Can a Leasehold Security Deposit be Garnished?
In Texas, a tenant’s leasehold interest is exempt from claims of creditors as a homestead. See e.g., Capital Aggregates, Inc. v. Walker, 448 S.W.2d 830,832 (Tex. Civ. App. Austin 1969). What if the leasehold contract contains a provision requiring a security deposit? Is that security deposit subject to garnishment by a creditor? Like a bank account, the security deposit is not property of the landlord until conditions precedent have taken place – e.g., cleaning fees, damage repairs, etc.
The Texas Property Code does not address whether a security deposit under a real or personal property lease is subject to the claims of creditors. One case, In re Nagel, 216 B.R. 397 (Bkrtcy. 1997), addressed the issue in the context of a Chapter 7 bankruptcy proceeding. The Chapter 7 trustee contended the security deposit should be viewed separate and apart from the lease and, therefore, was property of the debtor’s bankruptcy estate. The bankruptcy court, relying only on bankruptcy law involving executory contracts, determined that the leasehold interest and the deposit arose from the same executory contract. Reasoning that you cannot assume a part of an executory contract, the leasehold contract must be taken as a whole, including the security deposit provision. Since the leasehold was created by the contract and is exempt, the security deposit must be exempt. The security deposit is not property of the debtor’s bankruptcy estate subject to the claims of creditors.
What if no bankruptcy existed? What if the lease was for commercial purposes? These questions remain open for another day. However, if a leasehold contract constitutes one agreement and cannot be separated from its provisions, it remains, to the extent noted, that a security deposit may not be subject to the claims of a tenant’s creditors.