Case Information
*1 FILED DEC 10 2014 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: ) BAP Nos. CC-14-1050-KiTaD
) CC-14-1059-KiTaD EDWARD E. ELLIOTT, ) (Consolidated)
) Debtor. ) Bk. No. SV 11-23855-VK )
) )
EDWARD E. ELLIOTT, )
)
Appellant, )
) O P I N I O N v. )
)
DIANE C. WEIL, Chapter 7 Trustee, )
)
)
Appellee. )
______________________________)
Argued and Submitted on October 23, 2014,
at Malibu, California
Filed - December 10, 2014
Aрpeal from the United States Bankruptcy Court for the Central District of California Honorable Victoria S. Kaufman, Bankruptcy Judge, Presiding
Appearances: Andrew E. Smyth, Esq. of Smyth Law Office argued
for appellant, Edward E. Elliott; Alla Tenina, Esq. of Tenina Law, Inc. argued for appellee, Diane C. Weil, Chapter 7 Trustee.
Before: KIRSCHER, TAYLOR and DUNN, Bankruptcy Judges. *2
KIRSCHER, Bankruptcy Judge:
Debtor Edward E. Elliott (“Elliott”) appeals an order sustaining the objection of appellee, chapter 7 [1] trustee Diane C. Weil (“Trustee”), to his claimed homestead exemption under C . ODE § 704.730(a)(3). The bankruptcy court sustained Trustee’s objection on the basis that Elliott had claimed the exemption in bad faith. Elliott contends that despite his misconduct, he is nevertheless entitled to the exemption due to an intervening change in the controlling law while this appeal was pending.
We conclude that Law v. Siegel,
At the § 341(a) meeting of creditors, Elliott confirmed his address as Hiawatha Street and claimed that his bankruptcy petition, schedules and statement of financial affairs were true and complete. Furthermore, Elliott asserted that he did not own any real property and had not transferred or given away anything of value in the last four years.
Based on the information disclosed in Elliott’s bankruptcy schedules and corresponding testimony, Trustee issued a “No Distribution” report. Elliott was granted a discharge on March 8, 2012, and the bankruptcy case was closed on March 13, 2012.
On March 26, 2012, Lee Wong Investments, Inc. (“LWI”) transferred by quitсlaim deed real property located in Los Angeles (the “Buckingham Property”) to Elliott as a gift. Elliott does not dispute that LWI is a Nevada corporation which he organized and controls.
Following this transaction, Elliott sent a letter to counsel for the Judgment Creditors, who were never informed of the *4 bankruptcy, stating that he acquired the Buckingham Property after the bankruptcy and demanding that their judicial liens be removed. This demand triggered an investigation by the Judgment Creditors, which revealed the history of Elliott’s continuous interest in the Buckingham Property through numerous sophisticated transfers of title. The Buckinghаm Property was first transferred from Elliott to 1019 South Central Associates Ltd. (“S. Central”), a business that, according to information Trustee received from the California Secretary of State, was organized by the son of Elliott’s deceased partner. This initial transfer occurred on August 14, 2006, just a few months after the judgment was entered against Elliott in the state court fraud case. Then, on February 13, 2007, S. Central transferred the Buckingham Property to LWI, the corporation organized and controlled by Elliott. [3] Finally, on March 26, 2012, the Buckingham Property was transferred back to Elliott in his individual capacity, following his discharge.
When the Judgment Creditоrs discovered Elliott’s continuous interest in the Buckingham Property, they moved to reopen the bankruptcy case. The bankruptcy court granted their motion and ordered that the case be reopened.
Nearly one year after the bankruptcy case was reopened, Elliott amended his schedules to disclose his interest in the Buckingham Property. He valued the property at $360,000 and *5 indicated that Bank of America held a $120,826 secured claim against it. He also claimed a homestead exemption for the Buckingham Property under C § 704.730(a)(3).
