In re Guevarra, Case No. 18-25306-B-7
| Decision Date | 07 June 2021 |
| Docket Number | Case No. 18-25306-B-7 |
| Court | U.S. Bankruptcy Court — Eastern District of California |
| Parties | In re: RIZAL JUCO GUEVARRA, Debtor(s). |
DC No. BHS-4
This case involves application of the principle that "when a debtor claims a state-created exemption, the exemption's scope is determined by state law, which may provide that certain types of debtor misconduct warrant denial of the exemption." Law v. Siegel, 571 U.S. 415, 425 (2014) (emphasis in original). More precisely, the issue before the court is whether the debtor's "wild card" exemption claimed under California Code of Civil Procedure § 703.140(b)(5) should be disallowed on the basis of equitable estoppel.2
The present dispute arises out of real property located at 4134 Glascow Drive, North Highlands, California ("Property"). Debtor Rizal Guevarra acquired an interest in the Property pursuant to a July 2, 2014, grant deed which conveyed the Property to the debtor and his nephew as joint tenants. The debtor and his nephew subsequently encumbered the Property by a May 27, 2016, deed of trust given as security for a loan. The deed of trust also reflects that title to the Property is vested in the debtor and his nephew as joint tenants.
The debtor filed the voluntary petition that commenced this chapter 7 case on August 23, 2018. On the initial Schedule A/B, the debtor valued the Property at $217,612.00 and stated that the value of the portion he owned was "$0.00." In the space provided for a description of the debtor's ownership interest appeared the notation: "Co-signed for Nephew; Debtor has no interest in property." The debtor also did not claim the Property or any interest in it exempt on the initial Schedule C. In fact, the debtor used the "wild card" exemption on the initial Schedule C to exempt a $22,306.20 Wells Fargo 401(k) bank account.
The debtor appeared at the § 341(a) creditors' meeting on September 25, 2018, at which time he reaffirmed the accuracy of the initial Schedules under oath. During the § 341(a) creditors' meeting the debtor was also made aware of the chapter 7 trustee's position that the debtor owned a 50% interest in the Property.
On October 11, 2018, the chapter 7 trustee filed a notice for creditors to file proofs of claim. The notice was served on the debtor and his attorney.
Approximately two weeks later, on October 25, 2018, the chapter 7 trustee employed an attorney to assist with the sale of the Property or the debtor's interest in it. Several weeks later, on November 9, 2018, the chapter 7 trustee's attorney again informed the debtor's attorney of the estate's position that the debtor owned a 50% interest in the Property. A little over a month later, on December 13, 2018, the chapter 7 trustee's attorney sent the debtor's nephew a letter informing the nephew that the debtor's 50% interest in the Property was property of the bankruptcy estate and that the chapter 7 trustee intended to "move to sell either [the debtor's] interest in the Subject Property or the entire Subject Property." Several days later, on December 19, 2018, the debtor's attorney sent the chapter 7 trustee's attorney a letter in which he stated that "the debtor has no interest in the property."
Meanwhile, on August 20, 2019, the chapter 7 trustee filed an adversary proceeding in which he sought to sell the Property in its entirety. Having the good fortune to find a buyer for the debtor's 50% interest, the chapter 7 trustee dismissed the adversary proceeding and instead pursued a sale of the debtor's interest in a motion filed on November 1, 2019.
The debtor opposed the sale motion on December 6, 2019. The debtor filed an opposition which reiterated that he
The debtor repeated these assertions three days later, on December 9, 2019, in a motion to convert the chapter 7 case to achapter 13 case. A declaration filed with the conversion motion stated that the debtor is "not the owner of the property, [he is] just a co-signer." The conversion motion similarly stated that the debtor At the same time-and in what would appear to be the proverbial "Freudian slip"-the conversion motion also stated that "[t]he reason for conversion is because the Trustee is demanding $32,000 to sell Debtor's portion (50%) interest in property listed in debtor's schedules known as 4134 Glascow Drive, North Highlands, CA." (Emphasis added).
The sale motion was heard and granted the following day, on December 10, 2019. Based on evidence that established that title to the Property was vested in the debtor and his nephew as joint tenants, the court ruled that the debtor held a 50% interest in the Property and the interest was subject to sale. The order granting the sale motion and approving the sale of the debtor's 50% interest to a third-party overbidder for $32,500.00 was also filed on December 10, 2019. The debtor did not appeal the sale order.
