- Case Type:
- Case Status:
- BAP No. CC-20-1280-LFT (9th Circuit, Jun 17,2021) Published
- Under Hitt v. Glass (In re Glass), 164 B.R. 759, 765 (9th Cir. BAP 1994), aff’d, 60 F.3d 565 (9th Cir. 1995), a trustee may defeat a debtor's exemption on property released from a lien or security interest only if the release occurs after the trustee states or indicates that she will invoke her avoidance powers to recover the property. Otherwise, a debtor is may exempt the property under 11 U.S.C. § 522(g).
- Procedural context:
- The trustee objected to the Debtor's exemption of his interest in a residence owned by the Debtor and his wife, arguing that the Debtor was not entitled to the exemption under 11 U.S.C. § 522(g)(1). The Debtor filed a motion for declaratory relief that the trustee was precluded from objecting to the exemption or, in the alternative, to dismiss his case or for the filing of a no-asset report. The bankruptcy court heard both motions, denied the Debtor's motion and overruled the Trustee's objection to Debtor's homestead exemption.
- In 2010, Debtor and his wife recorded a Declaration of Homestead on their residence in North Hills, California (“Residence”). In 2019, the Debtor consulted with a company called “Legal Experts.” Moshe at Legal Experts advised the Debtor that he did not "qualify" for bankruptcy because "there was too much equity in the Residence." Moshe suggested that the Debtor and his spouse secure a debt owed to the Debtor's wife's sister, Maria, and then wait a year before filing for bankruptcy. On May 30, 2019, a deed of trust in favor of Maria, securing a debt of $200,000, was recorded. In March 2020, the Debtor signed his petition and supporting documents at the office of Legal Experts. Legal Experts was not supposed to file the petition until after the one-year anniversary had passed. Legal Experts, however, jumped the gun and filed the Debtor's Chapter 7 bankruptcy petition on May 14, 2020. The Debtor's schedules valued the Residence at $650,000, and claimed that the Residence was subject to $597,503 of secured debt, including $200,000 owed to Maria that was secured by a third-priority deed of trust. The Debtor did not claim a homestead exemption on Schedule C, notwithstanding the 10-year old filing of the Declaration of Homestead. Instead, he declared a wildcard exemption of $27,497 on the Residence pursuant to Cal. Code Civ. Pro. § 703.140(b)(5) and 11 U.S.C. § 522(b)(3). At the § 341 meeting, the trustee inquired about the debt owed to Maria. The Debtor contacted Legal Experts, who advised the Debtor to hire a new attorney. The Debtor hired a new attorney. The new attorney filed new schedules and advised the Debtor to have Maria reconvey her third-priority deed of trust on the Residence. The Debtor's new attorney also informed the trustee that Maria's deed of trust was in the process of being reconveyed. The trustee informed the new attorney that Maria's third-priority deed of trust was avoidable. On July 6, 2020, the trustee filed an avoidance complaint against Maria. Maria executed the reconveyance deed on July 8, 2020; and the reconveyance deed was recorded on July 15, 2020. The Debtor filed a motion to convert his case to a Chapter 13 proceeding. The bankruptcy court denied the motion to convert, and ordered the trustee and the Debtor to mediation regarding the Debtor's homestead exemption. The trustee and the Debtor filed cross-motions regarding whether the Debtor had a homestead exemption based on the reconveyance of Maria's deed of trust. After a hearing, the bankruptcy court denied Debtor's motions and overruled the trustee's objections to the Debtor's homestead exemption.
- LAFFERTY, FARIS, and TAYLOR, Bankruptcy Judges
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