In re: Andy Diaz ( 2016 )


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  •                                                              FILED
                                                                  MAR 11 2016
     1
                                                              SUSAN M. SPRAUL, CLERK
     2                             ORDERED PUBLISHED            U.S. BKCY. APP. PANEL
                                                                OF THE NINTH CIRCUIT
    
     3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
     4                            OF THE NINTH CIRCUIT
     5   In re:                        )      BAP No.     CC-15-1219-GDKi
                                       )
     6   ANDY DIAZ,                    )      Bk. No.     8:13-19194-CB
                                       )
     7              Debtor.            )
         ______________________________)
     8                                 )
                                       )
     9   ANDY DIAZ,                    )
                                       )
    10              Appellant,         )
                                       )
    11   v.                            )      O P I N I O N
                                       )
    12   WENETA M.A. KOSMALA, Trustee, )
                                       )
    13              Appellee.          )
         ______________________________)
    14
    15                       Submitted on January 21, 2016
                                at Pasadena, California
    16
                                 Filed - March 11, 2016
    17
                  Appeal from the United States Bankruptcy Court
    18                for the Central District of California
    19       Honorable Catherine E. Bauer, Bankruptcy Judge, Presiding
    20
    21   Appearances:     Michael J. Carras of Conforti & Carras, APC argued
                          on behalf of Appellant Andy Diaz; Erin P. Moriarty
    22                    of the Law Offices of Weneta M.A. Kosmala argued
                          on behalf of Appellee Weneta M.A. Kosmala,
    23                    Trustee.
    24   Before: GAN,1 DUNN, and KIRSCHER, Bankruptcy Judges.
    25
    26
    27
    28
              1
                 Hon. Scott H. Gan, Bankruptcy Judge for the District of
         Arizona, sitting by designation.
     1   GAN, Bankruptcy Judge:
     2
     3        Debtor Andy Diaz (“Diaz”) appeals from a final order
     4   granting the motion of the chapter 72 trustee, Weneta M.A.
     5   Kosmala (“Trustee”), to disallow Diaz’s homestead exemption
     6   claimed under California law.      The Trustee’s motion was joined by
     7   Susan Wilson, Diaz’s former mother in law and creditor in the
     8   case.    Because the bankruptcy court incorrectly interpreted
     9   California homestead law, we VACATE and REMAND.
    10                                 I.    FACTS
    11        Prior to 2011, Diaz was married to Rebecca Wilson Diaz, and
    12   lived at a residence in Fullerton, CA. (“Property”).     The couple
    13   had a son, who is now about eight years old.     In October, 2011,
    14   Diaz suffered two major brain aneurysms which required multiple
    15   surgeries and initially left him in a coma for several weeks.
    16   After some time, Diaz awoke from the coma, but was unable to walk
    17   or talk.    The aneurysms caused symptoms similar to a stroke.
    18   Diaz began recovering from the aneurysms, and after a few months,
    19   was released to the care of his mother, who lived across the
    20   street and six doors down from the Property.     As Diaz’s recovery
    21   progressed, he regained the ability to walk and talk, however, he
    22   remains unable to work and continues to receive Social Security
    23   Disability benefits.    Diaz and Rebecca Wilson Diaz divorced in
    24   2011.    On November 9, 2013, Diaz filed his chapter 7 case.
    25
    26        2
                 Unless otherwise indicated, all chapter and section
    27   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
         “Rule” references are to the Federal Rules of Bankruptcy
    28   Procedure, Rules 1001-9037, and all “Civil Rule” references are
         to the Federal Rules of Civil Procedure, Rules 1-86.
    
