Opinion
Case No. 19-27357-B-7
05-18-2020
IN RE: Clay DUDLEY, Debtor(s).
Michael O'Dowd Hays, Chico, CA, for Debtor. J. Russell Cunningham, Sacramento, CA, for Trustee.
Michael O'Dowd Hays, Chico, CA, for Debtor.
J. Russell Cunningham, Sacramento, CA, for Trustee.
MEMORANDUM AND ORDER REGARDING DEBTOR'S REQUEST FOR EXTENSION OF STATUTORY HOMESTEAD PROCEEDS REINVESTMENT PERIOD
Christopher D. Jaime, Judge United States Bankruptcy Court
Introduction
The court has before it a Debtor's Motion for Additional Time to Purchase New Residential Homestead filed by debtor Clay Dudley. The debtor requests an extension of the time under California law within which proceeds from the sale of property claimed as a homestead must be reinvested in a replacement homestead property in order to preserve the exempt status of the sale proceeds.
The hearing on the debtor's motion was continued from April 28, 2020, to May 19, 2020, and the debtor was instructed to submit additional points and authorities in support of his request. The chapter 7 trustee and other parties in interest were also invited to address the debtor's request. The debtor timely submitted an additional brief. The chapter 7 trustee filed a late response. No other party in interest opposed or responded to the motion.
The court has reviewed the motion, the trustee's response, and all related declarations and exhibits. The court has also reviewed and takes judicial notice of the docket in this chapter 7 case. See Fed. R. Evid. 201(c)(1).
The court has determined this matter may be decided on the papers. See General Order No. 618 at p.3, ¶ 3 (E.D. Cal. May 13, 2020) (ordering courthouse closure "until further notice" due COVID-19 pandemic and further ordering that all civil matters are to be decided on the papers unless the presiding judge determines a hearing is necessary). Oral argument will not assist in the decision-making process or resolution of the motion. See Local Bankr. R. 9014 -1(h), 1001-1(f). The hearing on May 19, 2020, at 9:30 a.m. will be vacated.
Findings of fact and conclusions of law are set forth below. See Fed. R. Civ. P. 52(a) ; Fed. R. Bankr. P. 7052.
Background
The debtor is 57 years old. The Social Security Administration has determined that the debtor is disabled.
The debtor filed a chapter 7 petition on November 26, 2019. He received a discharge on March 19, 2020.
In Schedule C filed with the petition, the debtor claimed the $175,000.00 homestead exemption amount in his residence at 432 Weymouth Way, Chico, California ("Homestead Property") permitted by California Code of Civil Procedure § 704.730. No party in interest objected to the claim of exemption.
The Homestead Property was abandoned to the debtor without objection on December 19, 2019, and the debtor sold it shortly thereafter. Escrow on the sale closed on February 7, 2020. The debtor received $112,102.34 in sale proceeds ("Homestead Proceeds").
The Homestead Proceeds currently enjoy the same exempt status as the Homestead Property. However, according to the debtor, the Homestead Proceeds will lose their exempt status if they are not reinvested in a replacement homestead within six months of the time they were received, or by August 5, 2020.
The debtor states that he intends to use the Homestead Proceeds to purchase a replacement homestead property and he has been diligent in efforts to timely do so. The debtor also states that his efforts have been hampered by a loss of liquidity in the mortgage market based on the type of loan for which he currently qualifies. And in the midst of the debtor's efforts to timely reinvest the Homestead Proceeds, the COVID-19 pandemic happened.
The COVID-19 pandemic has effectively shut commerce, closed businesses and schools, eliminated employment, substantially changed daily life at the local, state, and national levels, and generally limited products and services to those deemed necessary or essential. Id. As one court aptly described current conditions:
Meanwhile, the world is in the midst of a global pandemic. The President has declared a national emergency. The Governor has issued a state-wide health emergency. As things stand, the government has forced all restaurants and bars [ ] to shut their doors, and the schools are closed, too. The government has encouraged everyone to stay home, to keep infections to a minimum and help contain the fast-developing public health emergency.
Art Ask Agency v. Individuals, Corporations, et al., 2020 WL 1427085, *1 (N.D. Ill. 2020).
