Opinion
NOT FOR PUBLICATION
September 21, 2007, Submitted Without Oral Argument
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. LA 04-10052 TD. Hon. Thomas B. Donovan, Bankruptcy Judge, Presiding.
Before: DUNN, KLEIN and MONTALI, Bankruptcy Judges.
MEMORANDUM
The debtor, Stephen Law, appeals an order denying his motion for an order directing the chapter 7 trustee, Alfred H. Siegel, to pay the debtor's claimed homestead exemption, and imposing sanctions on the trustee for " bad faith" in refusing to comply with an order of the Bankruptcy Appellate Panel entered in an earlier appeal. For the reasons set forth below, we REVERSE and REMAND.
The underlying case has a long and convoluted history, which includes a number of appeals before the Bankruptcy Appellate Panel. The Panel already has set forth in great detail the past events of the case in prior decisions. Law v. Siegel (In re Law), BAP Nos. CC- 05-1303/1344 and 06-1195/1180, (filed December 29, 2006); Lin v. Siegel (In re Law), BAP Nos. CC- 06-1427/1379 (filed July 10, 2007). To avoid unnecessary repetition, we recount only those facts relevant to the instant appeal.
On January 5, 2004, the debtor filed for bankruptcy relief under chapter 7. The debtor's residence was the sole asset of the bankruptcy estate.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date (October 17, 2005) of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23.
The residence was subject to several liens, including a first deed of trust held by Washington Mutual Bank, a note and deed of trust held by Lin's Mortgage & Associates (collectively, the " Lin Lien"), and three judgment liens.
The residence further was subject to a $75,000 homestead exemption claim by the debtor. The trustee did not object to the debtor's claimed homestead exemption.
The debtor executed and recorded a homestead declaration on August 4, 1995.
Five months after the petition date, the trustee initiated an adversary proceeding against Lili Lin, seeking to avoid the Lin Lien as a fraudulent transfer under § 544(b) and California Civil Code § 3439.04(a), and to recover the transfer under § 550. Two people claiming to be Lili Lin stepped forward to take part in the adversary proceeding: Lili Lin of Artesia and Lili Lin of China.
The trustee settled with Lili Lin of Artesia by way of a stipulated judgment. Under the stipulated judgment, the transfer to Lili Lin of Artesia was avoided, and the interests of Lili Lin of Artesia in the Lin Lien were deemed recovered by and assigned to the trustee and preserved for the benefit of the bankruptcy estate. Over the objections of Lili Lin of China and the debtor, the bankruptcy court entered an order approving the Lili Lin of Artesia Settlement (" Settlement Order").
According to the trustee, the amount of the Lin Lien recovered by the trustee was $280,813.17. The record provides no information, however, as to how the trustee calculated the amount of the Lin Lien. Based on certain language in the order on the Surcharge Motion (" Surcharge Order"), which the bankruptcy court redacted, we speculate that the trustee may have included interest on the Lin note in his calculation. According to the trustee, the interest on the Lin note was 10% or $16,800 per year, based on the original principal of $168,000.
Lili Lin of China appealed the Settlement Order to the Bankruptcy Appellate Panel (BAP No. CC-05-1303-KMoB). The Panel affirmed the Settlement Order. The Panel also held that Lili Lin of China remained entitled to assert her claim to the Lin Lien and that the trustee needed to obtain a judicial determination as to the validity or nonexistence of her interest, as the case may be.
The Bankruptcy Appellate Panel addressed several appeals of the debtor and/or Lili Lin of China (BAP Nos. 05-1303/1344 and 06-1180/1195) in a memorandum of decision filed on December 29, 2006 (" December 29, 2006 Decision").
The trustee appealed the Panel's decision requiring him to obtain a judicial determination of Lili Lin of China's interest, if any, in the Lin Lien. The appeal is pending before the Ninth Circuit.
The trustee also initiated an adversary proceeding against Lili Lin of China to obtain a judicial determination as to her interest in the Lin Lien (" Declaratory Judgment Action"), pursuant to the Panel's decision. To date, the Declaratory Judgment Action has not been resolved.
