Gebhart v. Gaughan

• Decision Date: 14 September 2010
• Docket Number: Nos. 07-16769, 07-35704.,s. 07-16769, 07-35704.
• Citation: 621 F.3d 1206
• Parties: In the Matter of Nikalous G. GEBHART, Debtor, Nikalous G. Gebhart, Appellant, v. Maureen Gaughan, Trustee-Appellee. In the Matter of Steven Jay Chappell; Julie Lynn Chappell, Debtors, Steven Jay Chappell; Julie Lynn Chappell, Appellants, v. Michael P. Klein, Chapter 7 Trustee, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

621 F.3d 1206

In the Matter of Nikalous G. GEBHART, Debtor,

Nikalous G. Gebhart, Appellant,

v.Maureen Gaughan, Trustee-Appellee.

In the Matter of Steven Jay Chappell; Julie Lynn Chappell, Debtors,

Steven Jay Chappell; Julie Lynn Chappell, Appellants,

v.Michael P. Klein, Chapter 7 Trustee, Appellee.

Nos. 07-16769, 07-35704.

United States Court of Appeals,Ninth Circuit.

Argued and Submitted Dec. 12, 2008.

Submission Vacated Aug. 27, 2009.

Resubmitted July 30, 2010.

Filed Sept. 14, 2010.

Harold E. Campbell, Mesa, AZ, for appellant Gebhart.

Steven J. Brown, Phoenix, AZ, for appellee Gaughan.

Marc S. Stern, Seattle, WA, for appellants Chappells.

James W. Shafer, Seattle, WA, for appellee Klein.

Tara Twomey, San Jose, CA, for amicus curiae National Association of Consumer Bankruptcy Attorneys.

Appeal from the United States District Court for the District of Arizona, Roslyn O. Silver, District Judge, Presiding. D.C. No. CV-07-0193 ROS.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel, Riblet, Klein, and Montali, Bankruptcy Judges, Presiding. BAP No. WW 06-1435 RKMo.

Before: A. WALLACE TASHIMA and MARSHA S. BERZON, Circuit Judges, and ROBERT J. TIMLIN, ^* District Judge.

OPINION

TASHIMA, Circuit Judge:

These consolidated appeals present the question of how to construe the homestead exemption in bankruptcy. In both cases, the debtors filed for Chapter 7 bankruptcy at a time when the value of the equity in their homes was less than the amount they were eligible to claim under the state or federal homestead exemption. There was no value in the homestead properties that could be claimed by the bankruptcy estate, and the debtors therefore anticipated that they would be able to retain ownership of their homes, subject to the terms of their mortgages, after the bankruptcy closed. The value of the homes subsequently increased so that the debtors had equity in excess of the homestead exemptions. Our question is whether the bankruptcy Trustees may force a sale of the homestead properties in order to recover the excess equity, or whether instead the debtors should be allowed to retain any postpetition increase in the fair market value of their homes.

We have jurisdiction over these appeals pursuant to 28 U.S.C. §§ 158(d)(1), 1291.

Background

The Gebhart Bankruptcy

On August 8, 2003, Nikalous Gebhart (“Gebhart”), a resident of Arizona, filed for Chapter 7 bankruptcy protection. As part of his bankruptcy petition, he claimed an exemption in the amount of $89,703 for the house he owned in Phoenix. According to the petition, the market value of the property at the time of filing was $210,000, and it was encumbered by mortgages in the amount of $120,297. The $89,703 figure represents the difference between the value of the homestead and the mortgages with which it was encumbered. Gebhart claimed the exemption pursuant to ARIZ. REV. STAT. § 33-1101(A), which at the time of the bankruptcy filing provided that an Arizona resident “may hold as a homestead exempt from attachment, execution and forced sale, not exceeding one hundred thousand dollars in value ... [t]he person's interest in real property in one compact body upon which exists a dwelling house in which the person resides.” ¹ The Trustee did not object to Gebhart's claim of a homestead exemption in the property.

Gebhart received his discharge under 11 U.S.C. § 727 on December 12, 2003. He continued to reside in his house and even refinanced his mortgage with a lender who apparently believed Gebhart owned the property free and clear of any claims by the bankruptcy estate. In fact, however, the bankruptcy case was not closed. On November 10, 2006, the Trustee asked the bankruptcy court to approve the appointment of a real estate broker to sell the home for the benefit of the estate. ² The Trustee believed that the value of the house had increased substantially since the time of the bankruptcy filing, and that if it were sold, the estate would recover a great deal of money, even after paying off the mortgage and the expenses of the sale and paying Gebhart the value he had claimed for his homestead exemption. Gebhart responded by moving that the court order the Trustee to abandon the homestead as valueless to the estate, or, in the alternative, that the court determine that the estate no longer had any interest in the homestead. Gebhart argued that the value of the homestead for the purposes of the bankruptcy case had been locked in at the time of the bankruptcy filing, and that because the entire value at that time had been covered by mortgages and the homestead exemption, there was no value left for the estate to recover.

