Opinion
No. 03-10068
September 10, 2003
Memorandum re Disability Homestead Exemption and Motion to Avoid Lien
I. Introduction
The debtor purchased her real property at 5 Council Crest Drive in Corte Madera in 1990. Shortly after she married her non-debtor husband in 2001, she transferred title to the property to the both of them as joint tenants. After she filed her Chapter 7 petition, the bankruptcy trustee avoided the transfer of a half interest in the property to her husband and is now a one-half owner of the property.
The debtor claimed an exemption of $125,000.00 in the real property, and moved to avoid the judgment lien of creditor Patrick Caballero. Her motion is contested by Caballero, who has also objected to the exemption.
II. Issues
Resolution of these disputes involves two legal issues. First, the court must decide who bears the burden of proof as to a disability homestead exemption under California law. Second, the court must decide if there is merit to Caballero's assertions that half of whatever exemption is allowed is attributed to the husband's avoided half ownership.
III. Disability Exemption
LaHaye has claimed the $125,000 exemption provided by California Code of Civil Procedure § 704.730(a)(3)(B) for "[a] person physically or mentally disabled and as a result of that disability is unable to engage in substantial gainful employment." The term "substantial gainful employment" is the same term used in federal social security law. Federal rules define the term as the ability to earn at least $700 per month, plus a modest adjustment for wage increases since 2001. 20 C.F.R. § 404.1574.
The evidence before the court establishes that LaHaye has a chronic back condition and is not now employed but is contradictory as to whether she is unable to engage in substantial gainful employment. Since the court is unable to make a clear determination on the evidence, resolution of the issue depends on which party bears the burden of proof. While Caballero argues that this burden lies with the debtor, it appears that he bears the burden. FRBP 4003(c); In re Rostler, 169 B.R. 408, 411 (Bankr.C.D.Cal. 1994). Accordingly, the exemption must be allowed.
IV. Reduction of Exemption by Half
Without citing any case authority, Caballero asks the court to reduce LaHaye's exemption by half, attributing half to her husband's avoided interest. This argument seems contrary to both the law and the policy of homestead exemptions.
The sole case cited by Caballero, In re Talmadge, 832 F.2d 1120 (9th Cir. 1987), holds only that a married couple cannot double their homestead exemptions. It is not precedent for cutting an allowed exemption in half.
Homestead laws are intended to preserve the stability of society by protecting the home-owning middle class. The exemption amounts are the amounts determined by the state legislature as necessary for a debtor to purchase a new home if excess equity has resulted in the execution sale of his existing home. Reducing the homestead by half means that a debtor would have only half the funds necessary to purchase a new home.
Caballero's argument is that LaHaye had a single homestead on the entire fee, so that when the trustee acquired half the property half of LaHaye's exemption went with it. This is not a correct statement of California law. The debtor owned only a half interest in the property when she filed her bankruptcy petition. See In re Summers, 332 F.3d 1240 (9th Cir. 2003). She is entitled to a full exemption on her interest.
While state homestead law and federal exemption law do not exactly dovetail, bankruptcy issues are generally decided as if there was an execution sale under state law. In re Cole, 93 B.R. 707, 709 (9th Cir. BAP 1988). California Code of Civil Procedure § 704.800(a) provides that there can be no execution sale unless the sale price is sufficient to cover the homestead exemption plus the encumbrances. An execution sale where the debtor receives only half of the exemption is not possible. The proper rule is that the debtor is entitled to claim her homestead in whatever portion of her property remains at the time of execution sale.
The court is also unconvinced by Caballero's attempt to reduce LaHaye's exemption as a punitive measure for having deeded half of her property to her husband. Except in rare instances where stolen money is used to purchase a homestead, the amount of the exemption is not reduced due to the debtor's conduct or the nature of the debt. In fact, § 523(c) of the Bankruptcy Code protects exempt property from the kind of nondischargeable debt Caballero alleges to hold against LaHaye.
V. Conclusion
The debtor had $132,000.00 in equity in her home when she filed her bankruptcy petition. She is entitled to an exemption of $125,000.00. The Caballero judgment lien therefore impairs her exemption to the extent it exceeds $7,000.00.
VI. Orders
Counsel for LaHaye shall submit an order overruling Caballero's objection to her claim of exemption and a separate order granting her motion to avoid his judgment lien except to the extent of $7,000.00.