Opinion
NOT FOR PUBLICATION
Argued and Submitted at Sacramento, California: January 19, 2006
Appeal from the United States Bankruptcy Court for the Eastern District of California. Honorable Thomas C. Holman, Bankruptcy Judge, Presiding. BK. No. 04-31759.
Before: NAUGLE, [ MARLAR and PAPPAS, Bankruptcy Judges.
Hon. David N. Naugle, Bankruptcy Judge for the Central District of California, sitting by designation.
MEMORANDUM
The Chapter 7 Trustee, Lawrence G. Gray (" Gray" or " Trustee"), appeals an order of the bankruptcy court overruling his objection under § 522(g) to Anthony John Bova's (" Bova") claim of homestead exemption.
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, prior to the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (" BAPCA"), Pub. L. 109-8, 119 Stat. 23 (Apr. 20, 2005).
Because there was no transfer of Bova's equitable interest in the Subject Property, and therefore no recovery of property by the Trustee, § 522(g) does not preclude Bova's claimed homestead exemption. We AFFIRM.
Facts
On May 13, 2004, Bova filed a voluntary chapter 7 bankruptcy. Bova listed, on his Schedule A, a " 1/6 interest in 1404 Picardy Dr., Stockton" (" Subject Property"). Gray was appointed as the chapter 7 trustee.
The Subject Property was initially transferred to Bova and two of his five other siblings, Marie Ann Andrews (" Andrews") and Darlene L. Schenone (" Schenone"), in 1968 via grant deed. Bova's parents, Anthony and Angelina Bova, were the transferors. Bova, Andrews and Schenone were the transferees. They understood that they held title on behalf of all six Bova children, each sibling having an equal 1/6 undivided interest in the Subject Property.
It is undisputed that on May 16, 1991, Bova transferred legal title in the Subject Property to Andrews and Schenone via grant deed in order to facilitate refinancing of the mortgage on the Subject Property. It is also undisputed that the parties to the transfer did not intend that Bova be divested of his interest in the Subject Property by that transfer. Bova, Andrews and Schenone understood and do not dispute that Bova retained his 1/6 interest in the Subject Property despite the transfer. Bova could not remain on title and refinance because his bank advised him that he could not borrow any more money at the time. Bova currently lives and has lived on the Subject Property since approximately 2003, and periodically pays rent to Andrews and Schenone.
On December 14, 2004, Gray filed an adversary proceeding against Andrews and Schenone. Gray sought to sell both the interest of Andrews and Schenone, as well as the estate's interest, in the Subject Property pursuant to § 363(h). Andrews and Schenone objected to the sale, claiming Bova was entitled to a homestead exemption as to his interest in the Subject Property.
On March 16, 2005, Bova amended his Schedule C to claim a homestead exemption in his 1/6 interest in the Subject Property in the amount of $150,000, pursuant to California Code of Civil Procedure (" C.C.P.") § 704.730(a)(3).
On March 21, 2005, Gray amended his Complaint in the adversary proceeding to seek turnover of estate property pursuant to § 542(a). Then, on April 14, 2005, Gray filed an objection to Bova's claimed exemption in the bankruptcy case, asserting that it should be disallowed under § 522(g).
The hearing on Gray's objection to Bova's exemption took place on May 24, 2005. Earlier the same day, the bankruptcy court had issued a tentative decision overruling Gray's objection to the homestead exemption on the grounds that § 522(g) requires the trustee to prove that the property was concealed. Because Bova had disclosed his interest in the Subject Property on his bankruptcy schedules, the bankruptcy court tentatively concluded that Gray could not show that Bova had concealed the Subject Property.
At the May 24, 2005 hearing, Gray sought a continuance to permit further briefing of the issue as to who carried the burden of proving under § 522(g) that Bova did not voluntarily transfer and conceal the Subject Property. The bankruptcy court continued the hearing to June 28, 2005.
Gray argued, in his supplemental brief to the bankruptcy court, that the tentative ruling erroneously inverted the language of § 522(g) by placing the burden on the trustee to show that debtor both voluntarily transferred and concealed the Subject Property. Gray further argued that a proper interpretation of § 522(g)requires that he need only show that Bova voluntarily transferred or concealed the Subject Property.
At the June 28, 2005 hearing, Gray's counsel represented to the bankruptcy court that there was no tentative ruling. Transcript (June 28, 2005), page 3. The bankruptcy court then asked Gray's counsel: (1) whether Gray contested the fact that Bova has had an equitable interest in the Subject Property at all relevant times; and (2) whether Gray contested that the only thing that happened was that Bova transferred only his legal interest to his sisters, who now held the property for the benefit of the six siblings. Gray's counsel responded " No" to both inquiries. Transcript (June 28, 2005), page 5.
