Steve Nolan v. Karl T. Anderson

• Court: Court of Appeals for the Ninth Circuit
• Decided: February 3, 2022
• Docket: 21-55204
• Status: Unpublished

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS FEB 3 2022 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

In the Matter of: STEVE WILLIAM No. 21-55204 NOLAN, DEBTOR, D.C. No. 5:20-cv-01496-MCS ------------------------------------- KARL T. ANDERSON, Chapter 7 Trustee, MEMORANDUM* APPELLANT,

v.

STEVE WILLIAM NOLAN,

APPELLEE.

Appeal from the United States District Court for the Central District of California Marc C. Scarsi, District Judge, Presiding

Argued and Submitted November 16, 2021 Pasadena, California

Before: BYBEE and BENNETT, Circuit Judges, and BATAILLON,** District Judge.

Chapter 7 Bankruptcy Trustee Karl T. Anderson (Trustee) appeals the district

court’s order affirming the bankruptcy court’s denial of his objection to the

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. ** The Honorable Joseph F. Bataillon, United States District Judge for the District of Nebraska, sitting by designation. homestead exemption claimed by debtor, Steve William Nolan. We have

jurisdiction under 28 U.S.C. § 158(d)(1) and 28 U.S.C. § 1291. We review the

district court’s decision on appeal from a bankruptcy court de novo. In re Point Ctr.

Fin., Inc., 957 F.3d 990, 995 (9th Cir. 2020). We give no deference to the district

court’s decision and conduct our own independent review of the bankruptcy court’s

decision. Id. The scope of a statutory exemption is a question of law, which is

reviewed de novo. In re Gilman, 887 F.3d 956, 964 (9th Cir. 2018). We affirm.

The Debtor and his brother, Gregory Nolan, are beneficiaries of their deceased

father’s living trust. The father had transferred title to the subject property, a home

located in Corona, California, to the trust, for distribution to the two brothers equally

upon his death. The Debtor was named successor trustee in the trust. He had resided

in the decedent’s home with his late father and continues to live there.

Gregory Nolan filed an action in Superior Court of the State of California for

the County of Riverside, Probate Division (Probate Court) to compel an accounting,

remove Steve Nolan as trustee, appoint himself as trustee, and award money

damages for withheld rent. The Debtor then filed a Chapter 7 voluntary petition in

bankruptcy court, indicating he was residing in the property, claiming a 50%

equitable interest in the subject property, acknowledging that title to the subject

property was held in the trust, and claiming a $75,000 homestead exemption under

California law. The Trustee objected to the claimed homestead exemption. The

2 21-55204 bankruptcy court overruled the Trustee’s objection. The Trustee appealed and the

district court affirmed.

On appeal, the Trustee argues: 1) federal jurisdiction is lacking because the

probate exception applies; 2) the district court erred in overruling his objection to

the homestead exception; and 3) the district court erred in allocating the burden of

proof.

1. Under binding Supreme Court and Ninth Circuit precedent, the

“narrow” and “distinctly limited” probate exception to federal jurisdiction is

inapplicable. Marshall v. Marshall, 547 U.S. 293, 305, 310 (2006); Goncalves By

& Through Goncalves v. Rady Child.’s Hosp. San Diego, 865 F.3d 1237, 1252 (9th

Cir. 2017). “[U]nless a federal court is endeavoring to (1) probate or annul a will,

(2) administer a decedent’s estate, or (3) assume in rem jurisdiction over property

that is in the custody of the probate court, the probate exception does not apply.”

Goncalves By & Through Goncalves, 865 F.3d at 1252 (quoting Three Keys Ltd. v.

SR Util. Holding Co., 540 F.3d 220, 227 (3d Cir. 2008)). The Probate Court did not

assume in rem jurisdiction over property, and no other provisions of the exception

are applicable. The Probate Court proceeding was an action for breach of fiduciary

duty and the remedy sought was an accounting, appointment of a new trustee, and

monetary damages. The relief sought in Probate Court would not affect the

beneficial interest the Debtor holds in the subject property under his father’s

3 21-55204 irrevocable trust. We find no error in the district court’s determination that the

probate exception does not apply to this case.

