In re: Rizal Juco Guevarra

FILED
MAR 29 2021
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. EC-20-1165-LBT
RIZAL JUCO GUEVARRA,
Debtor. Bk. No. 18-bk-25306
RIZAL JUCO GUEVARRA,
Appellant,
v. MEMORANDUM∗
DOUGLAS M. WHATLEY, Trustee,
Appellee.
Appeal from the United States Bankruptcy Court
for the Eastern District of California
Christopher D. Jaime, Bankruptcy Judge, Presiding
Before: LAFFERTY, BRAND, and TAYLOR, Bankruptcy Judges.
INTRODUCTION
Chapter 7 1 debtor Rizal Guevarra appeals the bankruptcy court’s
order sustaining the chapter 7 trustee’s (“Trustee”) objection to Debtor’s
∗ This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
claim of exemption in proceeds from the sale of real property in which
Debtor claimed no interest. Debtor listed the property on his schedules, but
he claimed that he had no interest in it and was merely a “co-signer” with
his nephew. He did not claim any exemption in the property even after
Trustee notified Debtor’s counsel shortly after the petition date that the
estate claimed an interest in the property because Debtor and his nephew
held title as joint tenants. Debtor amended his schedules to claim an
exemption in the proceeds under California’s “wild card” exemption only
after Trustee had sold Debtor’s interest in the property.
Trustee objected to the newly asserted exemption, arguing that
Debtor had acted in bad faith and should be equitably estopped from
claiming the exemption. The bankruptcy court did not analyze equitable
estoppel but sustained the objection on the ground that Debtor had not
acted in good faith in claiming the exemption because he claimed it to
benefit his nephew, and the purpose of bankruptcy exemptions is to
protect the debtor’s property. But under California law, the wild card
exemption may be claimed in any property, and there is no requirement
that the Debtor have any specific intent with regard to the use of the
exempted property. Accordingly, we VACATE and REMAND.
Unless specified otherwise, all chapter and section references are to the
1
Bankruptcy Code, 11 U.S.C. §§ 101–1532.
2
FACTS
Debtor filed his chapter 7 petition in August 2018; appellee Douglas
M. Whatley was appointed trustee. On Debtor’s Schedule A, he listed real
property located on Glascow Drive in North Highlands, California (the
“Property”), valuing it at $217,612 but stating that the value of the portion
he owned was “$0.00.” In the space provided for a description of the
debtor’s ownership interest appeared the notation, “Co-signed for
Nephew; Debtor has no interest in property.” He did not claim any
exemption in the Property on Schedule C.
In November 2019, Trustee filed a motion to sell the estate’s interest
in the Property. In his supporting declaration, Trustee stated that,
according to recorded title documents, Debtor and his nephew, Daryl
Guevarra, owned the Property as joint tenants.2 Trustee also submitted as
exhibits copies of the purchase and sale agreement, the grant deed, and a
deed of trust, all of which showed that Debtor co-owned the Property with
Daryl and was a co-borrower on the loan secured by the deed of trust.
Debtor opposed the motion, arguing that he had no interest in the
Property but was merely a co-signer with Daryl. A few days later, he filed a
motion to convert the bankruptcy case to chapter 13 to “save his nephew’s
2
Neither the declaration nor the exhibits were included in the excerpts of record.
We therefore have exercised our discretion to take judicial notice of the bankruptcy
court’s electronic docket and imaged papers filed in Debtor’s bankruptcy case. See
Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP
2003).
3
home.” The bankruptcy court denied the motion to convert and granted
the motion to sell the estate’s interest in the Property; that interest was
thereafter sold for $32,500.3
Debtor then filed amended Schedules A/B and C. Again, Schedule A
listed the Property, valuing Debtor’s interest at $0.00. In the space for
describing the nature of the debtor’s ownership interest, Debtor wrote:
“Debtor interest in said property it [sic] was sold for $32,500 by chapter 7
trustee[.]” Under “Other information you wish to add,” Debtor wrote
“Debtor claims said funds under exemption statute CCP 703.” On Schedule
C, Debtor added the $32,500 proceeds from the sale of the Property and
claimed $27,915 as exempt under California Code of Civil Procedure
(“CCP”) § 703.140(b)(5), the “wild card” exemption.
