In re Foreacre, 05-7179-SSC.

• Decision Date: 29 December 2006
• Docket Number: No. 05-7179-SSC.,05-7179-SSC.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Arizona
• Parties: In re Bruce & Sylvia FOREACRE, Debtor.

358 B.R. 384

In re Bruce & Sylvia FOREACRE, Debtor.

No. 05-7179-SSC.

United States Bankruptcy Court, D. Arizona.

December 29, 2006.

Mark Wesbrooks, The Wesbrooks Law Firm, PLLC, Phoenix, AZ, for Debtor.

Dina L. Anderson, Anderson & Nowak, PLC, Phoenix, AZ, for Anthony H. Mason, trustee.

MEMORANDUM DECISION

SARAH SHARER CURLEY, Bankruptcy Judge.

I. INTRODUCTION

This matter comes before the Court pursuant to an "Objection to Property Claimed Exempt" ("Objection") filed by Anthony Mason, the duly appointed Chapter 7 trustee ("Trustee") in the above-captioned case, on May 25, 2005. On June 14, 2005, the Debtors filed their "Debtors' Response to Trustee's Objection to Claim of Exemption" ("Response"). After various pre-trial matters were considered, the Court ultimately conducted an evidentiary hearing. At the conclusion of the hearing, the matter was deemed under advisement.

In this Memorandum Decision, the Court has set forth its findings of fact and conclusions of law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. The issues addressed herein constitute a core proceeding over which this Court has jurisdiction. 28 U.S.C. §§ 1334(b) and 157(b) (West 2006).¹

II. FACTUAL BACKGROUND

The Debtors filed their Chapter 7 bankruptcy petition on April 25, 2005 ("Filing Date").² Anthony H. Mason was appointed the trustee of the bankruptcy estate. The Debtors sold their residence located at 8748 W. Williams Road, Peoria, Arizona 85283 ("Williams Property") on or about April 12, 2005, and received net sale proceeds in the amount of $150,975.54 ("Residence Proceeds").³ On their bankruptcy schedules, the Debtors claimed an exemption in the Residence Proceeds pursuant to A.R.S. § 33-1101(A).⁴ The Debtors' daughter and son-in-law, Cynthia and Gerald Gill ("the Gills") had resided at the Williams Property with the Debtors prior to its sale, but the Gills did not have any interest in the Property,

On April 13, 2005, the Debtors deposited $149,475.54 of the Residence Proceeds into the Wells Fargo Checking Account No. xxxxxx4325 ("Checking Account").⁵ On April 14, 2005, the Debtors transferred $139,475.54 from the Checking Account to the Wells Fargo Savings Account No. xxxxxx6263 ("Savings Account"), leaving a balance of $10,000 in the Checking Account. On April 20, 2005, the Debtors then transferred $139,526.67 from the Savings Account back into the Checking Account. Separate and apart from the transfer of funds between the Checking and the Savings Account, the Debtors spent the sum of $9,500.68 on personal living expenses between April 13, 2005 through April 24, 2005.

As of the Filing Date, the balance of the Residence Proceeds in Debtors' Checking Account was $140,225.99.⁶ On the Filing Date, the Debtors engaged in various transactions: $1,500 was deposited into the Checking Account; $1,804 in cash was withdrawn from the Checking Account; and a check in the amount of $1,000 was withdrawn by the Debtors from the Checking Account to open an escrow at First American Title for the earnest money deposit to purchase the real property located at 17976 Goodson Rd, Caldwell, ID 83607 ("Idaho Property"). The Debtors testified that they and the Gills had viewed the Idaho Property prior to the Debtors' petition being filed. However, prior to the filing of the petition, the Gills placed an offer on the Idaho Property, and ultimately purchased the Idaho Property post-petition.⁷ According to the Debtors, the title to the Idaho Property was not placed in the their names, because they were unable to secure financing while in a Chapter 7 bankruptcy proceeding. Even after the filing of the bankruptcy petition, the Debtors continued to spend funds from the Checking Account. From April 26, 2005 through May 26, 2005, the Debtors spent the sum of $6,729.70.

On May 25, 2006, the Trustee filed an objection to the exemption claimed in the Residence Proceeds on the grounds that the Debtors had failed to provide the Trustee with the information and documentation that properly identified the Residence Proceeds as constituting the identifiable proceeds from the sale of the homestead property, and that the Residence Proceeds had been commingled with the other funds in the Debtors' Checking Account.⁸ Although the Objection had been filed, on or about May 27, 2005, the Debtors paid the amount of $89,755.94, from the Checking Account,⁹ to First American Title for the down payment on the Idaho Property, even though the contract, the title, and the financing for the Idaho Property were solely in the name of the Gills.¹⁰ Effectively, as a result of these various documents, the Debtors had transferred the Residence Proceeds, constituting the down payment on the Idaho Property, to the Gills. The Debtors continued to deposit and withdraw funds from the Checking Account, and the Debtors used the Residence Proceeds to purchase items and make other expenditures unrelated to the purchase of a new residence, including automobile loan payments, bill payments, other living expenses (such as dining out at restaurants), certain payments to relatives, and traveling to and from Idaho. The Debtors also continued to place their wages and social security payments into the Checking Account with the Residence Proceeds. The Debtors also used the Residence Proceeds to make improvements to the Idaho Property.