The bankruptcy court then determined that Bova held an equitable interest in the Subject Property. Relying upon In re Moffat, 107 B.R. 255 (Bankr. C.D. Cal. 1989), the court allowed Bova's homestead exemption. The bankruptcy court also decided that, under these facts, nothing was recoverable by the Trustee, because all that had occurred was a transfer of Bova's " legal interest to the other two co-owners who now hold the property for the six siblings." Transcript, page 4, ll. 23-25; page 5, l. 1. Because all Gray sought to do in his adversary proceeding was to sell the interests of Bova and the co-owners, the bankruptcy court did not address Gray's argument that the Trustee need only show that Bova had voluntarily transferred the Subject Property in order to defeat the exemption under § 522(g).
On July 8, 2005, the bankruptcy court entered the order overruling the objection to Bova's homestead exemption without prejudice to Gray's initiating a proceeding to seek damages against Bova, if the delayed claim of exemption had prejudiced creditors.
Gray timely appealed.
Jurisdiction
The bankruptcy court had jurisdiction under 28 U.S.C. § 1334 and § 157(b)(1) and (b)(2). This Panel has jurisdiction under 28 U.S.C. § 158(b)(1).
Issues Presented
(1) Whether Bova's transfer of legal title constituted a transfer of property under § 522(g).
(2) Whether a trustee " recovers" property, as required under § 522(g), under circumstances where Bova still owns and discloses an equitable interest in property held in a resulting trust.
Standard of Review
We review the legal issues, including a debtor's right to claim exemptions, de novo, and review factual findings for clear error. Federal Rule of Bankruptcy Procedure 8013; In re Blumer, 95 B.R. 143, 145 (9th Cir. 1988); In re Kelley, 300 B.R. 11, 16 (9th Cir. BAP 2003) citing Village Nurseries v. Gould, (In re Baldwin Builders), 232 B.R. 406, 409-10 (9th Cir. BAP 1999); Coughlin v. Cataldo, (In re Cataldo), 224 B.R. 426, 428-29 (9th Cir. BAP 1998).
Discussion
1. Was There A Transfer of Property Under § 522?
§ 541(a)provides:
The commencement of a case under section 301, 302 or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
11 U.S.C § 541(a)(2005).
In this case, the parties do not dispute that Bova retained an equitable interest in the Subject Property after executing the grant deed to his sisters in 1991. Thus, pursuant to § 541(a)(1), Bova's equitable interest in the Subject Property became property of the estate when he filed his Chapter 7 case. Under § 522(b) and the case law interpreting the California homestead statutes, like Moffat, Bova could exempt his equitable interest in the Subject Property as a homestead.
Section 522(b)(1) allows states to opt out of the federal list of exemptions established in § 522(d), and California has done so. See C.C.P. § 703.130; In re Reaves, 285 F.3d 1152, 1155 (9th Cir. 2002). Therefore, Bova's right to the exemption is determined under California law. See In re Carter, 182 F.3d 1027, 1029 (9th Cir. 1999); In re McKown, 203 F.3d 1188, 1189 (9th Cir. 1999).
Rule 4003(c) provides that the objecting party has the burden of proving that exemptions are not properly claimed. The objecting party must produce evidence to rebut the presumptively valid exemption. Carter, 182 F.3d at 1029. The Bankruptcy Rules set forth the procedural framework for filing both a list of property claimed as exempt and objections to claimed exemptions. Moffat, 107 B.R. at 258. Therefore, under Rule 4003(c), Gray, as objecting party, has the burden to prove that the exemption is not properly claimed.
Bova claimed a homestead exemption in his 1/6 interest in the Subject Property pursuant to C.C.P. § 704.730(a)(3) in the amount of $150,000 with a current market value of $20,000. Whether Bova may claim a $150,000 homestead exemption under C.C.P. § 704.730 for his claimed interest in the Subject Property, which he valued at $20,000, is a question not presently before this Panel. Instead, Gray contends that, under § 522(g), Bova's conveyance of legal title, 13 years before, constituted a transfer as defined by § 101(54), which thereby precludes Bova's claim of a homestead exemption because he voluntarily transferred the Subject Property, regardless of whether he retained an equitable interest therein.
§ 522(g)(1) provides:
Notwithstanding sections 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under section 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if
(1)(A) such transfer was not a voluntary transfer of such property by the debtor; and
(B) the debtor did not conceal such property.
11 U.S.C. § 522(g)(1)(2005).
Gray argues that the bankruptcy court improperly applied § 522(g) by requiring him to prove that Bova transferred and concealed the Subject Property. However, the tentative ruling included in the record on appeal reflects that the bankruptcy court properly interpreted the conjunctive requirement of § 522(g)(1)(A)(B).