                                            -2-
     1        Originally, Diaz claimed the California “wildcard”
     2   exemptions of Cal. Civ. Proc. Code § 703.140(b).    After the
     3   Trustee moved for turnover of the Property in 2015, Diaz filed an
     4   amended schedule C to claim the automatic homestead exemption
     5   under Cal. Civ. Proc. Code § 740.730(a)(3).    Because Diaz was
     6   disabled, the amount of the exemption was $175,000.3
     7        Trustee objected to the claimed homestead exemption on the
     8   basis that Diaz did not reside in the Property on the date of
     9   filing, and that his absence could not be considered temporary
    10   for the purposes of claiming the exemption under California law.
    11   Specifically, the Trustee argued that Diaz lacked a foreseeable
    12   prospect of having the ability to resume occupancy of the
    13   Property.
    14        The Trustee’s objection was supported by declarations of
    15   Rebecca Wilson Diaz and her mother Susan Wilson, which are
    16   virtually identical.    Their statements are as follows:
    17        1.     Diaz spent several months in hospitals and therapy
    18               facilities before being released to his mother’s house;
    19        2.     Even 3½ years after the aneurysms, Diaz cannot care for
    20               himself;
    21        3.     Diaz is never left alone and requires constant care
    22               from his mother or brother Gilbert;
    23        4.     The Property is occupied by Diaz’s brother and sister-
    24               in-law, Arthur and Priscilla;
    25        5.     Debtor has been allowed to spend the night at the
    26
    27        3
                 Trustee has not contested Diaz’s disability, therefore if
    28   he is eligible to claim the homestead exemption, the amount would
         be $175,000.
    
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     1             Property a few times, but only in the capacity of a
     2             “visitor” and with his mother and Gilbert continuing to
     3             provide care.   In the morning, Diaz is returned to his
     4             mother’s house;
     5        6.   The bulk of Diaz’s personal effects remain at his
     6             mother’s house;
     7        7.   Visitations with Diaz’s son occur at his mother’s
     8             house; and
     9        8.   All correspondence is sent to Diaz’s mother’s house and
    10             all interactions between Wilson Diaz and Diaz have
    11             taken place there.
    12        Diaz responded to the Trustee’s objection and argued that
    13   his condition had improved dramatically and that he had returned
    14   to living in the Property on a full-time basis.   Diaz questioned
    15   the Trustee’s reliance on Susan Wilson’s testimony because as the
    16   estate’s largest creditor, she would benefit from disallowing the
    17   exemption.   Diaz supported his opposition with a declaration in
    18   which he made the following statements:
    19        1.   Diaz has made great strides in his recovery as
    20             evidenced by letters from his doctors (attached to the
    21             declaration and to a supplemental declaration);
    22        2.   Diaz maintains the Property as his address on his
    23             California Drivers License and voter’s registration and
    24             receives all mail at the Property;
    25        3.   The mortgage and utilities at the Property are in
    26             Diaz’s name;
    27        4.   Diaz’s personal belongings are at the Property;
    28        5.   Diaz maintains a separate bedroom in the Property;
    
    
                                         -4-
     1        6.   Arthur and Priscilla also live in the Property; and
     2        7.   Diaz is taking independent living classes.
     3   Arthur and Gilbert Diaz also filed declarations stating that Diaz
     4   resides in the Property.
     5        Trustee filed a reply to Diaz’s opposition and argued that
     6   Diaz provided no evidence that his absence was temporary.
     7   Trustee argued that because Diaz was living nearby at his
     8   mother’s house, and the Property was occupied by family members,
     9   Diaz did not need to change address information.   The mortgage
    10   and utilities could remain in Diaz’s name but be paid by Arthur
    11   and Priscilla.   Trustee argues that because Diaz was living at
    12   his mother’s house, he had no use for his furniture and other
    13   household items, which remained at the Property for the use of
    14   Arthur and Priscilla.   Trustee again argued that Diaz was not
    15   able to live alone or care for himself, so his absence could not
    16   be temporary.
    17        On June 30, 2015, the bankruptcy court held a hearing on the
    18   Trustee’s motion.   At the end of the hearing, the court granted
    19   the Trustee’s motion to disallow the homestead exemption, ruling:
    20             And, you know, this is a sad situation, but I am
                   going to grant the motion of the Trustee. This
    21             has to do with a very substantial homestead, the
                   highest homestead that would be available. And I
    22             cannot find that the debtor is entitled to this
                   homestead because at the time of the bankruptcy
    23             three and a half years ago he was not living in
                   the property and it does appear to me that the
    24             folks that have benefitted from this three and a
                   half years of bankruptcy are the relatives, so I
    25             am going to grant the motion.
    26   June 30, 2015 Hr’g Tr., at 16:11-20.
    27        After the ruling, Diaz’s attorney asked if it would change
    28   the court’s analysis if Diaz had been in a rehabilitation
    
