FILED DEC 10 2014 SUSAN M. SPRAUL, CLERK 1 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP Nos. CC-14-1050-KiTaD ) CC-14-1059-KiTaD 6 EDWARD E. ELLIOTT, ) (Consolidated) ) 7 Debtor. ) Bk. No. SV 11-23855-VK ) 8 ) ) 9 EDWARD E. ELLIOTT, ) ) 10 Appellant, ) ) O P I N I O N 11 v. ) ) 12 DIANE C. WEIL, Chapter 7 ) Trustee, ) 13 ) Appellee. ) 14 ______________________________) 15 Argued and Submitted on October 23, 2014, at Malibu, California 16 Filed - December 10, 2014 17 Appeal from the United States Bankruptcy Court 18 for the Central District of California 19 Honorable Victoria S. Kaufman, Bankruptcy Judge, Presiding 20 21 Appearances: Andrew E. Smyth, Esq. of Smyth Law Office argued for appellant, Edward E. Elliott; Alla Tenina, Esq. 22 of Tenina Law, Inc. argued for appellee, Diane C. Weil, Chapter 7 Trustee. 23 24 Before: KIRSCHER, TAYLOR and DUNN, Bankruptcy Judges. 25 26 27 28 1 KIRSCHER, Bankruptcy Judge: 2 3 Debtor Edward E. Elliott (“Elliott”) appeals an order 4 sustaining the objection of appellee, chapter 71 trustee Diane C. 5 Weil (“Trustee”), to his claimed homestead exemption under CAL. 6 CIV. PROC. CODE § 704.730(a)(3). The bankruptcy court sustained 7 Trustee’s objection on the basis that Elliott had claimed the 8 exemption in bad faith. Elliott contends that despite his 9 misconduct, he is nevertheless entitled to the exemption due to an 10 intervening change in the controlling law while this appeal was 11 pending. 12 We conclude that Law v. Siegel, 134 S.Ct. 1188 (2014), has 13 abrogated Ninth Circuit law such that unless statutory power 14 exists to do so, a bankruptcy court may not deny a debtor’s 15 exemption claim or bar a debtor’s exemption claim amendment on the 16 basis of bad faith or of prejudice to creditors. Martinson v. 17 Michael (In re Michael), 163 F.3d 526, 529 (9th Cir. 1998) 18 (adopting test set forth in Doan v. Hudgins (In re Doan), 672 F.2d 19 831, 833 (11th Cir. 1982)). However, a statutory basis may exist 20 to deny Elliott’s claimed homestead exemption. We VACATE and 21 REMAND for further proceedings by the bankruptcy court.2 22 23 1 Unless specified otherwise, all chapter, code and rule 24 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. 25 2 We exercised our discretion to review documents that were 26 electronically filed in the bankruptcy court but were not included in Elliott’s excerpts of the record. See O’Rourke v. Seaboard 27 Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957–58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 28 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
-2- 1 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 2 Elliott filed a chapter 7 bankruptcy case on December 1, 3 2011. On his bankruptcy petition, Elliott listed his address as 4 Hiawatha Street. On Schedules A and D, Elliott did not list any 5 real property in which he had an interest or list any real 6 property in which creditors held secured claims. Elliott did not 7 claim entitlement to a homestead exemption in his Schedule C and 8 he did not list any ownership interest in an incorporated business 9 on Schedule B. Additionally, Elliott omitted certain judgment 10 lien creditors (the “Judgment Creditors”) who obtained a judgment 11 against him in 2006 for fraud and negligent misrepresentation. 12 At the § 341(a) meeting of creditors, Elliott confirmed his 13 address as Hiawatha Street and claimed that his bankruptcy 14 petition, schedules and statement of financial affairs were true 15 and complete. Furthermore, Elliott asserted that he did not own 16 any real property and had not transferred or given away anything 17 of value in the last four years. 18 Based on the information disclosed in Elliott’s bankruptcy 19 schedules and corresponding testimony, Trustee issued a “No 20 Distribution” report. Elliott was granted a discharge on March 8, 21 2012, and the bankruptcy case was closed on March 13, 2012. 22 On March 26, 2012, Lee Wong Investments, Inc. (“LWI”) 23 transferred by quitclaim deed real property located in Los Angeles 24 (the “Buckingham Property”) to Elliott as a gift. Elliott does 25 not dispute that LWI is a Nevada corporation which he organized 26 and controls. 27 Following this transaction, Elliott sent a letter to counsel 28 for the Judgment Creditors, who were never informed of the
