In re Tallerico

532 B.R. 774

In re : Jonathan Kris Tallerico and Carleen Marie Tallerico, Debtors.

Case No. 15–22117–C–7

United States Bankruptcy Court, E.D. California.

Signed June 30, 2015

W. Russell Fields, Sacramento, California, for Debtors.

Jamie P. Dreher, Downey Brand LLP, Sacramento, California, for Gary Silva, Jr., Judgment Creditor.

David V. Duperrault, Silicon Valley Law Group, San Jose, California, for Michael A. Aber, Third–Party Claimant.

OPINION

KLEIN, Bankruptcy Judge:

Federal Rule of Bankruptcy Procedure 4003(c) is invalid to the extent it assigns the burden of proof on an objection to a state-law claim of exemption in a manner contrary to state law.

The Bankruptcy Rules Enabling Act, 28 U.S.C. § 2075, forbids rules that alter substantive rights. The Supreme Court clarified in Raleigh v. Illinois Dep't of Revenue, 530 U.S. 15, 20–21, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000), that burden of proof is substantive, not procedural. It follows that Rule 4003(c), which was first adopted in 1973 on the assumption that burden of proof was procedural, offends § 2075.

The state law governing the state exemptions claimed in this case specifies that exemption claimants have the burden of proof. This state-law rule of decision also triggers state rules of evidentiary presumptions per Federal Rule of Evidence 302.

The burden of proof is crucial here. At trial of this “Motion for Turnover” (which subsumes three distinct contested-matter issues: judgment lien avoidance, objection to exemption, and turnover by a custodian), the key issue was whether the debtor owned personal property claimed as exempt. The debtor did not satisfy his burden of production and did not establish by a preponderance of evidence that he, rather than the LLC through which he operates his bike shop, owns cash, inventory, and parts that the Sheriff seized enforcing a judgment prepetition.

Since the corollary to the burden of proof is the risk of non-persuasion, the creditor's objection to claim of exemption is SUSTAINED as to all of the seized property except the debtor's tools, the judgment lien is AVOIDED as to the debtor's tools, and the motion for turnover is GRANTED only as to the debtor's tools.

Facts

Chapter 7 debtor Jonathan Tallerico is a bicycle mechanic who specializes in servicing and building premium bicycles. He operates a bike shop in Lodi, California, through a limited liability company, Tallerico Bicycles, LLC, which does business under the name Lodi Bicycle Shoppe. Before August 2014, he operated through sole proprietorships under similar names.

Tallerico and his spouse filed this joint chapter 7 case at 4:46 p.m. on March 17, 2015.

Six hours before the chapter 7 filing, the San Joaquin County Sheriff levied on all personal property at the premises of Lodi Bicycle Shoppe to enforce a money judgment that Gary Silva, Jr., had obtained against Tallerico individually and against Tallerico Bicycles, LLC. The seizure included cash, merchandise, parts, equipment, and tools. The Sheriff's inventory (the accuracy of which is not in dispute) has 311 line items. Most of the line items are reasonably specific (“3 Voler Tank Top/Gray”). Some are generic and collective (“1 Craftsman tool box w/various tools—access refer to photo”).

The debtors claimed all of the levied property as exempt under so-called “California bankruptcy exemptions.” Cal.Code Civ. Pro. § 703.140. The claimed exemptions included: tools ($3,500 § 703.140(b)(6) ); inventory (“6 bicycles, misc. cloth[e]s, and other bicycle related items” $7,500 § 703.140(b)(5) ); cash ($1,157 § 703.140(b)(5) ).

Their “Motion for Turnover” seeks to recover the levied personal property on a theory of impairment of exemptions.

Silva opposed the motion and objected to the pertinent claims of exemption, posing evidentiary issues requiring trial.

At the preliminary hearing, the court agreed with Silva and ruled that at trial the debtor would have the burden of proof based on California Code of Civil Procedure § 703.580(b) because this state statute trumps the contrary provision in Rule 4003(c). Further briefing was invited on the issue. None ensued.

Before trial, Michael Aber joined in the objection and asserted senior judgment lien rights based on a money judgment excepted from discharge in 2002 in Tallerico's prior bankruptcy.

At trial, Tallerico testified and was cross-examined. Findings of fact and conclusions of law were rendered orally on the record after the parties rested and presented oral argument. This opinion memorializes the decision regarding the burden of proof and related evidentiary questions.

Jurisdiction

Federal subject-matter jurisdiction is founded on 28 U.S.C. § 1334. An objection to a claim of exemption, a proceeding to avoid the fixing of a lien, and a request for an order to turn over property of the estate are all core proceedings that a bankruptcy judge may hear and determine as of right. 28 U.S.C. §§ 157(b)(2)(B), (E) & (K). The parties agree that, if this dispute involves a matter a bankruptcy judge may not hear and determine, it may be heard and determined by a bankruptcy judge.

