With regard to exemptions, a debtor can’t be punished for dramatically shifting legal theories in response to an unfavorable decision by the bankruptcy court. That’s the teaching of a March 25 opinion for the Ninth Circuit Bankruptcy Appellate Panel by Bankruptcy Judge Gary A. Spraker.
The opinion also shows that state exemption law might provide equitable grounds for denying an objection claim, despite the Supreme Court’s ruling in Law v. Siegel, 571 U.S. 415 (2014), that equity cannot override a debtor’s exemption granted by a federal statute.
The opinion also seems to be an implicit warning that a trustee cannot claim surprise when the trustee was aware of the facts but hoped that the debtor was not smart enough to advance a winning legal theory.
The Home and the Resulting Trust
The chapter 7 debtor disclosed in his schedules that he had joint title to a home with a value of some $217,000. He also stated in the schedules that the value of his interest in the home was zero dollars and that it was encumbered by a mortgage.
In the schedules, the debtor said he had “co-signed” for his nephew and that he had “no interest in the property.” The debtor claimed no exemption in the property.
At the 341 meeting and in subsequent communications with the trustee, the debtor said that he took title with his nephew as joint tenants and co-signed the mortgage so his nephew could qualify for the loan. The debtor said that he had never lived in the home, only his nephew, and that the nephew had always paid the mortgage and operating expenses.
Unfortunately for the debtor, his counsel never explained the legal theory supporting the assertion that the debtor had no interest in the home until after the bankruptcy court had ruled against him and declared that the debtor’s half of the home was estate property.
Judge Spraker’s opinion suggests that the debtor had a perhaps winning argument under California law that the home was impressed with a resulting trust. In California, a transferee who does not pay the purchase price is presumed to hold the property in a resulting trust for the party who paid the consideration. If there is a resulting trust, the trust res is not estate property.
The Procedural Posture
The chapter 7 trustee filed a motion to sell the debtor’s half interest in the property. The debtor objected, saying he had no interest in the home. The bankruptcy court overruled the objection and approved the sale for $32,000, subject to existing liens. The agreement with the purchaser provided that if a court were to rule that the debtor had no interest in the property, the trustee would refund the purchase price.
The debtor did not appeal the sale-approval order.
Three months later, the debtor amended his schedules to claim a wildcard exemption in the $32,000. Judge Spraker said that the debtor amended his exemptions pro se because his lawyer had been suspended from practice. Later, the debtor’s new lawyer explained that the debtor had claimed no interest in the home based on California’s recognition of resulting trusts.
The bankruptcy court denied the wildcard exemption claim, saying that it was made for an improper purpose and not in good faith under California law.
In a previous opinion, the BAP reversed, holding that the wildcard exemption does not require an intent to use the exempt property for any particular purpose. The BAP remanded to consider the trustee’s equitable estoppel argument. In re Guevarra, 20-1165, 2021 WL 1179619 (B.A.P. 9th Cir. March 29, 2021).
On remand, the debtor laid out the resulting trust theory to justify the claim that the debtor had no interest in the property. The trustee invoked equitable estoppel to contend that the debtor should not be rewarded for lengthy inaction while the trustee was incurring expenses in administering the property. The trustee did not deny the underlying facts, Judge Spraker said.
After remand, the bankruptcy court denied the wildcard exemption, invoking equitable estoppel.
Reversed Again
The debtor appealed. If Law v. Siegel applied, the bankruptcy court could not have denied the exemption on equitable grounds, but the exemption claim was based on California law because the state has opted out of federal exemptions.
In California, exemptions are liberally construed in favor of the debtor, and debtors have a general right to amend their exemptions at any time before the case is closed. In California, though, equitable estoppel can be invoked if there was a misrepresentation made to someone who was not aware of the facts, among other factors for the court to consider.
Although there is not much law on the topic, the Ninth Circuit had said in a nonprecedential opinion that equitable estoppel can counter an exemption claim.
Applying the paucity of California law to the facts, Judge Spraker said it was “largely irrelevant” when the debtor first presented his “nuanced” resulting trust theory to the bankruptcy court. Equitable estoppel, he said, “focuses on representation(s) to the party allegedly prejudiced. [Citation omitted.] Here, the relevant party is the trustee, and the record is clear that [the debtor] early on informed the trustee, through his counsel, of the facts and law supporting the resulting trust argument.”
The significant facts, Judge Spraker said, “were disclosed early and often to the trustee.” Indeed, he said that the trustee’s attorney’s time records showed research on resulting trusts.
Judge Spraker did not say whether the resulting trust theory would have prevailed had it been raised when the trustee was selling the property or on the appeal, had there been one. Rather, he said that “no finder of fact reasonably could have found that [the debtor] misled the trustee as to his ownership in the Property.”
Judge Spraker continued:
As a result of the court’s decision [finding that the debtor owned half of the home], [the debtor’s] circumstances changed, and that change in circumstances provided him with a basis to claim an exemption he previously did not believe he had . . . . The record simply does not support any inference that [the debtor] held a present intent to exempt a property interest that he believed was limited to bare legal title when he filed his original schedules and exemptions.
To deprive the debtor of his wildcard exemption, Judge Spraker said, would amount “to nothing more than penalizing the debtor for raising an unsuccessful legal argument.” He fleshed out the idea, saying:
Courts must be careful not to penalize debtors for exercising the statutory right to amend their exemptions or to read too much into a debtor’s failure to exempt an asset. Without more, such an omission does not constitute a misrepresentation or concealment for purposes of equitable estoppel. Similarly, standing alone, the failure to exempt an asset does not impermissibly induce a trustee to administer an asset as he or she knows that debtors may amend their exemptions as a matter of right.
The BAP reversed the order sustaining the trustee’s objection to the wildcard exemption because “the record does not support the bankruptcy court’s findings that [the debtor] knowingly concealed his interest in the Property while the trustee was ignorant of that interest.”
With regard to exemptions, a debtor can’t be punished for dramatically shifting legal theories in response to an unfavorable decision by the bankruptcy court. That’s the teaching of a March 25 opinion for the Ninth Circuit Bankruptcy Appellate Panel by Bankruptcy Judge Gary A. Spraker.
The opinion also shows that state exemption law might provide equitable grounds for denying an objection claim, despite the Supreme Court’s ruling in Law v. Siegel, 571 U.S. 415 (2014), that equity cannot override a debtor’s exemption granted by a federal statute.
The opinion also seems to be an implicit warning that a trustee cannot claim surprise when the trustee was aware of the facts but hoped that the debtor was not smart enough to advance a winning legal theory.