Trustee Gets Second Chance to Prove Fraudulent Claim

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By Diane Davis

Dec. 18 — A Chapter 7 trustee will get another chance to prove that a debtor fraudulently claimed a homestead exemption on her property after the U.S. Bankruptcy Appellate Panel of the Ninth Circuit vacated the bankruptcy court's judgment and remanded the case to the bankruptcy court (Whatley v. Stijakovich-Santilli (In re Stijakovich-Santilli), 2015 BL 411506, B.A.P. 9th Cir., No. EC-15-1000-FDJu, 12/15/15).

Judge Robert J. Faris of the U.S. Bankruptcy Appellate Panel of the Ninth Circuit concluded that the bankruptcy court erred when it ruled that Chapter 7 trustee Douglas M. Whatley wasn't entitled to the extended objection period under Federal Rule of Bankruptcy Procedure 4003(b)(2) because he could have discovered debtor Rhonda Stijakovich-Santilli's misstatements earlier.

The bankruptcy court was also incorrect in ruling that the evidence of the debtor's subsequent false statements couldn't support a finding that she fraudulently claimed the homestead exemption, the BAP said.

Homestead Exemption Claim

The debtor owned three single family homes, including one property in California. When she filed her Chapter 7 bankruptcy petition, the debtor claimed a homestead exemption in the California property as her primary residence. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.

According to the debtor's bankruptcy petition, she only had monthly income from Social Security and roommates.

After the debtor received a discharge in her bankruptcy case, she filed a motion to compel abandonment of the three single family residences because there was no equity in them for the estate. She claimed a homestead exemption of $175,000 in the one property due to a disability.

Trustee's Objections

The trustee objected to the debtor's homestead exemption, arguing that the debtor fraudulently asserted the exemption claim. According to the trustee, the debtor didn't reside at the property on the date she filed her petition and didn't reside there the year before either based on statements in her tax returns indicating that it was rental property.

The debtor contended that although she received rental income on the property, she also resided there. She later admitted, however, that she was living elsewhere, but said she left most of her personal belongings in the home based on advice her former attorney had given her. She said he had told her the house would be considered her primary residence if she left her belongings there.

Objection Barred by Rule 4003(b)

The bankruptcy court determined that the trustee's objection was barred under Rule 4003(b)(1) unless the debtor fraudulently asserted a claim of exemption under Rule 4003(b)(2).

Under Rule 4003(b)(1), a creditor or trustee must file an “objection to the list of property claims as exempt within 30 days after the meeting of creditors held under Section 341(a) is concluded or within 30 days after any amendment to the list or supplement schedules is filed, whichever is later.” Rule 4003(b)(2) provides an exception to this rule. It provides that “the trustee may file an objection to a claim of exemption at any time prior to one year after the closing of the case if the debtor fraudulently asserted the claim of exemption.”

The bankruptcy court said it found the debtor's testimony “troubling,” but believed that the debtor resided at the property but misreported it on her income tax returns. The court also said the trustee should have taken more steps to investigate further whether the debtor was attempting to deceive the court. The trustee was on “notice” the court said, based on the debtor's bankruptcy schedules.

No Duty to Investigate

On appeal, the BAP said that the bankruptcy court erred by imposing a duty to investigate on the trustee.

The trustee took the debtor at her word and justifiably relied on the bankruptcy schedules and her declaration as to their accuracy, the panel said.

The bankruptcy court shouldn't have discounted the debtor's subsequent actions and statements as evidence of a fraudulent assertion of a claim of exemption, the BAP said.

The BAP remanded the case to permit the bankruptcy court to apply the correct legal definition of the phrase “fraudulently asserted” and to determine whether the evidence shows that the debtor fraudulently asserted the claim of exemption.

On remand, the BAP said, the bankruptcy court can also consider the declaration or testimony of the debtor's former attorney, which contradicted the debtor's testimony.

Judges Randall L. Dunn and Meredith A. Jury joined the opinion.

Barry H. Spitzer of the Law Office of Barry H. Spitzer represented appellant/Chapter 7 trustee Douglas M. Whatley; Appellee/debtor Rhonda Stijakovich-Santilli represented herself.

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