In response to the COVID-19 pandemic, California Governor Gavin Newsom issued a Proclamation of a State of Emergency on March 4, 2020. Two weeks later, on March 19, 2020, Governor Newsom issued Executive Order N-33-20, a state-wide "stay at home order" that directs all individuals living or residing in the State of California to stay home or at their place of residence except as necessary to obtain essential services or for essential operations. The California Public Health Officer thereafter published a list of essential functions covered by the Governor's Executive Order. The Public Health Officer's list designates real estate workers as critical, to the extent remote working is not possible; however, it also limits scheduled property viewings to a single potential buyer and prohibits open-house viewings. Id. at p.23, ¶ 12.
As of the date of this order, the Proclamation of a State of Emergency may be found online at: https://www.gov.ca.gov/wpcontent/uploads/2020/03/3.4.20-Coronavirus-SOE-Proclamation.pdf
As of the date of this order, the Executive Order may be found online at: https://covid19.ca.gov/img/Executive-Order-N-33-20.pdf
As of the date of this order, the list of Essential Critical Infrastructure Workers may be found online at: https://covid19.ca.gov/img/EssentialCriticalInfrastructureWorkers.pdf
The debtor states that the limited availability of mortgage loan funds and restrictions placed on access to real property have substantially and adversely affected his ability to timely locate, view, inspect, and close on a replacement homestead. In other words, according to the debtor, conditions created by the COVID-19 pandemic and the current state of emergency have substantially and adversely affected his ability to timely reinvest the Homestead Proceeds.
Discussion
As an initial matter, the court notes that the trustee does not dispute any of the facts stated in or associated with the debtor's motion. The trustee also does not oppose the debtor's request for an extension of the time to reinvest the Homestead Proceeds. And the trustee acknowledges that the Homestead Property was abandoned without opposition, concedes that the estate generally does not have an interest in abandoned property, states that the decision to not oppose abandonment was based on a mistaken belief that the estate retained a reversionary interest in the Homestead Proceeds if not timely reinvested, and suggests that the abandonment order should be vacated under Federal Rule of Civil Procedure 60(b)(1) (applicable by Federal Rule of Bankruptcy Procedure 9024 ) based on the trustee's mistaken belief.
The trustee's request to vacate the abandonment order will be denied without prejudice. The trustee's response to the debtor's motion is not a properly filed, set, and served motion. Moreover, Civil Rule 60(b)(1) does not provide relief for litigation decisions made by a party which the party later regrets based on subsequently-acquired knowledge. See Latshaw v. Trainer Wortham & Co., Inc., 452 F.3d 1097, 1100–01 (9th Cir. 2006) ; Adams v. Ziebarth (In re Adams), 2019 WL 6463992, *4 (9th Cir. BAP 2019) ; Lowery v. Hart, 2016 WL 900286, *5 (E.D. Cal. 2016). To the extent there may be a basis for relief from the abandonment order, if at all, it is not under Civil Rule 60(b)(1) based on the trustee's mistaken belief.
Now to the debtor's request for an extension. The court notes that the debtor has identified the amount of the homestead but not the nature of the homestead or the statutory basis of the obligation to reinvest the Homestead Proceeds. The court's briefing order refers to § 704.720(b) of the California Code of Civil Procedure as an example of the six-month reinvestment obligation. However, since the debtor sold the Homestead Property after it was abandoned and because the debtor refers to a six-month period that runs from receipt of the Homestead Proceeds and when the sale of the Homestead Property closed, it may be that the six-month reinvestment period arises under § 704.960 of the California Code of Civil Procedure. Under the former the six-month period runs from the date proceeds are actually received whereas under the latter the six-month period runs from the date of sale.
California Code of Civil Procedure § 704.720(b) states as follows:
(b) If a homestead is sold under this division or is damaged or destroyed or is acquired for public use, the proceeds of sale or of insurance or other indemnification for damage or destruction of the homestead or the proceeds received as compensation for a homestead acquired for public use are exempt in the amount of the homestead exemption provided in Section 704.730. The proceeds are exempt for a period of six months after the time the proceeds are actually received by the judgment debtor, except that, if a homestead exemption is applied to other property of the judgment debtor or the judgment debtor's spouse during that period, the proceeds thereafter are not exempt.
