The following is a case summary written by William E Winfield, a member of the California Lawyers Association (CLA) Business Law Section, analyzing a recent decision of interest:
A California bankruptcy court has upheld the debtor’s claim of homestead exemption in property held by an irrevocable trust of which he was a beneficiary. In re Steve William Nolan, 618 B.R. 860 (Bankr. C.D. Cal. 2020). Bankruptcy Judge Scott Clarkson overruled the objection of the chapter 7 trustee to the homestead exemption, holding that a beneficial interest in real estate occupied by the Debtor is a sufficient basis for a homestead exemption. To view the memorandum, click here.
William B. Nolan (“Father”) established a living trust in 1993 which named his son Steve William Nolan (“Debtor”) as a beneficiary and a trustee of the Trust. Father quitclaimed his residence (the “Property”) to the Trust. At some point Debtor also moved in and resided there with his father. Upon Father’s death, Debtor became the sole trustee of the Trust and continued to reside at the Property but did not distribute the Trust assets, prompting Debtor’s brother, also a named beneficiary, to file a petition in probate court seeking an accounting, removal of the trustee and appointment of a new trustee.
Debtor filed for relief under Chapter 7 of the Bankruptcy Code listing a 50% beneficial interest in the Property and claiming a $75,000 exemption under Cal. Code Civ. P. § 704.730.
The chapter 7 trustee, Karl T. Anderson, objected to Debtor’s homestead on the grounds that the Debtor’s beneficial interest and role as trustee of the trust were insufficient to meet the statutory requirements for a homestead. The bankruptcy court overruled the objection and allowed the exemption.
The chapter 7 trustee’s objection was that 1) the Debtor’s beneficial interest was an interest in personal property, not real estate; 2) the Debtor’s position as trustee of the trust created only bare legal title in the Property; and 3) Debtor’s occupancy did not create a sufficient interest in the Property. The elements of a homestead exemption under California law are that the Debtor have a legal interest in the real property and that the Debtor reside in the real property. The chapter 7 trustee cited Phillips v. Gilman (In re Gilman), 887 F.3d 956 (9th Cir. 2018) and Cal. Code Civ. P. § 704.710.
In overruling the chapter 7 trustee’s objection, Judge Clarkson found that the Debtor owned a beneficial interest in the Property that could have been attached by an “enforcement lien” of a judgment creditor. Since the chapter 7 trustee, as a hypothetical lien creditor, could have sought to attach Debtor’s interest in the Property, the interest “coupled with his residency in the Property falls within the scope of the automatic homestead exemption.” California’s automatic homestead law specifically includes beneficial interests. The interest of a beneficiary of an irrevocable trust is more than bare legal title when coupled with the express provision in the trust that the beneficiary would inherit a legal interest in the real property. The Debtor’s physical occupancy established his intent to reside continuously in the property as his dwelling.
Judge Clarkson ably points out the legislative intent of protecting homestead interest was intended to apply expansively in favor of allowing the exemption. Allowance of the exemption in this case furthers the public policy objection of safeguarding homesteads. A narrow reading of the elements of the automatic homestead advocated by the Chapter 7 Trustee would undercut this policy objective of the Legislature.
These material were prepared by ILC member William E Winfield, partner, Nelson Comis Kettle & Kinney LLP, Oxnard , California ( firstname.lastname@example.org) with editorial contributions by M. Jonathan Hayes of Resnick Hayes Moradi LLP.