In re Newton

Full title: In Re MICHAEL NEWTON and ELLEN NEWTON, Chapter 7 Debtors

Court: United States Bankruptcy Court, D. Arizona

Date published: Feb 23, 2004

No. 03-13924-PHX-GBN (Bankr. D. Ariz. Feb. 23, 2004)

Opinion

No. 03-13924-PHX-GBN.

February 23, 2004

Terry A Dake Terra A Dake Ltd., Phoenix AZ, Attorney for Trustee Anthony H Mason.

Lawrence D Hirsch, Hirsch Law Office PC, Scottsdale AZ, Attorney for Debtors.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

GEORGE NIELSEN, Chief Judge, Bankruptcy

The objection of Chapter 7 bankruptcy trustee Anthony H. Mason to the homestead exemption claim of debtors Michael W. and Ellen K. Newton was tried to the court as a bench trial on December 18, 2003 and January 27, 2004.

The court has considered the parties' legal briefs, sworn witness testimony, admitted exhibits and the facts and circumstances of this case. An interim order was entered on February 13, 2004 announcing the court's decision. The following findings and conclusions are now entered:

FINDINGS OF FACT

1. Mr. and Mrs. Newton have owned a residence located at 6040 East Harvard Avenue in Scottsdale, Arizona since the mid 1970's. In 1988 the Newton family moved into a rental residence at 4126 North 58^th Place in Phoenix. The move was accomplished to obtain a better school district for their children and avoid the perceived harassing actions of the Harvard homeowners' association toward the family. Debtors retained ownership of the Harvard property and rented it to tenants, the last being Donald D. and Marge Glenn. After the children were grown, debtors did not move back to Harvard. Mrs. Newton was still uncomfortable with the association and the couple had made friendships at the 58^th Place property. The Glenns, who had been tenants since 1993, agreed to vacate in late 2002, following state court litigation. Testimony ("test.") of Michael W. Newton of December 18, 2003 and January 27, 2004.

2. The present case is debtors' third bankruptcy filing since 1995 in either Phoenix or Tucson. All three filings contain factual inaccuracies or omissions, many concerning debtors' residence. The 1995 Tucson filing incorrectly lists debtors' residence as the Harvard address, although they resided at 58^th Place at the time. The lease of 58^th place was not listed in the schedule of unexpired leases. Admitted exhibits ("exs.") 12-14, test.

The 1996 Phoenix bankruptcy case again incorrectly listed debtors' residence as on Harvard. That property was claimed exempt as a homestead, even though the family did not reside there. Although the Glenns were tenants at the time, their lease was not identified as an estate asset. Exs. 15-17. Mr. Newton attributes these errors to himself and to his former counsel. Test.

3. Despite the two previous bankruptcies, debtors' financial problems continued, due to a failed restaurant business. After a September 6, 2002 settlement of the litigation, the Glenns left the Harvard residence. Debtors repaired the residence and allowed Mr. Newton's brother to move in. After he left, the property was listed for sale on June 5, 2003. The broker's listing agreement reflects that debtors were already independently working with three potential purchasers at the time. Mr. Newton met with his father-in-law on June 18, 2003 and thereafter consulted an attorney regarding debtors' deteriorating finances.

The next day, acting on counsel's advice, debtors filed a homestead declaration on the Harvard property. Mr. Newton moved to the property to establish the homestead, again on advice of counsel. A temporary residence was intended only, until the property sold. He then intended to return to 58^th Place. Debtor moved a bed, chair, clothing, a television set, his medications, a computer, some documents and sheets to cover the windows into the vacant residence. The rest of his personal belongings remained at the 58^th Place rental property, where his wife continued to live. He had his breakfast and dinner at Harvard every day, eating on the kitchen counter top. Debtor would return to the property by 8:00 p.m. each night. He used a cell phone at the premises. Debtors paid for water and electricity service. He received visitors and mail at the premises, although some bills for Harvard utilities were sent to the 58^th Place address. Exs. 2-3, 4 at P. 3, paragraph 30; Exs. B and K; test.