Trustee objected to the claimed exemption. He argued that Debtor
had not acted in good faith and was equitably estopped from asserting an
exemption in the proceeds because Debtor had insisted from the inception
of the case that he had no interest in the Property, and he had not claimed
any exemption until nineteen months after the petition date. Trustee stated
that if he had known Debtor would claim an interest and exemption in the
proceeds, he would not have sold the Property. In his declaration in
support of the motion, Trustee’s counsel, Barry Spitzer, testified that he
3 Trustee had previously filed an adversary proceeding against Daryl, seeking
permission to sell the entire Property. Daryl did not file an answer or responsive
pleading, and the court entered an order of default. After Trustee found a buyer for the
estate’s 50% interest in the Property, he dismissed the adversary proceeding.
4
had called Debtor’s counsel, Mr. Gillis, approximately three months after
the petition date and had left a detailed message explaining that Trustee
claimed an interest in the Property; about a week later Mr. Spitzer spoke
directly with Mr. Gillis regarding the ownership issue and requested
documents. Trustee submitted as an exhibit to his objection a copy of a
letter from Mr. Spitzer to Daryl Guevarra dated December 13, 2018,
informing Daryl that Debtor’s 50% interest in the Property was property of
the estate and that Trustee intended to sell either the entire Property or the
estate’s interest. Trustee also submitted a copy of a December 19, 2018,
letter from Mr. Gillis to Mr. Spitzer stating that he was in the process of
gathering documents to show that Debtor had no interest in the Property.
Mr. Gillis also requested that Mr. Spitzer “show [me] some law that says if
a person is listed as a joint tenant, that he has 50% ownership.”
Debtor filed an opposition, in which he argued that he had not acted
in bad faith because he did not hide the Property from Trustee, and he
changed his exemption only after the bankruptcy court ruled he had a 50%
interest in the Property. He claimed that there was case law to support his
claim that he held no interest.4 Debtor also filed a declaration from Daryl
4 Debtor cited Johnson v. Johnson, 192 Cal. App. 3d 551 (1987) and Siegel v. Boston
(In re Sale Guaranty Corp.), 220 B.R. 660 (9th Cir. BAP 1998). Both cases involved
resulting trusts. Under California law, if a transferee of property does not pay the
purchase price for the property, the transferee is presumed to hold the property in a
resulting trust for the party who paid the consideration for its purchase. In re Sale Guar.
Corp., 220 B.R. at 664. Further, if a bankruptcy trustee has constructive notice of the
resulting trust, it cannot be avoided under the trustee’s strong-arm powers. Id. at 665-
5
stating that Debtor had agreed to co-sign on the loan secured by the
Property but never made any loan payments and did not live there.
The bankruptcy court thereafter issued a memorandum decision and
order sustaining the objection. It found that Debtor had not met his burden
to show that the exemption was claimed in good faith, i.e., within the
parameters of the exemption statute. The court found that this criterion
was not met because Debtor claimed the exemption to protect his nephew’s
property rather than his own.
Debtor 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 err in sustaining Trustee’s objection to
Debtor’s claim of exemption?
STANDARDS OF REVIEW
We review de novo the right of a debtor to claim an exemption. Elliott
v. Weil (In re Elliott), 544 B.R. 421, 430 (9th Cir. BAP 2016), aff’d, 692 F. App’x
472 (9th Cir. 2017). “De novo review requires that we consider a matter
anew, as if no decision had been made previously.” Francis v. Wallace (In re
Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014). Factual findings underlying
66. But Debtor did not indicate on his schedules that he held the Property in a resulting
trust, nor did he ever request any adjudication of these issues.
6
the bankruptcy court’s legal conclusions are reviewed for clear error. In re
Elliott, 544 B.R. at 430. A factual finding is clearly erroneous if it is illogical,
implausible, or without support in inferences that may be drawn from the
facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832
(9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir.
2009) (en banc)).
DISCUSSION
When a bankruptcy case is filed, all the debtor’s legal and equitable
interests in property as of the petition date become property of the estate.
§ 541(a)(1). Nevertheless, an individual debtor may exempt certain
property pursuant to applicable state or federal law. California has opted
out of the federal exemption scheme, which means that California debtors
must use California exemptions. Accordingly, bankruptcy courts look to
California law in determining the validity of the exemption. Phillips v.
Gilman (In re Gilman), 887 F.3d 956, 964 (9th Cir. 2018). See also Little v.