-3- 1 bankruptcy, stating that he acquired the Buckingham Property after 2 the bankruptcy and demanding that their judicial liens be removed. 3 This demand triggered an investigation by the Judgment Creditors, 4 which revealed the history of Elliott’s continuous interest in the 5 Buckingham Property through numerous sophisticated transfers of 6 title. The Buckingham Property was first transferred from Elliott 7 to 1019 South Central Associates Ltd. (“S. Central”), a business 8 that, according to information Trustee received from the 9 California Secretary of State, was organized by the son of 10 Elliott’s deceased partner. This initial transfer occurred on 11 August 14, 2006, just a few months after the judgment was entered 12 against Elliott in the state court fraud case. Then, on February 13 13, 2007, S. Central transferred the Buckingham Property to LWI, 14 the corporation organized and controlled by Elliott.3 Finally, on 15 March 26, 2012, the Buckingham Property was transferred back to 16 Elliott in his individual capacity, following his discharge. 17 When the Judgment Creditors discovered Elliott’s continuous 18 interest in the Buckingham Property, they moved to reopen the 19 bankruptcy case. The bankruptcy court granted their motion and 20 ordered that the case be reopened. 21 Nearly one year after the bankruptcy case was reopened, 22 Elliott amended his schedules to disclose his interest in the 23 Buckingham Property. He valued the property at $360,000 and 24 25 3 In her objection to Elliott’s homestead exemption, Trustee provided records from the Nevada Secretary of State as evidence of 26 Elliott’s ownership interest in LWI, the company which held title to the Buckingham Property on the petition date. These records 27 showed that when the Buckingham Property was transferred from S. Central to LWI, Elliott was LWI’s president, treasurer and 28 director.
-4- 1 indicated that Bank of America held a $120,826 secured claim 2 against it. He also claimed a homestead exemption for the 3 Buckingham Property under CAL. CIV. PROC. CODE § 704.730(a)(3). 4 Trustee objected to Elliott’s claimed homestead exemption on 5 the basis of bad faith. She outlined the pattern of affiliate 6 transfers of the Buckingham Property to advance the proposition 7 that Elliott never really relinquished control of it, but instead 8 utilized these transfers to shield it from creditors, Trustee and 9 the bankruptcy court. 10 In response, Elliott filed declarations from his friend 11 Juanita A. Jehdian (“Jehdian”) and his attorney Andrew E. Smyth 12 (“Smyth”). Jehdian asserted that she currently lived at the 13 Buckingham Property with Elliott. Although she admitted not 14 living there on the petition date, Jehdian claimed that she had 15 frequently visited the Buckingham Property during the month of 16 December 2011, and in doing so, knew that Elliott had “resided at 17 the [Buckingham Property] in December 2011.” Smyth declared that 18 Elliott “has a homestead exemption on file.” In support, Smyth 19 attached a copy of a homestead declaration filed by Elliott with 20 the state of California on October 18, 2005, where he claimed as a 21 declared homestead the Buckingham Property. 22 In reply, Trustee refuted Elliott’s suggestion that the 2005 23 homestead declaration protected his entitlement to a homestead 24 exemption. Specifically, Trustee argued that because Elliott did 25 not hold title to the Buckingham Property on the petition date, he 26 could not claim the homestead exemption. Thus, Trustee maintained 27 that notwithstanding Elliott’s bad faith, the bankruptcy court 28 could nevertheless sustain her objection on the basis that Elliott
-5- 1 was never entitled to a homestead exemption in the first place. 2 At the exemption hearing, the bankruptcy court sustained 3 Trustee’s objection to Elliott’s claimed homestead exemption on 4 the basis of bad faith. The court focused on: Elliott’s failure 5 to disclose his correct address as the Buckingham Property; his 6 misleading testimony at the § 341(a) meeting; the suspicious 7 timing of the property transfer following discharge; and Elliott’s 8 subsequent amendments claiming a right to exempt a property he had 9 initially concealed. The court ultimately concluded that “this is 10 not just about delay. This is about bad faith of a Debtor who 11 misrepresented where he lives, who waited until after he got 12 discharged to disclose his residency in the property, and this is 13 not an appropriate use of the bankruptcy code.” Hr’g Tr. (Jan. 9, 14 2014) 3:4-8. 15 The order denying Elliott’s claimed homestead exemption was 16 entered “on the basis that the debtor belatedly claimed the 17 exemption in bad faith.” Elliott timely appealed. 18 II. JURISDICTION 19 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 20 and 157(b)(2)(B). An order denying a debtor’s claim of exemption 21 constitutes a final order. Preblich v. Battley, 181 F.3d 1048, 22 1056 (9th Cir. 1999). Therefore, we have jurisdiction under 28 23 U.S.C. § 158. 24 III. ISSUES 25 1. Did the United States Supreme Court’s decision in Law v. 26 Siegel, entered while this appeal was pending, abrogate the 27 bankruptcy court’s “bad faith” basis for denying Elliott’s claimed 28 homestead exemption under CAL. CIV. PROC. CODE § 704.730(a)(3)?
