Schaefers v. Blizzard Energy, Inc. (In re Schaefers)

623 B.R. 777

IN RE: Bernd SCHAEFERS, Debtor.

Bernd Schaefers, Appellant,

v.Blizzard Energy, Inc.; Franziska Shepard, Appellees.

BAP No. CC-20-1067-SGL

Bk. No. 9:19-bk-11163-MB

United States Bankruptcy Appellate Panel of the Ninth Circuit.

FILED DECEMBER 1, 2020

Appellant Bernd Schaefers argued pro se;

William C. Beall of Beall & Burkhardt, APC for appellees Blizzard Energy, Inc., and Franziska Shepard

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

OPINION

SPRAKER, Bankruptcy Judge:

INTRODUCTION

Chapter 7¹ debtor Bernd Schaefers appeals from the bankruptcy court's denial of his homestead exemption claim – asserted not in any real property but in a limited liability company known as BKS Cambria LLC ("LLC"), which he owns with his wife. The LLC owns real property located in Cambria, California ("Property"), where Schaefers has lived since 2014. Schaefers relies on a state court ruling, which held that the LLC is liable under a reverse alter ego theory for the individual debt he owes to his largest creditor. In other words, Schaefers argues that the reverse alter ego ruling based on his inequitable conduct establishes his "equitable" interest in the Property and establishes his right to claim a homestead exemption in it under California law. It does not. Schaefers' argument runs contrary to the equitable purpose underlying alter ego doctrine: to extend liability beyond a debtor to avoid injustice. To recognize a homestead exemption in the Property owned by the LLC Schaefers created would reward him for the inequitable conduct that warranted extension of his individual liability to the LLC. Because he has not established an interest in the Property sufficient to support a homestead exemption, we AFFIRM.

FACTS

In July 2019, Schaefers commenced his bankruptcy case by filing a voluntary chapter 11 petition. In December 2019, a chapter 11 trustee was appointed, and his case subsequently was converted to chapter 7.

Schaefers' schedules identified Blizzard Energy, Inc. ("Blizzard") as his largest creditor, with a disputed judgment claim of $3,825,000 ("Blizzard Judgment").² Elsewhere in his schedules, he asserted that Blizzard and its principal Franziska Shepard (jointly, "Blizzard Parties") obtained the Blizzard Judgment as a result of fraud, perjury, witness tampering, and abuse of process. He thus listed a cause of action against Shepard for the same amount as the judgment. The only other asset of significance he listed in his schedules was his 50% membership interest in the LLC, which he valued at $5,000,000.³ Schaefers did not list any interest in real property. In his original schedules, he asserted only two exemption claims: one for his automobile and another for his furniture and clothing.

The bankruptcy court granted the Blizzard Parties relief from the automatic stay to proceed in the San Luis Obispo County Superior Court ("Superior Court") with a prepetition motion to amend the Blizzard Judgment to include the LLC as an additional judgment debtor under a theory of reverse alter ego.⁴ The state court entered a tentative decision detailing its reasons why it intended to hold the LLC liable for Schaefers' individual judgment debt to the Blizzard Parties.

The day after the Superior Court hearing, Schaefers amended his exemptions. As part of his amendment, Schaefers added a $175,000 exemption claim in the LLC ("LLC Exemption") based on Cal. Code of Civil Procedure ("C.C.P.") § 704.730 – also known as California's automatic or "residential" homestead exemption. According to Schaefers, the Property owned by the LLC is a decommissioned U.S. Air Force base, which includes officers' quarters consisting of a four-bedroom residence, where he has lived continuously since 2014.

The Blizzard Parties timely objected to the LLC Exemption. They argued that Schaefers could not claim a homestead exemption in the LLC because he did not own the Property. As they pointed out, Schaefers' interest was in the LLC and not the Property. They further contended that the interest in the LLC did not qualify as a dwelling under California law, so he could not claim a homestead exemption in the LLC.

The Blizzard Parties also anticipated that Schaefers would argue that he now qualified as the "owner" of the Property based on the Superior Court's finding that the LLC was his alter ego. They maintained that the alter ego ruling could not be invoked by Schaefers as grounds for concluding that he personally owned the Property.

Schaefers opposed the objection to his LLC Exemption. He reasoned that the Property qualified as a dwelling for purposes of California's homestead exemption law by virtue of his residing there. He therefore concluded that the Blizzard Parties' objection should be overruled.

