In re Law, LA-04-10052-TD.

• Decision Date: 20 February 2009
• Docket Number: No. LA-04-10052-TD.,LA-04-10052-TD.
• Citation: 401 B.R. 447
• Parties: In re Stephen LAW, Debtor.
• Court: U.S. Bankruptcy Court — Central District of California

401 B.R. 447

In re Stephen LAW, Debtor.

No. LA-04-10052-TD.

United States Bankruptcy Court, C.D. California.

February 20, 2009.

Ainat Kiewe, Steven T. Gubner, Talin Keshishian, Woodland Hills, CA, Ezra Brutzkus & Gubner LLP, Robin B. Sokol, Encino, CA, for debtor.

Alfred H. Siegel, Siegel, Gottlieb, Mangel & Levine, Sherman Oaks, CA, trustee.

MEMORANDUM DECISION REGARDING TRUSTEE'S MOTION TO SURCHARGE DEBTOR'S HOMESTEAD EXEMPTION

THOMAS A. DONOVAN, Bankruptcy Judge.

Trustee's Renewed Motion to Surcharge Debtor's Homestead Exemption ("Motion") was heard by this court on November 5, 2008 at 10:30 a.m. Steven T. Gubner appeared on behalf of Alfred H. Siegel, chapter 7 trustee ("Trustee") of the bankruptcy estate of Stephen Law ("Debtor"). Debtor appeared in pro per. All papers have been filed and this matter is now ripe for resolution.

Having carefully considered the briefs, pleadings, declarations, and exhibits filed in support of, and in opposition to, the Trustee's Motion, and all of the filings in this bankruptcy case and in the related adversary proceedings on file, I conclude that a surcharge of the Debtor's homestead exemption by $75,000 is proper. My reasons are as follows.¹

Procedural Posture

On December 29, 2006, the Bankruptcy Appellate Panel ("BAP") entered a memorandum of decision reversing my earlier order, entered on May 8, 2006, surcharging Debtor's homestead exemption on Trustee's earlier motion. The BAP concluded that the surcharge was improper because no extraordinary circumstances had been established justifying the surcharge, and because it appeared to the BAP that "the intent of the trustee was to punish the debtor for his tactics." The BAP decision left open the possibility of a future order surcharging Debtor's homestead exemption if the order was "supported by specific findings of fact and appropriate conclusions of law ... including an adequate explanation why any surcharge based on specific damages or expenses incurred by the estate should be reimbursed from the debtor's exemptions." The Ninth Circuit recently affirmed the BAP's decision. The following comprises my findings of fact and conclusions of law on the Trustee's Renewed Motion.

Applicable Legal Standard

A court may surcharge a debtor's claimed exemption "when reasonably necessary both to protect the integrity of the bankruptcy process and to ensure that a debtor exempts an amount no greater than what is permitted by the exemption scheme of the Bankruptcy Code." Latman v. Burdette, 366 F.3d 774, 786 (9th Cir. 2004). Such a surcharge is justified where a debtor's misconduct amounts to a fraud on the court and the debtor's creditors. In re Onubah, 375 B.R. 549, 554 (9th Cir. BAP2007). A surcharge must be calculated to compensate the estate for the actual damage inflicted by a debtor's misconduct. Id. at 556. The remedy of surcharge cannot "be used to shift costs to a debtor who has unsuccessfully, but in good faith ... challenged the trustee's administration of the estate." Id. Attorneys' fees may be awarded as part of a surcharge if the debtor's conduct causes "the estate to incur unnecessary expenses ... and without the award the estate would not have been made whole." Id.

Summary of My Findings and Conclusions

On January 5, 2004, Debtor filed his chapter 7 petition. The only significant asset of the bankruptcy estate was Debtor's residence, which was encumbered by two deeds of trust and three judgment liens. The second deed of trust, supported by a purported $168,000 personal loan from a woman named Lili Lin, has been the subject of a bitter controversy between Debtor and Trustee. This dispute has consumed nearly five years and hundreds of thousands of dollars in lawyers' time, as documented in the Trustee's lawyers' still pending preliminary fee application, filed on March 10, 2008. For reasons set forth more fully below, I am persuaded—based on a preponderance of the evidence before me—that the loan was fabricated by Debtor in an attempt to preserve equity in his residence and defeat the collection efforts of his judgment creditors. In response to Trustee's challenge to (1) the second deed of trust, as asserted primarily by Debtor, with intermittent, questionable, and unpersuasive support purportedly offered by a woman named Lili Lin of China, and (2) Debtor's homestead claim, I conclude that Debtor's assertions concerning the second deed of trust have not been proved by a preponderance of the evidence and that the Trustee's surcharge request has been substantiated by the evidence.