-6- 1 2. Bad faith notwithstanding, is there a statutory basis to deny 2 Elliott’s claimed homestead exemption? 3 IV. STANDARDS OF REVIEW 4 The right of a debtor to claim an exemption is a question of 5 law we review de novo. Kelley v. Locke (In re Kelley), 300 B.R. 6 11, 16 (9th Cir. BAP 2003). The bankruptcy court’s findings of 7 fact with respect to a claimed exemption, including a debtor’s 8 intent, are reviewed for clear error. Id. Factual findings are 9 clearly erroneous if illogical, implausible or without support in 10 the record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th 11 Cir. 2010). 12 V. DISCUSSION 13 A. Exemptions generally 14 When a debtor files a bankruptcy petition, all of his assets 15 become property of the estate and may be used to pay creditors, 16 subject to the debtor’s ability to reclaim specified property as 17 exempt. Schwab v. Reilly, 560 U.S. 770, 774 (2010). “Exemptions 18 serve to protect and foster a debtor’s fresh start from 19 bankruptcy.” In re Rolland, 317 B.R. 402, 412-13 (Bankr. C.D. 20 Cal. 2004). 21 A claimed exemption is “presumptively valid.” Carter v. 22 Anderson (In re Carter), 182 F.3d 1027, 1029 n.3 (9th Cir. 1999). 23 Once an exemption has been claimed, “the objecting party has the 24 burden of proving that the exemptions are not properly claimed.” 25 Rule 4003(c); Gonzalez v. Davis (In re Davis), 323 B.R. 732, 736 26 (9th Cir. BAP 2005). Initially, this means the objecting party 27 has the burden of production and the burden of persuasion. In re 28 Carter, 182 F.3d at 1029 n.3. If the objecting party produces
-7- 1 evidence to rebut the presumptively valid exemption, the burden of 2 production then shifts to the debtor to produce unequivocal 3 evidence to demonstrate the exemption is proper. Id. The burden 4 of persuasion, however, always remains with the objecting party. 5 Id. 6 California has opted out of the federal exemption scheme and 7 permits its debtors only the exemptions allowable under state law. 8 CAL. CIV. PROC. CODE § 703.130. Therefore, while “the federal 9 courts decide the merits of state exemptions, . . . the validity 10 of the claimed state exemption is controlled by the applicable 11 state law.” In re Kelley, 300 B.R. at 16. California exemptions 12 are to be broadly and liberally construed in favor of the debtor. 13 In re Gardiner, 332 B.R. 891, 894 (Bankr. S.D. Cal. 2005); In re 14 Rolland, 317 B.R. at 413. 15 Elliott contends he is entitled to apply the homestead 16 exemption provided by CAL. CIV. PROC. CODE § 704.730(a)(3) to the 17 Buckingham Property. That statute provides in pertinent part that 18 a homestead exemption of $175,000 is allowed if: 19 (3) [T]he judgment debtor . . . who resides in the homestead is at the time of the attempted sale of the 20 homestead any one of the following: 21 (A) A person 65 years of age or older. 22 (B) A person physically or mentally disabled who as a result of that disability is unable to engage in 23 substantial gainful employment. There is a rebuttable presumption affecting the burden of proof that a 24 person receiving disability insurance benefit payments under Title II or supplemental security 25 income payments under Title XVI of the federal Social Security Act satisfies the requirements of this 26 paragraph as to his or her inability to engage in substantial gainful employment. 27 (C) A person 55 years of age or older with a gross 28 annual income of not more than twenty-five thousand dollars ($25,000) or, if the judgment debtor is
