CLAY DUDLEY

• Court: United States Bankruptcy Court, E.D. California
• Decided: May 18, 2020
• Docket: 19-27357
• Status: Unknown

Opinion

1 UNITED STATES BANKRUPTCY COURT 2 EASTERN DISTRICT OF CALIFORNIA 3 In re: ) Case No. 19-27357-B-7 ) 4 CLAY DUDLEY, ) DC No. MOH-14 ) 5 ) Debtor(s). ) 6 ________________________________) 7 MEMORANDUM AND ORDER REGARDING DEBTOR’S REQUEST FOR EXTENSION OF 8 STATUTORY HOMESTEAD PROCEEDS REINVESTMENT PERIOD 9 Introduction 10 The court has before it a Debtor’s Motion for Additional 11 Time to Purchase New Residential Homestead filed by debtor Clay 12 Dudley. The debtor requests an extension of the time under 13 California law within which proceeds from the sale of property 14 claimed as a homestead must be reinvested in a replacement 15 homestead property in order to preserve the exempt status of the 16 sale proceeds. 17 The hearing on the debtor’s motion was continued from April 18 28, 2020, to May 19, 2020, and the debtor was instructed to 19 submit additional points and authorities in support of his 20 request. The chapter 7 trustee and other parties in interest 21 were also invited to address the debtor’s request. The debtor 22 timely submitted an additional brief. The chapter 7 trustee 23 filed a late response. No other party in interest opposed or 24 responded to the motion. 25 The court has reviewed the motion, the trustee’s response, 26 and all related declarations and exhibits. The court has also 27 reviewed and takes judicial notice of the docket in this chapter 28 7 case. See Fed. R. Evid. 201(c)(1). 1 The court has determined this matter may be decided on the 2 papers. See General Order No. 618 at p.3, ¶ 3 (E.D. Cal. May 13, 3 2020) (ordering courthouse closure “until further notice” due 4 COVID-19 pandemic and further ordering that all civil matters are 5 to be decided on the papers unless the presiding judge determines 6 a hearing is necessary). Oral argument will not assist in the 7 decision-making process or resolution of the motion. See Local 8 Bankr. R. 9014-1(h), 1001-1(f). The hearing on May 19, 2020, at 9 9:30 a.m. will be vacated. 10 Findings of fact and conclusions of law are set forth below. 11 See Fed. R. Civ. P. 52(a); Fed. R. Bankr. P. 7052. 12 13 Background 14 The debtor is 57 years old. The Social Security 15 Administration has determined that the debtor is disabled. 16 The debtor filed a chapter 7 petition on November 26, 2019. 17 He received a discharge on March 19, 2020. 18 In Schedule C filed with the petition, the debtor claimed 19 the $175,000.00 homestead exemption amount in his residence at 20 432 Weymouth Way, Chico, California (“Homestead Property”) 21 permitted by California Code of Civil Procedure § 704.730. No 22 party in interest objected to the claim of exemption. 23 The Homestead Property was abandoned to the debtor without 24 objection on December 19, 2019, and the debtor sold it shortly 25 thereafter. Escrow on the sale closed on February 7, 2020. The 26 debtor received $112,102.34 in sale proceeds (“Homestead 27 Proceeds”). 28 The Homestead Proceeds currently enjoy the same exempt - 2 - 1 status as the Homestead Property. However, according to the 2 debtor, the Homestead Proceeds will lose their exempt status if 3 they are not reinvested in a replacement homestead within six 4 months of the time they were received, or by August 5, 2020. 5 The debtor states that he intends to use the Homestead 6 Proceeds to purchase a replacement homestead property and he has 7 been diligent in efforts to timely do so. The debtor also states 8 that his efforts have been hampered by a loss of liquidity in the 9 mortgage market based on the type of loan for which he currently 10 qualifies. And in the midst of the debtor’s efforts to timely 11 reinvest the Homestead Proceeds, the COVID-19 pandemic happened. 