Gerrit M. Pronske.
Gerrit M. Pronske. (Courtesy photo)

The U.S. Fifth Circuit Court of Appeals has blocked the wife of an indicted exotic-used-car dealer from collecting $500,000 from the sale of their multimillion dollar Dallas luxury home after the couple tried to partition the ownership of the house one hour before her husband filed for bankruptcy.

The background the Fifth Circuit’s decision in Wiggains v. Reed is as follows, according to the decision. Jeremy Wiggains and his wife, Tanya, bought the expensive house in Dallas’ Preston Hollow neighborhood in 2013 and sold it nine months later for $3.4 million.

After the couple received the offer, on advice of counsel, they executed a partition agreement, which recharacterized their home from community property to separate property in which one half of the house belonged to each spouse.

Jeremy Wiggains later filed for bankruptcy an hour after the partition agreement was signed. He claimed an exemption for his separate interest in the home under Texas law, which is subject to the $155,675 homestead exemption under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to address the so-called “mansion loophole.” Tanya Wiggains did not file for bankruptcy.

The sale of the home netted $568,688 in proceeds after liens on the home were satisfied. And in 2014, Tanya Wiggains filed an adversarial proceeding seeking her separate property interest in the home. The bankruptcy trustee filed a counterclaim to avoid the partition agreement and keep the proceeds of the sale for the estate.

In 2014, Jeremy Wiggains testified in a bankruptcy court hearing that entering into the partition agreement was the right thing to do as he did not believe his wife was obligated on his business debts.

Jeremy Wiggains, the owner Straight Line Automotive Group, which specialized in selling high-end exotic cars, was indicted for bank fraud in 2015. Federal prosecutors accused Wiggains of scheme in which he sold cars such as a $170,000 2008 Ferrari 430 and a $128,000 2013 Aston Martin Vantage he received as “trade-ins” to other car dealers. He would then sell those same cars to other unwitting buyers, as well as obtaining bank financing for the vehicles, essentially allowing Wiggains to get paid three times for selling the same car, according to his indictment. He has since plead guilty and is awaiting a May 15 sentencing.

In 2015, the bankruptcy court ruled Jeremy Wiggains sole intent in entering the partition agreement with his wife was to avoid the mansion loophole, equating his intent to “gamesmanship” for the purpose of placing assets outside of creditors’ reach. Tanya Wiggains later filed a motion seeking to be compensated for the sale of the home and argued that she was entitled to 95 percent of the $568,688.

But the bankruptcy court shot down Tanya Wiggains’ motion, concluding her case was “not particularly compelling” and that she was not entitled to proceeds from the sale of the house. She later appealed that decision to the Fifth Circuit, arguing that the bankruptcy court erred by finding that her husband’s actual intent of the partition agreement was to hinder or delay his creditors.

And on Feb. 14, the Fifth Circuit ruled that bankruptcy court correct in ruling that the intent of the partition agreement was to avoid paying creditors.

“Keeping property in the hands of his wife is the mirror of keeping property out of the hands of creditors,” wrote Judge Leslie Southwick.

Southwick notes that Texas homestead laws provide strong protections to homeowners against creditors, contrasting with BAPCPA’s aim of limiting the dollar amount of homestead exemptions. But under this clash of policies, Southwick concluded that BAPCPA wins out under the Supremacy Clause.

“When it became clear that Mr. Wiggains would file bankruptcy to satisfy his outstanding debts, the couple entertained various options and made their best estimate on ultimate financial benefits by having only Wiggains file after the partition agreement was recorded,” Southwick wrote.

“Allowing Mrs. Wiggains to sidestep the statutory limits for homestead exemptions and obtain approximately $500,000 in proceeds that otherwise are for creditors would lay waste to the provisions of the Bankruptcy Code involved here,” Southwick concluded, affirming the bankruptcy court’s ruling.

Gerrit Pronske, a partner in Dallas’ Pronske, Goolsby & Kathman who represents Tanya Wiggains, said he’ll ask the Fifth Circuit to review the decision en banc.

Pronske, who advised the couple to sign the partition agreement, noted that the trustee stipulated during the litigation that agreement did not amount to the fraudulent transfer of assets.

“It’s an unusual case,” Pronske said. “I don’t think I’d ever seen a case where the trustee agrees that it’s not a fraudulent transfer but sues for fraudulent transfer.”

Diane G. Reed, the bankruptcy trustee in the case, said the Fifth Circuit made the correct ruling. Reed pointed out that Tanya Wiggains would have been entitled to the $155,675 mansion loophole exemption if she filed for bankruptcy like her husband.

“I think they were just gambling by her doing the partition agreement and not filing and that she would be entitled to her exemption of everything under the state law,” said Reed, a partner Waxahachie’s Reed & Elmquist.

“It may have not been fraudulent but it did hinder the creditors to collect their money,” Reed said of the partition agreement. “And the bankruptcy court ruled that that’s enough.’’