Mr. Thaw sought bankruptcy protection. As part of the process, the trustee was going to sell the house he owned with Mrs. Thaw, who was not bankrupt, and claimed a homestead exemption.
The Fifth Circuit rejected Mrs. Thaw's claim that selling her interest in the house was a taking. Before 2005, the bankruptcy code allowed a non-debtor spouse to have a compensable interest in a home jointly-owned with the debtor. But amendments to the code in 2005 capped and eliminated the homestead exemption. And since the Thaws purchased their home after 2005, Mrs. Thaw did not have a vested right that was taken.
The court rejected the argument that in Palazzolo v. Rhode Island, 533 U.S. 606 (2001), the Supreme Court eliminated the "notice" argument:
Palazzolo’s narrow exception has no application here. Kernell does not connect the “certain circumstances” identified in Palazzolo to the Bankruptcy Code provisions at issue here. She does not argue that the sale of her interest in the property is “so unreasonable or onerous as to compel compensation,” id., so the trustee’s actions do not fall within any limit imposed by Palazzolo. Just as the Bankruptcy Code protects a non-debtor from gratuitous confiscation, it makes the sale of the property not “so unreasonable or onerous as to compel compensation.” Moreover, the forced sale will not disturb Kernell’s investment-backed expectations. See Palazzolo, 533 U.S. at 617 (considering, in determining whether a taking occurred, “the extent to which the regulation interferes with reasonable investment-backed expectations”). Since BAPCPA was in effect before the Thaws purchased the property, and because the Thaws purchased the property after they had knowledge of the judgment against Stanley, Kernell was on constructive notice of how the Bankruptcy Code would operate in the event of Stanley’s bankruptcy. In sum, the sale of the property is neither a “gratuitous confiscation” nor “so unreasonable or onerous as to compel compensation.”
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