At the June 28 continued hearing, Gray's counsel maintained that there had been no tentative ruling. The bankruptcy court did not reference § 522 on the record of the hearing. Nonetheless, given the questions posed by the bankruptcy court to counsel, regarding Bova's voluntary transfer of his legal interest and retention of an equitable interest, the Panel is satisfied that the bankruptcy court determined that no transfer of Bova's equitable interest occurred; and thus, there was no property for the trustee to recover for purposes of § 522(g). The bankruptcy court did not need to determine whether Gray had the burden of proof to show that Bova transferred and concealed the Subject Property once Gray's counsel admitted that Bova transferred only his legal interest and retained an equitable interest.
Gray relies upon Glass v. Hitt (In re Glass), 60 F.3d 565, 569 (9th Cir. 1995)(citing In re Glass, 164 B.R. 759, 764 (9th Cir. BAP 1994)), to support his argument that he need only establish that Bova either voluntarily transferred or concealed the Subject Property under § 522 (g)(1)(A)(B).
Glass presents an interesting twist in the quotation of § 522(g)(1)(A)(B) that may differ from the statute as enacted. However, the " and" versus " or" controversy is not determinative in this case. Gray's counsel conceded at oral argument that not every transfer of an interest in property by a debtor (e.g., from husband and wife, as joint tenants, to themselves as tenants in common), would forever defeat the rights of that debtor to claim an exemption.
Whether a transfer has occurred is controlled by federal law. Barnhill v. Johnson, 503 U.S. 393, 397-98, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992) citing McKenzie v. Irving Trust Co., 323 U.S. 365, 369-370, 65 S.Ct. 405, 89 L.Ed. 305 (1945). Section 101(54) of the Bankruptcy Code defines " transfer" as:
[E]very mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption.
11 U.S.C. § 101(54) (2005).
As held in In re Wallaert, 149 B.R. 665 (Bankr. W.D. Wash. 1992), " [t]he all-encompassing language unambiguously comprehends any disposition of any interest in property." Id. at 668 (internal citations omitted).
However, the definition of transfer " in turn includes references to parting with 'property' and an 'interest in property.' In the absence of any controlling federal law, 'property' and 'interests in property' are creatures of state law." Barnhill, 503 U.S. at 398 citing McKenzie at 370. See also, Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
a. " Interest of Property"
In addition, for § 522(g) to operate, there must be a transfer of an " interest in property." In deciding whether Bova transferred an interest in property, the analysis in Wallaert, 149 B.R. 665 (Bankr. W.D. Wash. 1992), is instructive as, under both Washington and California law, legal title empowers the holder of title to lawfully convey the property. See Stevens Group Fund IV v. Sobrato Dev. Co., 1 Cal.App.4th 886, 894-95, 2 Cal.Rptr.2d 460 (Cal.Ct.App. 1991). In Wallaert, the court held that one holding legal title to property also holds the legal power to convey or encumber that property. This power " must be fairly characterized an interest in property, when the lack of it is, under state law, a defect entitling the purchaser to rescind a contract to purchase real property." Wallaert, 149 B.R. at 668-69. Therefore, the court held that a transfer of a debtor's legal title to property constitutes a transfer of an interest in that property pursuant to § 101(54) of the Bankruptcy Code, despite the debtors' retention of an equitable interest. See id.
Here, Bova originally held a 1/3 interest in the legal title of the Subject Property along with Andrews and Schenone. Bova then transferred that legal interest to Andrews and Schenone in the 1991 grant deed and relinquished his role as trustee for his siblings as to that legal interest. Bova's conveyance of his 1/3 legal interest to Andrews and Schenone constituted a transfer of a property interest pursuant to § 101(54). But as explained below, while Bova transferred his legal interest in the Subject Property in 1991, that would not constitute a recoverable transfer by the Trustee under § 522 because Bova never relinquished his only true interest-an equitable 1/6 interest in the Subject Property.
b. The Nature of Bova's Remaining " Interest in Property" Express or Resulting Trust?
In California, the law of trusts is established by statute. See McCurdy v. Otto, 140 Cal. 48, 53, 73 P. 748 (1903). An express trust with respect to real property is required to be in writing. Viau v. Viau, 57 Cal.App. 66, 73, 207 P. 39 (Cal.Ct.App. 1922). Therefore, Bova's transfer of his legal title in the Subject Property to his sisters did not give rise to an express trust.
However, a resulting trust arises when the circumstances show the parties did not intend that a transferee receive the transferor's entire beneficial interest in property. See American Motorists Ins. Co. v. Cowan, 127 Cal.App.3d 875, 884, 179 Cal.Rptr. 747 (Cal.Ct.App. 1982); Restatement 3d Trusts § 7 (2003), Comment a. A resulting trust carries out the inferred intent of the parties. Id. at 885. The beneficial interest that is held in the resulting trust is " simply an equitable reversionary interest implied by law with the 'resulting trust' terminology being applied if and when the reversionary interest materializes as a present interest." Restatement 3d of Trusts § 7 (2003), Comment a.
