In re Nolan

618 B.R. 860

IN RE Steve William NOLAN, Debtor.

Case No. 6:19-bk-17161-SC

United States Bankruptcy Court, C.D. California, Riverside Division.

Signed July 21, 2020

Date: June 23, 2020

Nathan Fransen, Corona, CA, for Debtor.

ORDER AND MEMORANDUM DECISION OVERRULING TRUSTEE'S OBJECTION TO DEBTOR'S CLAIMED HOMESTEAD EXEMPTION

Scott C. Clarkson, United States Bankruptcy Judge

On May 21, 2020, Chapter 7 Trustee, Karl T. Anderson, ("Trustee") filed a Motion (the "Objection") objecting to the homestead exemption claimed by Steven W. Nolan ("Debtor") in real property located at 19300 Rising Sun Road, Corona, CA 92881 ("Property") [Dk. 41]. Debtor filed an opposition on June 9, 2020 [Dk. 45], and Trustee filed a reply on June 16, 2020 [Dk. 46]. A hearing was conducted on June 23, 2020, at 11:00 a.m. Appearances are as noted on the record. Having carefully considered the pleadings, arguments raised at the hearing, and the record as a whole, the Court took the matter under submission.

The issue before the Court is whether Debtor is entitled to claim an automatic homestead exemption in the Property under California law, where Debtor does not hold title to the Property; rather, an irrevocable trust for which Debtor is a beneficiary, and was trustee at the time of filing, holds title to the Property. As set forth more fully below, the Court finds that while Trustee's arguments are well-considered, under the unique facts of this case, joined with a review of the applicable statutes, the legislative history and policy behind the California homestead exemption statutes, and in anticipation of how the California Supreme Court would rule were this question to be presented to it, Debtor has met his burden to demonstrate that Debtor's beneficiary interest, coupled with his residency in the Property, is reachable by judgment creditors, thus entitling Debtor to claim an automatic homestead exemption.

Therefore, Trustee's Objection to Debtor's claimed homestead exemption is hereby OVERRULED.

I. BACKGROUND

On May 20, 1993, William B. Nolan ("Father") established a revocable living trust ("Trust") with the third and final amendment dated April 28, 2012. The plain language of the Trust reads:

Upon the death of the Trustor, the Trustee shall make specific distributions.... The Trustee shall pay out of the trust estate all debts then outstanding at the death of the Trustor, not including any mortgage or expense on real property but including federal or state taxes, last illness and funeral expenses, and any other costs or expenses incurred in administering the estate of the Trustor, whether in trust or not. The Trustee shall distribute to Gregory J. Nolan an amount equal to then-owed by the Trustor on a loan obtained by Trustor for the benefit of Steven J. Nolan...less twenty-three thousand dollars. The Trustee shall then distribute the remaining trust estate as herein provided....

After the death of the Trustor, the Trustee shall divide the trust estate into as many equal shares as there are children of the Trustor....

Any share allocated to a living child of the Trustor shall be distributed to that child, free of trust.

Objection, Exhibit 2 [Dk. 41].

On December 6, 2016, Father recorded a quitclaim deed transferring the Property from himself to the Trust. Father died on January 21, 2017, with two surviving sons, Gregory J. Nolan ("Brother") and Debtor, who each became 50% beneficiaries of the Trust. The Property was merely one of the assets, albeit apparently the largest, included in the Trust.¹

Upon Father's death, Debtor became trustee of the Trust and continued to reside on the Property, but did not distribute the Trust assets. On July 1, 2019, Brother filed a verified petition in probate court seeking to compel an accounting of the Trust assets, remove Debtor as trustee, and appoint a new trustee for the Trust ("Probate Action"). Objection, Exhibit 3 [Dk. 41].

The Probate Action was stayed on August 15, 2019 ("Petition Date"), when Debtor filed his voluntary Chapter 7 bankruptcy petition. In his schedules, Debtor listed the Property with a value of $500,000.00, claiming an equitable interest of 50% in the "equity in the Property" (listed as $250,000.00)² and acknowledging that title to the Property was held in the Trust.³ Additionally, Debtor listed a $75,000.00 homestead exemption⁴ in the Property pursuant to Cal. Civ. Proc. Code § 704.730.

On November 20, 2019 [Dk. 21], Debtor's brother obtained relief from stay, unopposed by Debtor, to continue the Probate Action. The probate court ultimately removed Debtor as trustee of the Trust in its order dated December 18, 2019, appointing Brother as the successor trustee. Objection, Exhibit 4 [Dk. 41].