Trustee objected to Elliott’s claimed hоmestead exemption on the basis of bad faith. She outlined the pattern of affiliate transfers of the Buckingham Property to advance the proposition that Elliott never really relinquished control of it, but instead utilized these transfers to shield it from creditors, Trustee and the bankruptcy court.
In response, Elliott filed declarations from his friend Juanita A. Jehdian (“Jehdian”) and his attorney Andrew E. Smyth (“Smyth”). Jehdian asserted that she currently lived at the Buckingham Property with Elliott. Although she admitted not living there on the petition date, Jehdian claimed that she had frequently visited the Buckingham Property during the month of December 2011, and in doing so, knew that Elliott had “resided at the [Buckingham Property] in December 2011.” Smyth declared that Elliott “has a homestead exemption on file.” In support, Smyth attached a copy of a homestead declaration filed by Elliott with the state of California on October 18, 2005, where he claimed as a declared homestead the Buckingham Property.
In reply, Trustee refuted Elliott’s suggestion that the 2005 homestead declaration protected his entitlement to a homestead exemption. Specifically, Trustee argued that because Elliott did not hold title to the Buckingham Property on the petition dаte, he could not claim the homestead exemption. Thus, Trustee maintained that notwithstanding Elliott’s bad faith, the bankruptcy court could nevertheless sustain her objection on the basis that Elliott *6 was never entitled to a homestead exemption in the first place.
At the exemption hearing, the bankruptcy court sustained Trustee’s objection to Elliott’s claimed homestead exemption on the basis of bad faith. The court focused on: Elliott’s failure to disclose his correct address as the Buckingham Property; his misleading testimony at the § 341(a) meeting; the suspicious timing of the property transfer following disсharge; and Elliott’s subsequent amendments claiming a right to exempt a property he had initially concealed. The court ultimately concluded that “this is not just about delay. This is about bad faith of a Debtor who misrepresented where he lives, who waited until after he got discharged to disclose his residency in the property, and this is not an appropriate use of the bankruptcy code.” Hr’g Tr. (Jan. 9, 2014) 3:4-8.
The order denying Elliott’s claimed homestead exemption was entered “on the basis that the debtor belatedly claimed the exemption in bad faith.” Elliott timely appealed.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
and 157(b)(2)(B). An order denying a debtor’s claim of exemption
constitutes a final order. Preblich v. Battley,
III. ISSUES
1. Did the United States Supreme Court’s decision in Law v. Siegel, entered while this appeal was pending, abrogate the bankruptcy court’s “bad faith” basis for denying Elliott’s claimed homestead exemption under C § 704.730(a)(3)? *7 2. Bad faith notwithstanding, is there a statutory basis to deny Elliott’s claimed homestead exemption?
IV. STANDARDS OF REVIEW
The right of a debtor to claim an exemption is a question of
law we review de novo. Kelley v. Locke (In re Kelley), 300 B.R.
11, 16 (9th Cir. BAP 2003). The bankruptcy court’s findings of
fact with respeсt to a claimed exemption, including a debtor’s
intent, are reviewed for clear error. Id. Factual findings are
clearly erroneous if illogical, implausible or without support in
the record. Retz v. Samson (In re Retz) ,
V. DISCUSSION
A. Exemptions generally
When a debtor files a bankruptcy petition, all of his assets
become property of the estate and may be used to pay creditors,
subject to the debtor’s ability to reclaim specified property as
exempt. Schwab v. Reilly,
A claimed exemption is “presumptively valid.” Carter v.
Anderson (In re Carter),
California hаs opted out of the federal exemption scheme and
permits its debtors only the exemptions allowable under state law.
C AL . C IV . P ROC . C ODE § 703.130. Therefore, while “the federal
courts decide the merits of state exemptions, . . . the validity
of the claimed state exemption is controlled by the applicable
state law.” In re Kelley,
Elliott contends he is entitled to apply the homestead exemption provided by C § 704.730(a)(3) to the Buckingham Property. That statute provides in pertinent part that a hоmestead exemption of $175,000 is allowed if:
(3) [T]he judgment debtor . . . who resides in the homestead is at the time of the attempted sale of the homestead any one of the following: (A) A person 65 years of age or older.
