In re Bunn-Rodemann

491 B.R. 132

In re BonnieJean BUNN–RODEMANN, Debtor.

No. 12–39835–C–7.

Docket Control No. JRR–1.

United States Bankruptcy Court, E.D. California.

April 10, 2013.

Stephen J. Johnson, Auburn, CA, for Debtor.

MEMORANDUM OPINION AND DECISION

RONALD H. SARGIS, Bankruptcy Judge.

John Roberts, the Chapter 7 Trustee (“Trustee”) has filed an objection to exemptions claimed by BonnieJean Bunn–Rodemann (“Debtor”) in this Chapter 7 bankruptcy case. Jurisdiction for this Contested Matter exists pursuant to 28 U.S.C. §§ 1334 and 157(a), and the referral of bankruptcy cases and all related matters to the bankruptcy judges in this District. E.D. Cal. Gen 182, 223. This Objection to Claim of Exemptions is a core arising under Title 11, including 11 U.S.C. §§ 522. 28 U.S.C. § 157(b)(2)(A), (B), and (O).

INTRODUCTION

The Debtor has claimed an exemption with respect to rights and interests relating to real property commonly known as 1845 Hidden Hills Drive, Roseville, California (the “Property”). The Exemption claimed by the Debtor on Amended Schedule C, Dckt. 9, is stated as follows:

TYPE OF PROPERTY: Any and all proceeds, revenues, or concessions conceded to or granted by the secured mortgage lender on the property at 1845 Hidden Hills Dr. Roseville, CA 95661 and or the debtor's intangible personal value contained in the possessory interest in the property. (Hereinafter “Property”)

STATUTE CREATING EXEMPTION: CCCP § 703.140(b)(5)

VALUED CLAIMED EXEMPT: $11,764.00

The Trustee objects to this exemption, asserting that the asset being claimed as exempt did not exist as of the commencement of the case and will only exist if the Trustee markets and sells the Property post-petition. The monies, to be paid by the creditor from the sales proceeds subject to the creditor's lien, were not property of the Debtor or property in which an exemption can be claimed. Such monies paid to the estate are “carve-outs” from the creditor's sale proceeds, which are paid based upon the post-petition activities of the bankruptcy estate's representatives.

The Debtor responds, opposing the objection to her claim of exemption, asserting that the scope of 11 U.S.C. § 541 property of the bankruptcy estate is very broad. She is correct, with 11 U.S.C. § 541 sweeping up every conceivable right and interest of the Debtor as of the commencement, with specifically enumerated exceptions. However, notwithstanding these interests and rights being swept into the bankruptcy estate, 11 U.S.C. § 541 does not create rights. State of California v. Farmers Markets, Inc. (In re Farmers Markets, Inc.), 792 F.2d 1400, 1402 (9th Cir.1986).

It is asserted by the Debtor that she was in possession of the Property as of the commencement of the bankruptcy case, had the right to negotiate and attempt to conduct a sale (or short-sale) of the Property, and the right to receive payment of any concessions or “incentive payments” a creditor would give her from that creditor's short-sale proceeds. The Debtor asserts that the pre-petition right to do this continues after the commencement of the case and that the Debtor's right to attempt to conduct a short-sale and receive the creditor's concessions may be claimed exempt as a necessary part of her post-discharge “fresh start.”

DISCUSSION

Exemption of the Asset by the Debtor

A debtor may claim an exemption in an asset which is property of the bankruptcy estate. The vast majority of exemptions under California Law (the applicable bankruptcy exemptions in California, Cal.Code Civ. Pro. § 703.140) are for monetary amounts in assets of the estate. Such assets continue to remain property of the estate until used, sold, or abandoned from the estate. Schwab v. Reilly, ––– U.S. ––––, 130 S.Ct. 2652, 2667, 177 L.Ed.2d 234 (2010); Gebhart v. Gaughan (In re Gebhart), 621 F.3d 1206, 1210 (9th Cir.2010).

The specific exemption claimed by the Debtor is provided in California Code of Civil Procedure 703.140(b)(1) and (5),

(1) The debtor's aggregate interest, not to exceed twenty-four thousand sixty dollars ($24,060) in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence.

...

(5) The debtor's aggregate interest, not to exceed in value one thousand two hundred eighty dollars ($1,280) plus any unused amount of the exemption provided under paragraph (1), in any property.

