In re Sain
This dеcision explores whether California law protects the homestead proceeds received by Debtor Douglas W. Sain ("Douglas") from his Chapter 7 Trustee Richard M. Kipperman ("Trustee"). At all relevant times, Douglas has lived at 11118 Mesa Top Place, San Diego, CA 92121 ("Mesa Top"), which Douglas bought back from Trustee during his bankruptcy case. Although Douglas made substantial contributions to finance the sale from personal assets that were not property of the estate, his father, Robert W. Sain ("Robert"),
Over a year after the sale escrow closed, Trustee brought a motion for turnover of the $75,000 in homestead proceeds Douglas received from the sale. Trustee claimed Douglas was not entitled to the proceeds since he did not acquire fee title in Mesa Top and did not reinvest the proceeds in a new homestead after receiрt. By involving both a lease and a debtor's repurchase of a home from a trustee, this case is outside the standard scenario of a Chapter 7 trustee sale of a homestead to a third party. No case was found, and none was cited to the court, addressing the facts present here, so the issues are of first impression. Because both the policy of preventing homelessness, and the policy of treating creditors fairly, are respected by permitting Douglas to retain his homestead proceeds, Trustee's motion will be denied.
I. Background
While application of the legal principles at issue is disputed, the facts are not. Douglas filed a voluntary Chapter 7 petition on December 13, 2014. He scheduled a 36% interest in Mesa Top, where he resided with his children,
Both Douglas's and his ex-wife's interests in Mesa Top were sold by Trustee to Douglas for $755,000 when Douglas was the highest bidder at a contested auction conduсted on May 5, 2016. At the auction, Douglas paid an $11,000 deposit required under the sale contract through a new wholly-owned subchapter S corporation, Sain Entertainment Corporation ("SEC"). Douglas had attempted to credit bid his $75,000 homestead exemption as part of his offer of purchase, but Trustee refused.
Douglas had initially expected Robert would liquidate investments to enable Douglas to buy Mesa Top outright. But, after Douglas was deemed to be the highest bidder, Robert decided instead to fund a loan for the purchase. This change in plans required Robert to take title himself, so Douglas requested Trustee consent to assign the purchase contract to Robert. While Trustee initially refused, this dispute was eventually resolved when Douglas agreed to provide additional deposits and assurances to the estate in return for Trustee's consent to the assignment. Douglas then liquidated $22,500 from his IRA on July 13, 2016, which he also contributed towards the purchase of Mesa Top.
Instead of paying Douglas his $75,000 in homestead proceeds at the close of escrow, Trustee withheld the entire amount and sought to pay $42,496.37 to Douglas's ex-wife to satisfy a domestic support obligation. Douglas objected, and the court ordered Trustee after a hearing to pay Douglas the full proceeds since the money was not property of the estate under Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi),
Almost ten months after Douglas finally received his homestead, Trustee brought a motion for turnover of the proceeds. Trustee argued: "Douglas did not acquire a new home, dwelling or homestead," but only a leasehold and failed to reinvest the proceeds after receipt as required by CCP § 704.720(b) and Wolfe v. Jacobson (In re Jacobson),
Having further considered the issues, the court makes its findings of fact and conclusions of law under Fed. R. Bankr. P. 7052 in this Memorandum Decision.
II. Analysis
A. Douglas Can Only Assert an Automatic Homestead
California provides two alternative homestead options for its citizens: an automatic homestead exemption set forth in CCP §§ 704.710 - 704.850 and a declared homestead set forth in CCP §§ 704.910 - 704.995. While Douglas's scheduled exemptions asserted only an automatic homestead, he tried to defend the turnover motion relying instead upon his recorded declaration of homestead. His apparent goal was to avoid the obligation to trace the automatic homestead proceeds imposed on the debtors in Jacobson,
The court need not assess whether the reinvestment obligations differ under the automatic and declared homestead schemes here. Not only did Douglas fail to elect a declared homestead exemption in his schedules, declared homesteads are not applicable to a sale by a bankruptcy trustee. Kelley v. Locke (In re Kelley),
B. The Leasehold Is an Exempt Homestead
Trustee contends Douglas's leasehold interest cannot be a homestead under California law. This was, until recently, more of an unresolved issue in this Circuit. Bencomo v. Avery (In re Bencomo), No. CC 15-1442-DKuF,
The court is also guided by other Ninth Circuit authority extending Oregon homestead law specifically to leasehold interests. Sticka v. Casserino (In re Casserino),
The California homestead exemption statute is very similar to the Oregon law analyzed in Casserino,
[A] place where a person resides аnd may include but is not limited to the following:
(1) A house together with the outbuildings and the land upon which they are situated.