On March 5, 2007, Lili Lin of China filed an answer (" March Answer") in the Declaratory Judgment Action. The trustee moved to strike the March Answer and requested entry of default against her. Lili Lin of China opposed. (Lili Lin of China filed another answer on March 9, 2007, which is nearly identical to the March Answer; the only difference is the date of the attorney's signature and date of service of the answer. The answer filed on March 9, 2007 was not mentioned in the trustee's motion to strike.) After notice and a hearing, on August 15, 2007, the bankruptcy court entered an order striking the March Answer, but did not enter a default. On August 27, 2007, Lili Lin of China filed a second answer (" August Answer"). She also has appealed the order striking her March Answer to the Bankruptcy Appellate Panel (BAP No. CC-07-1323).
After auctioning and selling the residence for $680,000, the trustee filed a motion to surcharge the debtor's homestead exemption (" Surcharge Motion"). The trustee sought to surcharge the debtor's entire homestead exemption on the grounds that the debtor willfully and knowingly attempted to defraud his creditors by removing equity from the residence through the Lin Lien. Over the debtor's opposition, on May 8, 2006, the bankruptcy court entered an order approving the Surcharge Motion (" Surcharge Order").
The debtor appealed the Surcharge Order to the Bankruptcy Appellate Panel (BAP No. CC-06-1180-KMoB). The Panel reversed the Surcharge Order on the ground that there were no extraordinary circumstances present justifying the surcharge of the debtor's entire homestead exemption. Although the debtor's conduct toward the bankruptcy court and the trustee had been both resistant and antagonistic, his proven conduct did not equate with bad faith. Consequently, an equitable surcharge of his homestead exemption was not appropriate under current Ninth Circuit case law. The Panel noted, however, that " specific instances of mischief by the debtor in the past might support further monetary sanctions in the future, including a surcharge against his exemption, " though " any such relief . . . should be supported by specific findings of fact and appropriate conclusions of law regarding the debtor's conduct, including an adequate explanation why any surcharge based on specific damages or expenses incurred by the estate should be reimbursed from the debtor's exemptions." December 29, 2006 Decision (emphasis added). The Panel ultimately concluded that the surcharge of the debtor's entire homestead exemption was unwarranted. Aside from its reversal, the Panel gave no other directive regarding the Surcharge Order.
The trustee appealed the Panel's decision reversing the Surcharge Order. The appeal is pending before the Ninth Circuit.
The debtor and/or Lili Lin of China have appealed the December 29, 2006 Decision, which is pending before the Ninth Circuit. The debtor and/or Lili Lin of China also have appealed the decision of the Bankruptcy Appellate Panel filed on July 10, 2007 (BAP Nos. CC-06-1427/1379).
On February 5, 2007, the debtor filed a motion for an order directing the trustee to pay the debtor his claimed homestead exemption and to sanction the trustee for acting in " bad faith" by refusing to comply with the order of the Panel in its decision reversing the Surcharge Order (" Homestead Payment Motion"). The debtor asserted that the Panel's decision on the Surcharge Order directed the trustee to pay the debtor his claimed homestead exemption. As the trustee did not obtain a stay pending appeal within ten days after entry of the decision pursuant to Rule 8017, the debtor argued, the Panel's decision became enforceable. The trustee did not comply with the Panel's decision, however, and refused to respond to the debtor's requests for payment of the homestead exemption, thereby violating Rule 9011(b)(1). Thus, the debtor argued, the bankruptcy court should impose sanctions against the trustee.
The debtor relied on Rule 9011(b)(1) in support of his request for sanctions. However, Rule 9011(b)(1), which governs representations made by parties in documents presented to and/or filed with the bankruptcy court, is inapplicable.
The trustee opposed the Homestead Payment Motion, contending that his appeal of the Panel's reversal of the Surcharge Order divested the bankruptcy court of jurisdiction to rule on the debtor's Homestead Payment Motion. The trustee argued that, if the bankruptcy court entered an order requiring the trustee to pay the debtor his homestead exemption, that order would impact the issue(s) currently on appeal before the Ninth Circuit. The trustee further contended that, contrary to the debtor's argument, the trustee did not need to obtain a stay of the Surcharge Order, as the bankruptcy court lacked authority to issue an order requiring payment of the homestead exemption to the debtor until the appeal before the Ninth Circuit was resolved.