(B) A person physically or mentally disabled who as a result of that disability is unable to engage in substantial gainful employment. There is a rebuttable presumption affecting the burden of proof that a person receiving disability insurance benefit payments under Title II or supplemental security income payments under Title XVI of the federal Social Security Act satisfies the requirements of this paragraph as to his or her inability to engage in substantial gainful employment. (C) A person 55 years of age or older with a gross annual income of not more than twenty-five thousand dollars ($25,000) or, if the judgment debtor is *9 married, a gross annual income, including the gross annual income of the judgment debtor’s spouse, of not more than thirty-five thousand dollars ($35,000) and the sale is an involuntary sale. C § 704.730(a)(3). Trustee objected to Elliott’s
claimed exemption both on the grounds that it was made in bad faith and that his statutory right to the exemption was destroyed prepetition due to his frequent title transfers with respect to the Buckingham Proрerty. The bankruptcy court sustained Trustee’s objection on the basis of bad faith, but did not address the alternative basis for denying the exemption on statutory grounds. B . The effect of Law v. Siegel on the bankruptcy court’s denial of Elliott’s claimed homestead exemption based on his bad faith misconduct
Elliott contends that Law v. Siegel,
Prior to being abrogated by Law v. Siegel, law within the
Ninth Circuit gave a bankruptcy court the authority to deny an
amended exemption claim if the trustee or another party in
interest timely objеcted and showed, by a preponderance of the
evidence, that the debtor had acted in bad faith or that the
creditors had been prejudiced. In re Michael,
*10 When considering whether to deny Elliott’s claimed homestead exemption, the bankruptcy court properly applied the equitable principals of the law available at the time to the facts it believed demonstrated Elliott’s misconduct. At the exemption hearing, the court explained that Elliott’s misconduct, established by his concealment of the Buckingham Property through omissions in his initial schedules, his misrepresentations at the § 341(a) meeting and his calculated title transfers, was sufficient to establish Elliott’s bad faith. Therefore, the order denying Elliott’s claimed homestead exemption in its entirety was well supported by valid Ninth Circuit precedents.
However, Law v. Siegel, entered on March 4, 2014, while this
appeal was pending, abrogated our authority to deny exemptions or
amendments to exemptions based on a debtor’s bad faith. There,
the Supreme Court considered whether the bankruptcy court could
rely on § 105(a) to confer a general equitable power to surcharge
the debtor’s $75,000 homestead exemption to partially compensate
the estate for over $500,000 in administrative expenses resulting
from the debtor’s bad faith conduct, which, in effect, amounted to
a denial of his homestead exemption.
Specifically, the Court noted that the surcharge conflicted with two subsections of § 522: § 522(b), which allows a debtor to exempt estate property; and § 522(k), which expressly limits the use of exempt property to pay for administrative expenses. Id. at *11 1195. The Court reasoned that § 522, with its “carefully calibrated exceptions and limitations,” did “not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate,” such as the debtor’s bad faith conduct. Id. at 1196. Furthermore, outside of § 522, the Code did not confer “a general, equitable power in bankruptcy courts to deny exemptions based on a debtor’s bad-faith conduct.” Id.
Although the bankruptcy court’s denial of Elliott’s claimed homestead exemption did not involve precisely the same context of surcharging an exemption to pay administrative expenses as in Law v. Siegel, the same rationale that prohibited the equitable surcharge of exemptions in that case must also apply to the denial of amended exemptions based on Elliott’s misconduct here. The Code specifically provides that exеmpt property “is not liable” for the payment of “any [prepetition] debt.” Id. at 1192 (citing § 522(c)). The bankruptcy court’s denial of Elliott’s homestead exemption allows the sale proceeds from the claimed homestead to pay prepetition debts. However, under Law v. Siegel, the court cannot contravene the § 522(c) mandate in this way “absent a valid statutory basis for doing so.” Id. at 1196.