    
                                         -5-
     1   hospital instead of recovering at his mother’s house.            In
     2   response, the court clarified the ruling:
     3             Well, I –- I’d have to look at the law. You’re
                   free to appeal. I’m not saying I enjoyed making
     4             this type of decision, but we do have to look at a
                   snapshot at the time of filing. And there has
     5             been a substantial period of time that has gone by
                   before he was able to move back into the house.
     6             And as I said, I’m also a little suspicious, I’ve
                   got to tell you, that Mr. Diaz probably was not
     7             capable of making the decision to file bankruptcy
                   and that the benefit totally went to his relatives
     8             who stayed in that house. And now – you know, now
                   $175,000 homestead exemption seems like an
     9             incredibly large exemption for someone who hasn’t
                   lived in the house for a number of years.
    10
    11   June 30, 2015 Hr’g Tr., at 17:6-18.
    12        On July 8, 2015, the bankruptcy court entered an order
    13   granting the Trustee’s motion.         Diaz timely appealed.
    14                             II.    JURISDICTION
    15        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
    16   §§ 1334 and 157(b)(2)(B).       A bankruptcy court’s order denying an
    17   exemption is a final, appealable order.            Preblich v. Battley, 181
    
    18 F.3d 1048
    , 1056 (9th Cir. 1999).             We have jurisdiction under 28
    19   U.S.C. § 158.
    20                                   III.     ISSUE
    21        Did the bankruptcy court err in interpreting the California
    22   homestead exemption statute?
    23                       IV.     STANDARDS OF REVIEW
    24        “The right of a debtor to claim an exemption is a question
    25   of law that we review de novo.”          Elliott v. Weil (In re Elliott),
    26   
    523 B.R. 188
    , 191 (9th Cir. BAP 2014).            The bankruptcy court’s
    27   interpretation of state exemption laws is reviewed de novo.
    28   Calderon v. Lang (In re Calderon), 
    507 B.R. 724
    , 728 (9th Cir.
    
                                                -6-
     1   BAP 2014).    De novo review requires that we consider a matter
     2   anew, as if no decision had been rendered previously.     Id.
     3                              V.   DISCUSSION
     4        When a debtor files a Chapter 7 petition, all of the
     5   debtor’s legal or equitable interests in property become property
     6   of the estate, subject to the debtor’s right to reclaim certain
     7   property as exempt.    Schwab v. Reilly, 
    560 U.S. 770
    , 774 (2010).
     8   Section 522 provides a default list of exemptions, but allows
     9   states to opt out of the federal scheme and define their own
    10   exemptions.    11 U.S.C. §§ 522(b)(2), (b)(3)(A), (d).   California
    11   has opted out of the federal exemption scheme.     Cal. Civ. Proc.
    12   Code § 703.130.    The bankruptcy court decides the merits of state
    13   exemptions, but the validity of the exemption is controlled by
    14   California law.    LaFortune v. Naval Weapons Ctr. Fed. Credit
    15   Union (In re LaFortune), 
    652 F.2d 842
    , 846 (9th Cir. 1981).
    16   Therefore, we must interpret and apply California law to
    17   determine whether Diaz was entitled to claim the homestead
    18   exemption.
    19   A.   California Homestead Exemption
    20        Diaz has claimed the “automatic” homestead exemption of Cal.
    21   Civ. Proc. Code §§ 704.710-704.810.     The automatic homestead
    22   exemption protects a debtor from a forced sale and requires that
    23   the debtor reside in the homestead property at the time of a
    24   forced sale.    Redwood Empire Prod. Credit Ass’n v. Anderson (In
    25   re Anderson), 
    824 F.2d 754
    , 757 (9th Cir. 1987); Cal. Civ. Proc.
    26   Code §§ 704.710(a)-(c), 704.720, 704.730, 704.740.     The filing of
    27   a bankruptcy petition constitutes a forced sale for purposes of
    28
    
    
                                           -7-
     1   the automatic homestead exemption.    Kelley v. Locke (In re
     2   Kelley), 
    300 B.R. 11
    , 21 (9th Cir. BAP 2003).
     3        Section 704.710(c) provides:
     4        “Homestead” means the principal dwelling (1) in which
              the judgment debtor or the judgment debtor’s spouse
     5        resided on the date the judgment creditor’s lien
              attached to the dwelling, and (2) in which the judgment
     6        debtor or the judgment debtor’s spouse resided
              continuously thereafter until the date of the court
     7        determination that the dwelling is a homestead.
     
