Fava v. FreemanFava v. Freeman
The Order of the Court is set forth below. The case docket reflects the date entered.
____________________________________________________________________________
SO ORDERED,
Judge Jason D. Woodard
United States Bankruptcy Judge
This adversary proceeding came before the Court for trial by videoconference on February 25, 2026, on the Complaint for Turnover of Property of the Estate [
The defendant would be a stranger to this bankruptcy case but for this adversary proceeding. The trustee seeks a judgment under
The Court has considered the evidence and applicable law and concludes that turnover is not warranted for the reasons set forth herein and in the Court’s Memorandum Opinion and Order Denying Motion for Summary Judgment.4 The trustee has failed to meet his burden to show that the property is not of inconsequential value or benefit to the estate under
I. JURISDICTION
As set forth more fully in its summary judgment opinion,6 this Court has jurisdiction pursuant to
Specifically, the Court concluded that because it has jurisdiction over all property of the bankruptcy estate, wherever located, it has jurisdiction over the home in California.8 Further, the Court determined that venue is proper under
Pursuant to the joint pre-trial order submitted by the parties and entered by the Court, the parties agreed, “The following facts are established by the pleadings, by stipulation, by court order, or by admission.”11 The stipulated facts are reproduced below verbatim:
- Debtor Kevin O’Conner Freeman filed his chapter 7 bankruptcy petition on June 22, 2020 (“Petition Date”).
- His voluntary petition provides that he lives in Water Valley, Mississippi, located in the Northern District of Mississippi.
- The Court previously found that the debtor had lived in this district longer than any other district during the 180 days prior to filing the petition, thus making him eligible to file in Mississippi.
- Along with the petition, the debtor filed Schedule A/B, which listed real property located at 33277 Kabian Court in Temecula, California (the “Property”).
- The trustee, as plaintiff, now seeks turnover of the Property from the defendant, so that the non-exempt asset can be sold to pay the debtor’s creditors.
- On May 25, 2006, the debtor and the defendant took title to the Property as “Husband and Wife as Joint Tenants.” The Property is encumbered by a deed of trust securing a promissory note in the original principal amount of $375,000. No additional deeds of trust or refinancing was obtained by either Debtor or Defendant since the May 25, 2006 acquisition date.
- As of October 2024, the Court found that the fair market value of the Property was at least $620,000, with significant non-exempt equity of at least $373,000.
- The Property is the only non-exempt asset of meaningful value in the bankruptcy case.
The Debtor and the Defendant are not divorced. - Debtor and defendant separated on August 1, 2012 as defendant admitted in her November 8, 2022 Petition for Dissolution (Divorce) of Marriage filed in Freeman & Freeman, Case No. FLHE2206385 before the Superior Court of California, County of Riverside (“Riverside Superior Court” or “Family Court”).
- Debtor and Defendant have no minor children. The regular monthly mortgage payment for the Property is $1,480.54.
- As of March 8, 2023, the mortgage payments for the Property were in arrears of $5,203.64.
- Three claims have been filed and/or scheduled in the bankruptcy case. Capital One Bank (USA), N.A. filed a claim for $357.35 for a credit card. That proof of claim provides that the revolving credit card account was opened on December 5, 2016, but there is no indication of when the outstanding $375.35 debt was incurred. The statement attached to that proof of claim lists only the debtor as an account holder.
- Foremost Insurance Company filed a claim for $83,382.41, the basis of which is a judgment entered by a Mississippi state court. That judgment was entered on February 11, 2019, and is also against the debtor only.12
In addition to the stipulated facts, the Court reiterates its prior pertinent findings.