-8- 1 married, a gross annual income, including the gross annual income of the judgment debtor’s spouse, of not 2 more than thirty-five thousand dollars ($35,000) and the sale is an involuntary sale. 3 4 CAL. CIV. PROC. CODE § 704.730(a)(3). Trustee objected to Elliott’s 5 claimed exemption both on the grounds that it was made in bad 6 faith and that his statutory right to the exemption was destroyed 7 prepetition due to his frequent title transfers with respect to 8 the Buckingham Property. The bankruptcy court sustained Trustee’s 9 objection on the basis of bad faith, but did not address the 10 alternative basis for denying the exemption on statutory grounds. 11 B. The effect of Law v. Siegel on the bankruptcy court’s denial of Elliott’s claimed homestead exemption based on his bad 12 faith misconduct 13 Elliott contends that Law v. Siegel, 134 S.Ct. 1188 (2014), 14 has overruled the bankruptcy court’s authority to deny his 15 homestead exemption on the basis of bad faith. We agree. 16 Prior to being abrogated by Law v. Siegel, law within the 17 Ninth Circuit gave a bankruptcy court the authority to deny an 18 amended exemption claim if the trustee or another party in 19 interest timely objected and showed, by a preponderance of the 20 evidence, that the debtor had acted in bad faith or that the 21 creditors had been prejudiced. In re Michael, 163 F.3d at 529 22 (adopting test set forth in In re Doan, 672 F.2d at 833; Tyner v. 23 Nicholson (In re Nicholson), 435 B.R. 622, 630 (9th Cir. BAP 24 2010); Arnold v. Gill (In re Arnold), 252 B.R. 778, 784 (9th Cir. 25 BAP 2000). Under this line of authority, a debtor’s intentional 26 attempt to conceal estate assets was a recognized basis to support 27 a court’s finding of bad faith and, thus, sufficient grounds to 28 deny a debtor’s claimed exemption.
-9- 1 When considering whether to deny Elliott’s claimed homestead 2 exemption, the bankruptcy court properly applied the equitable 3 principles of the law available at the time to the facts it 4 believed demonstrated Elliott’s misconduct. At the exemption 5 hearing, the court explained that Elliott’s misconduct, 6 established by his concealment of the Buckingham Property through 7 omissions in his initial schedules, his misrepresentations at the 8 § 341(a) meeting and his calculated title transfers, was 9 sufficient to establish Elliott’s bad faith. Therefore, the order 10 denying Elliott’s claimed homestead exemption in its entirety was 11 well supported by valid Ninth Circuit precedents. 12 However, Law v. Siegel, entered on March 4, 2014, while this 13 appeal was pending, abrogated our authority to deny exemptions or 14 amendments to exemptions based on a debtor’s bad faith. There, 15 the Supreme Court considered whether the bankruptcy court could 16 rely on § 105(a) to confer a general equitable power to surcharge 17 the debtor’s $75,000 homestead exemption to partially compensate 18 the estate for over $500,000 in administrative expenses resulting 19 from the debtor’s bad faith conduct, which, in effect, amounted to 20 a denial of his homestead exemption. 134 S.Ct. at 1194-95. The 21 Supreme Court rejected such a remedy, finding that surcharging an 22 exemption contravened specific provisions in the Bankruptcy Code, 23 and no statutory basis in the Bankruptcy Code allowed for the 24 surcharge on equitable grounds. Id. at 1195-96. 25 Specifically, the Court noted that the surcharge conflicted 26 with two subsections of § 522: § 522(b), which allows a debtor to 27 exempt estate property; and § 522(k), which expressly limits the 28 use of exempt property to pay for administrative expenses. Id. at
-10- 1 1195. The Court reasoned that § 522, with its “carefully 2 calibrated exceptions and limitations,” did “not give courts 3 discretion to grant or withhold exemptions based on whatever 4 considerations they deem appropriate,” such as the debtor’s bad 5 faith conduct. Id. at 1196. Furthermore, outside of § 522, the 6 Code did not confer “a general, equitable power in bankruptcy 7 courts to deny exemptions based on a debtor’s bad-faith conduct.” 8 Id. 9 Although the bankruptcy court’s denial of Elliott’s claimed 10 homestead exemption did not involve precisely the same context of 11 surcharging an exemption to pay administrative expenses as in Law 12 v. Siegel, the same rationale that prohibited the equitable 13 surcharge of exemptions in that case must also apply to the denial 14 of amended exemptions based on Elliott’s misconduct here. The 15 Code specifically provides that exempt property “is not liable” 16 for the payment of “any [prepetition] debt.” Id. at 1192 (citing 17 § 522(c)). The bankruptcy court’s denial of Elliott’s homestead 18 exemption allows the sale proceeds from the claimed homestead to 19 pay prepetition debts. However, under Law v. Siegel, the court 20 cannot contravene the § 522(c) mandate in this way “absent a valid 21 statutory basis for doing so.” Id. at 1196. 