Here, the record shows that Bova transferred legal title to Andrews and Schenone in 1991. However, it is undisputed that the parties did not intend that Andrews and Schenone also take Bova's beneficial interest in the Subject Property pursuant to the transfer. Bova maintains he has always retained a 1/6 interest in the Subject Property and so listed it on his Schedule A. Andrews and Schenone and Bova's other siblings agree and acknowledge his interest. Therefore, Bova's interest in the Subject Property can be classified as a beneficial interest under a resulting trust, which is an equitable reversionary interest implied by law.
In sum, Bova transferred his legal interest to Andrews and Schenone but always retained an equitable reversionary interest implied by law. That interest remained his property.
2. Gray " Recovered" Nothing As Is Required By § 522(g)
a. Bova Owns a 1/6 Equitable Interest Which Gray May sell Pursuant to § 363(h)
Section 522(g) precludes a debtor from exempting property that the debtor voluntarily transferred " that the trustee recovers under section . . . 542 . . . . " 11 U.S.C. § 522(g)(2005).
We agree with the bankruptcy court that, under these facts, there was nothing for Gray to recover. Although Bova transferred his legal title in the Subject Property, he retained his equitable interest. It was disclosed in the Schedules and not disputed by any co-owner. Because Bova retained the only true property interest he ever had, Gray could sell the Subject Property in its entirety under § 363(h), as Bova's equitable interest transferred to the estate upon the filing of the bankruptcy. Or, Gray could sell the 1/6 interest standing alone.
b. Gray Could Merely Step Into Bova's Shoes and Have the 1/6 Legal Title Held in Resulting Trust Transferred to the Estate
A resulting trustee ordinarily has no duty other than to transfer the property to the person entitled thereto. Restatement 3d Trusts § 7 (2003), Comment e (" Thus, if . . . a transfer of property is made to one person and the purchase price is paid by another, it is the duty of the transferee to convey the property upon demand to the payor or the payor's successors in interest, in the absence of other direction by the payor or successor."); 13 Witkin, Summary of California Law, Trusts § 311 (2005).
Indeed, the " trustee has no duties to perform, no trust to administer, and no purpose to carry out except the single one of holding or conveying [title to property] according to the beneficiary's demand." Richman v. Green, 143 Cal.App.2d 470, 473, 299 P.2d 890 (Cal.Ct.App. 1956) citing Bainbridge v. Stoner, 16 Cal.2d 423, 428, 106 P.2d 423 (1940). As the bankruptcy court held, Moffat is instructive in this case even though here we are dealing with a resulting trust and Moffat dealt with a revocable trust. In Moffat, the court held:
Pursuant to debtor's interest as trustor in the 'revocable' living trust, the bankruptcy estate holds a 'contingent reversionary interest' in the subject dwelling. The bankruptcy trustee - standing in debtor's place as trustor of the Living Trust - can, in his discretion, revoke the trust in whole or in part, reverting title in the residence back to the bankruptcy estate.
Moffat, 107 B.R. at 260.
In this case, Gray need merely stand in Bova's place as a beneficiary of the resulting trust and ask for his portion of legal title from Andrews and Schenone. Section 522(g) contemplates " exemptions on behalf of debtors who have voluntarily transferred their property rights so as to give rise to the trustee's avoidance powers." Glass, 60 F.3d at 569 (internal citations omitted) (emphasis added). Here, the transfer of legal title did not give rise to Gray's avoidance powers under § 542(a) and it appears that Gray merely amended his initial § 363(h) complaint to include § 542(a) in order to deny Bova his homestead exemption.
Nor are the purpose and policies behind § 522(g) frustrated in this case, as Bova did not conceal his interest in the Subject Property after he had transferred his legal interest approximately thirteen years prior to filing bankruptcy. It is well recognized under California state law that " [a] homestead statute, being of a remedial and humane character, should be given a liberal construction in favor of the exemptions created." Thorsby v. Babcock, 36 Cal.2d 202, 204, 222 P.2d 863 (1950).
Conclusion
The transfer of Bova's legal interest constitutes a transfer under § 101(54), but it did not constitute a transfer recoverable by the trustee under § 522(g) because it was undisputed that Bova always held, disclosed and retained a 1/6 beneficial interest. The bankruptcy court correctly held that since there was no recovery as required by § 522(g), and by analogizing to Moffat, that Bova held an equitable interest in the Subject Property. Because there was no transfer of an equitable interest in property and no recovery as required by § 522(g), Bova was not precluded from claiming the Subject Property exempt as his homestead. AFFIRMED.