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Bankruptcy Law Click here for the full text of this decision FACTS:The court determines whether a debtor (Robert Perry) is entitled to exempt from claims of creditors (the Dearings) approximately 85 acres of rural property upon which he lives and operates a mobile home park, by claiming it as his rural homestead. HOLDING:Vacated and remanded. Texas permits a family who has filed for bankruptcy protection to exempt up to 200 rural acres of land from the bankruptcy estate if the property is used for the purpose of a rural home. Texas Property Code �41.002(b). Texas Constitution article XVI �51. The homestead designation precludes property from forced sale in order to satisfy the bankrupt’s debts, unless those debts are “for the purchase money thereof, or a part of such purchase money, the taxes due thereon, or for work and material used in constructing improvements thereon.” Texas Constitution article XVI �50. In his bankruptcy schedule, Perry claimed as an exempt homestead the 26-acre tract and the contiguous 59-acre tract. The Dearings timely objected to this designation. Under Texas’ homestead law, homestead rights may be lost only through death, abandonment or alienation. In re Moody, 862 F.2d 1194 (5th Cir. 1989). The Dearings allege that Perry alienated title to the twenty-six acre tract by conveying it to the Corporation, and in the process extinguished his homestead interest. Perry responds that the conveyance was a sham, or “pretended sale” intended to circumvent Texas homestead laws, and thus void under the Texas Constitution. The bankruptcy court determined that the 1985 conveyance was not a sham. The district court disagreed and reversed. A bankruptcy court’s determination as to whether a debtor’s sale of his home to a corporation was a pretended sale is a question of fact to be reversed only if it is clearly erroneous. The claimant has the initial burden of establishing homestead status. Burk Royalty Co. v. Riley, 475 S.W.2d 566 (Tex. 1972). This is accomplished by presenting evidence of both 1. overt acts of homestead usage and 2. an intent to claim the land as a homestead. Perry completed this “short hurdle” prior to the 1985 transfer to American Campgrounds Inc. (Perry’s business) by occupying it for more than twenty years. A claimant’s homestead designation, such as the one made by Perry in 1997, is also considered prima facie evidence of what constitutes the family homestead. Wade v. First Nat’l Bank, 263 S.W. 654 (Tex. Civ. App. 1925). Once the claimant has made a prima facie case in favor of homestead status, the objecting party has the burden of demonstrating that the homestead rights have been terminated. Bankruptcy Rule 4003(c). When a homestead is conveyed to a corporation, the stock of which is owned by the grantors, the property loses its homestead character regardless of whether the grantors continue to occupy the property. Nash v. Conatser, 410 S.W.2d 512 (Tex. Civ. App. 1966). Valid title then vests in the corporation, and the property becomes subject to the debts of the corporation. The Dearings assert that this is precisely what occurred when Perry transferred title of the 26-acre tract to the corporation. Perry, however, argues that the transfer was made at the suggestion of the Bank and solely to secure the $127,000 loan with the homestead, in violation of the Texas Constitution. As such, he contends, the transfer was a “pretended” sale and is thus void. Perry’s argument lacks merit, the court determines. Texas prohibits only those pretended sales that include a condition of defeasance. A condition of defeasance permits the seller to reclaim the title to the property conveyed after the loan is repaid. Perry testified that there was no condition of defeasance attached to the transfer to the corporation. Therefore, even if the parties did engage in a pretended sale of the 26-acre tract, it was not the kind of pretended transaction that the Texas Constitution prohibits. Neither the Texas Property Code, nor the Texas Constitution, bar a rural resident from operating a business, per se, on the property on which he resides. Because the “business” or “calling” of rural residents has traditionally been agricultural, the Texas Supreme Court has not yet been presented with the opportunity to pass upon a case that involves (a) a rural resident, who claims; (b) rural property, that is; (c) on the same tract as his residence; and (d) is used for non-agricultural business purposes, as part of his homestead. In the absence of a clear statement expressly limiting the scope of the rural homestead to property used for home or agricultural purposes, the court does not agree that the operation of a business, without more, necessarily forfeits a rural homestead interest. OPINION:Benavides, J.; Wiener, Benavides and Dennis, JJ.

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