22 A debtor’s bad faith is not a statutorily created exception 23 to the exemption but rather is a judge-made exception under Ninth 24 Circuit authority. The Supreme Court has now mandated in Law v. 25 Siegel that “[t]he Code’s meticulous . . . enumeration of 26 exemptions and exceptions to those exemptions confirms that courts 27 are not authorized to create additional exceptions.” Id. 28 Accordingly, courts can no longer deny claimed exemptions or bar
-11- 1 amendments to exemptions on the ground that the debtor acted in 2 bad faith, when no statutory basis exists for doing so. As such, 3 despite Elliott’s apparent bad faith, his claimed homestead 4 exemption must stand absent some statutory basis for its denial. 5 See also In re Arellano, 517 B.R. 228, 229-32 (Bankr. S.D. Cal. 6 2014)(containing comprehensive discussion of the impact of Law v. 7 Siegel). 8 C. A statutory basis to deny Elliott’s claimed homestead exemption may exist. 9 10 Although Law v. Siegel no longer allows the bankruptcy court 11 to deny a debtor’s claimed exemption based on bad faith conduct or 12 prejudice to creditors, the Supreme Court has affirmed the 13 principle that a “valid statutory basis” is sufficient grounds to 14 deny a debtor’s homestead exemption. 134 S.Ct. at 1196. Thus, in 15 the case at bar, state law governing California’s homestead 16 exemption criteria and the Code’s limitations on exemptions may 17 provide another basis to deny Elliott’s claimed homestead 18 exemption in the Buckingham Property. 19 1. California’s criteria for homestead exemptions 20 Trustee argues that even if the bankruptcy court’s authority 21 to deny Elliott’s homestead exemption based on bad faith has been 22 abrogated, Elliott is still not entitled to the claimed exemption 23 because he did not have legal or equitable title to the Buckingham 24 Property on the petition date. Specifically, Trustee asserts that 25 Elliott’s declared homestead exemption was destroyed by his 26 conveyance of the Buckingham Property’s title to a third party 27 prepetition. While we agree with Trustee, Elliott’s loss of the 28 declared homestead is not dispositive of his right to a homestead
-12- 1 exemption under California law. 2 Two types of homestead exemptions exist in California: the 3 declared homestead exemption governed by Article 5; and the 4 automatic homestead exemption governed by Article 4. In re 5 Cumberbatch, 302 B.R. 675, 678 (Bankr. C.D. Cal. 2003). The 6 declared and automatic homestead exemptions are separate and 7 distinct. Katz v. Pike (In re Pike), 243 B.R. 66, 69 (9th Cir. 8 BAP 1999). While the amount of both homestead exemptions is the 9 same, the appropriate context for applying each differs. Id. 10 a. Declared homestead exemption 11 The protections of an Article 5 declared homestead exemption 12 apply only in the context of voluntary sales. In re Kelley, 300 13 B.R. at 19. For a debtor to invoke the declared homestead 14 exemption he must record a declaration stating that the residence 15 is his principal dwelling. See CAL. CIV. PROC. CODE §§ 704.920, 16 704.930(a)(3). Once the declaration is duly recorded, the 17 declared homestead exemption continues thereafter even if the 18 debtor does not reside in the premises, unless the debtor has 19 abandoned the declared homestead. See In re Kelley, 300 B.R. at 20 18 (emphasis added). 21 A declared homestead can be effectively abandoned or 22 destroyed where title to all or a portion of the homestead 23 property is transferred to a third party. Knudsen v. Brock (In re 24 Knudsen), 80 B.R. 193, 195 (Bankr. C.D. Cal. 1987)(debtor ceases 25 to hold interest in declared homestead property for purposes of an 26 Article 5 exemption when debtor conveys title of subject property 27 to third party, and reconveying property from third party to 28 debtor does not “automatically resurrect” homestead declaration).
