McKee v. Anderson (In re McKee)

In re: MICHELE LYNN MCKEE, Debtor.

MICHELE LYNN MCKEE, Appellant, v. KARL T. ANDERSON, Chapter 7 Trustee; LAURA O'KANE; CORRINE LONG, Appellees.

BAP No. CC-22-1042-GTS

United States Bankruptcy Appellate Panel of the Ninth Circuit

November 18, 2022

NOT FOR PUBLICATION

Appeal from the United States Bankruptcy Court for the Central District of California Scott Ho Yun, Bankruptcy Judge Presiding

Before: GAN, TAYLOR, and SPRAKER, Bankruptcy Judges.

MEMORANDUM ^[*]

Gan Judge

INTRODUCTION

Chapter 7^[1] debtor Michele Lynn McKee ("Debtor") appeals the bankruptcy court's order sustaining an objection to Debtor's homestead exemption filed by chapter 7 trustee Karl T. Anderson ("Trustee") and partially sustaining an objection filed by creditors Laura O'Kane and Corrine Long. After an evidentiary hearing, the court concluded that Debtor could not claim the California automatic homestead exemption because, on the petition date she did not physically occupy the property in question, and she did not have an intent to return to the property.

On appeal, Debtor argues that she is entitled to the homestead exemption under California law because it was impossible for her to safely return to the property due to emotional abuse and physical intimidation by her former life partner and co-owner O'Kane. We acknowledge that Debtor made decisions during a difficult situation. But the bankruptcy court correctly applied California law, and its factual findings-that Debtor made an economic decision to relinquish her interest in the property and did not demonstrate an intent to reside there-are not clearly erroneous. Accordingly, we AFFIRM.

FACTS

A. Prepetition Events

Debtor and O'Kane began a romantic relationship in late 2003 and began living together in 2004. In approximately 2009 they began working together as law partners in a firm called O'Kane & McKee, LLP ("O&M"). In 2010, Debtor and O'Kane purchased a lot and built a home on Bella Cara Way in Palm Springs, California ("Bella Cara"), which they finished in 2015. Debtor and O'Kane each owned one third of Bella Cara, and O'Kane's mother, Corrine Long, owned the remaining third.

In late September 2016, Debtor ended the personal relationship with O'Kane and a few months later she moved out of Bella Cara. Debtor initially rented a furnished house, and since February 2018, she has continuously lived in a rented condominium on Via Sonoma in Palm Springs ("Via Sonoma"). She changed her driver's license and voter's registration to reflect her address at Via Sonoma.

After the relationship ended, Debtor and O'Kane began discussions about dividing their jointly owned assets. The discussions culminated in an October 2017 written agreement (the "Agreement"), which provided for a division of personal property and titled vehicles, and a process to dissolve O&M. The Agreement further provided that the parties would sell jointly owned real property located in Oakland, California, and divide the net proceeds.

Regarding Bella Cara, the Agreement stated that Debtor would receive a "payout" of her interest based on her net equity under a hypothetical sale. The parties also agreed that Debtor would retain her one-third interest in proceeds from pending construction defect litigation. Pursuant to the Agreement, Debtor agreed to return her keys to Bella Cara and O'Kane agreed to be responsible for all taxes, insurance, and mortgage payments for Bella Cara after April 1, 2017.

The Agreement required Debtor to complete billing for an O&M matter (the "Robinson Matter") and obtain client approval for the invoice by December 1, 2017, and it provided she would receive her payout within 30 days of doing so.^[2] The Agreement specified that if Debtor failed to complete the billing and obtain approval on the Robinson Matter by December 1, 2017, her payout would be reduced, and if she did not complete the billing by December 31, 2017, she would essentially forfeit her interest in Bella Cara.

Debtor asserts that she completed the billing on the Robinson Matter by December 1, 2017, but O'Kane refused to approve her time. O'Kane maintains that Debtor did not complete the billing on the Robinson Matter until September 2018 and consequently forfeited her interest in Bella Cara.

O'Kane did not pay Debtor under the Agreement, and the handling of the Robinson Matter is part of ongoing litigation to dissolve O&M.

B. The Bankruptcy and Exemption Objections

In February 2021, Debtor filed her chapter 7 petition. She listed her one-third interest in Bella Cara in Schedule A/B and claimed the California automatic homestead exemption under California Code of Civil Procedure ("CCP") § 704.730.