A debtor’s bad faith is not a statutorily created exception
to the exemption but rather is a judge-made exception under Ninth
Circuit authority. The Supreme Court has now mandated in Law v.
Siegel that “[t]he Code’s mеticulous . . . enumeration of
exemptions and exceptions to those exemptions confirms that courts
are not authorized to create additional exceptions.” Id. Accordingly, courts can no longer deny claimed exemptions or bar
*12
amendments to exemptions on the ground that the debtor acted in
bad faith, when no statutory basis exists for doing so. As such,
despite Elliott’s apparent bad faith, his claimed homestead
exemption must stand absent some statutory basis for its denial.
See also In re Arellano,
C. A statutory basis to deny Elliott’s claimed homestead
exemption may exist.
Although Law v. Siegel no longer allows the bankruptcy court
to deny a debtor’s claimed exemption based on bad faith conduct or
prejudice to creditors, the Supreme Court has affirmed the
principle that a “valid statutory basis” is sufficient grounds to
deny a debtor’s homestead exemption.
1. California’s criteria for homestead exemptions Trustee argues that even if the bankruptcy court’s authority to deny Elliott’s homestead exemption based on bad faith has been abrogated, Elliott is still not entitled to the claimed exemption because he did not have legal or equitable title to the Buckingham Property on the petition date. Specifically, Trustee asserts that Elliott’s declared homestead exemption was destroyed by his conveyance of the Buckingham Property’s title to a third party prepetition. While we agree with Trustee, Elliott’s loss of the declared homestead is not dispositive of his right to a homestead *13 exemption under California law.
Two types of homestead exemptions exist in California: the
deсlared homestead exemption governed by Article 5; and the
automatic homestead exemption governed by Article 4. In re
Cumberbatch,
a.
Declared homestead exemption
The protections of an Article 5 declared homestead exemption
apply only in the context of voluntary sales. In re Kelley, 300
B.R. at 19. For a debtor to invoke the declared homestеad
exemption he must record a declaration stating that the residence
is his principal dwelling. See C ODE §§ 704.920,
704.930(a)(3). Once the declaration is duly recorded, the
declared homestead exemption continues thereafter even if the
debtor does not reside in the premises, unless the debtor has
abandoned the declared homestead. See In re Kelley,
A declared homestead can be effectively abandoned or
destroyed where title to all or a portion of the homestead
property is transferred to a third party. Knudsen v. Brock (In re
Knudsen),
Nevertheless, the California declared homestead exemption is
inapplicable here. Elliott sought to exempt the Buckingham
Property in the forced sale context of his bankruptcy case under
C § 704.730(a)(3), not in the context of a
voluntary sale, where the Article 5 declared exemption would
apply. This contextual distinction is critical because even if
Elliott’s declared homestead exemption was not abandoned, an
effective Article 5 exemption does not protect his interest in the
Buckingham Property in the forced sale context of his chapter 7
bankruptcy. See In re Kellеy,
Accordingly, the issue of whether Elliott’s homestead declaration was abandoned or destroyed through prepetition title transfers is irrelevant because “[i]n the context of bankruptcy . . . [d]ebtor’s declaration of homestead helps him not at all, as the additional benefits conferred in Article 5 would benefit him only in the situation of a voluntary sale.” In re Kelley, 300 B.R. at 21 (emphasis in original).
Therefore, despite Trustee’s correct assertion that Elliott’s
declared homestead exemption was destroyed prepetition, the issue
of whether he is entitled to a homestead exemption must be
assessed within the scope of the Article 4 automatic exemption.
*15
b.