The Debtor's exemption under California law in property of the estate is determined as of the bankruptcy case filing date. Owen v. Owen, 500 U.S. 305, 314, 111 S.Ct. 1833, 1838, n. 6, 114 L.Ed.2d 350;In re Wolf, 248 B.R. 365, 367–368 (9th Cir. BAP 2000). A debtor does not have the ability to claim exemptions which did not exist as of the commencement of the case or post-petition increases in the value of the property in excess of the amount claimed as exempt. In re Hyman, 967 F.2d 1316, 1319, n. 2 (9th Cir.1992). To be claimed as exempt the property must exist and become part of the bankruptcy estate. Owen, supra at 308, 111 S.Ct. 1833.

The “asset” being asserted by this exemption is the Debtor's physical possession of her residence and her ability to control a short-sale of the Property. Attempting to claim an exemption in this type of asset is a relatively new phenomenon arising from creditors realizing that a short-sale of the property securing the debt (by which the creditor agrees to take less than the full amount owed) is better than the creditor completing a non-judicial foreclosure sale and the creditor becoming the owner of the property. Once the creditor becomes the owner, it has to take on the responsibility of being an owner, including, (1) evicting the borrower/former owner, (2) managing the property as an asset of the creditor, (3) paying insurance, property taxes, and utilities, (4) employing people or third-party vendors to secure, repair, and maintain the property while it is being marketed, and (5) engaging a real estate broker to sell the property.

Savvy borrowers and their counsel often extract not only reasonable moving expenses (in lieu of the creditor having to incur the cost and expense of an unlawful detainer action), but negotiate an “incentive payment” from the sales proceeds for the efforts of the borrower in working with a real estate broker and taking the time to market the property for a short-sale. This is a basic economic calculation in which the creditor determines that the cost of the “incentive payment” is less than the cost of foreclosing, owning the property, and selling the property itself.

Recently, Chapter 7 trustees have begun working with creditors to conduct such short-sales of property of the bankruptcy estate. The trustee enters into an agreement with the creditor for a short-sale the property, rather than abandoning the overencumbered property to the debtor. If abandoned, the property would no longer be property of the estate, with the debtor having regained the right and ability to negotiate a short-sale with the creditor. The trustee who consummates a short-sale receives for the bankruptcy estate the “incentive payment” from the creditor's sale proceeds.

Rights of the Estate Asserted by the Chapter 7 Trustee

This Debtor has elected to file the present Chapter 7 case, rather than a Chapter 13 or Chapter 11 case. One of the immediate results of electing to file a Chapter 7 case is that all of the property of the estate is placed under the exclusive control of the Chapter 7 Trustee. The Chapter 7 Trustee is the representative of the bankruptcy estate. 11 U.S.C. § 323(a). He is the only person, absent an order of the court, authorized to collect, control, authorize the use of, liquidate, and disburse the property of the estate. 11 U.S.C. §§ 704(a), 721, 726.¹

In filing the Chapter 7 case, the Debtor transferred the overencumbered Property to the estate, giving control to the Chapter 7 Trustee to administer this Property as part of the bankruptcy estate. The Debtor no longer has the right or power to conduct a short-sale, control, or use this property of the bankruptcy estate. The Debtor no longer has the ability to “sell her owner real estate services” to engage a broker to market and sell the Property to generate cash sales proceeds, which are encumbered by the creditor's lien.

The Chapter 7 Trustee has the right to sell the Property. The creditor may enter into a transaction with the Chapter 7 Trustee for the estate to employ a real estate broker, market the Property, and consummate a short-sale of the Property. The Chapter 7 Trustee may choose to undertake the responsibility for maintaining, insuring and protecting the Property pending any sale. It is the Chapter 7 Trustee's labor and estate's expense in working to sell property of the estate which is the subject of the “incentive payment.”

This view of the Chapter 7 short-sale transaction is consistent with 11 U.S.C. § 506(c), which provides that a creditor's collateral shall be surcharged reasonable and necessary “costs and expenses of preserving, or disposing of, [property securing a claim] to the extent of any benefit to the holder of such claim, ...” With the “incentive payment,” the creditor and Chapter 7 Trustee monetize the benefit to the creditor for the estate retaining the property and incurring the cost and expense related to maintaining and selling the Property.

The California Exemption is Limited to Involuntary Liens

The Debtor's contention that this “incentive payment” may be claimed exempt also runs afoul the exemption laws of California—the Debtor cannot claim an exemption in the value of the property subject to the creditor's consensual lien. Exemptions may be claimed only against involuntary liens, such as judgments, attachments, and execution liens.

§ 703.010. Application of exemptions

Except as otherwise provided by statute:

(a) The exemptions provided by this chapter or by any other statute apply...