O'Kane and Long objected to Debtor's homestead exemption, arguing: (1) Debtor forfeited her interest in Bella Cara pursuant to the Agreement, and it was not property of the estate; and (2) Debtor admitted that on the petition date she resided at Via Sonoma and had not lived at Bella Cara since 2018.

Trustee also objected to Debtor's homestead exemption and partially joined O'Kane and Long's objection. Trustee argued that Debtor's interest in Bella Cara was property of the estate, but because Debtor admitted that she did not physically occupy Bella Cara on the petition date, and she was unable to demonstrate the requisite intent to live there, she was not entitled to the exemption. Trustee disputed the validity of the Agreement, but asserted that even if it was effective, it did not operate to disclaim Debtor's interest in Bella Cara. And regardless of the validity of the Agreement, it clearly demonstrated Debtor's intent not to reside at Bella Cara after October 2017.

Debtor responded to the objections and argued: (1) her interest in Bella Cara was property of the estate because it was O'Kane, not Debtor, who breached the Agreement, and even if Debtor breached it, O'Kane would have at most a claim for breach of contract; and (2) notwithstanding her lack of physical occupancy, she was entitled to claim the homestead exemption because she had a continuous intent to reside at Bella Cara. Debtor contended that although she and O'Kane were not married, they cohabited as life partners, and she should be entitled to the protection of CCP § 704.720(d). That statute allows a debtor who no longer resides in a homestead to retain the exemption when her "separated or former spouse continues to reside in or exercise control over possession of the homestead."

She further argued that the Agreement did not support a conclusion that she was abandoning her homestead; it merely demonstrated that she knew it was unsafe to return to Bella Cara, and she was doing what she could to amicably obtain her interest in the property and reinvest it elsewhere. Debtor claimed that her "involuntary absence" from Bella Cara did not constitute abandonment because, under the Agreement, she was supposed to receive the value of her interest within a short period of time.

Debtor filed a supplement to her opposition in which she argued that she did not abandon her homestead under California law because she was forced from Bella Cara by O'Kane's verbal abuse and physical intimidation. She asserted that, but for the abuse, she would still be living there.

The bankruptcy court set an evidentiary hearing on the objections. At the hearing, Debtor testified that O'Kane had been abusive "on multiple levels" throughout the relationship and became "very nasty" after Debtor ended the relationship. Debtor stated that after the breakup, she feared for her safety when O'Kane pushed her into the laundry room and would not let her leave. Three former employees of O&M all testified that they witnessed several instances of O'Kane yelling at Debtor and forcing her way into Debtor's office.

Debtor testified that after she moved out of Bella Cara, she intended that her interest in the property be "bought out" by O'Kane. She stated that she had no choice because she could no longer live at Bella Cara. Debtor testified that after the couple broke up, she wanted to stay at Bella Cara until it was sold but had to leave because of O'Kane's behavior. Debtor asked about the status of the buyout many times, and in 2018 she emailed O'Kane, accusing her of delaying the process to avoid paying the buyout. Debtor indicated that she intended to return to Bella Cara only if O'Kane agreed to vacate the property, but she had no expectation that O'Kane would ever leave.

At the conclusion of the evidentiary hearing, the bankruptcy court requested written closing arguments to address whether Debtor's intent to buy a new home with the proceeds from her interest in Bella Cara was sufficient to claim the homestead exemption under California law when she was unable to return to living at the property, and whether Debtor's intent to reside at Bella Cara should be measured by an objective or subjective standard. The parties submitted their written arguments, and the court subsequently entered its oral ruling on the record.

The court reserved judgment on whether Debtor forfeited her interest in Bella Cara because Trustee had a separate pending adversary proceeding which involved the validity and effect of the Agreement. The court ruled that, although Debtor had an intent to retain her monetary interest in Bella Cara, she did not have an intent to reside there. It reasoned that whether Debtor had the requisite intent to return to the property required an objective test, and it noted that apart from Debtor's statement that she would return if O'Kane left, all other evidence indicated that Debtor's goal was to take proceeds from her interest in Bella Cara to buy a new house.

The court also rejected Debtor's argument to apply CCP § 704.720(d) because she and O'Kane were not married, and the...