In its prior opinion and order13 sustaining the trustee’s objection to the debtor’s exemptions,14 the Court found that the debtor had long ago separated from the defendant with no intention of returning to reside in the Property.15 The Court also adopts its findings in that same opinion that the defendant
The Court makes additional findings regarding the equity in the Property, taking into account secured tax claims, the mortgage, and the Property’s value, as follows:
The third claim filed in the bankruptcy case, which was mentioned but otherwise unaddressed by the parties in their stipulated facts, is a $7,140.38 tax claim filed by the California Franchise Tax Board for the tax years 2011, 2012, and 2013.17 In its Proof of Claim No. 3-1, the taxing authority filed the 2011 and 2012 tax claims as secured claims, and the 2013 tax claim as unsecured. Including penalties, interest and costs, the unpaid taxes for each of these years amount to $3,026.21, $1,804.90, and $2,309.27, respectively.18 No party has contested the amounts claimed or the secured status of the 2011 and 2012 tax claims.19 Further, the parties stipulated to the admission of two Notices of State Tax Liens recorded by the taxing authority that encumber the
The Court accepts the expert testimony of the trustee’s appraiser and finds that the fair market value of the Property, as of July 17, 2025, was $745,000. In addition to the secured tax claims, the Property is encumbered by a mortgage.22 As of March 8, 2023, the balance of the mortgage debt was $246,693.16.23 More recent figures for the fair market value or the outstanding balance were not presented to the Court. Based on this imperfect record, the Court finds there is approximately $500,000.00 of equity in the Property.
III. CONCLUSIONS OF LAW
The trustee seeks turnover of the Property, which is governed by
(a) . . . an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.25
To satisfy his burden, the trustee must prove each of the following elements: (1) the property is in the possession, custody, or control of a non-custodial third party; (2) the property constitutes property of the estate; (3) the property is a type that the trustee could use, sell, or lease pursuant to
At the summary judgment stage, the Court found that the trustee had met its burden on the first three elements.27 The Court noted that the only element remaining for trial was whether the Property was of inconsequential value or benefit to the estate. For clarity and completeness, the Court’s findings and conclusions as to the four elements are restated and refined below.
A. The Property is in the possession, custody, or control of a non-custodial third party.
The parties do not dispute that the defendant is a non-custodial third party in possession of the Property.28 The defendant resides in the Property in
(A) receiver or trustee of any of the property of the debtor, appointed in a case or proceeding not under this title;
(B) assignee under a general assignment for the benefit of the debtor’s creditors; or
(C) trustee, receiver, or agent under applicable law, or under a contract, that is appointed or authorized to take charge of property of the debtor for the purpose of enforcing a lien against such property, or for the purpose of general administration of such property for the benefit of the debtor’s creditors.31
The defendant does not meet any of these foregoing definitions and is therefore a noncustodial third party in possession of the Property.32 The trustee has met the first element for turnover.
B. The Property is property of the estate.
Upon the filing of a bankruptcy petition, the Bankruptcy Code creates an estate.33 Section 541(a) of the Bankruptcy Code provides that property of the estate includes, inter alia, “(1) . . . all legal or equitable interests of the debtor in property as of the commencement of the case.”34 This includes:
All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—(A) under
the sole, equal or joint management and control of the debtor; or (B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is liable.35
“The purpose of Section 541(a)(2) is ‘to pass to the bankruptcy estate the community property which would otherwise be available under applicable state law for the satisfaction of claims against the debtor.’”36
While the determination of whether a debtor’s interest in property constitutes property of the estate is a question of federal law, “Property interests held by a debtor at the time of filing are determined by reference to state law.”37 “The term ‘community property’ is not defined in the Bankruptcy Code, but it is a ‘term of art referring to that certain means of holding marital property in those states which have adopted a community property system.’”38 “The ultimate characterization of property as either community or separate is determined by applicable state law, and that determination establishes what interest, if any, the bankruptcy estate has in the property.”39 Because the Property is located in California and the debtor and defendant obtained their
Under California law, real property acquired by either spouse during the marriage is community property.41 A married couple’s separation does not change that status, and married persons may only “change—i.e., transmute—the character of property from community to separate, or vice versa, if the transmutation is ‘made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.’”42 That has not happened here.
