Although it recognized that the doctrine of equitable estoppel could be used to defeat an amendment to a bankruptcy exemption under California law, the Bankruptcy Appellate Panel for the Ninth Circuit (the BAP) ruled in a recent case that the trustee had not proved all the necessary elements and reversed a bankruptcy court ruling that had disallowed the amendment. Guevarra v Whatley (In re Guevarra), 2022 WL 884595 (9th Cir. BAP 3/25/22).
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Debtor Guevarra filed a chapter 7 bankruptcy in August 2018. He listed property located in North Highlands, California (the Property) in his Schedule A/B, but stated: “[c]o-signed for Nephew; Debtor has no interest in property.” He showed the value of his interest as $0.00. Consistent with this statement, Guevarra did not claim an exemption in the Property. He used his wildcard exemption under California Code of Civil Procedure (“CCP”) § 703.140(b)(5) to protect money in a bank account and in a 401(k) account.
Guevarra never denied that he was listed on the deed to the Property as a joint tenant with his nephew Daryl. Trustee Douglas Whatley (Trustee), over Guevarra’s assertions otherwise, claimed that the estate owned a 50% interest in the Property. He then proposed to sell that 50% interest for $32,000, with a disclaimer that if a court ruled in the future that the estate held no interest in the Property, the purchase price would be refunded to the buyer. Guevarra tried to convert his case to a chapter 13 to save his nephew’s property, but the bankruptcy court denied the motion since it believed that Guevarra’s disclaimer of ownership in the Property was bad faith. The court approved the sale, which closed in December 2019.
Guevarra amended his schedules in March 2020, showing the sale of his interest in the Property and reallocating his wild card exemption such that $27, 915 was used to shield the sale proceeds. The Trustee objected to the amended exemption, asserting that Guevarra had acted in bad faith and was equitably estopped from asserting the new exemption. After contested arguments, the bankruptcy court sustained the exemption, based on an improper use of the wildcard exemption.
Guevarra appealed and won an initial reversal because the BAP held that he did not need to “harbor an intent to use the exempt property to claim a wildcard exemption,” The BAP then remanded the matter for the bankruptcy court to consider the equitable estoppel argument. In that ruling the BAP noted that California law presumes that a joint tenant who does not pay for real property holds bare legal title subject to a resulting trust. It instructed the bankruptcy court to consider that issue on remand. Accordingly, Guevarra for the first time asserted he held the property in a resulting trust for Daryl. In the remanded action, the court again sustained the objection to the exemption, this time on the equitable estoppel ground. Part of its reasoning was that Guevarra failed to reveal the resulting trust argument in early proceedings in the case.
Guevarra appealed to the BAP, which reversed, concluding that the Trustee could not prove the elements of equitable estoppel, allowing the amended exemption.
After the Supreme Court’s ruling in Law v Siegel, 134 S. Ct.1188 (2014), that bankruptcy courts have no equitable authority under federal law to deny exemptions based on bad faith, such factors could be considered only if state law provides an equitable basis for disallowing an amended exemption. The BAP noted that the Ninth Circuit had previously observed that equitable estoppel could be invoked to sustain an objection to a California exemption. To do so, however, explicit elements had to be proved: (1) a misrepresentation or concealment of material facts; (2) made with knowledge, actual or virtual, of the facts; (3) to a party ignorant, actually and permissibly, of the truth; (4) with the intention, actual or virtual, that the ignorant party act on it; and (5) that the party was induced to act on it.
Here, the undisputed facts showed that the Trustee could not prove those elements. Guevarra from his initial schedules had revealed that he was on title to the Property but thought that he held bare legal title, with no actual ownership interest. That he did not assert there was a resulting trust in favor of Daryl until the remand hearing was irrelevant, because the supporting facts had been disclosed from the inception. Nothing that Guevarra did or said misled the Trustee nor were any facts concealed. Whether or not the resulting trust could be defeated by the Trustee’s strong-arm powers, as was later asserted by the Trustee, was not relevant. What was important was the Trustee could not prove the first element of equitable estoppel. Equitable estoppel could not be used to deny the amendment in these circumstances.
This Trustee was not misled by misrepresentations or concealment of material facts. Here, equitable estoppel could not be used to disallow the exemption. What the Trustee failed to recognize is that the misrepresentation or nondisclosure needed to be of facts, not the legal theory that could be asserted based on those facts. However, trustees in California should be heartened that in the right circumstances, bad acts of a debtor can be used to establish equitable estoppel to deny an amended exemption. But the burden to prove all the necessary elements will lie with the trustee. This is not the same burden which is shifted to the debtor under California law to establish the right to an exemption. Equitable estoppel is essentially an affirmative defense to the exemption right, with the burden falling on the objecting party. Therefore, before asserting such objection, a trustee should be certain that he or she can bear that burden on all the necessary elements.
This review was written 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.