In April 2018, the U.S. Court of Appeals for the Ninth Circuit vacated a bankruptcy court judgment allowing a judgment debtor a
$ 100,000 California homestead exemption. It remanded for a new trial to address the debtor’s intent on the petition date and “any additional issues related to the homestead exemption….” In re Gilman, 887 F.3d 956, 966 (9th Cir. 2018). The trial on remand took place on January 28-29, 2019. This post explains the relevance of, and arguments about, the debtor’s intent. The “other issues” will be addressed in another post.
California’s residential homestead exemption has been interpreted to require a debtor intend to reside in the dwelling claimed as a homestead. SeeIn re Diaz, 547 B.R. 329, 336 (9th Cir. BAP 2016). Under the “snapshot” rule, exemptions in bankruptcy cases are fixed at the time of the bankruptcy petition. E.g., In re Jacobson, 676 F.3d 1193, 1199 (9th Cir. 2012). While the debtor here was occupying the property when he filed his bankruptcy petition, “[p]hysical occupancy on the filing date without the requisite intent to live there is not sufficient to establish residency.” Gilman, 887 F.3d at 966. Significantly, prior to filing the petition the debtor and his wife had contracted to sell the home the debtor claimed as a homestead. That contract had not been terminated before the petition date and it would be natural to infer the from that arrangement that the debtor intended vacate the property. In fact, the debtor had effectively declared he was willing to move if that would resolve his debts with his judgment creditors, whom he assumed would accept some payment made through escrow.
At trial, the debtor admitted he intended to sell the house when he entered the contract. He testified, however, that he changed his mind when he could not obtain the cooperation of the judgment creditors in his "plan" for resolving the debt. (The debtor’s equity in the home was not sufficient to satisfy his judgment debts, which were believed to be nondischargeable. The creditors balked when the debtor demanded the creditors furnish acknowledgments of satisfaction of the judgments in exchange for receiving a payment through escrow.)
The judgment creditors saw things differently. Their counsel testified that the creditors had been involved in a protracted “litigation negotiation” in the years before the debtor filed his petition. During that period the debtor had repeatedly attempted to obtain acknowledgments his judgments liabilities were fully satisfied in exchange for payment of less than the amounts due. Initially, the debtor had threatened to file for bankruptcy if partial payment was not taken in full satisfaction. When such threats failed to scare the creditors, the debtor's attorneys repeatedly attempted to effect an accord and satisfaction by proffering checks for partial payment accompanied by correspondence asserting the checks represented payment-in-full. None of these tactics were successful. The debtor’s filing of the bankruptcy petition, the creditors asserted, was actually a calculated attempt to convince the creditors he was not bluffing about a bankruptcy filing. It represented his last effort to bend the creditors to his will.
The creditors connected some dots. They reminded the Court the debtor had filed a false statement of social security number at the beginning of the case. While the debtor brushed off that occurrence as nothing but a “typo by his attorney,” the SSN statement form required the debtor to provide a “wet signature” acknowledging a social security number as his own. Unless he signed a blank form for his attorney (which is dishonest in itself), he verified as his social security number one he would have known was not his own. The creditors asserted the debtor filed his petition to coerce the creditors into acknowledging his debts were satisfied in exchange for payment of some lesser amount. The debtor planned to dismiss the bankruptcy upon receiving the satisfactions and had used a false social security number in the hope it would allow him to keep a bankruptcy off his credit history. The creditors presented evidence that the debtor believed the creditors would not be violating the automatic stay by negotiating with him because "providing the amount of their liens” would not violate the automatic stay or, alternatively, he could stipulate that the dealings would not violate the stay.
The debtor never pin-pointed the exact time he supposedly changed his intent to sell the house. Unfortunately for him, his agents were trying to sell the house even after the petition was filed. Agency contracts do not disappear merely because a debtor files for bankruptcy. Insofar as dealings with third persons are concerned, under state law the debtor's agents are the debtor. In other words, the debtor’s story about changing his intent were pointless. He (through his agents) was trying to sell the house on and after the petition date.
Several issues are expected to feature prominently in the eventual decision. First, the debtor did not produce the sales contract in discovery and did not introduce it in evidence. The creditors asserted the court should treat the issue as spoliation and infer the contract included recitals to the effect the debtor intended to sell the house. California Evidence Code Section 622 (a conclusive presumption) applies as substantive state law in a federal suit and it prohibits litigants from contradicting the recitals in their contracts. In short, the debtor should be estopped from from contradicting the tenor of the contract by arguing he had “changed his mind.”
Second, the Court agreed that debtor had the burden of proof as he would in a California court. SeeIn re Diaz, 547 B.R. 329, 337 (9th Cir. BAP 2016) (“Where a state law exemption statute specifically allocates the burden of proof to the debtor, Rule 4003(c) does not change that allocation”).
Debtor’s evidentiary difficulties are formidable. First, he did not explain why he presented no witnesses other than himself. He could have called his wife and waived the privilege attending confidential marital communications. She would have been situated to discuss his statements and their moving plans.
Second, the debtor pointed to no “objective” evidence to corroborate his alleged intent on the petition date. In his prior bankruptcy, he had actually recorded a homestead declaration. Even though California’s “automatic” homestead exemption does not require the recording of a homestead declaration, nothing prevented the debtor from filing his homestead exemption claim or a “statement of intention” on the petition debt. No such filings were made until he “completed” his schedules some two weeks after the petition date.
Third, the debtor had severe credibility issues. He had been denied a discharge under Section 727(a)(2)(B) for certain post-petition fraudulent transfers of estate property. His schedules were known to be false because they had failed to disclose the existence of the executory contract for the sale of the house. It was also discovered that, after filing the schedules, the debtor received several tax refunds-- nearly
$ 20,000-- for pre-petition tax years. He and his wife kept these refunds and he did not amend the schedules to disclose them. Finally, in response to an interrogatory, the debtor had asserted the sales transaction was “in the process” of being cancelled on the petition date. The creditors, however, introduced a document suggesting otherwise. The document indicated that some three days after the petition was filed the buyers’ counsel was asking the debtor's counsel what could be done to complete the sale.
The trial holds a message for attorneys for consumer debtors. Diaz turns California into a “show me” state, so California creditors now have a weapon against deceitful debtors. Attorneys for debtors had better know the elements of exemptions and document the facts supporting exemption claims as of the petition date.