The trustee also argued that the validity of the Lin Lien must be determined before he could pay the debtor his homestead exemption. Under the Lin note, the debtor agreed to pay all costs and expenses incurred in any action or proceeding purporting to affect the Lin Lien. Whether Lili Lin of China or the trustee ultimately prevails in the adversary proceeding or on appeal to the Ninth Circuit, the trustee argued, the debtor nonetheless would be liable for the costs and expenses incurred by Lili Lin of China or the trustee. Thus, the trustee concluded, it was unknown whether the proceeds from the sale of the residence were sufficient to pay the debtor's claimed homestead exemption in full.
The trustee later filed a motion, seeking an order authorizing him to use the remaining sale proceeds to pay the judgment lien creditors (" Motion to Distribute Sale Proceeds"). In the Motion to Distribute Sale Proceeds, the trustee noted that he had approximately $489,591.08 in net sale proceeds remaining.
With respect to the debtor's request for sanctions, the trustee contended that the sanctions were unwarranted, as there was no order directing the trustee to pay the debtor his homestead exemption. Without further court order regarding the distribution of the remaining sale proceeds and without a final judicial determination regarding the Surcharge Order, the trustee could not pay the debtor his homestead exemption.
The hearing on the Homestead Payment Motion took place on February 28, 2007. At the hearing, the bankruptcy court agreed with the trustee that the pending appeal of the Surcharge Order deprived it of jurisdiction. The bankruptcy court reasoned that any ruling with respect to the debtor's homestead exemption would interfere with the appellate court's exercise of its jurisdiction over the issue(s) on appeal concerning the Surcharge Order. The bankruptcy court denied the debtor's Homestead Payment Motion.
With respect to the debtor's argument regarding sanctions, the bankruptcy court made no specific ruling either on the record at the hearing or in its order.
The debtor appealed.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b). We have jurisdiction under 28 U.S.C. § 158.
III. ISSUE
Whether the bankruptcy court erred in denying the Homestead Payment Motion based on its determination that it lacked jurisdiction in light of the trustee's appeal of the Surcharge Order currently pending before the Ninth Circuit.
IV. STANDARD OF REVIEW
Whether the bankruptcy court has jurisdiction is an issue of law that we review de novo. Marino v. Classic Auto Refinishing, Inc. (In re Marino), 234 B.R. 767, 769 (9th Cir. BAP 1999).
V. DISCUSSION
An appeal divests a trial court of jurisdiction, barring the trial court from acting on those aspects of the case involved in the appeal. Hill & Sandford, LLP v. Mirzai (In re Mirzai), 236 B.R. 8, 10 (9th Cir. BAP 1999). The trial court can enforce a judgment, however, provided that the judgment has been neither superseded nor stayed, as the pendency of an appeal does not destroy its finality. Id . (quoting Wedbush, Noble, Cooke, Inc. v. SEC, 714 F.2d 923, 924 (9th Cir. 1983)).
An unopposed homestead exemption claim is analogous to a judgment. In the absence of an order granting an extension of time, once the period to object to a claimed exemption expires, a party-in-interest is time-barred from challenging the validity of the exemption claim, and the property claimed as exempt is exempt. Smith v. Kennedy (In re Smith), 235 F.3d 472, 475 (9th Cir. 2000). " '[D]eadlines may lead to unwelcome results, but they prompt parties to act and they produce finality.'" Smith, 235 F.3d at 476 (quoting Taylor v. Freeland & Kronz, 503 U.S. 638, 644, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992)) (emphasis added). Similar to an unstayed judgment, an unopposed homestead exemption claim stands final.