2. “A Chapter 7 bankruptcy petition creates an estate to satisfy creditors’

claims.” In re Jacobson, 676 F.3d 1193, 1198 (9th Cir. 2012). The estate consists

of “all legal or equitable interests of the debtor in property” when the petition is filed.

Id. (quoting 11 U.S.C. § 541(a)(1)). The beneficiary of a trust holds a contingent

equitable interest in trust property. N.C. Dep’t of Revenue v. The Kimberly Rice

Kaestner 1992 Fam. Tr., 139 S. Ct. 2213, 2218 (2019). That beneficial interest

becomes property of the estate. 11 U.S.C. § 541(a)(1), (c)(2); see In re Cutter, 398

B.R. 6, 19 (B.A.P. 9th Cir. 2008), aff’d, 468 F. App’x 657 (9th Cir. 2011).

California, like many states, gives debtors an exemption for their “principal

dwelling” or “homestead.” In re Jacobson, 676 F.3d at 1198 (quoting Cal. Civ. Proc.

Code §§ 704.710(c), 704.720(a)). California’s homestead exemption “ensures that

insolvent debtors and their families are not rendered homeless by virtue of an

involuntary sale of the residential property they occupy.” Amin v. Khazindar, 5 Cal.

Rptr. 3d 224, 228 (Ct. App. 2003). “This strong public policy requires courts to

adopt a liberal construction of the law and facts to promote the beneficial purposes

of the homestead legislation to benefit the debtor.” Id.

Under California statutes, the automatic homestead exemption protects a

debtor from forced judicial sales of a debtor’s dwelling and requires the debtor reside

4 21-55204 in the property at the time of the forced sale. In re Anderson, 824 F.2d 754, 756 (9th

Cir. 1987); Cal. Civ. Proc. Code § 704.710(c). “[T]he filing of a bankruptcy petition

constitutes such a ‘forced sale’ for [purposes of the automatic homestead

exemption.]” In re Kelley, 300 B.R. 11, 17 (B.A.P. 9th Cir. 2003); see also In re

Diaz, 547 B.R. 329, 335 (B.A.P. 9th Cir. 2016) (stating, “the filing of the petition

serves as both a hypothetical levy and as the operative date of the exemption”).

Debtors can qualify for a homestead exemption even though title to property is held

in a trust. Fisch, Spiegler, Ginsburg & Ladner v. Appel, 13 Cal. Rptr. 2d 471, 473

(Ct. App. 1992). Entitlement to the exemption requires a showing of a debtor’s

physical occupancy of the property and intent to reside there. In re Gilman, 887

F.3d at 965.

We find no error in the district court’s findings on the homestead exemption

issue. The district court properly held that the Debtor’s equitable interest fell within

the automatic prong of the homestead exemption, which is designed to protect a

debtor living in a dwelling who is subject to a forced sale. The Trustee does not

dispute that the Debtor resided in the property at the time the petition was filed and

intended to stay there.

3. Although Fed. R. Bankr. P. 4003 provides that a claimed exemption is

“presumptively valid,” “where a state law exemption statute specifically allocates

the burden of proof to the debtor, Rule 4003(c) does not change that allocation.” In

5 21-55204 re Diaz, 547 B.R. at 337. “California has mandated the use of state exemptions in

bankruptcy and has placed the burden of proof on the party claiming the exemption.”

Id. We reject the Trustee’s challenge to the allocation of the burden of proof. The

record shows that, as the party claiming the exemption, the Debtor made an

appropriate showing. The facts of residency were not disputed, and both the

bankruptcy court and the district court determined the scope of the statutory

exemption as a matter of law. We find no error by the district court.

AFFIRMED.

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