In an unpublished disposition, the Ninth Circuit Court of Appeals (the Court) affirmed bankruptcy court and district court rulings that a debtor’s beneficial interest in real property owned by an irrevocable trust was a sufficient equitable interest to support an automatic homestead exemption under California law. Anderson v. Nolan (In re Nolan), 2022 WL 327927 (9th Cir. 2/3/22).
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Debtor Steve Nolan’s father William Nolan established a living trust in 1993. The final amendment to the trust added his home in Corona, California, to the trust assets and he recorded a quitclaim deed in 2016 transferring legal title to the home to the trust. He then died, making the trust irrevocable. The terms of the trust distributed the trust assets to the Debtor and his brother, Gregory, and named the Debtor as trustee. When the Debtor did not take immediate steps to liquidate and distribute the trust assets, Gregory filed a petition in the probate court to compel an accounting and to remove his brother as trustee. Soon thereafter, the Debtor filed a chapter 7 case.
In his bankruptcy schedules, the Debtor, who had resided in the Corona property for several years, claimed the California automatic homestead exemption under Cal. Code Civ. Pro § 704.730 in the sum of $75,000.00 on the residence. The bankruptcy court granted Gregory’s motion for relief from stay to continue with the probate proceeding, where the court eventually removed the Debtor as trustee. The chapter 7 trustee (Trustee) filed an objection to the Debtor’s homestead exemption, asserting that because he only had an interest in the trust as beneficiary and not title to the home, he was not entitled to the homestead exemption.
The bankruptcy court, in a published opinion, overruled the objection and found the Debtor was entitled to claim the exemption based on his equitable interest in the home and his continuing residence therein. The court noted that California law did not require fee ownership in real property for a homestead exemption, only that a debtor have an equitable interest in the home and reside there on the petition date. As a 50% beneficiary of the trust which owned the home, the Debtor satisfied the need for an equitable interest in the home and no one challenged that he resided there. The bankruptcy court recognized there was no authority directly on point but concluded that the weight of cases supported his determination.
The Trustee appealed to the district court, which affirmed, then to the Ninth Circuit, which found no error in the lower courts’ decisions.
The Court briefly addressed the Trustee’s argument that federal jurisdiction was lacking because the probate exception applied. Citing to binding Supreme Court and Ninth Circuit precedent, the Court stated the “narrow” and “distinctly limited” probate exception to federal jurisdiction was inapplicable because the bankruptcy court was not probating or annulling a will, administering a decedent’s estate, or assuming in rem jurisdiction over property controlled by the probate court. Because the relief sought in the probate court was an accounting and appointment of a new trustee, the outcome there would not affect the beneficial interest the Debtor held in the Corona property nor his right to a homestead exemption. As such, the probate exception did not alter federal jurisdiction.
The Court then considered whether the equitable interest of the Debtor was sufficient for a California homestead and affirmed that it was. It referenced both California and Supreme Court authority to conclude that the Debtor’s beneficial interest was property of the estate and was sufficient for a claim of exemption, so long as the Debtor resided in the property. California law has long held that legal title to real property is not required for a homestead exemption. The irrevocable interest created by the trust “fell within the automatic prong of the homestead exemption, which is designed to protect a debtor living in a dwelling who is subject to a forced sale.” The Debtor was entitled to that protection.
Finally, the Court confirmed that in California the burden of proof on a claim of exemption fell on debtors, notwithstanding the provision of Fed. R. Bankr. P. 4003 which states exemptions are presumptively valid, placing the burden on objectors. However, here that distinction did not matter because the Debtor amply established the critical facts and the determination that a homestead existed was a matter of law.
We now have three courts in the Ninth Circuit, bankruptcy, district, and circuit, which support the conclusion that a beneficial interest in a trust can be a sufficient equitable interest to claim a California automatic homestead exemption. California courts have repeatedly ruled that fee ownership is not a requirement for the automatic homestead exemption and the federal courts have also stepped in line. A debtor needs only possession, residency, and some type of equitable interest in the property. This author was hopeful that the Ninth Circuit would publish on this issue, creating a precedent which established the breadth of equitable interests sufficient to support a homestead exemption, but that did not happen here. One take is that the circuit panel felt the law was sufficiently well-settled to obviate the need for a binding opinion. A less optimistic view would be the unpublished status reflected a reluctance to interpret California law beyond what was minimally required to address the issues on appeal. Certainly, the practice tip for debtors’ lawyers is to keep their eyes open for anything which would qualify as an equitable interest in a debtor’s personal residence and to not be shy about asserting a homestead exemption even when legal title is absent.
The materials were prepared by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.
 The factual recitations here are not found in the unpublished disposition, but rather are taken from the District Court opinion found at In re Nolan, 2021 WL 528679 (C.D.Ca. 2021).