Maria Victoria Reade

MEMORANDUM DECISION REGARDING OBJECTIONS TO THE DEBTOR’S SECOND AMENDED HOMESTEAD EXEMPTION
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NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re:
Maria Victoria Reade,
Debtor.
Case No.: 2:11-bk-53726-DS
Chapter: 7
MEMORANDUM DECISION REGARDING
OBJECTIONS TO THE DEBTOR’S
SECOND AMENDED HOMESTEAD
EXEMPTION
Maria Victoria Reade (the “Debtor”) filed a voluntary chapter 7 petition on October
20, 2011. Sam Leslie is the duly appointed chapter 7 trustee (the “Trustee”).
The Debtor and her ex-husband, Keith Roizman (“Roizman”) were involved in a
marriage dissolution action commenced pre-petition in Los Angeles Superior Court (the
“Superior Court Action,” Los Angeles Superior Court Case No. BD512241). Wendy
Sheinkopf (“Sheinkopf”) represented Roizman, and Bernard Shoeps (“Shoeps”)
represented the Debtor.
On March 19, 2012, Shoeps filed Claim No. 9 for $77,492 based on his fees
incurred representing the Debtor.
One of the disputes in the Superior Court Action was whether the Debtor was
required to pay for Roizman’s attorney’s fees. On April 11, 2012, Sheinkopf filed Claim No.
12 (the “Claim”) for up to $143,909.37 based on these fees. On October 23, 2013, the Los
FILED & ENTERED
DEC 23 2014
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	egarcia
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MEMORANDUM DECISION REGARDING OBJECTIONS TO THE DEBTOR’S SECOND AMENDED HOMESTEAD EXEMPTION
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Angeles Superior Court considered the ability of Roizman and the Debtor to pay these fees
and issued a fee award (the “Fee Award Ruling”) ordering the Debtor to pay Sheinkopf
$73,000. The Debtor appealed the Fee Award Ruling, and the appeal is still pending.
On January 10, 2014, the Debtor filed an amendment to her Schedule C to claim a
homestead exemption of $75,000 (the “Homestead Amendment”). The Debtor filed a proof
of service on January 21, 2014, indicating that all parties had been given proper notice.
Docket No. 138. The Trustee filed an opposition to the Homestead Amendment on
February 10, 2014. Docket No. 143. On March 28, 2014, the court overruled the Trustee’s
objection and entered an order allowing the Debtor’s Homestead Amendment of $75,000
pursuant to California Civil Procedure Code section 704.730 (the “Order”). Docket No. 148.
On June 16, 2014, Sheinkopf filed a motion to vacate the Order on the basis that
she had not received proper service of the Homestead Amendment. Docket No. 152. On
September 15, 2014, the court vacated the Order on the basis that service of the
Homestead Amendment was improper and ordered the Debtor to properly serve notice of
the Homestead Amendment and opportunity to object. Docket No. 165.
On September 23, 2014, the Debtor filed a second amended Schedule C, again
asserting a $75,000 homestead exemption, and notified parties of the opportunity to
object.
On October 15, 2014, Sheinkopf filed an objection to the Debtor’s second amended
homestead exemption on the basis of bad faith and prejudice. Docket No. 170.
Specifically, Sheinkopf relied on the case law applying the bankruptcy court’s equitable
powers under section 105(a) of the Bankruptcy Code to disallow an exemption where the
debtor has acted in bad faith and creditors are prejudiced. Sheinkopf further argued that
even if the homestead exemption were allowed, the exemption would not be immune to
her Claim because exempt property may be used to satisfy a judgment for spousal support
under California Civil Procedure Code section 703.070.
On the same day, Shoeps filed an objection to the Debtor’s second amended
homestead exemption on the basis that it was late filed, prejudicial, and was a form of self-
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MEMORANDUM DECISION REGARDING OBJECTIONS TO THE DEBTOR’S SECOND AMENDED HOMESTEAD EXEMPTION
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help to avoid creditors. Docket No. 169. The Shoeps objection contains no discussion of
legal authority, but at oral argument counsel stated that the objection essentially joined the
Sheinkopf objection in asserting bad faith and prejudice.
DISCUSSION
I. There Is No Basis under Bankruptcy Law or California Law to Disallow the
Amended Homestead Exemption
The Bankruptcy Code authorizes a debtor to exempt certain assets. 11 U.S.C. §
522(b). Exempt assets are not available for payment of either pre-petition claims or
administrative expenses. 11 U.S.C. § 522(c) and (k).
Bankruptcy Rule 1009 provides that a “schedule . . . may be amended by the debtor
as a matter of course at any time before the case is closed,” Fed. R. Bankr. P. 1009(a)
(emphasis added), and the Ninth Circuit has applied this right to the claim of exemptions.