    8 Cal. Civ
    . Proc. Code § 704.710(c) was amended in 1983 to
     9   remove the word “actually,” which appeared before “resided,” in
    10   order to avoid a possible construction that a temporary absence,
    11   such as a vacation or hospitalization, would defeat a debtor’s
    12   right to claim the exemption.   See 17 Cal.L.Rev.Comm. Reports 854
    13   (1983).   Several courts have relied on this amendment to find
    14   that a debtor who did not physically occupy a property on the
    15   filing date would not be precluded from claiming the automatic
    16   homestead exemption if the absence was temporary.   See, e.g., In
    17   re Pham, 
    177 B.R. 914
    , 918-20 (Bankr. C.D. Cal. 1994); In re
    18   Bruton, 
    167 B.R. 923
    , 926 (Bankr. S.D. Cal. 1994); In re Dodge,
    19   
    138 B.R. 602
    , 607 (Bankr. E.D. Cal. 1992).
    20       Trustee construes the homestead law as creating a rule with
    21 an exception.    According to the Trustee, the rule is that a
    22 debtor must physically occupy the property on the filing date
    23 with an intent to remain there, subject to an exception for
    24 temporary absences.    Trustee argues that Diaz admits that he did
    25 not reside in the Property on the petition date and urges us to
    26 evaluate Diaz’s subsequent actions to determine whether his
    27 absence was temporary.
    28
    
    
                                         -8-
     1      Diaz does not concede that the Property was not his
     2 residence on the filing date.    Trustee’s suggested construction
     3 improperly shifts the analysis from the Debtor’s intent to reside
     4 in the Property and focuses instead on the Debtor’s temporary
     5 absence and his intent to return to occupancy of the Property.
     6      The purpose of the “continuous residency” requirement is to
     7 prevent a judgment debtor from moving into a property after the
     8 creation of a judgment lien or levy in order to establish an
     9 exemption.   Hastings v. Holmes (In re Hastings), 
    185 B.R. 811
    ,
    10 814 (9th Cir. BAP 1995).   However, the filing of the petition
    11 serves as both a hypothetical levy and as the operative date of
    12 the exemption.    See Wolfe v. Jacobson (In re Jacobson), 
    676 F.3d 13
     1193, 1199 (9th Cir. 2012)(“bankruptcy exemptions are fixed at
    14 the time of the bankruptcy petition”); Nadel v. Mayer (In re
    15 Mayer), 
    167 B.R. 186
    , 189 (9th Cir. BAP 1994)(“[t]he filing of
    16 the petition constitutes an attempt by the trustee to levy on the
    17 property.    It is this hypothetical levy the court must focus on
    18 in analyzing [the debtor’s] entitlement to a homestead
    19 exemption.”).
    20      Consequently, in a case where the filing of the petition
    21 serves as the hypothetical levy, a debtor will always satisfy the
    22 continuous occupancy requirement of the California automatic
    23 homestead exemption because the date of attachment and the date
    24 of the court determination that the exemption applies occur
    25 simultaneously.   Therefore, Diaz is entitled to claim the
    26 exemption only if he resided in the Property on the petition
    27 date.
    28
    
    
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     1       Under California law, the relevant factors for determining
     2 if a debtor resides in a property are the physical fact of the
     3 occupancy of the property and the debtor’s intention to live
     4 there.     Kelley v. Locke (In re Kelley), 
    300 B.R. 11
    , 21 (9th Cir.
     5 BAP 2003) (citing Ellsworth v. Marshall, 
    196 Cal. App. 2d 471
    , 474
     6 (1961)).
     7       Prior to the creation of the automatic homestead exemption
     8 in 1975,4 California law provided that a party could obtain a
     9 monetary exemption for his or her family residence only by
    10 recording a declaration of homestead.    Webb v. Trippet, 235
    