12 The COVID-19 pandemic has effectively shut commerce, closed 13 businesses and schools, eliminated employment, substantially 14 changed daily life at the local, state, and national levels, and 15 generally limited products and services to those deemed necessary 16 or essential. Id. As one court aptly described current 17 conditions: 18 Meanwhile, the world is in the midst of a global pandemic. The President has declared a national 19 emergency. The Governor has issued a state-wide health emergency. As things stand, the government has forced 20 all restaurants and bars [] to shut their doors, and the schools are closed, too. The government has 21 encouraged everyone to stay home, to keep infections to a minimum and help contain the fast-developing public 22 health emergency. 23 Art Ask Agency v. Individuals, Corporations, et al., 2020 WL 24 1427085, *1 (N.D. Ill. 2020). 25 In response to the COVID-19 pandemic, California Governor 26 Gavin Newsom issued a Proclamation of a State of Emergency on 27 28 - 3 - 1 March 4, 2020.1 Two weeks later, on March 19, 2020, Governor 2 Newsom issued Executive Order N-33-20, a state-wide “stay at home 3 order” that directs all individuals living or residing in the 4 State of California to stay home or at their place of residence 5 except as necessary to obtain essential services or for essential 6 operations.2 The California Public Health Officer thereafter 7 published a list of essential functions covered by the Governor’s 8 Executive Order.3 The Public Health Officer’s list designates 9 real estate workers as critical, to the extent remote working is 10 not possible; however, it also limits scheduled property viewings 11 to a single potential buyer and prohibits open-house viewings. 12 Id. at p.23, ¶ 12. 13 The debtor states that the limited availability of mortgage 14 loan funds and restrictions placed on access to real property 15 have substantially and adversely affected his ability to timely 16 locate, view, inspect, and close on a replacement homestead. In 17 other words, according to the debtor, conditions created by the 18 COVID-19 pandemic and the current state of emergency have 19 substantially and adversely affected his ability to timely 20 21 1As of the date of this order, the Proclamation of a State of Emergency may be found online at: 22 https://www.gov.ca.gov/wpcontent/uploads/2020/03/3.4.20-Coronavir us-SOE-Proclamation.pdf 23 24 2As of the date of this order, the Executive Order may be found online at: 25 https://covid19.ca.gov/img/Executive-Order-N-33-20.pdf 26 3As of the date of this order, the list of Essential 27 Critical Infrastructure Workers may be found online at: https://covid19.ca.gov/img/EssentialCriticalInfrastructureWorkers 28 .pdf - 4 - 1 reinvest the Homestead Proceeds. 2 3 Discussion 4 As an initial matter, the court notes that the trustee does 5 not dispute any of the facts stated in or associated with the 6 debtor’s motion. The trustee also does not oppose the debtor’s 7 request for an extension of the time to reinvest the Homestead 8 Proceeds. And the trustee acknowledges that the Homestead 9 Property was abandoned without opposition, concedes that the 10 estate generally does not have an interest in abandoned property, 11 states that the decision to not oppose abandonment was based on a 12 mistaken belief that the estate retained a reversionary interest 13 in the Homestead Proceeds if not timely reinvested, and suggests 14 that the abandonment order should be vacated under Federal Rule 15 of Civil Procedure 60(b)(1) (applicable by Federal Rule of 16 Bankruptcy Procedure 9024) based on the trustee’s mistaken 17 belief. 18 The trustee’s request to vacate the abandonment order will 19 be denied without prejudice. The trustee’s response to the 20 debtor’s motion is not a properly filed, set, and served motion. 21 Moreover, Civil Rule 60(b)(1) does not provide relief for 22 litigation decisions made by a party which the party later 23 regrets based on subsequently-acquired knowledge. See Latshaw v. 24 Trainer Wortham & Co., Inc., 452 F.3d 1097, 1100-01 (9th Cir. 25 2006); Adams v. Ziebarth (In re Adams), 2019 WL 6463992, *4 (9th 26 Cir. BAP 2019); Lowery v. Hart, 2016 WL 900286, *5 (E.D. Cal. 27 2016). To the extent there may be a basis for relief from the 28 abandonment order, if at all, it is not under Civil Rule 60(b)(1) - 5 - 1 based on the trustee’s mistaken belief. 