California Code of Civil Procedure § 704.960 states as follows:
(a) If a declared homestead is voluntarily sold, the proceeds of sale are exempt in the amount provided by Section 704.730 for a period of six months after the date of sale.
(b) If the proceeds of a declared homestead are invested in a new dwelling within six months after the date of a voluntary sale or within six months after proceeds of an execution sale or of insurance or other indemnification for damage or destruction are received, the new dwelling may be selected as a declared homestead by recording a homestead declaration within the applicable six-month period. In such case, the homestead declaration has the same effect as if it had been recorded at the time the prior homestead declaration was recorded.
For present purposes the distinction between § 704.720(b) and § 704.960 appears to be one without a difference. The relevant question is not when the six-month reinvestment period begins to run. The debtor acknowledges that it is currently running. Rather, the relevant question here is whether the six-month reinvestment period can be extended or otherwise tolled once it has started to run. And as noted below, that question applies equally to the six-month period under either statute.
Generally, when a debtor files bankruptcy, all of the debtor's property becomes property of the bankruptcy estate. See 11 U.S.C. § 541. Federal law provides avenues for a debtor to exempt certain property. See 11 U.S.C. § 522(d). Congress has also authorized states to opt out of the federal bankruptcy exemptions created by Bankruptcy Code § 522(d) which means the federal exemption scheme can be supplanted by states that choose to provide their own exemptions. See 11 U.S.C. § 522(b)(2) ; Granger v. Watson (In re Granger), 754 F.2d 1490, 1492 (9th Cir. 1985) ("[A] state that has opted out has considerable freedom in creating exemptions and eligibility requirements for those exemptions."). California exercised the § 522(b)(2) option to opt out by making the federal bankruptcy exemptions inapplicable in the state. See C.C.C.P. § 703.130.
California Code of Civil Procedure § 703.130 states as follows:
Pursuant to the authority of paragraph (2) of subsection (b) of Section 522 of Title 11 of the United States Code, the exemptions set forth in subsection (d) of Section 522 of Title 11 of the United States Code (Bankruptcy) are not authorized in this state.
A bankruptcy court construing California exemptions applies a state-law rule of decision. In re Tallerico, 532 B.R. 774, 780 (Bankr. E.D. Cal. 2015). In other words, "[l]ike all federal courts when addressing a state-law rule of decision, the bankruptcy court is predicting what the California Supreme Court would rule if it were presented with the question." Id. In that endeavor, state law governs. Law v. Siegel, 571 U.S. 415, 134 S. Ct. 1188, 1196–97, 188 L.Ed.2d 146 (2014) ("when a debtor claims a state-created exemption, the exemption's scope is determined by state law"); Philips v. Gilman (In re Gilman), 887 F.3d 956, 964 (9th Cir. 2018) ; Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193, 1199 (9th Cir. 2012). State law includes state statutory law. Elliott v. Weil (In re Elliott), 523 B.R. 188, 194 (9th Cir. BAP 2014) ; Kornhauser v. Block (In re Block), 2016 WL 3251406, *3 (9th Cir. BAP 2016). And it includes state equitable law. Gilman, 887 F.3d at 966 (citing ( Gray v. Warfield (In re Gray), 523 B.R. 170, 175 (9th Cir. BAP 2014) )).
The debtor has not cited any California statute that would permit the court to extend or toll the six-month reinvestment period under § 704.720(b) or § 704.960. The court has also found none. So that leaves California equitable law.
California's six-month reinvestment period has been equitably tolled when, through no fault of their own, exemption claimants lacked possession of or control over homestead proceeds following an involuntary or voluntary sale of the homestead and, as a result, were unable to timely reinvest the proceeds. Chase v. Bank of America, Nat. Trust & Sav. Ass'n, 227 Cal. App. 2d 259, 38 Cal.Rptr. 567 (1964) (involuntary sale); Thorsby v. Babcock, 36 Cal. 2d 202, 222 P.2d 863 (1950) (voluntary sale); see also Gill v. Woodburn, Adv. No. 12-02035-RK, at pp. 19–20 (Bankr. C.D. Cal. 2012) (involuntary sale but relying on Chase and Thorsby to conclude that the debtor's lack of possession of homestead proceeds tolled six-month period). Bankruptcy courts construing similar reinvestment obligations under other states' homestead statutes have reached similar conclusions. In re Dinh, 562 B.R. 122, 133–34 (Bankr. S.D. Tex. 2016) ; In re Marriott, 427 B.R. 887, 894–95 (Bankr. D. Idaho 2010).