The Purported Lili Lin Loan

To support his claims concerning the second deed of trust (the "disputed deed of trust"), Debtor asserts that in 1998 he received a loan of $168,000 from a woman named Lili Lin.² During the nearly five years since his bankruptcy filing, Debtor has not produced any persuasive evidence that he actually received such a loan. Moreover, the evidence he has produced is inconsistent, supporting an inference that no such loan was made. For instance, at his meeting of creditors, Debtor stated under oath that the proceeds of the Lili Lin loan were not deposited in a bank account, but rather were paid directly to his creditors, and that Debtor possessed receipts reflecting this.³ Since then, he has never produced receipts reflecting such payments. He later claimed that the funds were not paid directly to creditors, but were wired into his bank account;⁴ but the bank statements he offered in support of this claim do not prove by credible or persuasive admissible evidence that he received such a loan or that any such sum as $168,000 came from a woman named Lili Lin.⁵ These inconsistencies lead me to disbelieve all of Debtor's assertions regarding the disputed deed of trust: It strains credulity to imagine that Debtor would not have a clear recollection of the form in which he received a $168,000 personal loan, or that in the elapsed time of this 2004 bankruptcy case Debtor has been unable to produce persuasive, credible evidence substantiating the loan in response to Trustee's discovery requests, motions, or otherwise.

In June of 1999, a year after the purported loan was made, Debtor executed and had notarized two separate promissory notes,⁶ both, apparently, to document the same alleged loan. Both of the notes were issued, purportedly, in favor of someone named Lili Lin. One of the notes identified Lili Lin's birth date as November 22, 1947; the other contained no birth date. Debtor has not provided a credible explanation as to why he prepared and signed two separate promissory notes, one with the obligee's date of birth and one without.⁷ Also in June of 1999, Debtor executed and had notarized a deed of trust in favor of Lili Lin ("the disputed deed of trust"), which was recorded on June 28, 1999.⁸ Attached to the recorded deed was one of the two promissory notes—the one that did not include Lili Lin's birth date.⁹ Significantly, at the time the disputed deed of trust was recorded, an action titled Cau-Min Li v. Law was pending against the Debtor in the Los Angeles Superior Court.¹⁰ A resulting judgment of $131,821.74 was entered against Debtor in October of 1999, just four months after the Lili Lin deed was recorded.¹¹ Given the substantial lapse of time between the purported loan and its recordation, it seems likely that the disputed deed of trust was recorded in anticipation of the impending Li judgment.

A woman named Lili Lin, who lives in Artesia, California, ("Lili Lin of Artesia") was an acquaintance of Debtor at this time. In June of 1999, Debtor delivered to Lili Lin of Artesia a copy of the disputed deed of trust and promissory note.¹² He did so despite the fact that Lili Lin of Artesia had never loaned Debtor any money.¹³ Debtor later asked Lili Lin of Artesia to accept a check from him for $168,000, in satisfaction of the "loan," and to then return the money to him.¹⁴ Lili Lin of Artesia refused to do this.¹⁵

In February 2000, County Records Research received an unsigned letter, purportedly from Lili Lin of Artesia.¹⁶ The letter, which Lili Lin of Artesia says she did not send, sought to institute foreclosure proceedings on Debtor's residence. Around the same time, Lili Lin of Artesia received the following documents in the mail: (1) Assignment of Promissory Note Assigning the Promissory Note from Lili Lin [of Artesia] to Connie Chang; (2) Notice of Default and Election to Sell Under Deed of Trust; (3) Substitution of Trustee; (4) Declaration of Default and Demand for Sale.¹⁷ Included with them was an unsigned note asking her to sign the documents.¹⁸

If Lili Lin of Artesia had signed and delivered the documents, as requested, she would have (1) assigned her interest in the promissory note, if any, to Connie Chang, who is Debtor's ex-wife; (2) substituted County Records Research as the trustee under the disputed deed of trust; and (3) authorized County Records Research to foreclose on Debtor's residence. On or about March 23, 2000, Lili Lin of Artesia received further correspondence from County Records Research repeating the request that she sign the documents.¹⁹ She did not sign the documents. These circumstances, as proved by Trustee, strongly suggest to me that Debtor created the lien of the disputed deed of trust on his home in order to protect his equity from a judgment creditor, and then attempted to recover the protected equity via a sham transfer to his ex-wife.²⁰

When Debtor filed his bankruptcy petition in 2004, he listed the now disputed deed of trust in favor of Lin's Mortgage & Associates [of Guangzhou, China] in his schedules. Trustee filed an adversary proceeding asserting fraud against Lili Lin in June of 2004,²¹ seeking to avoid and recover the disputed deed of trust. Shortly thereafter, in his opposition to Trustee's motion for default judgment, Debtor asserted that he had in fact received the $168,000 loan from a different woman named Lili Lin ("Lili Lin of China")—a woman who...