Reaves (In re Reaves), 256 B.R. 306, 310 (9th Cir. BAP 2000), aff’d, 285 F.3d
1152 (9th Cir. 2002) (“The validity of the debtor’s claimed state exemption
is controlled by California law and by the California rules of
construction.”) (citation omitted). “The California exemption statutes are
liberally construed, for their manifest purpose is to protect income and
property needed for the subsistence of the judgment debtor.” Estate of Short
v. Payne (In re Payne), 323 B.R. 723, 727 (9th Cir. BAP 2005) (citation
omitted). Under California law, the debtor has the burden to prove he is
7
entitled to the claimed exemption. Diaz v. Kosmala (In re Diaz), 547 B.R. 329,
337 (9th Cir. BAP 2016).
Although Trustee alleged in his objection that Debtor had not acted
in good faith, Trustee did not ask the bankruptcy court to disallow the
exemption on that ground; rather, he argued that Debtor was equitably
estopped from claiming the exemption. But the bankruptcy court did not
engage in an analysis of equitable estoppel. It instead sustained the
objection on the ground that Debtor had not claimed the exemption in
good faith, which the court equated with claiming the exemption for its
intended purpose.
Debtor argues that, under Law v. Siegel, 571 U.S. 415 (2014), the
bankruptcy court was prohibited from disallowing the exemption on
grounds of lack of good faith. In Law, the Supreme Court reversed the
bankruptcy court’s order granting a chapter 7 trustee’s motion to surcharge
a debtor’s homestead exemption based on the debtor’s misrepresentation
that there was no equity in his property. The Court held that the
bankruptcy court could not utilize § 105(a)5 to contravene the Bankruptcy
5 Section 105(a) provides:
The court may issue any order, process, or judgment that is
necessary or appropriate to carry out the provisions of this title. No
provision of this title providing for the raising of an issue by a party in
interest shall be construed to preclude the court from, sua sponte, taking
any action or making any determination necessary or appropriate to
enforce or implement court orders or rules, or to prevent an abuse of
process.
8
Code, specifically, § 522(k), which provides that the exemption amount is
not liable for payment of any administrative expenses. Id. at 422. The Court
held that bankruptcy courts are not free “to grant or withhold exemptions
based on whatever considerations they deem appropriate. . . . The Code's
meticulous—not to say mind-numbingly detailed—enumeration of
exemptions and exceptions to those exemptions confirms that courts are
not authorized to create additional exceptions.” Id. at 423-24. At the same
time, the Court acknowledged that when state exemptions are claimed,
“the exemption’s scope is determined by state law, which may provide that
certain types of debtor misconduct warrant denial of the exemption.” Id. at
425.
Courts in the Ninth Circuit, including this Panel, have interpreted
Law as overruling the bankruptcy court’s authority to deny an exemption
on grounds of bad faith. See Elliott v. Weil (In re Elliott), 523 B.R. 188, 193
(9th Cir. BAP 2014), and Gray v. Warfield (In re Gray), 523 B.R. 170, 175 (9th
Cir. BAP 2014). See also In re Lua, 529 B.R. 766, 773-74 (Bankr. C.D. Cal.
2015), rev’d and remanded on other grounds, 692 F. App’x 851 (9th Cir. 2017).
More recent case law has clarified that bankruptcy courts retain the power
to deny a state law exemption if that state’s law provides an equitable basis
for doing so. See In re Gilman, 887 F.3d at 966 (vacating and remanding
order overruling objection to automatic homestead exemption with
instructions to consider whether, under California law, equitable estoppel
could apply to preclude the exemption).
9
In its decision, the bankruptcy court reasoned that “[o]ne aspect of
the debtor’s burden of proof is to prove that the exemption is claimed in
good faith or, in other words, the exemption claimed is within the
parameters of the exemption statute.” Memorandum and Order at 9. In
support, the court cited In re Gilman, 608 B.R. 714, 723-24 (Bankr. C.D. Cal.
2019), aff’d sub nom., Tuxton China, Inc. v. The Oneida Grp. Inc. (In re Gilman),
No. 2:19-cv-10534-SVW, 2020 WL 7087703 (C.D. Cal. Oct. 28, 2020), appeal
docketed, No. 20-56279 (9th Cir. Dec. 2, 2020). Gilman was a decision issued
after remand from the Ninth Circuit Court of Appeals. In its opinion
vacating and remanding, the Circuit instructed the bankruptcy court to
make findings on whether the debtor intended to continue to reside on the
property in which he claimed the California automatic homestead
exemption. In re Gilman, 887 F.3d at 966. Additionally, as noted above, the
Circuit instructed the bankruptcy court that it could consider whether
equitable estoppel or other California equitable law could apply to
preclude the exemption. Id.