2 Now to the debtor’s request for an extension. The court 3 notes that the debtor has identified the amount of the homestead 4 but not the nature of the homestead or the statutory basis of the 5 obligation to reinvest the Homestead Proceeds. The court’s 6 briefing order refers to § 704.720(b) of the California Code of 7 Civil Procedure as an example of the six-month reinvestment 8 obligation.4 However, since the debtor sold the Homestead 9 Property after it was abandoned and because the debtor refers to 10 a six-month period that runs from receipt of the Homestead 11 Proceeds and when the sale of the Homestead Property closed, it 12 may be that the six-month reinvestment period arises under § 13 704.960 of the California Code of Civil Procedure.5 Under the 14 15 4California Code of Civil Procedure § 704.720(b) states as follows: 16 (b) If a homestead is sold under this division or is damaged or destroyed or is acquired for public use, the 17 proceeds of sale or of insurance or other 18 indemnification for damage or destruction of the homestead or the proceeds received as compensation for 19 a homestead acquired for public use are exempt in the amount of the homestead exemption provided in Section 20 704.730. The proceeds are exempt for a period of six 21 months after the time the proceeds are actually received by the judgment debtor, except that, if a 22 homestead exemption is applied to other property of the judgment debtor or the judgment debtor's spouse during 23 that period, the proceeds thereafter are not exempt. 24 5California Code of Civil Procedure § 704.960 states as 25 follows: (a) If a declared homestead is voluntarily sold, the 26 proceeds of sale are exempt in the amount provided by 27 Section 704.730 for a period of six months after the date of sale. 28 (b) If the proceeds of a declared homestead are - 6 - 1 former the six-month period runs from the date proceeds are 2 actually received whereas under the latter the six-month period 3 runs from the date of sale. 4 For present purposes the distinction between § 704.720(b) 5 and § 704.960 appears to be one without a difference. The 6 relevant question is not when the six-month reinvestment period 7 begins to run. The debtor acknowledges that it is currently 8 running. Rather, the relevant question here is whether the six- 9 month reinvestment period can be extended or otherwise tolled 10 once it has started to run. And as noted below, that question 11 applies equally to the six-month period under either statute. 12 Generally, when a debtor files bankruptcy, all of the 13 debtor’s property becomes property of the bankruptcy estate. See 14 11 U.S.C. § 541. Federal law provides avenues for a debtor to 15 exempt certain property. See 11 U.S.C. § 522(d). Congress has 16 also authorized states to opt out of the federal bankruptcy 17 exemptions created by Bankruptcy Code § 522(d) which means the 18 federal exemption scheme can be supplanted by states that choose 19 to provide their own exemptions. See 11 U.S.C. § 522(b)(2); 20 Granger v. Watson (In re Granger), 754 F.2d 1490, 1492 (9th Cir. 21 1985) (“[A] state that has opted out has considerable freedom in 22 invested in a new dwelling within six months after the 23 date of a voluntary sale or within six months after 24 proceeds of an execution sale or of insurance or other indemnification for damage or destruction are received, 25 the new dwelling may be selected as a declared homestead by recording a homestead declaration within 26 the applicable six-month period. In such case, the 27 homestead declaration has the same effect as if it had been recorded at the time the prior homestead 28 declaration was recorded. - 7 - creating exemptions and eligibility requirements for those 2 exemptions.”). California exercised the § 522(b) (2) option to 3 |} opt out by making the federal bankruptcy exemptions inapplicable the state. See C.C.C.P. § 703.130.