A party-in-interest has 30 days from the conclusion of the § 341(a) meeting to object to the debtor's exemption claims. Smith, 235 F.3d at 475. There are exceptions to the 30-day deadline, however. For example, if the debtor is unclear as to what property he or she is claiming exempt, to the extent that the trustee and/or creditors have insufficient notice, the 30-day period begins to run upon the debtor amending the schedules or upon the objecting creditors and/or trustee receiving actual notice. Preblich v. Battley, 181 F.3d 1048, 1052 (9th Cir. 1999). Also, if the debtor amends his or her schedules to include an exemption claim not initially listed, the 30-day period begins to run from the date of the amendment with respect to the newly claimed exemption(s). Bernard v. Coyne (In re Bernard), 40 F.3d 1028, 1032 (9th Cir. 1994).
Here, the trustee did not challenge the validity of the debtor's claimed homestead exemption within the prescribed period. Thus, the debtor's right to his homestead exemption became final; the $75,000 of value in his residence that the debtor claimed as exempt is exempt. Taylor, 503 U.S. at 643-44.
Because the debtor's claimed homestead exemption is final, the bankruptcy court had the authority to act on the Homestead Payment Motion, notwithstanding the appeal of the Surcharge Order. The bankruptcy court could and should have made a determination and issued an order with respect to the Homestead Payment Motion - but it declined to do so. Therefore, we remand the Homestead Payment Motion to the bankruptcy court for further proceedings. We emphasize that this remand results solely from the bankruptcy court's view that it lacked jurisdiction, and we intimate no view as to what the court should rule.
The trustee argues, both in his opposition to the Homestead Payment Motion and in his opening brief, that the estate may not have sufficient funds to pay the debtor's claimed homestead exemption in full due to the ongoing dispute over the validity of the Lin Lien. In light of the competing claims in the instant case, the bankruptcy court should consider on remand whether there are sufficient funds available to pay the debtor's claimed homestead exemption in full or in part.
We further note that although the debtor is entitled to his claimed homestead exemption, it still may be subject to surcharge, based upon an appropriately supported motion filed by the trustee. Although a surcharge cannot be used to punish a debtor, Onubah v. Zamora (In re Onubah), 375 B.R. 549, 2007 WL 2701336, at *6 (9th Cir. BAP 2007), it may be used to prevent fraud, caused by the debtor's misconduct, upon the court and estate creditors, Latman v. Burdette, 366 F.3d 774, 785 (9th Cir. 2004). For example, if the debtor's misconduct denies creditors access to nonexempt property, a surcharge of the debtor's exemption is appropriate. Onubah, 375 B.R. 549, 2007 WL 2701336, at *5. As the Panel earlier held, a bankruptcy court may surcharge the debtor's exemption to ensure that the debtor not only retains his or her statutory " fresh start, " but also to protect the interests of creditors in nonexempt property. Id . (quoting Latman, 366 F.3d at 786).
In its December 29, 2006 Decision, the Panel stated that the debtor's past misconduct may constitute grounds for monetary sanctions in the future, including a surcharge of his homestead exemption, provided that any such surcharge is supported by specific factual findings and appropriate legal conclusions. Thus, the trustee may renew his motion to surcharge the debtor's claimed homestead exemption, as long as appropriate factual and legal bases exist to justify such a surcharge under the standards set out in Latman and Onubah.
V. CONCLUSION
The bankruptcy court had jurisdiction to consider the Homestead Payment Motion and to issue an appropriate order thereon, notwithstanding the appeal of the Surcharge Order pending before the Ninth Circuit. Thus, we REVERSE and REMAND to the bankruptcy court for further proceedings and to issue an appropriate order in the circumstances of this case.
Meanwhile, the trustee filed a motion for entry of default on August 29, 2007, and a motion for default judgment on September 11, 2007 (collectively, the " Default Motions"). Lili Lin of China filed an opposition to the motion for entry of default.
On September 27, 2007, the court entered an order for the following, which were set for hearing on October 18, 2007 at 11:00 a.m.: (1) order to show cause why Lili Lin's August Answer should not be stricken; (2) order requiring Lili Lin to appear personally at the hearing; (3) order requiring the trustee to brief the issue(s) regarding the order striking the March Answer; and (4) order setting a status conference on the Default Motions for the same date and time.