On remand, the Gilman bankruptcy court found that the debtor
intended to reside at the property and was thus entitled to the exemption.
608 B.R. at 721. The court rejected the creditors’ equitable theories,
including bad faith, as providing a basis for disallowing the exemption. It
rejected the bad faith theory because the cases cited by creditors did not
involve application of such a theory to disallowance of a homestead
exemption, and because the objecting creditors had not pointed to any bad
10
faith conduct by debtor that was related to his claim of homestead
exemption. In re Gilman, 608 B.R. at 723-24.
One of the cases cited to the Gilman court was Bertozzi v. Swisher, 27
Cal. App. 2d 739 (1938). Bertozzi involved a debtor who claimed an
exemption in a racehorse when the exemption was intended to apply only
to work horses. The Gilman court noted that although Bertozzi mentioned
good faith, it was in the context of the requirement that “horses so exempt
are intended in good faith to be used as instruments of husbandry or
labor . . . .” 608 B.R. at 723 (quoting Bertozzi, 27 Cal. App. 2d at 742). The
Gilman court rejected the notion that Bertozzi had any application to the
facts before it because “Bertozzi says nothing about general, unrelated ‘bad
faith’ conduct preventing a debtor from claiming an exemption to which
the debtor would otherwise be entitled.” Id. at 724.
The bankruptcy court here interpreted Gilman and Bertozzi as
authorizing the denial of an exemption on grounds of lack of good faith by
interpreting good faith as requiring the debtor to show that the property
sought to be exempted qualifies for the specific exemption. Put another
way, the debtor must have a good faith intent to use the property for the
exemption’s intended purpose. This makes sense in the context of most
exemptions. For example, for property to be exempt under the California
automatic homestead exemption, the debtor must occupy the property and
intend to live there or, if the debtor does not reside in the property, he must
intend to return. In re Diaz, 547 B.R. at 336. And, as illustrated in Bertozzi,
11
for a debtor to exempt a horse under the exemption statutes in effect at the
time, the animal must have been intended for use “in husbandry or labor.”
27 Cal. App. 2d at 742.
But here, the exemption at issue is the California wild card
exemption, which provides that a debtor may exempt his “aggregate
interest, not to exceed one thousand five hundred fifty dollars ($1,550) in
value, plus any unused amount of the exemption provided under
paragraph (1) [the homestead exemption], in any property.” CCP
§ 703.140(b)(5) (emphasis added). This exemption may be used to “protect
any kind of property whatsoever.” Goswami v. MTC Distrib. (In re Goswami),
304 B.R. 386, 390 (9th Cir. BAP 2003) (citation omitted). There is no
requirement that the debtor show a good faith intent to do anything
specific with the exempt property, i.e., the property need not be dedicated
to a particular purpose nor does the statute require that the debtor keep it
for his own subsistence. For this reason, the bankruptcy court erred in
sustaining Trustee’s objection based solely on lack of good faith, i.e., failure
of the property to qualify for the exemption.
As noted, Trustee asked the bankruptcy court to disallow the
exemption based on equitable estoppel. Under California law,
[a] valid claim for equitable estoppel requires: (a) a
representation or concealment of material facts; (b) made with
knowledge, actual or virtual, of the facts; (c) to a party ignorant,
actually and permissibly, of the truth; (d) with the intention,
12
actual or virtual, that the ignorant party act on it; and (e) that
party was induced to act on it.
Simmons v. Ghaderi, 44 Cal. 4th 570, 584 (2008). On appeal, Trustee again
argues that the exemption could be disallowed on those grounds. Equitable
estoppel is recognized by California courts as a valid basis for disallowance
of a claim of exemption. In re Lua, 529 B.R. at 775. But, for reasons that are
not apparent from the record, the bankruptcy court made no findings on
the elements of equitable estoppel. Moreover, application of equitable
estoppel is left to the discretion of the bankruptcy court. See Cuadros v.
Super. Ct., 6 Cal. App. 4th 671, 675 (1992). Accordingly, we will not make
this determination ourselves. Instead, we remand for the bankruptcy court
to consider whether Debtor is equitably estopped from claiming an
exemption in the proceeds.
CONCLUSION
The bankruptcy court erred in concluding that it could disallow
Debtor’s California wild card exemption on the ground that it was claimed
for a purpose other than that for which the exemption was intended. We
therefore VACATE and REMAND for further proceedings consistent with
this disposition.
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