-13- 1 First Trust & Sav. Bank of Pasadena v. Warden, 18 Cal.App.2d. 131, 2 134 (1936). Elliott’s declared homestead for purposes of Article 3 5 was effectively abandoned or destroyed when he conveyed title to 4 the Buckingham Property to S. Central in 2006; it was not 5 resurrected by his reacquisition of title from LWI in 2012. Id. 6 Nevertheless, the California declared homestead exemption is 7 inapplicable here. Elliott sought to exempt the Buckingham 8 Property in the forced sale context of his bankruptcy case under 9 CAL. CIV. PROC. CODE § 704.730(a)(3), not in the context of a 10 voluntary sale, where the Article 5 declared exemption would 11 apply. This contextual distinction is critical because even if 12 Elliott’s declared homestead exemption was not abandoned, an 13 effective Article 5 exemption does not protect his interest in the 14 Buckingham Property in the forced sale context of his chapter 7 15 bankruptcy. See In re Kelley, 300 B.R. at 20; In re Knudsen, 80 16 B.R. at 196-97. 17 Accordingly, the issue of whether Elliott’s homestead 18 declaration was abandoned or destroyed through prepetition title 19 transfers is irrelevant because “[i]n the context of bankruptcy 20 . . . [d]ebtor’s declaration of homestead helps him not at all, as 21 the additional benefits conferred in Article 5 would benefit him 22 only in the situation of a voluntary sale.” In re Kelley, 300 23 B.R. at 21 (emphasis in original). 24 Therefore, despite Trustee’s correct assertion that Elliott’s 25 declared homestead exemption was destroyed prepetition, the issue 26 of whether he is entitled to a homestead exemption must be 27 assessed within the scope of the Article 4 automatic exemption. 28
-14- 1 b. Automatic homestead exemption 2 The Article 4 protections for automatic homestead exemptions 3 are applicable in a forced sale context. In re Kelley, 300 B.R. 4 at 19. The filing of a bankruptcy petition constitutes such a 5 “forced sale” to trigger the application of the automatic 6 homestead exemption. Id. at 17. Distinct from the Article 5 7 exemption, once triggered, the automatic homestead exemption need 8 not be memorialized or recorded in a homestead declaration. Wells 9 Fargo Fin. Leasing, Inc. v. D & M Cabinets, 177 Cal.App.4th 59, 68 10 (2009). 11 Elliott has claimed entitlement to the Article 4 automatic 12 homestead exemption by referencing CAL. CIV. PROC. CODE 13 § 704.730(a)(3) in his amended Schedule C. Because Elliott’s 14 claim of exemption is presumed valid, Trustee had the burden to 15 prove it was not properly claimed. See Rule 4003(c). Trustee 16 argued that Elliott was not entitled to the homestead exemption 17 because he could not claim an exemption in property he did not own 18 on the petition date. However, for purposes of CAL. CIV. PROC. CODE 19 § 704.730, Elliott’s conveyance of the Buckingham Property’s title 20 to a third party does not defeat his right to an automatic 21 exemption, because continuous residency, rather than continuous 22 ownership, controls the Article 4 analysis. 23 The statutory definition of “homestead” for purposes of the 24 Article 4 automatic exemption is set forth in CAL. CIV. PROC. CODE 25 § 704.710(c) and “requires only that the judgment debtor reside in 26 the property as his or her principal dwelling at the time the 27 judgment creditor’s lien attaches and continuously thereafter 28 until the court determines the dwelling is a homestead.”
