Reed, In re

Decision Date09 August 1991
Docket NumberNos. 89-55488,89-55491,s. 89-55488
Parties, Bankr. L. Rep. P 74,113 In re Morton REED, Debtor. Steven A. SCHWABER, Trustee, Plaintiff-Appellee, v. Morton REED, Defendant-Appellant, and Safi Reed; Joseph T. Vodnoy, et al., Defendants. In re Morton REED, Debtor. Steven A. SCHWABER, Trustee, Plaintiff-Appellee, v. Safi REED, Defendant-Appellant, and Morton Reed; Joseph T. Vodnoy, et al., Defendants.
CourtU.S. Court of Appeals — Ninth Circuit

Richard M. Moneymaker, Moneymaker & Kelley, Los Angeles, Cal., for defendant-appellant Morton Reed.

Richard K. Diamond, Danning, Gill, Gould, Diamond & Spector, Los Angeles, Cal., for defendant-appellant Safi Reed.

Stanley E. Goldich, Catherine A. Steiner, Pachulski, Stang & Ziehl, Los Angeles, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Central District of California.

Before REINHARDT and FERNANDEZ, Circuit Judges, and SMITH, District Judge. *

FERNANDEZ, Circuit Judge:

Morton Reed ("Debtor") and his wife, Safi Reed, appeal the district court's order affirming the bankruptcy court's preliminary injunction. The injunction orders the Debtor to turn over his portion of the net proceeds from the sale of the Reeds' home to the bankruptcy trustee, appellee Steven A. Schwaber ("the Trustee"). 1 We affirm.


On September 12, 1986, Debtor filed a voluntary petition in bankruptcy for Chapter 7 relief. He listed among his assets a one-half interest in his home in Beverly Hills ("residence"), which he held in joint tenancy with his wife, Safi Reed. Debtor also claimed a $45,000 homestead exemption in the residence under California law. Debtor swore the value of his one-half interest was $300,000, and that a secured debt of $380,000 encumbered the residence.

The Trustee filed a pre-printed "No Asset" report form on August 7, 1987, thereby stating that any assets were encumbered beyond value or otherwise negligible, and that the listed assets were to be abandoned in accordance with 11 U.S.C. Sec. 554(c), that is, when the estate was closed. The bottom of the pre-printed form contains a proposed order closing the case and a place for the bankruptcy clerk's signature. No signature, by stamp or otherwise, was ever placed on the order, and the order was never entered.

The Reeds then entered into an escrow to sell their residence. During escrow they discovered that Robert Humiston, in violation of 11 U.S.C. Sec. 362(a), had filed a judgment lien on the residence after the filing of the bankruptcy petition. At a hearing on Debtor's request to vacate the lien, the bankruptcy judge ordered the Trustee to appear. On August 21, 1987, the Trustee appeared and stated that he intended to withdraw the "No Asset" report based on his new belief that the home was held as community property rather than joint tenancy and was therefore a valuable asset in Debtor's estate.

As a result of the various hearings, the Humiston lien was withdrawn, the "No Asset" report was ordered withdrawn, and Debtor's counsel was admonished repeatedly that the Reeds were not to sell their residence or alter its title in any way. In spite of this, on November 6, 1987, the Reeds entered into another agreement to sell their residence. The Trustee withdrew his "No Asset" report on December 7, 1987. Escrow on the sale of the residence closed on December 15, 1987.

The Trustee learned of the sale in February of 1988 and filed this action for a preliminary injunction to require Debtor to turn over his share of the net proceeds and for an accounting of the proceeds. The bankruptcy court granted the injunction, 89 B.R. 100, and the district court affirmed. The Reeds now appeal.


We have jurisdiction pursuant to 28 U.S.C. Sec. 158(d).

We independently review the bankruptcy court's decision. Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986). We reverse a decision granting a preliminary injunction "only where the district court abused its discretion or based its decision on an erroneous legal standard or on clearly erroneous findings of fact." Lou v. Belzberg, 834 F.2d 730, 733 (9th Cir.1987), cert. denied, 485 U.S. 993, 108 S.Ct. 1302, 99 L.Ed.2d 512 (1988).


The issues on this appeal all concern the merits of the preliminary injunction. The parties do not dispute that the Trustee

would suffer irreparable injury if the injunction were not granted.

A. Homestead Exemption

Under California law at the time when Debtor claimed his homestead exemption, once a Debtor is allowed the exemption a property right to $45,000 of the proceeds from the sale of the Debtor's residence revests in the Debtor and is no longer part of the bankruptcy estate. Cal.Civ.Proc.Code Secs. 704.720, 704.730. 2 There is no support for Debtor's argument that title to the entire residence automatically revests in the Debtor.

