The following is a case update written by W. Sloan Youkstetter, Resnik Hayes Moradi LLP, analyzing a recent decision of interest:
In Guevarra v. Whatley (In re Guevarra), 2021 WL 1179619 (BAP 9th Cir. Mar. 29, 2021), the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) vacated the bankruptcy court’s decision to sustain an objection to the claimed California wildcard exemption based on the grounds that the debtor had not acted in good faith when claiming the exemption, but remanded to allow the bankruptcy court to examine whether the objection could be sustained based on principles of equitable estoppel. The BAP stated that although recent case law has clarified that bankruptcy courts retain the power to deny a state exemption if state law provides an equitable basis for doing so, there was no basis here because the nature of the wildcard exemption is such that there is no requirement that a debtor have a good faith intent to use the property for any specific purpose.
A copy of In re Guevarra can be found here.
The Chapter 7 debtor listed real property in his Schedule A/B, but stated the value of his interest in such property was $0.00 and included the notation, “Co-signed for Nephew; Debtor has no interest in property.” He did not initially claim any exemption in the property.
The appointed Chapter 7 trustee filed a motion to sell the estate’s interest in the property. The trustee attached evidence showing that the debtor was a joint tenant with his nephew on title and that the debtor was also a co-borrower on the loan and mortgage. The debtor opposed the motion and argued he was merely a co-signer with his nephew. Thereafter, the debtor filed a motion to convert to a case under Chapter 13. However, the court denied the motion to convert and granted the motion to sell. The trustee sold the estate’s interest for $32,500.
The debtor then amended Schedule C to claim a wildcard exemption of $27,915 in the sale proceeds and the trustee objected. The trustee argued that the debtor had not acted in good faith and was equitably estopped because he consistently stated he had no interest in the property. The debtor had waited nineteen months after the petition date to claim the exemption. The debtor filed an opposition arguing that he had not acted in bad faith because he disclosed the asset in his schedules and only amended to claim an exemption after the court ruled that he held an interest in the property.
The bankruptcy court found that the debtor claimed the exemption to protect his nephew’s property rather than his own. The bankruptcy court relied on In re Gilman, 608 B.R. 714, 723- 24 (Bankr. C.D. Cal. 2019), aff’d sub nom., Tuxton China, Inc. v. The Oneida Grp. Inc. (In re Gilman), No. 2:19-cv-10534-SVW, 2020 WL 7087703 (C.D. Cal. Oct. 28, 2020), appeal docketed, No. 20-56279 (9th Cir. Dec. 2, 2020) (ciding Bertozzi v. Swisher, 27 Cal. App. 2d 739 (1938)) for the proposition that when claiming an exemption, a debtor must show the asset being exempted actually qualifies for the specific exemption which requires that the debtor must have a good faith intent to use the property for the exemption’s intended purpose. Based thereon, the bankruptcy court sustained the objection because it reasoned that the debtor had not shown the exemption was claimed in good faith, “i.e., within the parameters of the exemption statute.” The bankruptcy court did not analyze the trustee’s equitable estoppel argument in its ruling.
On appeal, the BAP first looked at Law v. Siegel, 571 U.S. 415 (2014). There the Supreme Court held that bankruptcy courts are not free to disallow exemptions based on whatever considerations they deem appropriate, but acknowledged that when state exemptions are claimed, the exemption’s scope is determined by state law. The BAP reiterated the holding in Law, but asserted that bankruptcy courts retained the power to deny a state exemption if the state law provides an equitable basis for doing so.
Then the BAP analyzed and distinguished the Gilman case relied on by the bankruptcy court. The Gilman decision was issued after remand from the 9th Circuit where the 9th Circuit instructed the bankruptcy court to 1) make findings on whether the debtor intended to continue to reside on the property as required by the homestead exemption; and 2) determine whether equitable estoppel or another equitable basis under California law applies. Thus, the good faith at issue in Gilman was the good faith intent to reside in the property which is a requirement under state law in order to claim the homestead exemption. Here, the wildcard exemption has no such requirement.
The BAP analyzed the language of California Civil Procedure §703.140(b)(5). The wildcard exemption allows debtors to “protect any kind of property whatsoever.” Goswami v. MTC Distrib. (In re Goswami), 304 B.R. 386, 390 (9th Cir. BAP 2003). Thus, the BAP found that there was “no requirement that the debtor show a good faith intent to do anything specific with the exempt property, i.e., the property need not be dedicated to a particular purpose nor does the statute require that the debtor keep it for his own subsistence.”
Finally, the trustee argued that the exemption could be disallowed based on equitable estoppel. The BAP recognized that equitable estoppel could under certain circumstances be a valid basis to disallow an exemption under California law – including presumably the wildcard exemption – but the bankruptcy court made no findings on that issue and the BAP could not make that determination. As such, the matter was remanded to the bankruptcy court for further proceedings consistent with its ruling.
This decision was relatively straightforward. Bad faith under 11 U.S.C. §105(a) is dead and gone. Trustees and creditors will now need to look at state law for a basis to object to exemptions.
However, the equitable estoppel issue which was left unaddressed is likely to lead to further wrangling between debtors and trustees for the foreseeable future. With the California homestead exemption amounts being substantially increased, Chapter 7 trustees are going to be creative and aggressive in trying to find other assets to administer and they will definitely keep equitable estoppel in their tool belt. It will be interesting to see how courts take into consideration, if any, Rule 1009(a) of Fed. R. Bankr. P. – which freely allows a debtor to amend their schedules as a matter of course at any time before the case is closed – when analyzing equitable estoppel under state law.
These materials were written by W. Sloan Youkstetter, Resnik Hayes Moradi LLP (firstname.lastname@example.org). Editorial contributions were provided by M. Douglas Flahaut, Arnet Fox (Douglas.Flahaut@arentfox.com).