-15- 1 Tarlesson v. Broadway Foreclosure Invs., LLC, 184 Cal.App.4th 931, 2 937 (2010)(citing CAL. CIV. PROC. CODE § 704.710(c))(emphasis added). 3 Thus, based on the plain language of the statute, the automatic 4 homestead exemption does not require that the judgment debtor 5 continuously own the property. See In re Donaldson, 156 B.R. 51, 6 52 (Bankr. N.D. Cal. 1993)(by continuously residing in their home 7 throughout the bankruptcy proceeding, debtors retained a 8 possessory interest sufficient to establish their right to an 9 automatic exemption despite their loss of title in a prepetition 10 foreclosure); Tarlesson, 184 Cal.App.4th at 937-38 (where judgment 11 debtor conveyed her home’s title to a related party, debtor’s 12 continuous occupancy of the property was enough to retain a 13 sufficient equitable or beneficial interest in it to qualify as a 14 homestead under § 704.710(c) and thus claim an automatic homestead 15 exemption). 16 Accordingly, the automatic homestead exemption applies to any 17 interest in the property if the debtor satisfies the continuous 18 residency requirement set forth in CAL. CIV. PROC. CODE 19 § 704.710(c).4 The factors a court should consider in determining 20 whether the debtor has sufficient residency to establish an 21 exemptible interest in the property and, thus, to qualify for the 22 automatic homestead, are physical occupancy of the property and 23 24 4 This principle is consistent with and explicitly echoed in sections of Article 4 other than CAL. CIV. PROC. CODE § 704.730(c). 25 For instance, CAL. CIV. PROC. CODE § 704.820 recognizes that debtors with less than a fee interest are still entitled to a homestead 26 exemption under Article 4, stating in the Commission Comments it “implements the intent of [Article 4] not to restrict the interest 27 of the judgment debtor for which a homestead exemption is available. A homestead exemption is available to a judgment 28 debtor regardless of whether the judgment debtor’s interest is a fee, leasehold, or lesser interest.”
-16- 1 the intention with which the property is occupied. In re Kelley, 2 300 B.R. at 21 (citing Ellsworth v. Marshall, 196 Cal.App.2d 471, 3 474 (1961)). 4 Neither Elliott nor Trustee directly addressed before the 5 bankruptcy court, or address on appeal, whether Elliott’s alleged 6 residency at the Buckingham Property is sufficient to satisfy the 7 continuous residency requirement to qualify for the automatic 8 homestead exemption. Trustee’s objection focused on Elliott’s bad 9 faith in concealing the Buckingham Property and his destroyed 10 declaration of homestead. Neither party provided any relevant 11 evidence to support a finding whether or not Elliott had satisfied 12 the continuous residency requirement. Thus, as it stands, nothing 13 in the record confirms whether (1) Elliott resided at the 14 Buckingham Property at the time the Judgment Creditors’ lien(s) 15 attached and continued to reside there with the intent of 16 retaining it as his principal dwelling, and (2) whether he resided 17 there on the petition date. In fact, Elliott confirmed in his 18 § 341(a) meeting testimony that he resided on Hiawatha Street on 19 the petition date. 20 Because the bankruptcy court confined its inquiry to 21 Elliott’s bad faith in concealing the Buckingham Property, it did 22 not make any factual findings relevant to whether Elliott 23 satisfied the continuous residency requirement set forth in CAL. 24 CIV. PROC. CODE § 704.730(a)(3). Thus, material factual issues 25 exist that the court must consider in making this determination, 26 including the threshold determination that the Buckingham Property 27 28
-17- 1 is property of the estate.5 Accordingly, we must VACATE the order 2 on appeal and REMAND to the bankruptcy court to resolve these 3 factual issues and determine whether Elliott is entitled to an 4 automatic homestead exemption under CAL. CIV. PROC. CODE 5 § 704.730(a)(3). 6 2. The Bankruptcy Code’s statutory limitations of exemptions 7 8 Even if on remand the bankruptcy court finds that Elliott 9 retained, through continuous residency, a sufficient property 10 interest in the Buckingham Property to qualify for the automatic 11 homestead exemption under CAL. CIV. PROC. CODE § 704.730(a)(3), the 12 Code provides additional limitations which may function as a basis 13 to deny Elliott’s exemption given his misconduct. 14 As the Supreme Court acknowledged in Law v. Siegel, “§ 522 15 sets forth a number of carefully calibrated exceptions and 16 limitations, some of which relate to the debtor’s misconduct.” 17 134 S.Ct. at 1196. Most relevant among them for our purposes is 18 § 522(g). 19 Section 522(g) limits the ability of a debtor to claim an 20 exemption where the trustee has recovered property for the benefit 21 of the estate. Under § 522(g)(1), a debtor may claim an exemption 22 where the trustee has recovered property under §§ 510(c)(2), 542, 23 543, 550, 551 or 553 only if (1) the property was involuntarily 24 transferred, and (2) the debtor did not conceal the transfer or an 25 26 5 It is a “well settled rule that property cannot be exempted unless it is first property of the estate.” Heintz v. 27 Carey (In re Heintz), 198 B.R. 581, 586 (9th Cir. BAP 1996). As discussed more thoroughly below, the bankruptcy court has since 28 determined that the Buckingham Property is property of the estate.