The debtor and the defendant purchased the property in 2006, during their marriage, and as the deed clearly indicates, they took title as husband and wife. Though they have been separated since August 1, 2012, and the defendant has filed a petition for divorce in California, they are not yet divorced and any related property division is stayed by the bankruptcy case.43 “For
Further, the Court has disallowed the debtor’s homestead exemption on the Property for the reasons explained in the prior opinion sustaining the trustee’s objection.46 At summary judgment, the Court again held that the defendant has no right to claim the debtor’s homestead exemption (and that doing so would be futile), nor does she have the right to claim her own exemption in the Property.47 The Property is community property not subject to an exemption, so it remains property of the bankruptcy estate. The trustee has satisfied the second turnover element.
Section 363 provides, “The trustee . . . may use, sell, or lease, other than in the ordinary course of business, property of the estate . . . .”48 As property of the estate, the Property is of the kind that the trustee may sell under
“A chapter 7 trustee is a fiduciary of the estate whose principal duty is to administer estate property so as to maximize distribution to unsecured creditors, whether priority or general unsecured.”50 Specifically,
The Property is not exempt, has substantial equity, and there is a market for this asset. The trustee has satisfied the third turnover element.
“Section 542 carves out exceptions to the turnover command, and
“There is no single test to determine whether property is of greater than inconsequential value.”56 Instead, courts consider the unique facts and circumstances of each case. For example, “One method noted by courts is to compare the amount of claims filed in a debtor’s bankruptcy case to the value of the property that the trustee seeks to recover.”57 Other courts require a showing that some method of sale holds a reasonable prospect of a meaningful recovery in excess of the debtor’s exemption in the asset.58
“While Section 541(a)(2) places community property in the hands of the trustee, he cannot hold it in a vacuum. Section 726 limits the creditor constituency for which the community property is held. If there is no such constituency, it serves no purpose for the trustee to deal with the property.”59
Section 726(c) provides for a special distribution scheme from the proceeds of community property; therefore, community property may only be sold to pay particular claims.60 Specifically,
(A) First, community claims against the debtor or the debtor’s spouse shall be paid from property of the kind specified in section 541(a)(2) of this title, except to the extent that such property is solely liable for debts of the debtor.
(B) Second, to the extent that community claims against the debtor are not paid under subparagraph (A) of this paragraph, such community claims shall be paid from property of the kind specified in section 541(a)(2) of this title that is solely liable for debts of the debtor.
(C) Third, to the extent that all claims against the debtor including community claims against the debtor are not paid under subparagraph (A) or (B) of this paragraph such claims shall be paid from property of the estate other than property of the kind specified in section 541(a)(2) of this title.
(D) Fourth, to the extent that community claims against the debtor or the debtor’s spouse are not paid under subparagraph (A), (B), or (C) of this paragraph, such claims shall be paid from all remaining property of the estate.64
“The first sub-estate pays all community claims—including community claims assertable against the non-debtor spouse. The [sub-estate] consists only of Section 541(a)(2) property excluding property that is solely liable for debts of the debtor.”65 In other words, Sub-estate (A) community claims are community claims incurred by both spouses or just the non-filing spouse. If any money is left after payment of community claims in Sub-estate (A), Sub-estate (B) community claims are paid, which are “only community claims assertable against the debtor.”66 The important statutory mandate is that
Turning to Sub-estate (C), the plain language of
Sub-estate (D) then directs payment of all remaining community claims from all remaining property of the estate. But as with Sub-estates (A) and (B), Sub-estate (D) proceeds can only be used to pay community claims.