The reinvestment period has also been equitably tolled when the debtor receives homestead proceeds following a voluntary sale of the homestead but, again, circumstances beyond the debtor's control prevent the timely reinvestment of the proceeds. In re Bading, 376 B.R. 143 (Bankr. W.D. Tex. 2007). In Bading, a debtor's homestead consisted of two contiguous parcels. A creditor refused to release an improper lien on one parcel which resulted in the debtor selling her homestead in consecutive transactions. The debtor sold the first parcel and when she eventually obtained a release of the improper lien she sold the second parcel. Had the reinvestment period not been tolled as to the proceeds from the sale of the first parcel the debtor would have lost her exemption while she was attempting to sell the second parcel. Nevertheless, the court held that the time under state law within which the debtor was required to reinvest the proceeds of the first sale was tolled until the sale of both parcels was completed. The court explained that the running of the reinvestment period would have "deprived [the debtor] of the opportunity to enjoy the full benefits of the homestead guaranteed to her under the Texas Constitution." Id. at 153.
Each of these decisions recognize the core principle that "[c]ourts liberally construe ‘the law and facts to promote the beneficial purposes of the homestead legislation to benefit the debtor.’ " Gilman, 887 F.3d at 964 (quoting Tarlesson v. Broadway Foreclosure Invs., LLC, 184 Cal. App. 4th 931, 936, 109 Cal.Rptr.3d 319 (2010) ). Indeed, "California intended a liberal homestead statute so its citizens would not lose their homes through a technicality." Canino v. Bleau (In re Canino), 185 B.R. 584, 590 (9th Cir. BAP 1995). In that regard, an exemption in homestead proceeds should not be lost so long as the proceeds are not squandered or used for nonexempt purposes. See Jacobson, 676 F.3d at 1200.
Nothing in the record before the court suggests that the debtor intends to squander the Homestead Proceeds or otherwise use them improperly or for a nonexempt purpose. Indeed, the record suggests quite the opposite. The debtor states that he intends to reinvest the Homestead Proceeds in another homestead but he is unable to do so because of circumstances created by the COVID-19 pandemic and the current state of emergency. In this court's view, that is an equitable basis to toll the debtor's six-month reinvestment period consistent with California law and its COVID-19 pandemic policy.
In normal times six months to locate and close on a replacement homestead property to avoid a loss of the exemption is challenging enough. See Jacobson, 676 F.3d at 1198–99 (involuntary sale); England v. Golden (In re Golden), 789 F.2d 698, 699 (9th Cir. 1986) (voluntary sale). However, because of the COVID-19 pandemic and current state of emergency, and in recognition that the State of California has taken a number of measures to protect occupancy and ownership of residences and the family home, these are not normal times.
On March 16, 2020, Governor Newsom issued Executive Order N-28-20 which allows local governments to impose limits on commercial and residential evictions through at least May 31, 2020. The Executive Order states that limits on evictions may be imposed when the basis for the eviction is nonpayment of rent due to a substantial decrease in household or business income caused by the COVID-19 pandemic or any government response to it.
As of the date of this order, the Executive Order may be found online at: https://www.gov.ca.gov/wp-content/uploads/2020/03/3.16.20-Executive-Order.pdf
On March 25, 2020, Governor Newsom announced during a press conference that, in response to efforts by the State of California and in recognition of the circumstances created by the COVID-19 pandemic, some of the nations largest lenders along with hundreds of other smaller financial institutions, banks, and credit unions, voluntarily agreed to a 90-day grace period on mortgage payments for California residents.
As of the date of this order, the announcement may be found online at: https://www.gov.ca.gov/2020/03/25/governor-gavin-newsom-announces-major-financial-relief-package-90-day-mortgage-payment-relief-during-covid-19-crisis/; https://www.rev.com/blog/transcripts/california-governor-coronavirus-briefing-transcript-march-25; https://www.c-span.org/video/?470703-1/california-governor-newsom-coronavirus-news-conference.