See Martinson v. Michael (In re Michael), 163 F.3d 526, 529 (9th Cir. 1998); see also
Tyner v. Nicholson (In re Nicholson), 435 B.R. 622, 630 (9th Cir. BAP 2010).1
California residents filing for bankruptcy must choose from two sets of exemption
options under state law. 11 U.S.C. § 522(b)(1); Cal. Civ. Proc. Code § 703.130; Flinn v.
Morris (In re Steward), 227 B.R. 895, 898 (9th Cir. BAP 1998). “One set of exemptions are
the state law non-bankruptcy exemptions, including a homestead exemption, . . . [and]
[t]he other set of exemptions is modeled closely upon the federal exemptions listed in §
522(d).” Id. A debtor may choose only one set of exemptions. Id.; see Cal. Civ. Proc. Code
§ 703.140(a). Under the Bankruptcy Code and California law, exemptions are to be
construed liberally in favor of the debtor. In re Arrol, 207 B.R. 662, 665 (Bankr. N.D. Cal.
1997).
Although exemptions and their amendments are liberally construed, a judicially
created limit on this latitude and flexibility arose. Bankruptcy courts throughout the country,
including courts in the Ninth Circuit, have denied leave to amend or disallowed a claimed
1 Shoeps argues that the homestead exemption is “untimely,” without further explanation or reference to
bankruptcy or California law. This argument is without merit.
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exemption if the trustee or other party in interest timely objected and showed that either:
(1) the debtor acted in bad faith; or (2) creditors were prejudiced. Michael, 163 F.3d at 529
(adopting the test set forth in Doan v. Hudgins (In re Doan), 672 F.2d 831 (11th Cir.
1982)). The Bankruptcy Code does not mention either “bad faith” or “prejudice” as a basis
for disallowing an original or amended exemption. See Arnold v. Gill (In re Arnold), 252
B.R. 778, 784 (9th Cir. BAP 2000) (acknowledging that disallowing amended exemptions
based on bad faith or prejudice represents “judge-made exceptions”). Instead, courts have
relied on section 105(a) as the source of their equitable power to disallow amended
exemptions on those grounds. Nicholson, 435 B.R. at 630.2
This judicially created power was effectively abrogated by the recent United States
Supreme Court decision Law v. Siegel, –––U.S. –––, 134 S. Ct. 1188 (2014). In Law, the
debtor fabricated a lien against his home in an attempt to keep equity in the home from his
creditors. The debtor also claimed a $75,000 homestead exemption under California Civil
Procedure Code section 704.730(a)(1). The chapter 7 trustee successfully challenged the
lien and obtained a determination from the bankruptcy court that Mr. Law had perpetrated
a fraud. The court ruled that the trustee could surcharge the debtor's homestead
exemption to pay the trustee's attorneys' fees. The debtor appealed, and the Bankruptcy
Appellate Panel of the Ninth Circuit and the Ninth Circuit affirmed.
The Supreme Court reversed, holding that the general equitable powers of section
105(a) did not provide authority for judge-made exceptions to explicit mandates of the
Bankruptcy Code. Because section 522(k) explicitly prohibits the use of exempt property to
satisfy administrative expenses such as attorney fees, the bankruptcy court was not
authorized to invoke a judge-made equitable exception to order otherwise. Law, 134 S. Ct.
at 1194 (“We have long held that ‘whatever equitable powers remain in the bankruptcy
courts must and can only be exercised within the confines of’ the Bankruptcy Code.”). The
Supreme Court emphasized that “federal law provides no authority for bankruptcy courts to
2 For a more complete discussion of a debtor’s right to claim and amend exemptions, and the judicially
created limits on this right, see In re Arellano, 517 B.R. 228, 231 (Bankr. S.D. Cal. 2014).
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deny an exemption on a ground not specified in the Code,” and that any basis for denial of
a state law exemption must arise under state law. Id. at 1197-98.
This court lacks the authority to disallow the Debtor's claimed homestead exemption
based on section 105(a), whether indirectly by denying leave to amend or directly by
disallowing the exemption, because doing so would be clearly irreconcilable with Law. A
growing number of cases have so held. E.g. Elliott v. Weil (In re Elliott), No. CC-14-1050-
KiTaD, 2014 WL 6972472 (9th Cir. BAP Dec. 10, 2014); In re Arellano, 517 B.R. 228, 231
(Bankr. S.D. Cal. 2014); In re Franklin, 506 B.R. 765, 771 (Bankr. C.D. Ill. 2014); In re
Pipkins, Case No. 13–30087DM, 2014 WL 2756552, at *7 (Bankr. N.D. Cal. June 17,
2014); In re Gutierrez, No. 12–60444, 2014 WL 2712503, at *6 (Bankr. E.D. Cal. June 12,
2014); In re Gress, 517 B.R. 543, 547-48 (Bankr. M.D. Pa. 2014); In re Scotchel, Case No.