4. Mrs. Newton continued to reside at the 58^th Place rental property, debtors' marital property and the rest of Mr. Newton's belongings remained there, because (1) Mr. Newton only intended to live at the Harvard residence until it was sold, (2) debtors lacked the funds to move all their belongings and Mrs. Newton and (3) their dogs would have soiled the Harvard carpets, making the property harder to sell. Sale of the home for $208,000 closed on August 5, 2003. Debtors received $50,451.31 from the sale as homestead proceeds,¹ which was placed in a separate homestead account. Debtors' intent was to live on these exempted funds until they both obtained employment. Mr. Newton immediately moved back to the 58^th Place rental, where debtors resided at the time of this trial. Ex. 9, test.

1 Debtors also claim as homestead proceeds $4,500 on deposit with the title company that closed the sale. Test. The trustee's objection extends to these funds as well. Trustee's trial brief at 3, fn. 2, Administrative docket item ("dkt") 39. See debtors' amended Schedule C at P.1.

5. Two days after the sale on August 7, 2003, debtors filed their present chapter 7 case, with the assistance of bankruptcy counsel. Debtors' schedules and statements again contain errors and omissions. Although debtors were residing in the rental premises, they failed to schedule the 58^th Place lease as an executory contract or unexpired lease in Schedule G. They failed to list the sale of the Harvard home, which closed days before, in their Schedule of Financial Affairs ('SEA") at item 10. They failed to list the Glenn litigation involving the Harvard property as litigation pending within one year of their bankruptcy filing in SEA item 4. SFA item 15-listed Mr. Newton's prior residence at the Harvard address, but incorrectly listed his residence at beginning in April of 2003, instead of June. The schedules also contain errors and omissions regarding other items, such as a failure to report loan repayments of $2,000 made to Mr. Newton's brother within the preference period. Debtors will correct the latter problem by recovering the payment for the estate. Mr. Newton takes personal responsibility for all deficiencies in his bankruptcy papers. Test., Ex. 11.

6. Debtors' began expending homestead proceeds for their personal support. The first check written on the homestead account, check 101 dated August 8, 2003, was a rent payment check for 58^th Place. The trustee filed a timely objection to the homestead exemption on October 8, 2003. At the trustee's request, this court entered an October 14, 2003 order prohibiting debtors from spending the homestead proceeds. The Newtons were required to turn the remaining proceeds over to the trustee or their attorney pending further order. Ex. 5 at p. 5110955, dkts 23, 25.

7. The requisite intent to establish an Arizona homestead residence at Harvard is not apparent to this fact finder, based on the above facts.

8. To the extent any of the following conclusions of law should be considered findings of fact, they are hereby incorporated by reference.

CONCLUSIONS OF LAW

1. To the extent any of the above findings of fact should be considered conclusions of law, they are hereby incorporated by reference.

2. Pursuant to 28 U.S.C. 51334(a) (1994), jurisdiction of debtors' bankruptcy case is vested in the United States District Court for the District of Arizona. That court has referred all cases under Title 11 of the United States Code and all adversary proceedings arising under Title 11 or related to a bankruptcy case to the United States Bankruptcy Court for the District of Arizona. 28 U.S.C. 5157(a)(1994), Amended District Court General Order 01-15. This contested matter having been appropriately referred, this court has core jurisdiction to enter a final order resolving trustee's objection to debtors' homestead exemption and determining whether to order turnover of estate property. 28 U.S.C. 5157 (b) (2) (B), (E). No party has challenged the court's jurisdiction.

3. This court's conclusions of law are reviewed de novo and its factual findings are reviewed for clear error. Hanf v. Summers (In re Summers), 332 F. 3d 1240, 1242 (9^th Cir. 2003). The appellate court accepts the bankruptcy court's findings, unless upon review, it is left with the definite and firm conviction that a mistake has been committed. Ganis Credit Corp. v. Anderson (In re Jan Weilert RV, Inc.), 315 F. 3d 1192, 1196 (9^th Cir.), amended by 326 F. 3d 1028 (9^th Cir. 2003).