(2) A mobilehome together with the outbuildings and the land upon which they are situated.
(3) A boat or other waterborne vessel.
(4) A condominium, as defined in Section 783 of the Civil Code.
(5) A planned development, as defined in Section 11003 of the Business and Professions Code.
(6) A stock cooperative, as defined in Section 11003.2 of the Business and Professions Code.
(7) A community apartment project, as defined in Section 11004 of the Business and Professions Code.
This statutory definition was expressly intended to inсlude "any [ ] property in which the judgment debtor ... resides." Hastings v. Holmes (In re Hastings),
Even though a leasehold is not expressly listed as an example of a "dwelling" under CCP § 704.710(a), that conclusion is undeniable from other statutory provisions, which specifically address how a leasehold is to be handled under the homestead law. See CCP § 704.820 (permitting executing creditors to sell "the interest of the judgment debtor" and not "the dwelling" where the debtor owns a "leasehold or other interest less than a fee interest"); CCP § 704.740 (executing creditors need not obtain a court order to sell a debtor's dwelling if it is a "leasehold estate with an unexpired term of less than two years at the time levy"). The court must give the statute a holistic interpretation. People v. Gonzales,
Even if the inclusion of leasehold interests within the definition of a dwelling was less evident from the statutory language, the purpose of California homestead law would dictate the same outcome. That purpose is "to ensure that insolvent debtors and their families" are not "rendered homeless." Webb v. Trippet,
Douglas's ownership interests and residency in Mesa Top render it his dwelling, and the money Douglas reinvested in Mesa Top must be considered money he reinvested in an exempt homestead.
C. Douglas Reinvested More than $75,000 in Mesa Top
Trustee also contends Douglas cannot prove he satisfied the requirements of CCP § 704.720(b) by reinvesting the proceeds in a new home within six months after receipt. Trustee misallocates the burden of proof because it is he who has "the burden of proving the estate is entitled to a turnover." Jacobson ,
Trustee did not challenge these facts other than as to the payment of rent. Instead, he contends these investments do not count as proper reinvestments, for the following reasons: 1) The statutory purpose is not advanced since Douglas would never become homeless due to Robert's support; 2) Douglas failed to buy a new home after escrow closed; preventing the $50,000 in attorneys' fees paid to defend the homestead from being considered a reinvestment in a new home; 3) the $33,500 deposited towards the purchase of Mesa Top and August 2016 rent paid from the IRA predate Douglas's receipt of his homestead proceeds; and 4) the $5,117.43 in property taxes and $400.39 in HOA fees in early 2017 were paid by SEC and are not traceable to the homestead. Trustee does not support these contentions with any authority but Jacobson,
As explained below, each of Trustee's specific contentions against Douglas's retention of his homestead proceeds impermissibly relies upon a strict, rather thаn a liberal, construction of CCP § 704.720(b). Because court must liberally construe California's homestead law, precise adherence to the statutory requirements has been found in a wide array of circumstances to be unnecessary if the outcome would interfere with the beneficial purpose of the law. See
The collective message of these cases is to mandate a flexible approach to the statutory guidelines. Thorsby,
i. Douglas Satisfied the Statutory Purpose by Remaining in His Home
Douglas certainly kept himself, and his visiting children, from becoming homeless by investing at least $90,635.43 in Mesa Top. Trustee's speculation that Robert would always bail Douglas out if he lost his home is not persuasive since it is unsupported by evidence, and Trustee bore the burden of proof here. Jacobson ,
ii. Douglаs's Payment of Attorneys' Fees Is a Proper Investment Since He Did Not Need to Buy Another House
Trustee did not contest that $50,000 was invested by Douglas in attorneys' fees defending his homestead, which were directly traceable to Douglas's receipt of his homestead proceeds from Trustee. Instead, Trustee more obliquely claimed that Douglas could not credit these funds as an investment in a new home by arguing: "Douglas did not acquire a new home, dwelling or homestead," after receipt of the proceeds. But having just bought his existing home back frоm Trustee, Douglas did not need to buy another one, and nothing in the homestead statutes prevents debtors from buying back their homes from either a bankruptcy trustee or an executing creditor. Gardiner,
Trustee also bears some responsibility for Douglas's predicament here. If Trustee had permitted Douglas to credit bid his homestead as part of the purchase price, Douglas's retention of his home and his investment of his homestead proceeds, would have occurred simultaneously with the close of escrow for the sale. See Ortale v. Mulhern,
iii. Douglas's Deposits Before Escrow Closed Were a Proper Investment
Trustee also asserts that the $33,500 total escrow deposits and the undisputed $2,016 August 2016 rent payment that Douglas invested in Mesa Top from non-estate funds before receiving his homestead proceeds cannot satisfy CCP § 704.720(b), which provides that proceeds are exempt for six months "after" they "are actually received by the judgment debtor."