Automatic homestead exemption
The Article 4 protections for automatic homestead exemptions
are applicable in a forced sale context. In re Kelley, 300 B.R.
at 19. The filing of a bankruptcy petition constitutes such a
“forced sale” to trigger the application of the automatic
homestead exemption. Id. at 17. Distinct from the Article 5
exemption, once triggered, the automatic homestead exemption need
not be memorialized or recorded in a homestead declaration. Wells
Fargo Fin. Leasing, Inc. v. D & M Cabinets,
Elliott has claimed entitlement to the Article 4 automatic homestead exemption by referencing C AL . C IV . P ROC . C ODE § 704.730(a)(3) in his amended Schedule C. Because Elliott’s claim of exemption is presumed valid, Trustee had the burden to prove it was not properly claimed. See Rule 4003(c). Trustee argued that Elliott was not entitled to the homestead exemption because he could not claim an exemption in property he did not own on the petition date. However, for purposes of C AL . C IV . P ROC . C ODE § 704.730, Elliott’s conveyance of the Buckingham Property’s title to a third party does not defeat his right to an automatic exemption, because continuous residency, rather than continuous ownership, controls the Article 4 analysis.
The statutory definition of “homestead” for purposes of the
Article 4 automatic exemption is set forth in C § 704.710(c) and “requires only that the judgment debtor reside in
the property as his or her principal dwelling at the time the
judgment creditor’s lien attaches and continuously thereafter
until the court determines the dwelling is a homestead.”
*16
Tarlesson v. Broadway Foreclosure Invs., LLC,
Accordingly, the automatic homestead exemption applies to any
interest in the property if the debtor satisfies the continuous
residency requirement set forth in C AL . C IV . P ROC . C ODE
§ 704.710(c).
[4]
The factors a court should consider in determining
whether the debtor has sufficient residency to establish an
exemptible interest in the property and, thus, to qualify for the
automatic homestead, are physical occupancy of the property and
*17
the intention with which the property is occupied. In re Kelley,
Neither Elliott nor Trustee directly addressed before the bankruptcy cоurt, or address on appeal, whether Elliott’s alleged residency at the Buckingham Property is sufficient to satisfy the continuous residency requirement to qualify for the automatic homestead exemption. Trustee’s objection focused on Elliott’s bad faith in concealing the Buckingham Property and his destroyed declaration of homestead. Neither party provided any relevant evidence to support a finding whether or not Elliott had satisfied the continuous residency requirement. Thus, as it stands, nothing in the record confirms whether (1) Elliott resided at the Buckingham Property at the time the Judgment Creditors’ lien(s) аttached and continued to reside there with the intent of retaining it as his principal dwelling, and (2) whether he resided there on the petition date. In fact, Elliott confirmed in his § 341(a) meeting testimony that he resided on Hiawatha Street on the petition date.
Because the bankruptcy court confined its inquiry to Elliott’s bad faith in concealing the Buckingham Property, it did not make any factual findings relevant to whether Elliott satisfied the continuous residency requirement set forth in C . § 704.730(a)(3). Thus, material factual issues exist that the court must consider in making this determination, including the threshold determination that the Buckingham Property *18 is property of the estate. [5] Accоrdingly, we must VACATE the order on appeal and REMAND to the bankruptcy court to resolve these factual issues and determine whether Elliott is entitled to an automatic homestead exemption under C AL . C IV . P ROC . C ODE § 704.730(a)(3).
2. The Bankruptcy Code’s statutory limitations of exemptions
Even if on remand the bankruptcy court finds that Elliott retained, through continuous residency, a sufficient property interest in the Buckingham Property to qualify for the automatic homestead exemption under C ODE § 704.730(a)(3), the Code provides additional limitations which may function as a basis to deny Elliott’s exemption given his misconduct.
As the Supreme Court acknowlеdged in Law v. Siegel, “§ 522
sets forth a number of carefully calibrated exceptions and
limitations, some of which relate to the debtor’s misconduct.”