° 5 A bankruptcy court construing California exemptions applies state-law rule of decision. In re Tallerico, 532 B.R. 774, 780 7 (Bankr. E.D. Cal. 2015). In other words, “[l]like all federal courts when addressing a state-law rule of decision, the bankruptcy court is predicting what the California Supreme Court would rule if it were presented with the question.” Id. In that 11] endeavor, state law governs. Law v. Siegel, 134 S. Ct. 1188, 12 || 1196-97 (2014) (“when a debtor claims a state-created exemption, 13] the exemption’s scope is determined by state law”); Philips v. 14] Gilman (In re Gilman), 887 F.3d 956, 964 (9th Cir. 2018); Wolfe 15 Jacobson (In re Jacobson), 676 F.3d 1193, 1199 (9th Cir. 2012). State law includes state statutory law. Elliott v. Weil 17] (In re Elliott), 523 B.R. 188, 194 (9th Cir. BAP 2014); 18 || Kornhauser v. Block (In re Block), 2016 WL 3251406, *3 (9th Cir. 19 BAP 2016). And it includes state equitable law. Gilman, 887 20) F.3d at 966 (citing (Gray v. Warfield (In re Gray), 523 B.R. 170, 21175 (9th Cir. BAP 2014)). 22 The debtor has not cited any California statute that would 23 24 ‘California Code of Civil Procedure § 703.130 states as 25 || follows: 26 Pursuant to the authority of paragraph (2) of . subsection (b) of Section 522 of Title 11 of the United 27 States Code, the exemptions set forth in subsection (d) of Section 522 of Title 11 of the United States Code 28 (Bankruptcy) are not authorized in this state. ~g-

permit the court to extend or toll the six-month reinvestment 21} period under § 704.720(b) or § 704.960. The court has also found none. So that leaves California equitable law. 4 California’s six-month reinvestment period has been 5 equitably tolled when, through no fault of their own, exemption 6] claimants lacked possession of or control over homestead proceeds 71 following an involuntary or voluntary sale of the homestead and, 8 a result, were unable to timely reinvest the proceeds. Chase Bank of America, Nat. Trust & Sav. Ass’n, 227 Cal. App. 2d 259 10 (1964) (involuntary sale); Thorsby v. Babcock, 36 Cal. 2d 202 11] (1950) (voluntary sale); see also Gill v. Woodburn, Adv. No. 12 12-02035-RK, at pp. 19-20 (Bankr. C.D. Cal. 2012) (involuntary 13] sale but relying on Chase and Thorsby to conclude that the 14 | debtor’s lack of possession of homestead proceeds tolled six- 15 }month period). Bankruptcy courts construing similar reinvestment obligations under other states’ homestead statutes have reached 17 || similar conclusions. In re Dinh, 562 B.R. 122, 133-34 (Bankr. Tex. 2016); In re Marriott, 427 B.R. 887, 894-95 (Bankr. D. 19 |} Idaho 2010). 20 The reinvestment period has also been equitably tolled when 21} the debtor receives homestead proceeds following a voluntary sale 22 of the homestead but, again, circumstances beyond the debtor’s 23} control prevent the timely reinvestment of the proceeds. In re Bading, 376 B.R. 143 (Bankr. W.D. Tex. 2007). In Bading, a 25 | debtor’s homestead consisted of two contiguous parcels. A 26 || creditor refused to release an improper lien on one parcel which 27 resulted in the debtor selling her homestead in consecutive 28 ||) transactions. The debtor sold the first parcel and when she ~9-

1 eventually obtained a release of the improper lien she sold the 2 second parcel. Had the reinvestment period not been tolled as to 3 the proceeds from the sale of the first parcel the debtor would 4 have lost her exemption while she was attempting to sell the 5 second parcel. Nevertheless, the court held that the time under 6 state law within which the debtor was required to reinvest the 7 proceeds of the first sale was tolled until the sale of both 8 parcels was completed. The court explained that the running of 9 the reinvestment period would have “deprived [the debtor] of the 10 opportunity to enjoy the full benefits of the homestead 11 guaranteed to her under the Texas Constitution.” Id. at 153. 12 Each of these decisions recognize the core principle that 13 “[c]ourts liberally construe ‘the law and facts to promote the 14 beneficial purposes of the homestead legislation to benefit the 15 debtor.’” Gilman, 887 F.3d at 964 (quoting Tarlesson v. Broadway 16 Foreclosure Invs., LLC, 184 Cal. App. 4th 931, 936 (2010)). 17 Indeed, “California intended a liberal homestead statute so its 18 citizens would not lose their homes through a technicality.” 19 Canino v. Bleau (In re Canino), 185 B.R. 584, 590 (9th Cir. BAP 20 1995). In that regard, an exemption in homestead proceeds should 21 not be lost so long as the proceeds are not squandered or used 22 for nonexempt purposes. See Jacobson, 676 F.3d at 1200. 