-18- 1 interest in the property. Hitt v. Glass (In re Glass), 164 B.R. 2 759, 761 (9th Cir. BAP 1994), aff’d, 60 F.3d 565 (9th Cir. 1995). 3 Thus, the debtor is not entitled to claim an exemption “[w]here a 4 debtor voluntarily transfers property in a manner that triggers 5 the trustee’s avoidance powers or the debtor knowingly conceals a 6 prepetition transfer or an interest in property, and such property 7 is returned to the estate as a result of the trustee’s actions 8 directed toward either the debtor or the transferee[.]” Id. at 9 764-65. 10 In his opening appellant’s brief, Elliott identified § 522(g) 11 as a basis for denying a homestead exemption for the type of 12 misconduct involved here. However, he contends that “while it can 13 be argued in this case that [he] did conceal the [Buckingham 14 Property], this is not a case where the Trustee ‘recovered’ the 15 property[,]” and therefore, § 522(g) is inapplicable. We 16 disagree. 17 On June 4, 2013, Trustee filed a turnover action against 18 Elliott for the Buckingham Property under § 542. See Adv. No. 19 SV 13-01118-VK. Trustee has succeeded in that action.6 Hence, 20 this constitutes a “recovery” as contemplated by § 522(g), which 21 then brings the Buckingham Property within the scope of the 22 § 522(g)(1) limitation on Elliott’s right to claim an exemption in 23 24 6 While this appeal was pending, on April 7, 2014, the bankruptcy court entered a judgment revoking Elliott’s discharge 25 and vesting title of the Buckingham Property in Trustee after finding “the debtor knowingly and fraudulently failed to disclose 26 a significant asset in his schedules, i.e., the debtor’s interest in a corporation that held title to his residence. For no 27 consideration, less than three weeks after the debtor obtained his discharge, the debtor obtained title to his residence from that 28 corporation.” Adv. No. SV 13-01118-VK, dkt. no. 63 at 2, ¶ 1. No appeal has been filed.
-19- 1 property he voluntarily transferred and concealed. 2 The essence of Elliott’s appeal in utilizing Law v. Siegel to 3 shield his misconduct from functioning as lawful grounds to deny 4 his homestead exemption has led to, as Trustee bluntly but 5 accurately asserts, Elliott practically admitting he concealed the 6 asset and acted in bad faith. Indeed, Elliott does not dispute 7 that he failed to disclose his interest in the Buckingham Property 8 in his original schedules. He admits claiming Hiawatha Street as 9 his “street address” on his petition even though he knew he did 10 not live there. Elliott further acknowledges that at the § 341(a) 11 meeting he claimed his forms were true and complete, all the while 12 knowing the bankruptcy court had no knowledge of the Buckingham 13 Property he allegedly resides in and controlled through LWI. 14 Accordingly, we conclude that § 522(g)(1) is applicable and 15 an important limitation on Elliott’s claimed homestead exemption 16 for the bankruptcy court to consider on remand. 17 IV. CONCLUSION 18 For the reasons set forth above, we VACATE the bankruptcy 19 court’s order sustaining Trustee’s objection to Elliott’s claimed 20 homestead exemption and denying it in its entirety and REMAND for 21 a determination of whether Elliott is entitled to a homestead 22 exemption under CAL. CIV. PROC. CODE § 704.730(a)(3). 23 24 25 26 27 28
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