    11 Cal. App. 3d 647
    , 650 (1991).    Actual residency was required to
    12 claim the declared homestead.    See former Cal. Civ. Code § 1237
    13 (“The homestead consists of the dwelling house in which the
    14 claimant resides. . . .”).
    15       California courts have long held that a lack of physical
    16 occupancy does not preclude a party from establishing actual
    17 residency and claiming the homestead, if the claimant intends to
    18 return.    See, e.g., Michelman v. Frye, 
    238 Cal. App. 2d 698
    , 703-04
    19 (1965) (holding that a wife who was forced to leave the family
    20 dwelling could claim the homestead exemption despite not
    21 physically residing there, if she intended to return); Catsiftes
    22 v. Catsiftes, 
    29 Cal. App. 2d 207
    , 210 (1938) (“residence can be
    23 changed only by the union of act and intent”); Guiod v. Guiod, 14
    
    24 Cal. 506
    , 507-08 (1860) (holding that temporary removal for a
    25
    26        4
                 See former Cal. Civ. Proc. Code § 690.235, providing for
    27   an automatic “dwelling house” exemption; see also Krause v.
         Super. Ct., 
    78 Cal. App. 3d 499
     (1978). For a detailed history of
    28   California homestead exemptions, see Taylor v. Madigan, 
    53 Cal. App. 3d 943
     (1975).
    
                                         -10-
     1 specific purpose would not preclude a claim of homestead); Harper
     2 v. Forbes, 
    15 Cal. 202
    , 204 (1860) (“The necessities of the
     3 family, their maintenance, their health, or the education of the
     4 children, may often require a temporary change of residence.    In
     5 such cases the premises will still retain their original
     6 character as a homestead.”); Moss v. Warner, 
    10 Cal. 296
    , 297-98
     7 (1858)(holding that a three-year absence from the homestead did
     8 not preclude claiming a homestead exemption because the family,
     9 who temporarily lived with acquaintances due to safety concerns,
    10 intended to return).
    11      Conversely, physical occupancy on the filing date without
    12 the requisite intent to live there, is not sufficient to
    13 establish residency.   In Ellsworth v. Marshall, the court
    14 determined that the Ellsworths did not “actually reside” in the
    15 subject property despite their physical occupancy.   196
    
    16 Cal. App. 2d 471
     (1961).   The court found that they had moved into
    17 the property and declared a homestead exemption the day before a
    18 scheduled sale and therefore did not have a “bona fide intention
    19 to make the premises their home or residence.”   Id. at 476.
    20      Physical occupancy on the petition date is therefore neither
    21 a necessary nor sufficient condition of residency.   However,
    22 whether the debtor physically occupies the property or not, the
    23 debtor must have an intention to reside there.
    24      In the present case, the bankruptcy court interpreted the
    25 California homestead exemption as requiring physical occupancy on
    26 the filing date.   The court’s decision was also apparently based
    27 in part on the amount of the exemption, the finding that Arthur
    28 and Priscilla Diaz benefitted from the bankruptcy and would
    
    
                                       -11-
     1 benefit from the homestead exemption, and the finding that a
     2 substantial amount of time had gone by before Diaz resumed
     3 occupancy.   There is no evidence that the court considered Diaz’s
     4 intent to reside in the property on the filing date or evaluated
     5 the evidence supporting his intent.
     6       When the bankruptcy court has applied an incorrect legal
     7 standard, we typically vacate the decision and remand so that the
     8 bankruptcy court can apply the correct law to the facts.
     9 Calderon v. Lang (In re Calderon), 
    507 B.R. 724
    , 733 (9th Cir.
    10 BAP 2014).
    11       In this case, we find that the record was not sufficiently
    12 developed on the issue of Diaz’s intent to make the Property his
    13 residence.   Because the declaration evidence focused on Diaz’s
    14 ability to physically occupy the Property without assistance, the
    15 record should be reopened to permit evidence of Diaz’s intent on
    16 the filing date.   While a debtor’s intent can be inferred from
    17 surrounding circumstances, the debtor’s inability to live
    18 unassisted, the amount of the claimed exemption, or the fact that
    19 family members may also benefit from the exemption are not
    20 relevant factors to the analysis.
    21 B.   Burden of Proof
    22       Trustee urges us to conclude that based on the Supreme Court
    23 decision in Raleigh v. Illinois Dep’t of Revenue, 
    530 U.S. 15
    24 (2000), Diaz should bear the burden of proof to establish his
    25 right to claim the exemption.
    26       Generally, a debtor’s claimed exemption is presumptively
    27 valid, and the party objecting to a debtor’s exemption has the
    28 burden of proving that the exemption is improper.   Carter v.
    
