfailedtoshowthatitlookedforthelispendens
andcouldnotordidnotfindit.

[fn5]Initsposttrialbriefing,thebankarguesthatthecounterclaims
assertedbythedebtorandthechapter7trusteearenotlogicallyrelated
toitsrequesttohaveitsclaimdeterminednondischargeableunderthe
BankruptcyCode.Thisargumentignoresthefactthatadeterminationofthe
debtor'sliabilitytothebank,ifany,isanecessarypreludeto
determinationofdischargeability.

[fn6]InlightoftheCourt'sconclusion,theCourtneednotaddressthe
debtor'sotherobjectionstothebank'scompliancewiththeTexas
Constitution.TheCourtalsodoesnotreachquestionofwhethertoliftthe
automaticstayimposedby362(a).

[fn7]While"falsepretenses"and"falserepresentation"bothinvolve
intentionalconductintendedtocreateandfosterafalseimpression,the
distinctionisthatafalserepresentationinvolvesanexpressstatement,
whileaclaimoffalsepretensesmaybepremisedonmisleadingconduct

debtor'sotherobjectionstothebank'scompliancewiththeTexas
Constitution.TheCourtalsodoesnotreachquestionofwhethertoliftthe
automaticstayimposedby362(a).

[fn7]While"falsepretenses"and"falserepresentation"bothinvolve
intentionalconductintendedtocreateandfosterafalseimpression,the
distinctionisthatafalserepresentationinvolvesanexpressstatement,
whileaclaimoffalsepretensesmaybepremisedonmisleadingconduct
withoutanexplicitstatement.SeeWalkerv.Davis(InreDavis),
377B.R.827,834(Bankr.E.D.Tex.2007)andHaneyv.Copeland(Inre
Copeland),291B.R.740,760(Bankr.E.D.Tenn.2003).

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