23 Nothing in the record before the court suggests that the 24 debtor intends to squander the Homestead Proceeds or otherwise 25 use them improperly or for a nonexempt purpose. Indeed, the 26 record suggests quite the opposite. The debtor states that he 27 intends to reinvest the Homestead Proceeds in another homestead 28 but he is unable to do so because of circumstances created by the - 10 - 1 COVID-19 pandemic and the current state of emergency. In this 2 court’s view, that is an equitable basis to toll the debtor’s 3 six-month reinvestment period consistent with California law and 4 its COVID-19 pandemic policy. 5 In normal times six months to locate and close on a 6 replacement homestead property to avoid a loss of the exemption 7 is challenging enough. See Jacobson, 676 F.3d at 1198-99 8 (involuntary sale); England v. Golden (In re Golden), 789 F.2d 9 698, 699 (9th Cir. 1986) (voluntary sale). However, because of 10 the COVID-19 pandemic and current state of emergency, and in 11 recognition that the State of California has taken a number of 12 measures to protect occupancy and ownership of residences and the 13 family home, these are not normal times. 14 On March 16, 2020, Governor Newsom issued Executive Order N- 15 28-20 which allows local governments to impose limits on 16 commercial and residential evictions through at least May 31, 17 2020.7 The Executive Order states that limits on evictions may 18 be imposed when the basis for the eviction is nonpayment of rent 19 due to a substantial decrease in household or business income 20 caused by the COVID-19 pandemic or any government response to it. 21 On March 25, 2020, Governor Newsom announced during a press 22 conference that, in response to efforts by the State of 23 California and in recognition of the circumstances created by the 24 COVID-19 pandemic, some of the nations largest lenders along with 25 26 7As of the date of this order, the Executive Order may be 27 found online at: https://www.gov.ca.gov/wp-content/uploads/2020/03/3.16.20-Executi 28 ve-Order.pdf - 11 - 1 hundreds of other smaller financial institutions, banks, and 2 credit unions, voluntarily agreed to a 90-day grace period on 3 mortgage payments for California residents.8 4 Two days later, on March 27, 2020, Governor Newsom issued 5 Executive Order N-37-20 which prohibits enforcement of eviction 6 orders for nonpayment of residential rent by tenants affected by 7 COVID-19 through May 31, 2020.9 It also extends the deadline in 8 California Code of Civil Procedure § 1167 for a period of 60 days 9 for any tenant who, while the order is in effect, is served with 10 a complaint to evict the tenant from a residence or dwelling for 11 nonpayment of rent and who satisfies certain requirements. 12 On April 6, 2020, the Judicial Council adopted emergency 13 rules that will remain in effect until 90 days afer the Governor 14 lifts the state of emergency related to the COVID-19 pandemic or 15 until they are amended or repealed by the Judicial Council.10 16 Emergency Rule No. 1 of the Emergency Rules of California Rules 17 18 8As of the date of this order, the announcement may be found online at: 19 https://www.gov.ca.gov/2020/03/25/governor-gavin-newsom-announces -major-financial-relief-package-90-day-mortgage-payment-relief-du 20 ring-covid-19-crisis/; 21 https://www.rev.com/blog/transcripts/california-governor-coronavi rus-briefing-transcript-march-25; 22 https://www.c-span.org/video/?470703-1/california-governor-newsom -coronavirus-news-conference. 23 24 9As of the date of this order, the Executive Order may be found online at: 25 https://www.gov.ca.gov/wp-content/uploads/2020/03/3.27.20-EO-N-37 -20.pdf 26 27 10As of the date of this order, the Emergency Rules Related to COVID-19 may be found online at: 28 https://www.courts.ca.gov/documents/appendix-i.pdf - 12 - 1 of Court suspends evictions, other than those necessary to 2 protect public health. It also prohibits state courts from 3 issuing summons, entering of default judgments due to a tenant’s 4 lack of response, limits trial settings where the tenant has 5 responded or appears, and continues trials. Emergency Rule No. 2 6 of the Emergency Rules of California Rules of Court effectively 7 stays judicial foreclosures, other than those necessary to 8 protect public health. It also tolls deadlines for filing 9 judicial foreclosures and extends the period for exercising any 10 rights in a judicial foreclosure case, including any right of 11 redemption or a petition in relation to such right. 