Wolfe v. Jacobson (In re Jacobson)

• Decision Date: 23 April 2012
• Docket Number: No. 10–60040.,10–60040.
• Parties: In re Myrna JACOBSON, Debtor.John M. Wolfe, Chapter 7 Trustee, Appellant, v. Myrna Jacobson; Donald Jacobson, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

12 Cal. Daily Op. Serv. 4361
676 F.3d 1193

In re Myrna JACOBSON, Debtor.John M. Wolfe, Chapter 7 Trustee, Appellant,
v.
Myrna Jacobson; Donald Jacobson, Appellees.

No. 10–60040.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 16, 2012.Filed April 23, 2012.

Sidney Lanier and Brent Ayscough, Ayscough & Marar, Torrance, CA, for the appellant.

Jeffrey T. Vanderveen, Law Offices of Jeffrey T. Vanderveen, Vista, CA, for the appellees.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel, Kirscher, Pappas, and Taylor, Bankruptcy Judges, Presiding. BAP No. 10–1036.Before: JEROME FARRIS and WILLIAM A. FLETCHER, Circuit Judges, and ALVIN K. HELLERSTEIN, Senior District Judge.^*OPINION FARRIS, Circuit Judge:

This appeal grows out of an adversary proceeding in Myrna Jacobson's Chapter 7 bankruptcy proceedings. The bankruptcy trustee filed a complaint against Myrna and her husband, Donald Jacobson, claiming that certain money and property belonged to Myrna's bankruptcy estate. The trustee sought turnover to the bankruptcy estate of certain proceeds from the sale of the Jacobsons' homestead, a rental property held in Donald's name, and income earned from the rental property. The bankruptcy court rejected all of the trustee's claims. The Bankruptcy Appellate Panel affirmed. We have jurisdiction under 28 U.S.C. § 158(d)(1).

We reverse in part and affirm in part. The proceeds from the homestead sale belong to Myrna's bankruptcy estate. The rental property held in Donald's name and the income from it do not.

I.

This case arises from nearly three decades of litigation between the Jacobsons and Myrna's principal creditor, Larry Cunningham. In 1985, Cunningham sued the Jacobsons and their business partners in California state court for torts related to the construction and sale of a beach home in Orange County. The litigation dragged on for 10 years. In 1995, as a re-trial neared, the Jacobsons filed a Chapter 7 bankruptcy petition. The bankruptcy petition automatically stayed the state court litigation under 11 U.S.C. § 362(a)(1).

In 1997, Cunningham filed an adversary complaint in the bankruptcy court objecting to discharge of the Jacobsons' debts, alleging the Jacobsons had fraudulently concealed assets. After a trial, the bankruptcy court concluded that Myrna had fraudulently hidden assets from the bankruptcy court and denied her a discharge under 11 U.S.C. § 727(a). The bankruptcy court concluded, however, that Donald could not have formed the intent to commit fraud due to his mental disabilities and dependence on Myrna to run his affairs. The bankruptcy court thus granted Donald a discharge.

The bankruptcy court's ruling left Cunningham free to pursue his tort claims against Myrna in California state court. In 2000, a jury awarded Cunningham over $800,000.

By early 2006, Cunningham's judgment had increased in value to $1.3 million due to interest. Cunningham applied in California state court for a judicial sale of the Jacobsons' house on Kensington Road in Los Alamitos, California (the “Kensington property”). In response, Myrna filed the current Chapter 7 bankruptcy petition, which automatically stayed the foreclosure sale under 11 U.S.C. § 362(a)(2). Myrna claimed the Kensington property was her principal residence and therefore qualified for a homestead exemption from creditors' claims under California law. See Cal.Civ.Proc.Code § 704.720.