12–09, 2014 WL 4327947, at *4 (Bankr. N.D. W. Va. Aug. 28, 2014).
Of course, section 105(a) is not the only basis for denial of a homestead exemption.
Where, as here, a debtor claims a state-created exemption, the exemption's scope is
determined by state law, which may provide a basis for denial of the exemption. Law, at
1196-97 (2014); Elliott, 2014 WL 6972472. In this case, neither Sheinkopf nor Shoeps has
cited any state law basis to deny the Debtor’s homestead exemption for bad faith or
prejudice (or for any other reason). Accordingly, there is no basis in the record to disallow
the Debtor’s amended claim of exemption
II. Nondischargeability of Sheinkopf’s Claim Is Irrelevant to Allowing the Exemption;
Nondischargeability Is Only Relevant to Determining Whether Exempt Property
May Be Used to Satisfy the Claim
Sheinkopf has also argued that the Debtor’s homestead exemption is not immune
from the application of a judgment for spousal support under California Civil Procedure
Code section 703.070 and the Bankruptcy Code. She is correct. California Civil Procedure
Code section 703.070 provides that “if property sought to be applied to the satisfaction of a
judgment for child, family, or spousal support is shown to be exempt under subdivision (a)
in appropriate proceedings, the court shall, upon noticed motion of the judgment creditor,
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determine the extent to which the exempt property nevertheless shall be applied to the
satisfaction of the judgment.” Cal. Civ. Proc. Code § 703.070. The Bankruptcy Code also
provides that debts of this type are not dischargeable in a bankruptcy case. 11 U.S.C. §
523(a)(5) and (15).
However, the present motion is an objection to the Debtor’s amended homestead
exemption, and the nondischargeability of the Claim is not a basis to deny the Debtor’s
amended homestead exemption. Section 703.070 does not provide any basis to deny a
homestead exemption. Instead, it allows the court to determine the extent to which
property “shown to be exempt” may be used to satisfy a judgment. Cal. Civ. Proc. Code §
703.070(c). By the plain language of the statute, the property must be exempt for section
703.070 to apply. Thus, while Sheinkopf has not provided a reason to deny the Debtor’s
homestead exemption, the exempt property may still be used to satisfy her Claim, provided
that Sheinkopf meets the requirements of section 703.070: she must obtain a judgment
from the Superior Court and file a noticed motion with the Superior Court for a
determination that the exempt property “shall be applied to the satisfaction of the
judgment.” Cal. Civ. Proc. Code § 703.070.
As a preliminary matter, California Civil Procedure Code section 703.070 allows the
court to determine “the extent to which the otherwise exempt property is to be applied to
the satisfaction of [a] judgment.” Cal. Civ. Proc. Code § 703.070(c) (emphasis added).
Here, Sheinkopf admittedly does not have a judgment; the Fee Award Ruling is on appeal.
Reply, Docket No. 175, at 6:21. Before Sheinkopf can proceed further, she must obtain a
judgment from the Superior Court.
Sheinkopf must then meet the remaining requirements of section 703.070 to obtain
a determination from the Superior Court that exempt property may be used to satisfy her
judgment. She may also seek a determination of bankruptcy nondischargeability from the
Superior Court when she reduces her Fee Award Ruling to judgment. It is appropriate for
the Superior Court to make the determination that its order is one for spousal support, and
thus not dischargeable. See In re Siragusa, 27 F.3d 406, 408 (9th Cir. 1994) (“[T]he
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divorce court had jurisdiction to determine that the payments to [the debtor’s ex-wife] were
in the nature of alimony, and therefore not dischargeable under § 523(a)(5).”); In re Menk,
241 B.R. 896, 905 (9th Cir. BAP 1999) (“This conclusion squares with the fact that §
523(a)(3)(B) nondischargeability actions can be commenced ‘at any time,’ including after
bankruptcy and in a nonbankruptcy court.”).
As noted above, the Bankruptcy Code provides that debts for a domestic support
obligation or debts to a spouse, former spouse, or child of the debtor in connection with a
divorce decree or other court order are excepted from a debtor's discharge. 11 U.S.C. §
523(a)(5) and (15). These debts are non-dischargeable automatically, and Sheinkopf
would not need to file an adversary complaint in bankruptcy court to preserve
nondischargeability and seek payment from the Debtor. See 11 U.S.C. § 523(c)(1); In re
Couture, 2014 WL 293775, at *2 (Bankr. D. Mont. Jan. 27, 2014)(“debts for a domestic
support obligation or in connection with a divorce decree are excepted from discharge by
statute, without the need for an adversary proceeding or trial”).
CONCLUSION
For the foregoing reasons, the objections of creditors Sheinkopf and Shoeps to the
Debtor's second amended homestead exemption are OVERRULED.
The court will enter a separate order consistent with this memorandum decision.
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Date: December 23, 2014
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