This is the prism through which the Court must examine the final turnover element. To begin, there is one asset of any value in the bankruptcy estate. It is the Property, which is community property,69 and is thus excluded from paying any claims that fall within
A “community claim” is a “claim that arose before the commencement of the case concerning the debtor for which property of the kind specified in section 541(a)(2) of this title [i.e. community property] is liable, whether or not there is any such property at the time of the commencement of the case[.]”71 “This definition is keyed to the liability of the debtor’s property for a claim against either the debtor or the debtor’s spouse. If the debtor’s property is liable for a claim against either, that claim is a ‘community claim.’”72
There are only three claims in the bankruptcy case. Whether those claims are community claims turns on California state law.73 In California, “the community estate is liable for a debt incurred by either spouse before or during marriage.”74 The phrase “‘[d]uring marriage’ . . . does not include the
means the date that a complete and final break in the marital relationship has occurred, as evidenced by both of the following:
(1) The spouse has expressed to the other spouse the intent to end the marriage.
(2) The conduct of the spouse is consistent with the intent to end the marriage.76
The parties stipulated that the date of separation was August 1, 2012.77 That separation date precludes any claims arising after that date from being designated as community claims that can be paid under the distribution waterfall in subsections
1. A fraction of the claims are community claims which could possibly be paid from proceeds of the sale of the Property.
Three claims have been filed and/or scheduled in this case: (1) the $357.35 claim of Capital One Bank for credit card debt, (2) the $83,382.41 claim of Foremost Insurance Company evidenced by a Mississippi state court
a) Claim 1-1 of Capital One Bank (USA), N.A., is not a community claim.
Beyond the stipulation, the parties did not present any evidence to show when the $357.35 credit card debt to Capital One was incurred, but the parties agree that the revolving credit card account was not opened until December 5, 2016, more than four years after the separation date.79 The statement attached to that proof of claim lists only the debtor as an account holder, which is consistent with the stipulated facts.80 Claim 1-1 is not a community claim because the debtor is the sole obligor on the debt to Capital One and it was incurred no earlier than December 5, 2016. As a non-community claim, Claim 1-1 may not be paid from proceeds of the sale of the Property under the distribution waterfall in subsections
b) Claim 2-1 of Foremost Insurance Company is not a community claim.
Foremost Insurance Company‘s claim for $83,382.41 was also not incurred until after the debtor and defendant separated. The basis for the
c) Only a portion of Claim 3-1 of the California Franchise Tax Board is a community claim.
The third claim is a $7,140.38 aggregate tax claim for the years 2011 to 2013, filed by the California Franchise Tax Board.83 The tax claims are secured by the Property as evidenced by the recorded state tax liens.84 Because the separation date/community claim cutoff falls within these tax years, each tax year must be examined independently.
Including penalties, interests and costs, the 2011 taxes total $3,026.21.85 The 2011 taxes are a community claim under California law because they were incurred during the marriage (i.e., before the August 1, 2012, separation
The 2013 taxes total $2,309.27.87 The 2013 tax claim was incurred after the date of separation, and only the debtor is named as the delinquent taxpayer.88 Thus, the 2013 portion of the tax claim is not a community claim and cannot be paid from proceeds of the sale of the Property.
The 2012 taxes total $1,804.90.89 The 2012 taxes are more complicated given the timing of the separation. Under California community property law, each spouse is taxed on half of all income received during the marriage, regardless of which party has actually earned it.90 California law specifically provides that “the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.”91 But the “earnings and accumulations of a spouse . . . after the date of separation of the spouses, are the separate property of the spouse.”92 As such, earnings after
The trustee does not dispute that the community claims in this case are limited to the 2011 tax year and the 2012 tax year up to the August 1st date of separation. During closing arguments, the trustee argued that the total amount of community claims against the estate is $4,073.05.94 The trustee reached the $4,073.05 amount by adding the entire 2011 tax liability ($3,026.21) to the 2012 tax liability prorated through the separation date ($1,046.84).95 While prorating the 2012 tax year is a reasonable method to determine the community claim, that number could change depending on whether the community income was earned entirely before or after the date of separation.96 There is no evidence as to the specific times the 2012 income was earned and who earned it. Therefore, the total community claim could range anywhere from $3,026.21 to $4,831.11 depending on the amount of the 2012
2. A partial payment of Claim 3-1 is of insufficient value or benefit to the estate to warrant turnover of the Property.
As a threshold issue, the community claims the trustee could pay appear to be secured claims, which the trustee should not be seeking to pay at all. Even if the claims were unsecured, the Court concludes that the value to the estate would be inconsequential, especially when considering the significant administrative costs99 the estate would incur to administer the asset. Either of these conclusions would be sufficient to deny turnover.
a) The trustee should not act as a liquidating agent for secured creditors.