On Cunningham's motion, the bankruptcy court lifted the stay on the sale of the Kensington property. The Orange County Sheriff sold the Kensington property at auction and paid the Jacobsons a portion of the proceeds as required by the California homestead exemption. Cal.Civ.Proc.Code § 704.730(a)(3). The homestead exemption provides that the debtor's portion of the proceeds loses its exempt status if not reinvested in a new homestead within six months. Cal.Civ.Proc.Code § 704.720(b). The Jacobsons did not reinvest their portion of the proceeds within that window.

In 2007, the trustee filed this adversary proceeding against Donald and Myrna. The trustee raised three claims. First, he sought turnover to the bankruptcy estate of the Jacobsons' share of the Kensington property proceeds. Second, he sought turnover of a rental property on Enterprise Drive in Los Alamitos (the “Enterprise property”) to which Donald alone held title. Third, the trustee sought turnover of refinancing proceeds and rental income earned from the Enterprise property.

The bankruptcy court denied all of the trustee's claims. The bankruptcy court ruled the Kensington property proceeds were exempt, despite the Jacobsons' failure to reinvest them. The bankruptcy court reasoned that bankruptcy exemptions are fixed at the time of the bankruptcy petition and cannot be changed by post-petition events. The bankruptcy court viewed the homestead exemption as covering the Kensington property itself and concluded that post-petition conversion of the Kensington property into sale proceeds could not change its exempt status.

The bankruptcy court further held that Myrna had no interest in the Enterprise property or its income. The bankruptcy court found that documentary evidence established a presumption under California law that Donald was the sole owner. The bankruptcy court also deemed credible the Jacobsons' testimony that Donald had made the down payment on the Enterprise property with an inheritance that was his separate property. The bankruptcy court rejected the trustee's argument that judicial and collateral estoppel precluded the Jacobsons from arguing the Enterprise property was Donald's separate property.

The Bankruptcy Appellate Panel affirmed, and the trustee timely appealed.

II.

We review decisions of the Bankruptcy Appellate Panel de novo and apply the same standard of review that the Bankruptcy Appellate Panel applied to the bankruptcy court's ruling. In re Penrod, 611 F.3d 1158, 1160 (9th Cir.2010). We review conclusions of law de novo and findings of fact for clear error. In re Hoopai, 581 F.3d 1090, 1095 (9th Cir.2009). The decision whether to invoke judicial estoppel is reviewed for abuse of discretion. United States v. Ruiz, 73 F.3d 949, 953 (9th Cir.1996). We review the determination whether collateral estoppel is available de novo. Dias v. Elique, 436 F.3d 1125, 1128 (9th Cir.2006).

III.

We begin with the Kensington property proceeds. A Chapter 7 bankruptcy petition creates an estate to satisfy creditors' claims. The estate consists of “all legal or equitable interests of the debtor in property” when the petition is filed. 11 U.S.C. § 541(a)(1). A debtor may, however, exclude property from the estate through various exemptions. Section 522 of the Bankruptcy Code provides a default list of exemptions but allows states to opt out and define their own exemptions. 11 U.S.C. §§ 522(b)(2), 522(b)(3)(A), 522(d). California has opted out of the federal exemption scheme and limited Chapter 7 petitioners to the exemptions debtors may claim in non-bankruptcy cases. Cal.Civ.Proc.Code §§ 703.010(a), 703.130.

When Myrna filed the current bankruptcy petition, she claimed a homestead exemption for the Kensington property. California, like many states, gives debtors an exemption for their “principal dwelling” or “homestead.” Cal.Civ.Proc.Code §§ 704.710(c), 704.720(a). The California homestead exemption does not, however, prevent a judgment creditor from forcing a judicial sale of the homestead. See Cal.Civ.Proc.Code § 704.740. Such a sale will go forward so long as there are enough proceeds to satisfy all liens and encumbrances on the property and provide the debtor with a statutorily prescribed exemption amount. Cal.Civ.Proc.Code §§ 704.730, 704.800(a). When the Kensington property was sold, the California homestead exemption entitled the Jacobsons to $150,000 of the proceeds. Cal.Civ.Proc.Code § 704.730(a)(3) (2007).

The debtor's share of the proceeds are not fully...