Section 522(g) limits the ability of a debtor to claim an
exemption where the trustee has recovered property for the benefit
of the estate. Under § 522(g)(1), a debtor may claim an exemption
where the trustee has recovered property under §§ 510(c)(2), 542,
543, 550, 551 or 553 only if (1) the property was involuntarily
transferred, and (2) the debtor did not conceal the transfer or an
*19
interest in the property. Hitt v. Glass (In re Glass), 164 B.R.
759, 761 (9th Cir. BAP 1994), aff’d,
In his opening appellant’s brief, Elliott identified § 522(g) as a basis for denying a homestead exemption for the type of misconduct involved here. However, he contends that “while it can be argued in this case that [he] did conceal the [Buckingham Prоperty], this is not a case where the Trustee ‘recovered’ the property[,]” and therefore, § 522(g) is inapplicable. We disagree.
On June 4, 2013, Trustee filed a turnover action against Elliott for the Buckingham Property under § 542. See Adv. No. SV 13-01118-VK. Trustee has succeeded in that action. [6] Hence, this constitutes a “recovery” as contemplated by § 522(g), which then brings the Buckingham Property within the scope of the § 522(g)(1) limitation on Elliott’s right to claim an exemption in *20 property he voluntarily transferred and concealed.
The essence of Elliott’s appeal in utilizing Law v. Siegel to shield his misconduct from functioning as lawful grounds to deny his homestead exemption has led to, as Trustee bluntly but accurately asserts, Elliott practically admitting he concealed the asset and acted in bad faith. Indeed, Elliott does not dispute that he failed to disclose his interest in the Buckingham Property in his original schedules. He admits claiming Hiawatha Street as his “street address” on his petition even though he knew he did not live there. Elliott further acknowledges that at the § 341(a) meeting he claimed his forms were true and complete, all the while knowing the bankruptcy court had no knowledge of the Buckingham Property he allegedly resides in and controlled through LWI.
Accordingly, we conclude that § 522(g)(1) is applicable and an important limitation on Elliott’s claimed homestead exemption for the bankruptcy court to consider on remand.
IV. CONCLUSION
For the reasons set forth above, we VACATE the bankruptcy court’s order sustaining Trustee’s objection to Elliott’s claimed homestead exemption and denying it in its entirety and REMAND for a determination of whether Elliott is entitled to a homestead exemption under C § 704.730(a)(3).
Notes
[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.),
[3] In her objection to Elliott’s homestead exemption, Trustee provided records from the Nevada Secretary of State as evidence of Elliott’s ownership interest in LWI, the company which held title to the Buckingham Property on the petition date. These records showed that when the Buckingham Property was transferred from S. Central to LWI, Elliott was LWI’s president, treasurer аnd director.
[4] This principle is consistent with and explicitly echoed in sections of Article 4 other than C ODE § 704.730(c). For instance, C AL . C IV . P ROC . C § 704.820 recognizes that debtors with less than a fee interest are still entitled to a homestead exemption under Article 4, stating in the Commission Comments it “implements the intent of [Article 4] not to restrict the interest of the judgment debtor for which a homestead exemption is available. A homestead exemption is available to a judgment debtor regardless of whether the judgment debtor’s interest is a fee, leasehold, or lesser interest.”
[5] It is a “well settled rule that property cannot be
exempted unless it is first property of the estate.” Heintz v.
Carey (In re Heintz),
[6] While this appeal was pending, on April 7, 2014, the bankruptcy court entered a judgment revoking Elliott’s discharge and vesting title of the Buckingham Property in Trustee after finding “the debtor knowingly and fraudulently failed to disclose a significant asset in his schedules, i.e., the debtor’s interest in a corporation that held title to his residence. For no consideration, less than three weeks after the debtor obtained his discharge, the debtor obtained title to his residence from that corporation.” Adv. No. SV 13-01118-VK, dkt. no. 63 at 2, ¶ 1. No appeal has been filed.