Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Daniel Gill
June 8 — A Chapter 7 debtor could not claim that some of the proceeds he received for his previously allowed homestead exemption should be protected under California's wildcard exemption, the U.S. Bankruptcy Appellate Panel for the Ninth Circuit ruled in an unpublished opinion ( Ziegler v. Casey (In re Ziegler), 2016 BL 180442, B.A.P. 9th Cir., Nos. CC-15-1231-KiTaL, 8:13-bk-20257-CB, unpublished 6/6/16 ).
Bankruptcy Judges Kirscher, Taylor and Landis (sitting by designation) of the U.S. Bankruptcy Appellate Panel for the Ninth Circuit on June 6 found that a prior bankruptcy court order compelling the turnover of the subject cash prevented the debtor from now claiming the money exempt under a different exemption. Although noting that interesting policy questions were implicated, the BAP did not consider these because the final turnover order established that the debtor no longer had an interest in the money.
The decision may serve as a cautionary tale for both trustees and debtors in California, and their respective counsel. Trustees may be well served to follow up on what a debtor does with homestead exemption proceeds six months after receipt, and debtors are advised to be sure to reinvest those proceeds, or if they seek to file an amendment to claim a wildcard, that they do so prior to a court order for turnover of the funds.
When Robert Ziegler filed for Chapter 7 protection on Dec. 30, 2007, he claimed an exemption in his residence, which had “significant equity.”
In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors. Certain interests in property can be claimed as exempt from the bankruptcy estate (and therefore beyond the reach of the trustee or creditors), depending on the laws of the state where the bankruptcy was filed.
In California, a debtor may elect to claim an exemption in her residence pursuant to Calif. Code of Civil Procedure §704.720. The debtor claimed a homestead exemption of $75,000, and no party objected.
The trustee sold the residence and paid the debtor $75,000 on account of his exemption. However, the trustee intended to keep his eye on those proceeds.
California's homestead exemption has a backstop: Cal. CCP §704.720(b) provides that the proceeds from the sale of the homestead are exempt for a period of six months commencing when the debtor receives the funds; if the debtor does not apply that money to the purchase of another homestead, the proceeds lose their exempt status after the six month period.
Six months after the sale of the home, the trustee investigated what happened to the money delivered to the debtor. Instead of buying another homestead, the debtor spent some of the funds for his personal use and retained some other amounts. The trustee then filed a motion requiring the debtor to turn over the $75,000 homestead funds (including those amounts the debtor no longer had on hand).
The turnover motion was granted by the court, and it became final when the debtor failed to file a timely appeal.
The debtor then filed amendments to his Schedule B (which lists his personal property) and Schedule C (where the debtor sets forth his exemption claims). The debtor claimed an exemption of $26,925 in the sale proceeds under California's “wildcard” exemption, CCP §740.140(b)(5).
The trustee objected to the amended exemption, and the bankruptcy court sustained the objection, leading to this appeal to the BAP.
The court said that the debtor asserted “very interesting policy arguments for why a debtor should be able to exempt proceeds from the sale of his or her home under the wildcard exemption, if . . . the debtor is unable to reinvest those proceeds in a new homestead within the six month period required under California law.”
But the court did not discuss these policy considerations, instead basing its decision on the effect of the bankruptcy court's order directing the turnover of the homestead sale proceeds. The turnover order “necessarily subsumed a determination that the $75,000 was nonexempt property of the estate,” the court said, and therefore it was not the debtor's property and could not be the subject of a claim of exemption.
Richard G. Heston of Irvine, Calif. argued on behalf of the debtor. The trustee was represented by Kathleen J. McCarthy and Steve Burnell, Rancho Santa Margarita, Calif.
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