- Case Type:
- Case Status:
- 20-1067 (9th Circuit, Dec 01,2020) Not Published
- Bankruptcy Appellate Panel of the Ninth Circuit (BAP) affirmed the disallowance, by the U.S. Bankruptcy Court for the Central District of California (BC), of the Debtor's claim of a homestead exemption for a limited liability company that he owned with his wife. In holding this entity liable on a reverse alter ego theory for his individual debt, the Debtor argued, the state court had established his "equitable" interest in the property and thus his right to a homestead exemption for it under state law. The BAP rejected this as contrary to the alter ego doctrine's equitable nature.
- Procedural context:
- Prepetition, Blizzard Energy, Inc. (Blizzard) and its principal, Franziska Shepard (Shepard, and together with Blizzard, Blizzard Parties) had won a judgment (Blizzard Judgment) against Bernd Schaefers (Schaefers or Debtor) in the San Luis Obispo County Superior Court (Superior Court). Post-petition, after obtaining the approval of the BC, the Superior Court granted the Blizzard Parties’ prepetition motion to amend the Blizzard Judgment to include BKS Cambria LLC (LLC), an LLC the Debtor owned with his wife and which owned real property on which he had lived since 2014 (Property), as an additional judgment debtor under a theory of reverse alter ego. In March 2020, the BC held a hearing on the Blizzard Parties’ objection to the Debtor’s addition of a homestead exemption under California law, to his schedules, for his interest in BKS Cambria LLC (LLC), an LLC he owned with his wife and which owned real property on which he had lived since 2014 (Property). Ultimately, the BC sustained the objection on the basis of three conclusions: (1) the Debtor did not legally own the Property; rather, the LLC did; (2) the Debtor’s membership interest in the LLC was not real property in which California law would permit a judgment debtor to claim a homestead interest; and (3) the Blizzard Parties’ success in piercing the veil of the LLC to make it liable for the Debtor’s individual debt meant that he now owned the LLC’s assets, including the Property. Disallowance was set to follow. The BC entered its formal order on March 18, 2020, and the Debtor timely appealed.
- In July 2019, the Debtor commenced his bankruptcy case by filing a voluntary Chapter 11 petition. In December 2019, a Chapter 11 trustee was appointed. Soon thereafter, the Debtor’s case was converted to Chapter 7. The Debtor himself planted the mine from which this appeal burst forth. In these initial documents, the Debtor listed Blizzard as his largest creditor, with the disputed Blizzard Judgment valued at $3,825,000. Elsewhere in his schedules, the Debtor condemned the Blizzard Parties for obtaining the Blizzard Judgment as a result of fraud, perjury, witness tampering, and abuse of process. Accordingly, he listed a cause of action against Shepard for the same amount as the judgment. The Debtor listed only one other asset of significance: his 50% membership interest in the LLC, which he valued at $5,000,000.30, and which held title to the Property. In his original schedules, the Debtor did not list any interest in real property and asserted only two exemptions: one for his automobile and another for his furniture and clothing. The fact that the Debtor had filed soon after the Blizzard Judgment led to the inevitable. After some briefing, the BC granted the Blizzard Parties relief from the automatic stay so as to allow them to proceed in the Superior Court with a prepetition motion to amend the Blizzard Judgment to include the LLC as an additional judgment debtor under a theory of reverse alter ego. In a tentative ruling, the Superior Court agreed with the Blizzard Parties, detailing the reasons why it intended to hold the LLC liable for the Debtor’s individual judgment debt to the Blizzard Parties. The Debtor responded in the BC within a day—and the Blizzard Parties soon thereafter countered. Amending his exemptions, the Debtor added a $175,000 exemption claim in the LLC (“LLC Exemption”) based on California’s automatic or “residential” homestead exemption. As the Debtor averred, the Property owned by the LLC is a decommissioned U.S. Air Force base, which includes officers’ quarters consisting of a four-bedroom residence, where he has lived continuously since 2014. In their timely objection, the Blizzard Parties advanced three points: (1) the Debtor could not claim a homestead exemption in the LLC because he did not own the Property, as his interest was in the LLC and not the Property; (2) regardless, the interest in the LLC did not qualify as a dwelling under California law; and (3), anticipating the Debtor’s future argument, the alter ego ruling could not be invoked as grounds for establishing his personal ownership of the Property.
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