California does not permit a debtor to exempt his entire interest in a homestead, but specifically limits the dollar amount up to which a homestead exemption can be claimed. Cal.Civ.Proc.Code Sec. 704.730(a). The language of the relevant statutes makes it clear that the "homestead exemption" in California is merely a debtor's right to retain a certain sum of money when the court orders sale of a homestead in order to enforce a money judgment; it is not an absolute right to retain the homestead itself. See, e.g., Cal.Civ.Proc.Code Sec. 704.720(b), which states, "If a homestead is sold under this division ... the proceeds of sale ... are exempt in the amount of the homestead exemption provided in Section 704.730." (Emphasis added). See In re Hyman, 123 B.R. 342, 345-48 (9th Cir.BAP 1991).

In this case, no one objected to Debtor's homestead exemption within thirty days of the creditors' meeting. Therefore a right to $45,000 of any net proceeds from sale of the residence passed out of the bankruptcy estate on November 29, 1986. See Bankruptcy Court Rule 4003(b). However, the residence itself and all remaining net proceeds were still part of the bankruptcy estate and subject to administration by the Trustee. 3

B. The "No Asset" Report

Although filing a "No Asset" report may exhibit the requisite intent to abandon an asset, that report in and of itself cannot result in abandonment unless the court closes the case. Behrens v. Woodhaven Ass'n, 87 B.R. 971, 973 n. 1 (Bankr.N.D.Ill.1988); In re Dlugopolski, 67 B.R. 122, 124 (Bankr.D.Kan.1986) (no abandonment by operation of law because case had not been closed); 11 U.S.C. Sec. 554 (identifying three ways in which a trustee can abandon property, all of which require court action).

In this matter, the bankruptcy court found that the case was never closed by the court before the Reeds sold their home, and that factual finding is not clearly erroneous. See 11 U.S.C. Sec. 554(c). It is also undisputed that there was no notice and hearing before the trustee filed the "No Asset" report. See 11 U.S.C. Sec. 554(a), (b). Thus, there was no court action and no abandonment. 4

Page 1332

The policy statements in In re Hunter, 76 B.R. 117 (Bankr.S.D.Ohio 1987), would not change this result, even if we accepted them. The court in Hunter stated that the courts and the parties should be able to rely on a trustee's filing of a "No Asset" report without having to wonder whether the trustee will second guess himself. 5 Id. at 119. In the present case, there was no reliance. On the contrary, before the Reeds proceeded to sell their home, the bankruptcy judge stated, "I'm giving [them] warning, that the trustee is intending to administer this property. Your client can't sell it, okay." At any rate, it does not ask too much of parties or courts if they must wait until the order closing the estate is actually made. That is no more than the law expressly requires. To the extent that Hunter would ignore the law for the sake of administrative convenience, we decline to follow it.

C. Debtor's Interest in the Residence

State law determines the existence and scope of a debtor's interest in property. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917-18, 59 L.Ed.2d 136 (1979). That interest is determined upon filing the bankruptcy petition and becomes part of the bankruptcy estate at that time. 11 U.S.C. Sec. 541(a).

Under California law, only a Debtor's one-half joint tenancy interest 6 can be sold to satisfy a money judgment. Cal.Civ.Proc.Code Sec. 704.820. In order to actually transfer that interest free and clear of liens, the law provides that it cannot be sold by a creditor unless the proceeds from the sale would exceed the sum of the homestead exemption and the full value of any jointly given mortgage encumbrance on the property. Schoenfeld v. Norberg, 11 Cal.App.3d 755, 766, 90 Cal.Rptr. 47 (1970).

Cases interpreting Schoenfeld have strictly adhered to its mandate that, when calculating a Debtor's equity in a joint-tenancy interest for creditor sale purposes, one must subtract the full value of the outstanding liens and encumbrances and the homestead exemption from the Debtor's one-half interest in the fair market value. If the resulting number is negative, there can be no forced sale by a creditor. See In re Jacobs, 48 B.R. 570, 573 (Bankr.S.D.Cal.1985) (finding no equity in debtor's one-half interest, which was less than outstanding first deed of trust where a creditor brought the action); In re Miles, 35 B.R. 52, 54 (Bankr.E.D.Cal.1983) (in a creditor's action, following the Schoenfeld formula to determine whether there is any equity for the debtor's estate, or whether a creditor can force a sale of the property); In re Schneider, 9 B.R. 488, 490 (N.D.Cal.1981) (stating the interest subject to sale must exceed value of homestead exemption before that interest can be sold and finding no contention that joint encumbrances are to be deducted solely from debtor's interest). 7

Debtor argues that under Schoenfeld...

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