Judge Gregg Costa, of the U.S. Court of Appeals for the Fifth Circuit.

The U.S. Court of Appeals for the Fifth Circuit has ruled that a Texas businessman who was sentenced to two years in prison for bankruptcy fraud may use the sale of the proceeds of his house to pay his criminal defense attorneys, rejecting a U.S. bankruptcy trustee’s attempts to claim the home sale proceeds as part of his estate.

Curtis Harold DeBerry, the former owner of a failed produce company in Boerne, Texas, was eventually sentenced to two years in prison last year for hiding assets from creditors in bankruptcy.

As part of DeBerry’s Chapter 7 bankruptcy case, which he filed in 2014, he used the Texas homestead exemption law to protect his house from the bankruptcy estate. DeBerry sold his house later that year for $364,592, did not reinvest the proceeds and instead transferred the money to his wife and to San Antonio’s Goldstein Goldstein & Hilley for the benefit of Gerry Goldstein and Cynthia Orr, two firm partners who represented DeBerry in a criminal matter.

The bankruptcy trustee in the case later filed an adversarial proceeding against DeBerry and Goldstein Goldstein & Hilley alleging DeBerry’s creditors were entitled to the money because he had not reinvested the cash in another homestead within six months as required under the proceeds rule of Texas homestead exemption law.

DeBerry and the law firm argued the proceeds were exempt at the time of the filing of his bankruptcy petition and a bankruptcy court agreed holding that when a Chapter 7 debtor sells his exempted Texas homestead postpetition, the proceeds of the sale of the home are likewise exempted. However a U.S. District court reversed that ruling, which the bankruptcy trustee appealed to the Fifth Circuit.

After the parties filed their appellate briefs in the case, the Fifth Circuit decided Hawk v. Engelhartholding that funds withdrawn from an exempted retirement account after the filing of a Chapter 7 bankruptcy do not lose their exempt status within 60 days under the Texas proceeds rule.

DeBerry and the law firm argued that Hawk applied to the case, while the trustee argued that it didn’t because the decision involved a retirement account instead of a homestead.

In its decision, the Fifth Circuit determined that Hawk did apply and the proceeds from the sale of DeBerry’s home should be exempt from his creditors.

“The analysis in Hawk and ours today does not turn on giving DeBerry a ‘fresh start’; it turns on the clear principles of Texas law providing an exemption for homesteads,” Judge Gregg Costa explained in a footnote to his decision in the case. “The trustee also invokes the Bankruptcy Code’s goal of treating creditors equally, as the lawyers received all the homestead proceeds. But the other creditors are no worse off than they would have been if DeBerry had kept his home. Exclusion of that asset from the estate is always the effect of the homestead exemption.”

“Just as the retirement account in Hawk was exempt because it was owned on the date the Chapter 7 petition was filed, so too is the homestead exempt because it was owned at the commencement of DeBerry’s bankruptcy,” Costa concluded in the opinion.