Homesteads, Section 522(q)(1)(B)(ii), and Fraud by a Fiduciary in the 9th Circuit

The following is a case update written by Hale Andrew Antico, Chief Counsel of Antico Law Firm, analyzing In re Uriostegui (__B.R. __, 2025 WL 1367215 (9^th Cir. BAP May 12, 2025), a recent case of interest:

Summary

The Ninth Circuit Bankruptcy Appellate Panel (BAP) recently reversed a bankruptcy court’s decision that limited a debtor’s homestead exemption in In re Uriostegui, clarifying the requirements for limiting such exemptions under 11 U.S.C. § 522(q)(1)(B)(ii). This decision underscores the importance of establishing a fiduciary relationship prior to the wrongdoing that caused the debt when challenging homestead exemptions under Section 522(q)(1)(B)(ii).

To read the full published decision, click here.

Facts

Formation and Amendment of Trust

In 2005, Prescott Dowling (“Prescott”) and his wife Ellen formed a family trust; they served as the initial trustees. They named their eldest son Gregory as successor trustee. The beneficiaries included Gregory and other family members, but did not include Diane Ira Uriostegui (“Debtor”), a friend of Ellen and Prescott. Ellen died in 2011. In 2015, at the urging of Debtor, Prescott amended his trust to make Debtor the trustee and sole beneficiary.

Legal Actions and Judgments

Prescott died in 2016, leading to a lawsuit by disinherited son Gregory, alleging elder abuse by Debtor and seeking to set aside the 2015 amendment. The California Superior Court ruled in 2018 against Debtor for the financial elder abuse of Prescott, for acting with “malice, oppression, and fraud.”

The state court found that Debtor fraudulently provided false information to Prescott, convincing him to disinherit his son Gregory and other family members and to make Debtor the sole trustee and beneficiary of his trust. The state court entered a monetary judgment, including punitive damages. The Court of Appeal affirmed the judgment.

Bankruptcy Proceedings

Five years later, in 2023, Debtor filed a Chapter 7 bankruptcy petition. Gregory objected to Debtor’s claimed homestead exemption of $687,378 under § 522(q)(1)(B)(ii), seeking to limit it to the federal statutory cap of $189,050. Debtor argued that her fraud was not in a fiduciary capacity. The bankruptcy court ruled against Debtor, as it interpreted the statute to mean that the fraud arose in a fiduciary capacity. While agreeing that the statute requires a debt for fraud to arise from acts in a fiduciary capacity, the BAP found that the facts here did not rise to that level and reversed.

Reasoning

Statutory Construction

The Bankruptcy Appellate Panel (BAP) began by reviewing the relevant statute. Section 522(q)(1)(B)(ii) of Title 11 of the United States Code states:

As a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of an interest in property… which exceeds in the aggregate $[189,050] if… the debtor owes a debt arising from… fraud, deceit, or manipulation in a fiduciary capacity…

Scope of “In a Fiduciary Capacity”

The BAP then noted that the parties agreed with the bankruptcy court’s holding that the fraud for the purposes of  §522(q)(1)(B)(ii) must be in a fiduciary capacity. However, it sought guidance for statutory construction.

To what does the clause “in a fiduciary capacity” refer back to? Did it mean the more proximate manipulation had occurred while serving in a fiduciary capacity, or could it be as a result of all bad acts in the section, including (in this case) fraud? As there is no Ninth Circuit or BAP precedent on this section, the BAP then reviewed a leading case elsewhere for guidance.

The BAP found a significant Texas case a valid analog. There, the Texas bankruptcy court found that “in a fiduciary capacity” modifies “fraud,” “deceit,” and “manipulation.” In re Presto, 376 B.R. 554, 593 (Bankr. S.D. Tex. 2007).  This case is particularly relevant because it involves similar statutory language and addresses the dischargeability of debts arising from securities-related fraud.

The Presto court was analyzing similar language in § 523(a)(19)(A)(ii), which is intended to prevent debtor convicted of securities fraud of discharging those debts. That court had also reviewed § 548(e)(2)(B), finding that the “fraud, deceit, or manipulation” phrase appeared there, finding it fully linked to “in a fiduciary capacity.” As the BAP summarized it: “the purpose of § 523(a)(19) is to prevent discharge of debtors for securities-related fraud, not debts arising from any common law fraud.” *9 

Next, the BAP then rejected an argument from Gregory that it should interpret the construction of “fiduciary” more broadly.  Rejecting broader interpretations, the BAP cited holdings from Supreme Court and Ninth Circuit cases, which require an express or technical trust imposed before the wrongdoing. “The broad, general definition of fiduciary – a relationship involving confidence, trust, and good faith – is inapplicable in the dischargeability context.” Ragsdale v Haller, 780 F.2d 794, 796 (9^th Cir, 1986). Continuing, the BAP remarked that the law requires the “fiduciary relationship must ‘arise from an express or technical trust that was imposed prior to the wrongdoing that caused the debt.’” *10, citing Plyam v. Precision Dev., 530 B.R. 456, 471 (BAP 9^th Cir, 2015). The fiduciary relationship must exist “before the wrong and without reference to it.” Ragsdale at 796, citing, in part, Davis v Aetna Acceptance Co., 293 U.S. 328, 333 (1934).  These cases underscore the importance of a pre-existing fiduciary relationship in the dischargeability context.