II. DISCUSSION

A. The legal underpinnings of California's automatic homestead exemption illustrate the interests to be covered thereunder.

California has opted out of federal exemptions, electing to utilize exemptions enacted under state law. 11 U.S.C. § 522(b) ; Cal. Civ. Proc. Code § 703.130. Therefore, exemption questions in California bankruptcies require the application of California law. In re Tallerico , 532 B.R. 774, 780 (Bankr. E.D. Cal. 2015).

The California legislature enacted homestead exemption laws "to protect the sanctity of the family home against a loss caused by a forced sale by creditors...[and] ensure that insolvent debtors and their families are not rendered homeless by virtue of an involuntary sale of the residential property they occupy...." Amin v. Khazindar , 112 Cal. App.4th 582, 588, 5 Cal.Rptr.3d 224 (2003). As such, there is a strong public policy toward adopting "a liberal construction of the law and facts to promote the beneficial purposes of the homestead legislation to benefit the debtor." Id.

In California, a debtor may obtain the benefits of a homestead exemption either by recording a declaration of homestead ( Cal. Civ. Proc. Code § 704.910 - § 704.995 ),⁵ or through an automatic homestead exemption ( Cal. Civ. Proc. Code § 704.710 - § 704.850 ).⁶ The automatic homestead exemption is what is at issue in this case. The automatic homestead exemption protects a debtor from forced judicial sales of a debtor's dwelling. In re Diaz , 547 B.R. 329, 334 (9th Cir. BAP 2016). "The filing of a bankruptcy petition constitutes a forced sale for purposes of the automatic homestead exemption." Id.

The declared homestead exemption statutes were created first. However, "the Legislature was quite obviously concerned with the large number of homeowners who were not receiving the benefits of the homestead because of their ignorance of the law or their failure to satisfy the technical requirements for declaring a homestead." In re Gilman , 608 B.R. 714, 722 (Bankr. C.D. Cal. 2019) (citing San Diego White Truck Co. v. Swift , 96 Cal. App.3d 88, 92, 157 Cal.Rptr. 745 (1979) ). To solve this problem, the legislature created the automatic homestead exemption. Id.

Additionally, the California legislature sought to broaden the interests protected by the automatic homestead exemption as compared to the interests covered by its predecessor, the declared homestead. An examination of the differences between the two statutory exemptions further illustrates this intent. For example, the declared homestead is expressly limited to an "interest in real property (whether present or future, vested or contingent, legal or equitable) that is a ‘dwelling’ as defined in Section 704.710, but does not include a leasehold estate with an unexpired term of less than two years or the interest of the beneficiary of a trust ." Cal. Civ. Proc. Code § 704.910(c) (West) (emphasis added). There is no express limitation on the interests of the beneficiary of a trust in the automatic homestead, which, as set forth below, is problematic for Trustee's position. Instead, the automatic homestead defines a homestead as "the principal dwelling (1) in which the judgment debtor or the judgment debtor's spouse resided on the date the judgment creditor's lien attached to the dwelling, and (2) in which the judgment debtor or the judgment debtor's spouse resided continuously thereafter until the date of the court determination that the dwelling is a homestead," making no qualifying statement as to the interests covered under the statutory exemption. Cal. Civ. Proc. Code § 704.710(c).

The Legislative Committee Comments to the automatic homestead exemption statute, Cal. Civ. Proc. Code § 704.720, while not a model of clarity, reveal that interests of the beneficiary of a trust are included in the scope of the exemption. Cal. Civ. Proc. Code § 704.720 (West).

Unlike the former provisions, Section 704.720 does not specify the interest that is protected and does not limit the homestead in a leasehold to a long-term lease; any interest sought to be reached by the judgment creditor in the homestead is subject to the exemption . The homestead exemption does not apply where a lien on the property other than an enforcement lien is being foreclosed.

Legislative Committee Comment to Amended Cal. Civ. Proc. Code § 704.720 (West) (emphasis added ).

While the California legislature expanded the scope of interests covered under the protection of the automatic homestead exemption, the foregoing also demonstrates that any additional interest to be included within the expanded scope, and therefore the type of interest upon which a homestead exemption can be asserted, must be an "interest sought to be reached by the judgment creditor in the homestead." Id. By doing so, the legislature maintained the inherent requirement that a homesteader may exempt only an interest to which a judgment creditor could attach an enforcement lien under California state law.

As fully set forth below, a judgment creditor of a beneficiary to a trust may attach an enforcement lien to real property trust res. This underscores the legislature's intent to include a debtor's beneficiary interest in a trust within the scope of interests entitled to an automatic homestead exemption, even...