Two days later, on March 27, 2020, Governor Newsom issued Executive Order N-37-20 which prohibits enforcement of eviction orders for nonpayment of residential rent by tenants affected by COVID-19 through May 31, 2020. It also extends the deadline in California Code of Civil Procedure § 1167 for a period of 60 days for any tenant who, while the order is in effect, is served with a complaint to evict the tenant from a residence or dwelling for nonpayment of rent and who satisfies certain requirements.
As of the date of this order, the Executive Order may be found online at: https://www.gov.ca.gov/wp-content/uploads/2020/03/3.27.20-EO-N-37-20.pdf
On April 6, 2020, the Judicial Council adopted emergency rules that will remain in effect until 90 days after the Governor lifts the state of emergency related to the COVID-19 pandemic or until they are amended or repealed by the Judicial Council. Emergency Rule No. 1 of the Emergency Rules of California Rules of Court suspends evictions, other than those necessary to protect public health. It also prohibits state courts from issuing summons, entering of default judgments due to a tenant's lack of response, limits trial settings where the tenant has responded or appears, and continues trials. Emergency Rule No. 2 of the Emergency Rules of California Rules of Court effectively stays judicial foreclosures, other than those necessary to protect public health. It also tolls deadlines for filing judicial foreclosures and extends the period for exercising any rights in a judicial foreclosure case, including any right of redemption or a petition in relation to such right.
As of the date of this order, the Emergency Rules Related to COVID-19 may be found online at: https://www.courts.ca.gov/documents/appendix-i.pdf
The California Assembly took similar action on April 8, 2020, with the introduction of Assembly Bill 828. Assembly Bill 828 effectively prohibits all aspects of all foreclosures on residential real property while there is a state or locally declared state of emergency related to the COVID-19 pandemic in the jurisdiction in which the residential real property is located and until 15 days after the state or locally declared state of emergency ends.
As of the date of this order, Assembly Bill 828 may be found online at: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB828
Further protections for property owners came on May 6, 2020, when Governor Newsom issued Executive Order N-61-20 suspending until May 6, 2021, penalties, costs, or interest for failure to file property taxes timely.
As of the date of this order, the Executive Order may be found at https://www.gov.ca.gov/wp-content/uploads/2020/05/5.6.20-EO-N-6120-text.pdf
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Each of the above-described actions taken by the State of California reflect a public policy and legislative effort to protect real property interests, generally, and, specifically, to prevent the loss of residential occupancy and ownership rights due to the COVID-19 pandemic and the resulting state of emergency both of which are circumstances beyond the control of any adversely affected occupant, tenant, or homeowner. There is no good reason why that policy should not apply equally to the Homestead Proceeds. In other words, because the COVID-19 pandemic and the current state of emergency have significantly hindered the debtor's ability to timely reinvest the Homestead Proceeds the debtor's possession of the exempt proceeds and his ability to use them for their intended purpose should be protected to the same extent and by the same measures the State of California has adopted to prevent those in possession of residential real property from losing occupancy, leasehold, and ownership rights. The court therefore holds that under the facts of this case, the six-month reinvestment period applicable to the Homestead Proceeds is and shall be equitably tolled in the manner described below.
Tolling of the debtor's six-month reinvestment period began with the March 4, 2020, Proclamation of a State of Emergency. Tolling of the six-month reinvestment period will end on September 4, 2020, or when the March 4, 2020, state of emergency is terminated, whichever occurs first. Based on the debtor's statement that he received the Homestead Proceeds when escrow closed on February 7, 2020, that means 26 days of the six-month reinvestment period have run. The remaining 154 days (based on a 180-day period) will begin to run from the date of whichever event stated immediately above occurs first. Conclusion
For the foregoing reasons, and good cause appearing,
IT IS ORDERED that the debtor's motion is granted.
IT IS FURTHER ORDERED that the trustee's request to vacate the order abandoning the Homestead Property to the debtor is denied without prejudice.
IT IS FURTHER ORDERED that the hearing on May 19, 2020, at 9:30 a.m. is vacated.