As for the fact that the LLC owned the Property rather than him, Schaefers devoted a single sentence to this issue: "A Superior Court has determined that they will recognize the LLC as Mr. Schaefers [sic] alter ego." Schaefers attached to his opposition a declaration, which included as an exhibit a copy of the Superior Court's tentative alter ego ruling.⁵

In March 2020, the bankruptcy court held a hearing on the objection to the LLC Exemption. After considering the parties' papers and oral argument, the court sustained the objection. As the court explained, Schaefers did not own the Property. Rather, the LLC owned it. Additionally, his membership interest in the LLC was not real property in which California law would permit a judgment debtor to claim a homestead interest. The court also rejected Schaefers' argument that the Blizzard Parties' success in piercing the veil of the LLC to make it liable for Schaefers' debt meant that he now owned the LLC's assets, including the Property.

On March 18, 2020, the bankruptcy court entered its order sustaining the objection to Schaefers' homestead exemption claim. Schaefers timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court commit reversible error when it disallowed Schaefers' homestead exemption claim?

STANDARD OF REVIEW

A debtor's entitlement to claim an exemption from estate property is a question of law, which we review de novo. Diaz v. Kosmala (In re Diaz) , 547 B.R. 329, 333-34 (9th Cir. BAP 2016) (citing Elliott v. Weil (In re Elliott) , 523 B.R. 188, 191 (9th Cir. BAP 2014) ). The construction of state exemption laws also is reviewed de novo. Id. (citing Calderon v. Lang (In re Calderon) , 507 B.R. 724, 728 (9th Cir. BAP 2014) ). De novo review means that we consider the matter without giving any deference to the bankruptcy court's decision. Id.

DISCUSSION

"When a debtor files a bankruptcy petition, all of his assets become property of the estate and may be used to pay creditors, subject to the debtor's ability to reclaim specified property as exempt." In re Elliott , 523 B.R. at 192 (citing Schwab v. Reilly , 560 U.S. 770, 774, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010) ).

The Bankruptcy Code provides that debtors may exempt certain "property of the estate." § 522(b)(1). A state may choose to permit bankruptcy debtors to use the federal exemptions contained in the Bankruptcy Code in § 522(d). See 522(b)(2). Alternatively, a state may "opt out" of the exemptions provided by the Bankruptcy Code and allow their debtors to use instead the exemptions provided by state law (and allowable by federal non-bankruptcy law). See §§ 522(b)(2) and (3); 4 Collier on Bankruptcy ¶ 522.01 (16th ed. 2020). California has opted out of the Bankruptcy Code's list of exemptions. See C.C.P. § 703.130. As a result, California exemption law controls the resolution of Schaefers' homestead exemption claim. In re Elliott , 523 B.R. at 192 (citing Kelley v. Locke (In re Kelley) , 300 B.R. 11, 16 (9th Cir. BAP 2003) ).

California defines a homestead as a dwelling where a person resides. C.C.P. § 704.710(a) and (c). Californians may, therefore, claim a homestead exemption without holding a fee simple interest in the subject real property. In re Elliott , 523 B.R. at 196 & n.4 ; see also Phillips v. Gilman (In re Gilman) , 887 F.3d 956, 965 (9th Cir. 2018) ("California law rejects Phillips' argument that title to the property is necessary to claim a homestead exemption."). Even so, they must have some legal or equitable interest in the real property. In re Elliott , 523 B.R. at 196 & n.4 ; see also Fontaine v. Conn (In re Fontaine) , BAP No. CC-10–1003–MkHKi, 2010 WL 6259993, at *10 (9th Cir. BAP Nov. 26, 2010), aff'd , 472 F. App'x 738 (9th Cir. 2012) ("Without any legal or equitable interest in the Property, Ramona was not entitled to a homestead exemption. A legal or equitable interest in the property must exist for a homestead exemption to attach to that property." (citing Alan M. Ahart, California Practice Guide: Enforcing Judgments & Debts ¶ 6:1021.1 (The Rutter Group 2010))).

Schaefers contends that California requires mere residence alone to establish a homestead exemption. In support of this argument, he cites to Tarlesson v. Broadway Foreclosure Investments, LLC, 184 Cal. App. 4th 931, 936–38, 109 Cal.Rptr.3d 319 (2010). However, the debtor in Tarlesson held a beneficial interest in her residence sufficient to support a homestead exemption. She owned the real property but had temporarily conveyed title to her homestead to a relative to facilitate refinancing. Id. at 935, 109 Cal.Rptr.3d 319. Significantly, the debtor-transferor and the cousin-transferee agreed that the debtor always retained the full beneficial interest in the property. Id. ; see also In re Fontaine , 2010 WL 6259993 at *10-11 & n.16 (rejecting argument that California's homestead exemption requires only mere possession under Tarlesson ).

Unlike the debtor in Tarlesson , Schaefers has never identified any beneficial or equitable interest in the Property to support his homestead exemption claim and concedes that he has no legal interest in it. Inst...