In re: Frances Elizabeth Pass, 553 B.R. 749

Background

Pass and Galli (then married) filed a joint Chapter 13 petition in December 2009; they had recorded a declaration of homestead on their Fresno residence (Manila Ave) in 2002.
While the joint case was pending they separated, obtained state court orders (separation, grant deed, dissolution) purporting to change title interests in the Manila Ave house without seeking relief from the automatic stay.
Pass converted her case to Chapter 7 and later claimed a homestead exemption in a different house (Coalinga); the Chapter 7 trustee objected but the bankruptcy court allowed Pass’s Coalinga exemption (order not appealed).
Trustee sought to administer and sell the Manila Ave house as estate property, filed an adversary proceeding to avoid the postpetition transfers and to determine interests; Galli filed a new (2014) declaration of homestead.
The bankruptcy court granted summary judgment to the Trustee as to voiding the postpetition transfers but held that Galli’s 2002 homestead declaration created a homestead interest that the Trustee could not defeat without compensating Galli.
On appeal the Panel affirmed judgment on alternative grounds: although the court erred in relying on the declared-homestead protections, Galli nonetheless is entitled to an automatic (Article 4) homestead exemption under California law and thus must be compensated before an involuntary sale.

Issues

Issue	Plaintiff's Argument (Trustee)	Defendant's Argument (Galli)	Held
Whether the 2002 recorded declaration of homestead prevents Trustee from selling the house free of Galli’s interest	Declaration of homestead blocks attachment and thus prevents Trustee (as successor to judgment creditors) from selling without compensating Galli	The recorded declaration protects Galli’s homestead interest and prevents uncompensated sale	Court: Bankruptcy court erred in relying on declared-homestead protections to block sale, but judgment affirmed on alternative grounds (automatic exemption applies)
Whether Galli (a non-debtor whose case was dismissed) may claim an exemption in estate property	Galli cannot claim an exemption because exemption rights are fixed as of petition date and spouses cannot each claim separate homesteads	Galli may assert exemption now as an ex-spouse actually residing in the property; his non-debtor status does not preclude claiming exemptions under state law	Court: A non-debtor ex-spouse may claim state-law homestead exemption; Galli entitled to automatic homestead exemption
Whether California’s automatic homestead exemption is available given Pass’s successful later exemption in another house	Exemption rights should be determined by marital status at petition date; Pass’s later successful exemption in Coalinga precludes Galli’s claim in Manila Ave	Marital status for exemption purposes should be judged as of present; after dissolution each former spouse may claim an automatic homestead in property they reside in	Court: Rejected freezing marital status at petition date; after dissolution ex-spouse may claim automatic homestead where he actually resides
Whether the bankruptcy court needed to value Galli’s homestead interest now	Trustee: If Galli has a homestead interest, court must determine its dollar value	Galli: Valuation unnecessary until Trustee attempts sale	Court: Valuation not requested/necessary now; to be determined if and when Trustee seeks to sell

Key Cases Cited

Redwood Empire Production Credit Assoc. v. Anderson, 824 F.2d 754 (9th Cir. 1987) (distinguishes declared homestead and automatic homestead protections)
Allen v. Allen, 275 F.3d 1160 (9th Cir. 2002) (bankruptcy courts should avoid intruding into family law matters)
MacDonald v. MacDonald, 755 F.2d 715 (9th Cir. 1985) (limits on bankruptcy courts’ intrusion into state family law and property divisions)