The chapter 7 trustee is a fiduciary of the estate “whose principal duty is to administer estate property so as to maximize distribution to unsecured
A comprehensive review of the distribution scheme of § 726 reveals that “distributions by the Chapter 7 trustee are generally to be limited to only creditors having an allowed priority or non-priority unsecured claim[ ] against the estate.”103 “Clearly, the Code never contemplated that a Chapter 7 trustee should act as a liquidating agent for secured creditors who should liquidate their own collateral.”104 Therefore, the trustee should pursue turnover only for the purpose of providing a payout to unsecured creditors, as “secured creditors in a chapter 7 are protected by their liens.”105
In limiting trustees’ powers to liquidate encumbered assets where little to no equity is available for unsecured creditors, courts have considered the
At trial, the chapter 7 trustee testified that he is subject to the guidelines of the U.S. Trustee Handbook. The handbook specifically provides:
Generally, a trustee should not sell property subject to a security interest unless the sale generates funds for the benefit of unsecured creditors. A secured creditor can protect its own interests in the collateral subject to the security interest.108
Though the handbook is not binding on this Court, it “is a valuable source of guidance because it is prepared by the Executive Office of the U.S. Trustee Program [part of the Department of Justice], which was created ‘to promote the integrity and efficiency of the bankruptcy system for the benefit of all
Here, the only filed community claim that the trustee can pay from the sale of the Property is a $4,073.05 secured tax claim (after paying off the mortgagee, who did not even bother to file a claim in the bankruptcy case). Despite the taxing authority already being protected by its lien, the trustee is pursuing turnover of a secured asset that will not generate funds for the benefit of unsecured creditors. This alone is sufficient to deny turnover.
The handbook further instructs trustees to consider the impact of administrative costs in relation to the distribution to be made to unsecured creditors. It provides:
A trustee shall not administer an estate or an asset in an estate where the proceeds of liquidation will primarily benefit the trustee or the professionals, or unduly delay the resolution of the case. The trustee must be guided by this fundamental principle when acting as trustee. Accordingly, the trustee must consider whether sufficient funds will be generated to make a meaningful distribution to unsecured creditors, including unsecured priority creditors, before administering a case as an asset case.111
. . . .
Trustees should not only consider the commission earned on a sale of estate property in relation to the anticipated distribution to unsecured creditors but also take into account all expenses incurred by the estate such as professional fees, even tax liabilities associated with a sale because professional fees are an unsecured creditor priority claim. The distribution to creditors should be meaningful.112
Here, the sale of the Property is expected to yield around $500,000 of equity to pay around $4,000 of secured community claims. It cannot and will not pay any unsecured claims. After payment of the trustee‘s statutory compensation, special counsel‘s fees for litigating this adversary proceeding, a
A distribution of much less than one percent of the value of the asset is inconsequential in this case, especially when the only creditor to be paid is secured and could protect its own rights in the Property.