    
                                       -12-
     1 Anderson (In re Carter), 
    182 F.3d 1027
    , 1029 n.3 (9th Cir. 1999);
     2 Rule 4003(c).    If the objecting party can produce evidence
     3 sufficient to rebut the presumption of validity, then the burden
     4 of production shifts to the debtor to provide unequivocal
     5 evidence to demonstrate that the exemption is proper.      Carter,
     6 182 F.3d at 1029 n.3.    The burden of persuasion always remains
     7 with the objecting party who must provide sufficient proof to
     8 meet the preponderance of the evidence standard.     Id.
     9      Trustee argues that in Raleigh, the Supreme Court held that
    10 the burden of proof is a substantive aspect of a claim, so in the
    11 absence of a federal interest requiring a different result, the
    12 state law allocation of the burden should apply in an objection
    13 to the claim in bankruptcy.    530 U.S. at 20-21.    California has
    14 mandated the use of state exemptions in bankruptcy and has placed
    15 the burden of proof on the party claiming the exemption.      See
    
    16 Cal. Civ
    . Proc. Code    §§ 703.580(b), 704.780(a).
    17      At least three bankruptcy courts have held that Raleigh
    18 requires the use of the California burden of proof in deciding an
    19 exemption objection.    See In re Tallerico, 
    532 B.R. 774
    , 788
    20 (Bankr. E.D. Cal. 2015); In re Pashenee, 
    531 B.R. 834
    , 837
    21 (Bankr. E.D. Cal. 2015); In re Barnes, 
    275 B.R. 889
    , 898 n.2
    22 (Bankr. E.D. Cal. 2002); see also Gonzalez v. Davis (In re
    23 Davis), 
    323 B.R. 732
    , 740 (9th Cir. BAP 2005) (Klein, J.,
    24 concurring).    We have previously acknowledged the possibility
    25 that Raleigh requires use of the state law burden of proof for
    26 state law exemptions, and have affirmed this procedure in an
    27 unpublished memorandum.    Lopez v. Gill (In re Lopez), 
    2015 WL 28
     5309580, *3 (9th Cir. BAP, September 3, 2015).
    
    
                                        -13-
     1      Trustee argues that the application of the state law burden
     2 of proof is further supported by the Ninth Circuit’s holding in
     3 In re Jacobsen, that when exemptions are determined by state law,
     4 “‘it is the entire state law applicable on the filing date that
     5 is determinative’ of whether an exemption applies.”    
    676 F.3d 6
     1193, 1199 (9th Cir. 2012)(citation omitted).
     7      In re Carter, was decided prior to Raleigh, and there is no
     8 subsequent Ninth Circuit authority addressing the burden of proof
     9 with respect to an exemption objection.     We are persuaded by the
    10 reasoning in In re Tallerico and conclude that where a state law
    11 exemption statute specifically allocates the burden of proof to
    12 the debtor, Rule 4003(c) does not change that allocation.
    13                          VI.   CONCLUSION
    14      The bankruptcy court incorrectly interpreted the California
    15 homestead exemption statute.   For the reasons set forth above, we
    16 VACATE the bankruptcy court’s order sustaining the Trustee’s
    17 motion for disallowance of homestead exemption, and we REMAND for
    18 further proceedings consistent with this decision.
    19
    20
    21
    22
    23
    24
    25
    26
    27
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