The following is a case update written by Pardis Akhavan, Resnik Hayes Moradi LLP, analyzing a recent decision of interest:
The Bankruptcy Appellate Panel of the Ninth Circuit in Zamora v. Perez (In re Perez), 628 B.R. 327 (9th Cir. BAP June 17, 2021) found that the trustee’s actions did not result in “recovery of the property” within the meaning of Section 522(g) and therefore the trustee’s objection to the debtor’s homestead exemption was properly overruled.
A copy of In re Perez can be found here.
In 2019, the debtor was advised by Legal Experts that since the debtor had obtained a loan in the past from his sister Maria, the debtor could give Maria a deed of trust on his home and then file bankruptcy a year after the conveyance. The debtor and Maria executed a deed of trust securing a $200,000 debt (the “Perez DOT”). The debtor waited only a few months and then filed chapter 7.
On his schedules, the debtor listed his home at $625,000 and disclosed secured debt on the home of $597,503 which included the deed of trust to his sister. The debtor claimed the wild card exemption on the home in the amount of $27,497.
At the debtor’s Section 341(a) meeting, the trustee inquired about the deed of trust and the underlying loan from Maria. The trustee did not mention that she thought the deed of trust was an avoidable transfer or her intent to recover the interest in the property. On the same day, the trustee filed a “Notice of Assets” and shortly thereafter sought approval to employ a real estate broker to market the property.
After the Section 341(a) meeting, the debtor retained new counsel who advised him to “have Maria reconvey the Perez DOT immediately.” On the same day, the debtor amended Schedule A, declaring the home’s value as $599,000 and “included a notation that the Perez DOT was an avoidable preference.” The debtor also amended Schedule C to claim a homestead exemption of $175,000.
Debtor’s counsel promptly informed the trustee that the debtor filed the amended schedules. Debtor’s counsel informed the trustee that “he expected to have the Perez DOT reconveyed within a week to ten days” and in a separate email assured the trustee that Maria did not intend to fight avoidable transfer and would be executing a full reconveyance of the Perez DOT.
Thereafter, Maria executed the reconveyance deed, which was recorded on July 15, 2020.
In the meantime, on July 6, 2020, the trustee initiated an adversary proceeding against Maria “seeking avoidance of the Perez DOT.” Within a few days, the trustee filed her objection to the debtor’s homestead exemption and asserted that, “under § 522(g)(1), Debtor was barred from claiming any homestead exemption because the avoidance and recovery of the Perez DOT resulted from Trustee’s efforts.” The bankruptcy court overruled the trustee’s objection to the debtor’s homestead exemption. The BAP affirmed the bankruptcy court’s ruling.
In an objection to an exemption under § 522(g)(1), the trustee must successfully establish that “(1) the debtor transferred property in such a manner as to invoke the trustee’s avoidance powers; (2) either the transfer was voluntary, or the debtor knowingly concealed the transfer; and (3) the property was returned to the estate as the result of the trustee’s efforts.”
The parties in this case did not dispute that “the transfer was voluntary.” Furthermore, the BAP acknowledged that despite the trustee’s position, the debtor did not conceal the transfer because he disclosed the deed of trust in his schedules. Therefore, to deny the claimed exemption, the BAP had to address whether “the Perez DOT was reconveyed as a result of Trustee’s efforts.”
First, the BAP set the standard required to establish recovery of a property interest by a trustee. In its ruling, the BAP relied on Hitt v. Glass (In re Glass),164 B.R. 759, 765(9th Cir. BAP 1994), aff’d, 60 F.3d 565 (9th Cir. 1995), that “an explicit statement by the trustee to the debtor that the trustee intends to recover the property interest for the estate” is required to constitute a recovery by the trustee. The BAP stressed that “the debtor must be put on notice by an affirmative act or statement of the trustee that the transfer is avoidable and/or recoverable under the Bankruptcy Code and that the trustee intends to take action to recover the property interest.”
According to the records, the first time that the trustee mentioned to the debtor’s counsel that she intended to avoid the Perez DOT was after the debtor filed amended schedules that “omitted the Perez DOT and claimed the enhanced homestead exemption.” The trustee argued that her line of questioning about the Perez DOT at the Section 341(a) meeting put the Debtor on notice and caused the debtor to take action to “unwind the transfer” and file the amended schedules. The BAP disagreed with the trustee and stated that “Trustee’s questions were investigatory only” and the trustee never mentioned that she intended to avoid the Perez DOT. It was the debtor who initiated reconveying the Perez DOT. The BAP further commented that the trustee’s filing an adversary proceeding to recover the Perez DOT was unnecessary as the debtor’s counsel had advised the trustee earlier that Maria did not intend to fight the avoidance and would be executing the full reconveyance soon. As a result, the BAP made a finding that the bankruptcy court correctly ruled that the trustee’s action did not result in recovery of the property within the meaning of 522(g).
I write on this case because I was a member of the Wallace panel and at the time of that opinion, as a sitting bankruptcy judge, I was delighted to add it to the lexicon on contempt proceedings. Prior to that case, without citing any particular authority, I had declined to allow trustees to use contempt to enforce turnover orders for funds which had been in bank accounts on the petition date or fee awards based on fee-shifting provisions. To me, as noted by the Court here, contempt powers of courts are reserved for remedying serious misbehavior, not just failing to pay funds. I would tell them to obtain a writ of execution and enforce their orders, just as they would enforce a judgment. The Wallace decision cited authority which reinforced that my decisions were the correct ones. The bankruptcy court here properly applied the BAP’s reasoning.
The practice tip here is a simple one. If a practitioner has been successful in requesting a bankruptcy court to issue a fee award for misconduct, she should ask the court to make clear, either in an oral ruling, in written findings, or even specifically in the order, that the award is a sanction. Then contempt will be a remedy for failure to comply with the order.
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.