The bankruptcy court ruled in favor of the Trustee, ordering the appointment of a real estate broker and denying the motion for abandonment. Gebhart appealed to the district court, which affirmed the bankruptcy court's ruling. This appeal followed.

The Chappell Bankruptcy

The Chappells' story is similar to that of Gebhart. Steven and Julie Chappell filed for Chapter 7 bankruptcy on June 30, 2004. They owned a home in Camano Island, WA, in which their equity at the time of bankruptcy-$21,511-was less than the $36,900 they were allowed to claim under the federal homestead exemption in bankruptcy, 11 U.S.C. § 522(d)(1). ³

The Chappells received their discharge under 11 U.S.C. § 727 on October 21, 2004. On July 7, 2006, two years after the bankruptcy petition was filed, the holder of the Chappells' mortgage moved for relief from the stay in order to foreclose on the homestead because the Chappells had fallen into default. The Trustee responded that he believed the fair market value of the homestead had increased substantially since the bankruptcy filing, and asked permission to attempt to sell the property and keep the excess recovered for the benefit of the estate. The bankruptcy court ruled that the homestead had passed entirely out of the estate when the Chappells had claimed all of their equity in it as exempt and the Trustee failed to object. The Trustee appealed and the bankruptcy appellate panel (the “BAP”) reversed the bankruptcy court's decision, holding that the postpetition appreciation in the homestead belonged to the estate. Klein v. Chappell (In re Chappell), 373 B.R. 73, 83 (9th Cir.BAP2007). This appeal followed.

Standard of Review

When we review a district court's affirmance of a bankruptcy court's decision, we apply the same standard as the district court: the bankruptcy court's findings of fact are reviewed for clear error, and conclusions of law are reviewed de novo. Abele v. Modern Fin. Plans Servs., Inc. (In re Cohen), 300 F.3d 1097, 1101 (9th Cir.2002). The same is true of an appeal from the BAP's reversal of a bankruptcy court's decision. Sigma Micro Corp. v. Healthcentral.com (In re Healthcentral.com), 504 F.3d 775, 783 (9th Cir.2007).

Analysis

The primary issue we must decide in these consolidated appeals is whether the Trustee's failure to object to the homestead exemption claim within the period allowed by statute resulted in the homestead property being withdrawn from the bankruptcy estate at that point. The Supreme Court held in Taylor v. Freeland & Kronz, 503 U.S. 638, 644, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), that, unless the trustee objects to a claimed exemption within the 30-day period allowed under Federal Rule of Bankruptcy Procedure 4003(b), the property is exempted from the bankruptcy estate even if the debtor had no good faith basis for the claim of exemption. The effect of an exemption is that the debtor's interest in the property is “withdrawn from the estate (and hence from the creditors) for the benefit of the debtor.” Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991); accord Smith v. Kennedy (In re Smith), 235 F.3d 472, 478 (9th Cir.2000) (“It is widely accepted that property deemed exempt from a debtor's bankruptcy estate revests in the debtor.”). As the Second Circuit has stated, “[q]uite simply, property that has been exempted belongs to the debtor.” Bell v. Bell (In re Bell), 225 F.3d 203, 216 (2d Cir.2000). This principle is consistent with the text of the Bankruptcy Code, which defines exempt property as property that, unlike all the debtor's other property, does not belong to the bankruptcy estate. See 11 U.S.C. § 522(b)(1); see also S. REP. No. 95-989, at 52 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5838 (recognizing that exempt property “ceases to be property of the estate”).

The homestead exemptions available to the debtors in both of these cases, however, do not permit the exemption of entire properties, but rather specific dollar amounts. Under 11 U.S.C. § 522(d)(1), the Chappells were entitled to exempt “[t]he debtor's aggregate interest, not to exceed [$36,900] in value, in real property.” Similarly, the Arizona statute under which Gebhart claimed his exemption entitles a debtor to a homestead exemption “not exceeding one hundred thousand dollars in value.” ARIZ. REV. STAT. § 33-1101. The Supreme Court recently clarified in Schwab v. Reilly (In re Reilly), --- U.S. ----, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010), that exemptions claimed under statutes like these are limited to the dollar value claimed in the exemption. Even when a debtor claims an exemption in an amount that is equal to the full value of the property as stated in the petition and the trustee fails to object, the asset itself remains in the estate, at least if its value at the time of filing is in fact higher than the exemption amount. ⁴ Id. at 2661-62, 2666. Instead, what is removed from the estate is an “interest” in the property equal to the value of the exemption claimed at filing. Id. at 2660. ⁵ The implications for the cases at issue here are clear: the fact that the value of the claimed exemption plus the amount of the encumbrances on the debtor's residence was, in each case, equal to the market value of the residence at the time of filing the petition did not remove the entire...