4. The burden of proof in an exemption objection rests with the objector. Rule 4003(c), Fed.R. Bk. P., Shelley v. Kendall (In re Shelley), 184 B.R. 356, 360 (9^th Cir. Bankr. 1995), aff'd and adopted 109 F. 3d 639 (9^th Cir. 1997). Objector's standard of proof is the preponderance of the evidence. Kelley v. Locke (In re Kelley), 300 B.R. 11, 17 (B.A.P. 9^th Cir. 2003). The applicable Arizona homestead statute allows exemption of up to $100,000 in equity in residential real property in which the claimant resides. A.R.S. § 33-1101A. The exemption continues in identifiable cash proceeds for eighteen months from sale of the homestead or until claimant establishes a new homestead with the proceeds, whichever period is shorter. § 33-1101C. Arizona law requires that the homestead exemption be liberally construed in favor of debtors. Garcia v. Garcia (In re Garcia), 168 B.R. 403, 408 (D. Ariz. 1994). Also see, Coughlin v. Cataldo (In re Cataldo), 224 B.R. 426, 428 (B.A.P. 9^th Cir. 1998).

5. In this case, the dispute concerns what constitutes "resides" for purposes of § 33-1101. Since the statutory usage of the term "resides" primarily connotes a state of mind, even a temporary absence from a home will not defeat a homestead claim, if the party intends that home to be his residence. Garcia, Id. (emphasis added), (citing St. Joseph's Hospital and Medical Center v. Maricopa County, 142 Ariz. 94, 688 P. 2d 986, 991 (1984)). If the requisite state of mind is simply to exempt a homestead amount from creditors, clearly these debtors would qualify. However, more is required. The factors a court should consider in determining residency for homestead purposes are physical occupancy of the property and the intention for which the property is occupied.² Kelley, 300 B.R. at 21 (applying California law). Acting on advice of counsel on the eve of a 2003 bankruptcy filing,³ Mr. Newton established temporary occupancy with minimal furnishings in premises where debtors had not resided since 1988. Factual findings 1,3-4 id. His intent was for a temporary stay, lasting only until the property, already on the market, was sold. His wife, dogs and the remainder of the family possessions remained at the 58^th Place rental, awaiting his return. Factual findings 3-4.

2 Again, as noted in Garcia, mere physical day-to-day residence is not determinative. Id. at 408.

3 In the Ninth Circuit, a debtor may convert non-exempt property into exempt property, even on the eve of bankruptcy. The Code presumes creditors know the law and bear the risk that debtors will position their property to their best advantage. Ho v. Dowell (In re Ho), 274 B.R. 867, 876 fn. 11 (B.A.P. 9^th Cir. 2002), Cataldo Id. at 429, Murphey v. Crater (In re Crater), 286 B.R. 756, 761-64 (Bankr. Ariz. 2002) (Objection to discharge litigation).

6. This is not a case such as Garcia, involving a temporary absence from an established residence. 168 B.R. at 407-08. Nor is this a case like In re Elia, 198 B.R. 588, 591 (Bankr. Ariz. 1996) where debtor continued her established residence at a home, with minimal possessions, until the sale closing and move to a new residence. Here there was mere temporary occupancy with no intent to establish a residence. Rather, debtors' residence at 58^th Place continued undisturbed, regardless of Mr. Newton's temporary absence. The requisite legal intent to establish a residence at Harvard for homestead purposes has not been established.

7. Trustee has met his legal burden by a preponderance of the evidence, largely on Mr. Newton's own testimony.

ORDER

The Court finds for the trustee and against debtors. The objection to debtors' claimed homestead is sustained. Debtors and their counsel will forthwith turn over to trustee the homestead proceeds. Trustee is authorized to collect the additional funds on deposit with a title company as property of this bankruptcy estate.