Congressional Intent

Lastly in its construction analysis, the BAP compared § 522(q)(1)(B)(ii) with other provisions limiting the homestead exemption, concluding that Congress intended a narrow interpretation of “fiduciary capacity.” 

As such, it ruled that “fiduciary capacity” of § 522(q)(1)(B)(ii) has the same meaning as under §§ 523(a)(4), 523(a)(19), and 548(e)(2), and that the fiduciary relationship must be based on an express or technical trust and must be imposed before the wrongdoing that caused the debt.

Factual determination of Fiduciary Capacity

The BAP determined that the objector (Gregory) bore the burden of proving that the debt arose from fraud, deceit, or manipulation by one in a fiduciary capacity.

In the context of § 522(q), after it is established there is entitlement to a homestead exemption, an objector asserting the § 522(q) exemption cap has the burden to prove the predicate for capping the exemption. Here, that would entail proof of the “fraud, deceit, or manipulation in a fiduciary capacity” required by § 522(q)(1)(B)(ii).

In re Oliver, 649 BR 206, 215 (Bankr., ED Calif, 2023), cited at *12.

It is undisputed that the judgment resulted from Debtor’s fraud.  However, the judgment made no finding that the fraud occurred during a fiduciary capacity. While the parties disputed whether Prescott’s signing a document granting Debtor power of attorney before she induced the fraud creates an “express or technical trust,” the BAP did not rule on this as there is no evidence that Debtor had a power of attorney or used one when she defrauded Prescott about the trust.

Author’s Commentary

With the recent increase in California’s homestead exemption, now with a statutory minimum of $300,000, the risk of losing this protection to the lower federal exemption under Section 522 has become increasingly important for bankruptcy attorneys. The Ninth Circuit Bankruptcy Appellate Panel’s decision in In re Uriostegui provides valuable guidance on the interpretation of § 522(q)(1)(B)(ii) and the importance of establishing a pre-existing fiduciary relationship in the context of homestead exemptions.

Prior to 2021, California practitioners rarely were concerned about the federal limitation on the homestead exemption in § 522 due to the then-lower state exemption. However, the increase in California’s homestead exemption in 2021 made § 522 newly relevant, and this case contributes to the developing jurisprudence under the new higher homestead exemption figures.

Where attorneys can interpret statutory language differently, disagreements are inevitable, necessitating court intervention to create a body of case law. Now that we are in the years following the higher homestead exemption figures, we are starting to see Ninth Circuit jurisprudence interpreting the various nuances of § 522 as it applies to the California homestead exemption. This is one such case.

Unfortunately, the BAP’s interpretation of § 522(q)(1)(B)(ii) allows the debtor who defrauded a senior citizen to retain her full homestead exemption, highlighting the importance of clear evidence in fiduciary relationships. While this result may be unsavory, it seems that the BAP’s analysis was correct.

A key practice pointer for practitioners is to ensure clarity in state court judgments. While attorneys often strive to create a clear record for the purposes of nondischargeability, it is equally important to do so with an eye toward limiting or protecting future homestead exemptions.

With regard to § 522(q)(1)(B)(ii) in particular, we now know that it is crucial to have evidence of the debt arising from fraud, deceit, or manipulation, any of which must occur after a fiduciary relationship based on an express technical trust. It remains unclear whether a power of attorney is sufficient to create such a relationship.

In conclusion, In re Uriostegui provides valuable guidance on the interpretation of § 522(q)(1)(B)(ii) and the importance of establishing a pre-existing fiduciary relationship in the context of homestead exemptions. Bankruptcy practitioners should carefully consider these issues when representing clients in similar cases. As the jurisprudence under the increased California homestead exemption continues to develop, cases like this will play a crucial role in shaping best practices and legal strategies.

These materials were written by Hale Andrew Antico, Chief Counsel of Antico Law Firm, representing consumer debtors in the Central District of California, and President of the Central District Consumer Bankruptcy Attorneys Association, with editorial contributions by Kathleen A. Cashman-Kramer, Esq., a Director with the San Diego office of Fennemore LLP.