The Debtors' 341 Meeting of Creditors was held on June 9, 2005. The Debtors testified that they, stayed at a hotel in Phoenix to attend the Meeting of Creditors. Although the Trustee testified that he was aware that the Debtors no longer resided in Arizona as of June 2005, he believed that they were simply renting a place to stay in another State. What is clear, and the Court so finds, is that the Debtors did not disclose to the Trustee, at the time of the 341 Meeting of Creditors, that they had effectively transferred a substantial portion of the Residence Proceeds to the Gills, so that the latter parties could purchase the Idaho Property in which the Debtors had no cognizable interest.

Once the parties proceeded with the initial disclosures necessary in this contested matter, the Trustee was advised that the Debtors had purchased residential property in Idaho.¹¹ When the Trustee commenced a search of the Idaho County records, after the Debtors' disclosure, he discovered that the Idaho Property was titled in the names of the Gills. The Debtors and the Gills currently reside at the Idaho Property. The Debtors make the mortgage payments, although the Gills contribute to the payment of the living expenses.

Although the Trustee focuses on a number of computations in determining what would be the appropriate relief if this Court were to rule in favor of the Trustee on one of his alternative theories, the Court finds that the critical computation for purposes of this decision is that on the filing date, the Debtors had the sum of $140,225.99 in the Checking Account which constituted the Residence Proceeds.¹²

III. LEGAL ANALYSIS

A. Overview.

The Trustee poses a number of theories to permit recovery of all or a portion of the Residence Proceeds for the estate. Given the Debtors' concealment of the purchase of the Idaho Property, the commingling of funds, and the use of the Residence Proceeds for daily living expenses, the Trustee requests denial of any homestead exemption to the Debtors and the recovery of the $150,975.54 for the estate.¹³ Alternatively, the Trustee seeks recovery of the sum of $60,219.60, the amount remaining in the Checking Account, if the Debtors are entitled to claim the Residence Proceeds used to purchase the Idaho Property as exempt, or the sum of $40,787.74, the balance in the Checking Account, if the Debtors are entitled to the Residence Proceeds used for the Idaho Property as an exemption, and the post-petition expenditures of the Debtors are approved.

The filing of a bankruptcy petition creates an estate that consists of all of debtor's legal and equitable interests in property, including potentially exempt property. 11 U.S.C. § 541 (2006); Cusano v. Klein, 264 F.3d 936 (9th Cir.2001); In re Trujillo, 215 B.R. 200 (9th Cir. BAP 1997); In re Smith, 342 B.R. 801 (9th Cir. BAP 2006); In re Chappel, 189 B.R. 489 (9th Cir. BAP 1995). Whether an asset is property of the estate is determined by examining the nature of the asset on the date the bankruptcy petition was filed. In re Schmitt, 215 B.R. 417 (9th Cir. BAP 1997). Although the question of whether an interest claimed by the debtor is "property of the estate" is, a question to be decided by federal law, the bankruptcy courts must review and analyze state law to determine whether, and to what extent, the debtor has any legal or equitable interests in property as of the commencement of the case. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); In re Cohen, 300 F.3d 1097 (9th Cir.2002); In re Pettit, 217 F.3d 1072 (9th Cir.2000).

Section 522(b) of the Bankruptcy Code allows a debtor to exempt property from the bankruptcy estate. In re Lekas, 299 B.R. 597 (Bankr.D.Ariz.2003). Arizona has "opted out" of the federal Bankruptcy Code's exemptions; therefore, Arizona law governs homestead exemptions. 11 U.S.C. § 522(b) (2006); A.R.S. § 33-1133(B)(West 2006); In re Smith, 342 B.R. 801 (9th Cir. BAP 2006). Pursuant to A.R.S. § 33-1101(A), a debtor may claim a homestead exemption in an amount not exceeding $150,000. The homestead exemption attaches to a person's interest in the identifiable cash proceeds from the sale of the homestead for eighteen (18) months after the sale or until a new homestead is established from the proceeds pursuant to A.R.S. § 33-1101(C).¹⁴

The Arizona homestead is a statutory creation. If the language is plain, the courts must follow it. In re Plant, 300 B.R. 22, 23 (Bankr.D.Ariz.2003) citing Wuicich, v. Solomon-Wickersham Co., 18 Ariz. 164, 157 P. 972 (1916).

B. Identifiable Cash Proceeds.

One of the issues in this matter is...