3. Trustee‘s citations to In re Herrera and In re Anne Peterson do not support turnover.
The main cases cited by the trustee are the out-of-circuit cases of In re Herrera115 and In re Anne Peterson.116 While the Court may consider cases from other circuits, “[o]ut-of-circuit opinions are, at best, persuasive authority,
In Herrera, turnover was never at issue because the trustee did not file a complaint seeking turnover.119 The court granted the trustee‘s motion to sell community property after no objection from the debtor and a limited objection by the non-filing spouse, requesting payment from the net sale proceeds for unpaid domestic and child support owed by the debtor.120 In Anne Peterson, a complaint seeking turnover was filed by the trustee in an adversary proceeding,121 but the defendant failed to respond to the trustee‘s summary
The trustee‘s arguments, as shown by his reliance on Herrera and Anne Peterson, have generally centered on whether the Property has value, but again, that is not the question. At the turnover stage, which the trustee is seeking now, § 542 asks not whether property has value, but whether “such property is of inconsequential value or benefit to the estate.”124 Again, this Property is certainly valuable, but is of inconsequential value to the estate because the amount that could be paid to creditors is too low and the costs to get there are too high. Herrera and Anne Peterson are simply not applicable because of the posture of this case.
4. The trustee‘s expert witnesses were excluded because they would have been unhelpful.
At trial, the trustee asked the Court to reconsider its earlier order excluding attorneys D. Edward Hays and William M. Hulsy as expert
Prior to the pre-trial conference, the trustee filed his Unilateral Pretrial Statement and Order, which proposed to offer, inter alia, expert testimony and corresponding reports from (1) Lonn Apfel, a California Certified Appraiser, (2) D. Edward Hays, Esq., a California Certified Bankruptcy Law Specialist, and (3) William M. Hulsy, Esq., a California Certified Family Law Specialist. At the pre-trial conference, and in the subsequent Order on Motion to Strike,126 the Court allowed the testimony of the appraiser Apfel but disallowed attorneys Hays and Hulsy as expert witnesses.
Federal Rule of Evidence 702127 permits admission of expert testimony in the form of an opinion if its proponent demonstrates the following elements:
- the expert‘s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
- the testimony is based on sufficient facts or data;
- the testimony is the product of reliable principles and methods; and
- the expert‘s opinion reflects a reliable application of the principles and methods to the facts of the case.128
“The party offering the testimony bears the burden of establishing its admissibility by a preponderance of the evidence.”130 “[T]he Federal Rules of Evidence ‘assign to the trial judge the task of ensuring that an expert‘s testimony both rests on a reliable foundation and is relevant to the task at hand.‘”131 The Court‘s analysis is not limited to the arguments asserted by the parties, but “extends to ‘all aspects of an expert‘s testimony.‘”132 Thus the Court may “evaluate expert testimony sua sponte and exclude such testimony where appropriate . . . .”133
The Court of Appeals for the Fifth Circuit has been clear, “Experts cannot ‘render conclusions of law’ or provide opinions on legal issues.”134 This is because “our legal system reserves to the trial judge the role of deciding the
Counsel for the trustee confirmed in the pretrial hearing that Messrs. Hays and Hulsey were being offered as experts to provide opinions on legal issues and conclusions of law. Trustee‘s counsel represented, “Mr. Hays is qualified to testify on the manner in which federal bankruptcy courts analyze what value to ascribe the share of community property proceeds that is allocable to the Debtor‘s estate and to the Defendant non-filing spouse,”139 and “Mr. Hulsy is qualified to testify, under principles of federalism and concurrent jurisdiction, how a California family court would allocate the share of
The trustee is represented by able California counsel who is capable of the same advocacy that Mr. Hays or Mr. Hulsy would have offered with regard to California law, bankruptcy law, and any crossover between them. Their testimony would have been unhelpful to the Court, which can form its decisions on the basis of the evidence, arguments of counsel, and its own independent examination of legal authorities.141 The Court does not need an expert to educate it on bankruptcy law. Further, any testimony related to Mr. Hulsy‘s hypothetical of how a California court would allocate community property proceeds between the debtor‘s estate and the defendant would have been purely speculative and immaterial. A guess as to how a divorce court might have divided the Property would have been of no moment in this turnover action because the parties were not divorced and the Property was community property on the petition date, at which time the state of the title of the Property was fixed for purposes of the bankruptcy case.142
The trustee has failed to meet his burden to show that the Property is not of inconsequential value or benefit to the estate, which is an essential element of the trustee‘s turnover claim under
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