Analysis

The first task is to unpack and re-frame the dispute through the matrix of the Bankruptcy Code and rules, re-characterizing the motion under the correct procedure before shifting to the pertinent exemption law and the burden of proof.

IProcedure

The Bankruptcy Code authorizes the debtor to claim property as exempt. 11 U.S.C. § 522(b).

The debtor may avoid the fixing of a judicial lien (other than a judicial lien for a domestic support obligation) to the extent that the lien impairs an exemption to which the debtor otherwise would be entitled. 11 U.S.C. § 522(f)(1)(A).

The debtor may exempt property the trustee recovers under trustee avoiding powers so long as it was not concealed or voluntarily transferred. 11 U.S.C. § 522(g).

If the trustee does not attempt to avoid a transfer of property exemptible under § 522(g), then the debtor may do so. 11 U.S.C. § 522(h).

The debtor may recover under § 550 on account of a transfer avoided under § 522(h) as either a judicial lien or a nonpossessory, nonpurchase-money security interest under § 522(f), which recovery is preserved for the benefit of the debtor to the extent of the debtor's exemption. 11 U.S.C. §§ 522(i) & 550 ; cf. Goswami v. MTC Distrib. (In re Goswami), 304 B.R. 386, 390–91 (9th Cir. BAP 2003) (§ 522(f) elements).

When a Sheriff executes a writ in a judgment enforcement matter, the Sheriff becomes a “custodian” for purposes of the Bankruptcy Code. That is, the Sheriff acts as a receiver or agent appointed under applicable law that is authorized to take charge of property of the debtor for the purpose of enforcing a judgment lien against such property. 11 U.S.C. § 101(11)(C).

As a “custodian,” the Sheriff is subject to the turnover provisions of Bankruptcy Code § 543, which, on pain of surcharge, bans disbursements from custodial property and requires turnover unless excused by the bankruptcy court after notice and a hearing. 11 U.S.C. § 543. Exempt property turned over to the trustee may be released by the trustee to the debtor.

The rules of procedure permit a debtor to avoid a lien or transfer of exempt property by motion under the contested matter procedure of Federal Rule of Bankruptcy Procedure 9014, instead of Rule 7001 adversary proceeding. Fed. R. Bankr.P. 4003(d).¹

Rule 4003(d) permits a creditor to respond to a motion to avoid a judgment lien or other transfer under § 522(f) by challenging the validity of the exemption said to be impaired. Fed. R. Bankr.P. 4003(d). Such a challenge is permitted even after the deadline to object to claims of exemption has passed.

Rule 4003(d) codifies the result in In re Mohring, 142 B.R. 389, 395–96 (Bankr.E.D.Cal.1992), aff'd mem., 153 B.R. 601 (9th Cir. BAP 1993), aff'd mem., 24 F.3d 247 (9th Cir.1994) (even where exemption-by-default occurs, avoiding exemption-impairing lien requires proof of substantive entitlement to exemption).

It follows that the debtor's “Motion for Turnover” directed at the Sheriff has three distinct Bankruptcy Code components. First, (Debtor v. Silva) avoidance of Silva's judicial lien under § 522(f)(1)(A). Second, (Silva v. Debtor) Silva's objection to the debtor's claim of exemption. Third, (Debtor v. Sheriff) turnover of property by a custodian under § 543 to the trustee for release of the exempt property to debtors. On the sidelines is a residual dispute (Aber v. Silva) regarding lien priority.

Although the style of the motion does not explicitly raise the lien avoidance, the court must construe motions so as to provide just, speedy, and inexpensive determination of every case and proceeding. Fed. R. Bankr.P. 1001.

The appropriate just, speedy, and inexpensive measure is to re-designate the motion as including a Motion by Debtor to Avoid Lien and a Motion for Turnover under § 543 in response to which an Objection to Claim of Exemption is presented.

Rule 4003(d) permits the lien-avoidance and coincident exemption dispute to be resolved by motion as a Rule 9014 contested matter. Likewise, § 543 turnover entails a contested matter. There is no filing fee for any of these motions. All are eligible for consolidation under Civil Rule 42. Fed.R.Civ.P. 42, incorporated by Fed. R. Bankr.P. 7042 & 9014.

The debtor, Silva, and the Sheriff have all participated in the litigation, and Aber has asserted rights as a senior third party claimant permitted by California Code of Civil Procedure § 720.210. No party in interest has been omitted, misled, or fooled by the garbled motion.

Trial of the contested matters was necessary because there are disputed material factual issues regarding ownership of property claimed as exempt. Fed. R. Bankr.P. 9014(d).

IICalifornia Exemptions

California exemptions subdivide into two mutually exclusive alternatives, both of which are implicated by the present dispute. First, there are the general exemptions from judgment enforcement. In the alternative, in a bankruptcy case, and only in a...