Over a year and a half after the initial Schedules were filed, after the debtor testified to their accuracy, and after the debtor was informed that the trustee considered his 50% interest in the Property an asset of the bankruptcy estate; over a year after the debtor first represented that the interest had no value and, in any case, he did not own or have an interest inthe Property; and after the chapter 7 trustee incurred sale-related expenses in excess of $12,000.00, on March 18, 2020, the debtor filed amended Schedules A/B and C in which he claimed an interest in the Property and claimed the proceeds from the sale of the interest exempt under California's "wild card" exemption. The debtor valued his interest in the Property at $32,500.00 in amended Schedule A/B. In the space of amended Schedule A/B for describing the nature of the debtor's ownership interest in the Property, the debtor wrote: "Debtor interest in said property it [sic] was sold for $32,500.00 by chapter 7 trustee[.]" Under "Other information you wish to add," the debtor wrote: "Debtor claims said funds under exemption statute CCP 703." On amended Schedule C, the debtor added the $32,500.00 sale proceeds and claimed $27,915.00 exempt under California's "wild card" exemption. In so doing, the debtor changed his initial Schedule C "wild card" exemption from the Wells Fargo 401(k) bank account.
The chapter 7 trustee objected to the debtor's claim of exemption on March 30, 2020. The chapter 7 trustee asserted that the debtor had not acted in good faith and was equitably estopped from asserting an exemption in the sale proceeds. The chapter 7 trustee also asserted that if he had known that the debtor would exempt the sale proceeds he would not have sold the debtor's 50% interest and incurred the expense of selling the interest in the first instance.
The debtor filed an opposition to the chapter 7 trustee's objection on April 21, 2020. The opposition stated that the debtor did not act in bad faith. It also stated that the debtor changed his exemption after the court ruled during the salemotion hearing that he owned a 50% interest in the Property.
Addressing only the bad faith issue, in a memorandum and order filed on June 1, 2020, the court sustained the chapter 7 trustee's objection on the basis of bad faith. The debtor timely appealed the decision on June 12, 2020.
The Bankruptcy Appellate Panel for the Ninth Circuit heard the debtor's appeal on March 18, 2021, and issued an unpublished memorandum decision on March 29, 2021. Guevarra v. Whatley (In re Guevarra), 2021 WL 1179619 (9th Cir. BAP March 29, 2021). The memorandum decision reaffirms that a debtor as an exemption claimant bears the burden of proof on a California exemption, confirms that state-created exemptions are governed by state law which includes equitable law, recognizes that an exemption created under California law may be disallowed on state law equitable grounds, and states that equitable grounds for disallowing an exemption may include equitable estoppel. Nevertheless, finding bad faith inapplicable to the "wild card" exemption, the memorandum decision vacated this court's June 1, 2020, memorandum and order and remanded with instructions for this court to consider whether the debtor's "wild card" exemption may be disallowed on California state law equitable estoppel grounds. The court now proceeds to do so.
Generally, when a debtor files bankruptcy all of the debtor's property becomes property of the bankruptcy estate. See 11 U.S.C. § 541. Federal law provides avenues for a debtor to exempt certain property. See 11 U.S.C. § 522(d). Congress hasalso authorized states to opt out of the federal bankruptcy exemptions created by § 522(d) which means the federal exemption scheme can be supplanted by states that choose to provide their own exemptions. See 11 U.S.C. § 522(b)(2); Granger v. Watson (In re Granger), 754 F.2d 1490, 1492 (9th Cir. 1985) (). California exercised the § 522(b)(2) option to opt out. See Cal. Code Civ. Proc. § 703.130.
A bankruptcy court construing a California exemption applies a state-law rule of decision. In re Tallerico, 532 B.R. 774, 780 (Bankr. E.D. Cal. 2015).3 In other words, "[l]ike all federal courts when addressing a state-law rule of decision, the bankruptcy court is predicting what the California Supreme Court would rule if it were presented with the question." Id. In that endeavor, state law governs because "when a debtor claims a state-created exemption, the exemption's scope is determined by state law...
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