No other case has considered what is, in effect, a pre-investment, rather than a reinvestment, in a homestead. But, as with the other cases with unusual facts, the court cannot ignore the purpose of the reinvestment statute, which is broader than simply preventing homelessness. The courts in Thorsby,
Douglas did not squander his homestead proceeds here. Instead, he invested $55,517.82 in Mesa Top after he received them, and was partially reimbursed for his expenditures of non-estate property ($24,516 from his exempt IRA and $11,000 from his post-petition business). Both facets of the statutory purpose are satisfied here: Douglas was able to stay in his home, and his homestead proceeds were put to a proper use that was not detrimental to creditors.
In fact, if Douglas were required to turn over the homestead proceeds, creditors would receive an impermissible windfall. In Haaland,
In contrast, denying the turnover motion, and permitting Douglas to, in effect, be reimbursed for his use of non-estate assets, leaves the estate in the same financial position as it would have been had Douglas been permitted to credit bid his homestead proceeds; again, the net purchase price less the homestead. This is also the same outcome as if Trustee sold Mesa Top to a third party, and Douglas used his homestead proceeds to buy a diffеrent house. And, that Trustee was the party who opposed Debtor's effort to credit bid, is another reason to prevent the windfall. Thorsby ,
The court will permit Debtor to be reimbursed for his deposits into escrow as a proper reinvestment in his home.
iv. Douglas's Investment of Funds from SEC Was Proper
Trustee's last contention is that Douglas failed to trace SEC's payments in early 2017 of $5,117.43 in property taxes and $400.39 in HOA fees to the homestead proceeds received. The facts and reasoning of Gardiner,
Gardiner , id. at n.3, held that a debtor could protect his worker's compensation award even though it traveled a circuitous route through an investment in the debtor's home, which was then sold, when the proceeds from the sale of the home went into his ex-wife's attorney's trust account, before the debtor received the proceeds of the award back after the divorce. Even though the worker's compensation exemption did not expressly impose a tracing requirement, Gardiner reasoned that California law generally protected exempt assets that were converted into other exempt assets under the tracing statute CCP § 703.080. Id. One example offered of where tracing applied was the statute at issue here, CCP § 704.720. Id. Gardiner overruled the trustee's argument that the worker's compensation proceeds could not be properly traced due to their time residing in the attorney's trust account, because no authority was cited or found either that debtor lost control of the funds or that tracing could not be satisfied. Id. Similarly, there is no dispute that Douglas controls SEC as his wholly-owned company, and no authority was cited or found that the $5,117.43 in property taxes and HOA fees paid by SEC cannot be considered funds reinvested in Douglas's homestead.
Trustee's objection on this ground is also overruled.
III. Conclusion
Trustee is not entitled to the turnover of Douglas's $75,000 homestead proceeds.
IT IS SO ORDERED.
Notes
Douglas and his father are referred to by their first names to avoid confusion among the parties. No disrespect is intended.
Debtor had joint custody of his three minor children when he filed bankruptcy. Although Debtor's ex-wife was awarded sole legal custody in January 2018, Debtor has visitation rights with the children.
Since the court chose to decide this matter on the uncontested facts, it did not hold further proceedings on additional rent Douglas may have paid.