12 The California Assembly took similar action on April 8, 13 2020, with the introduction of Assembly Bill 828.11 Assembly Bill 14 828 effectively prohibits all aspects of all foreclosures on 15 residential real property while there is a state or locally 16 declared state of emergency related to the COVID-19 pandemic in 17 the jurisdiction in which the residential real property is 18 located and until 15 days after the state or locally declared 19 state of emergency ends. 20 Further protections for property owners came on May 6, 2020, 21 when Governor Newsom issued Executive Order N-61-20 suspending 22 until May 6, 2021, penalties, costs, or interest for failure to 23 24 25 26 11As of the date of this order, Assembly Bill 828 may be 27 found online at: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bil 28 l_id=201920200AB828 - 13 - 1 file property taxes timely.12 2 Each of the above-described actions taken by the State of 3 California reflect a public policy and legislative effort to 4 protect real property interests, generally, and, specifically, to 5 prevent the loss of residential occupancy and ownership rights 6 due to the COVID-19 pandemic and the resulting state of emergency 7 both of which are circumstances beyond the control of any 8 adversely affected occupant, tenant, or homeowner. There is no 9 good reason why that policy should not apply equally to the 10 Homestead Proceeds. In other words, because the COVID-19 11 pandemic and the current state of emergency have significantly 12 hindered the debtor’s ability to timely reinvest the Homestead 13 Proceeds the debtor’s possession of the exempt proceeds and his 14 ability to use them for their intended purpose should be 15 protected to the same extent and by the same measures the State 16 of California has adopted to prevent those in possession of 17 residential real property from losing occupancy, leasehold, and 18 ownership rights. The court therefore holds that under the facts 19 of this case, the six-month reinvestment period applicable to the 20 Homestead Proceeds is and shall be equitably tolled in the manner 21 described below. 22 Tolling of the debtor’s six-month reinvestment period began 23 with the March 4, 2020, Proclamation of a State of Emergency. 24 Tolling of the six-month reinvestment period will end on 25 26 12As of the date of this order, the Executive Order may be 27 found at https://www.gov.ca.gov/wp-content/uploads/2020/05/5.6.20-EO-N-61- 28 20-text.pdf - 14 - 1 || September 4, 2020, or when the March 4, 2020, state of emergency terminated, whichever occurs first. Based on the debtor’s 31 statement that he received the Homestead Proceeds when escrow closed on February 7, 2020, that means 26 days of the six-month 5 || reinvestment period have run. The remaining 154 days (based on a 6 || 180-day period) will begin to run from the date of whichever 7 ||/event stated immediately above occurs first. 8 Conclusion 10 For the foregoing reasons, and good cause appearing, 11 IT IS ORDERED that the debtor’s motion is granted. 12 IT IS FURTHER ORDERED that the trustee’s request to vacate 13 || the order abandoning the Homestead Property to the debtor is 14 || denied without prejudice. 15 IT IS FURTHER ORDERED that the hearing on May 19, 2020, at a.m. is vacated. 17 18 Dated: May 18, 2020 19 ; 20 fo Christopher D.“Jaime, Judge 21 United States Bankruptcy Court 22 23 24 25 26 27 28 ~-15 -

1 INSTRUCTIONS TO CLERK OF COURT SERVICE LIST 2 The Clerk of Court is instructed to send the attached 3 document, via the BNC, to the following parties: 4 Michael O'Dowd Hays 676 E 1st Ave #5 5 Chico CA 95926 6 J. Russell Cunningham Desmond, Nolan, Livaich & Cunningham 7 1830 15th Street Sacramento, CA 95811 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 16 -