Marylon M. Boyd

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 08-47463 TG
Chapter 13
MARYLON BOYD,
Debtor.
____________________________/
MEMORANDUM OF DECISION
An evidentiary hearing was conducted on June 17, 2009 on certain
issues raised by the objection to confirmation of the above-captioned
debtor’s 	(the 	“Debtor”) 	chapter 	13 	plan 	(the 	“Plan”) 	filed 	by 	the
City and County of San Francisco (the “City”), an unsecured creditor.
Appearances 	were 	stated 	on 	the 	record. 	At 	the 	conclusion 	of 	the
hearing, 	the 	Court 	took 	the 	matter 	under 	submission. 	The 	Court’s
findings and conclusions are set forth below.
DISCUSSION
A. 	SUMMARY OF FACTS AND PROCEDURAL HISTORY
In 1994, the Debtor married Preston DuFauchard (“DuFauchard”).
Both the Debtor and DuFauchard are attorneys. 	Since their marriage,
the Debtor and DuFauchard have maintained separate bank accounts and
paid 	for 	their 	own 	expenses. 	However, 	they 	have 	never 	executed 	a
Signed: August 04, 2009
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
August 05, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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written agreement transmuting their community property into separate
property.
In 	1996, 	DuFauchard 	purchased 	a 	residence 	located 	at 	12300
Elvessa St., Oakland, California (the “House”) where the Debtor and
DuFauchard reside. 	The purchase price was $280,000. 	DuFauchard used
his 	separate 	property 	savings 	to 	make 	the 	$14,000 	down 	payment 	and
took out a loan to pay the balance of the purchase price. 	He was the
sole signatory on the promissory note. 	The House was placed in his
name 	alone. 	The 	Debtor 	executed 	an 	interspousal 	deed, 	disclaiming
any interest in the House. 	She executed similar deeds later when the
deed 	of 	trust 	was 	refinanced 	and 	when 	DuFauchard 	placed 	an 	equity
line 	of 	credit 	on 	the 	House 	as 	a 	junior 	lien. 	DuFauchard 	has 	made
all the mortgage payments as well as all the other payments related
to the House expenses from his income.
In 2004, the Debtor, as executor for the estate of her deceased
son, 	filed 	a 	lawsuit 	against 	the 	City 	and 	County 	of 	San 	Francisco
(the 	“City”), 	alleging 	that 	the 	City 	had 	used 	excessive 	force,
leading 	to 	her 	son’s 	death. 	The 	Debtor 	did 	not 	prevail 	in 	the
action, and in 2008 the City was awarded a judgment for costs against
her 	for 	approximately 	$120,000 	(the 	“Judgment”). 	The 	Judgment 	is
currently on appeal to the Ninth Circuit Court of Appeals.
After entry of the Judgment, the City began enforcement efforts,
including 	efforts 	to 	enforce 	the 	Judgment 	against 	the 	House. 	In
response, 	the 	Debtor 	filed 	a 	chapter 	13 	petition. 	This 	case 	was
quickly dismissed due to certain technical deficiencies. 	The Debtor
then 	filed 	a 	second 	chapter 	13 	petition, 	commencing 	the 	above-
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1The “best interests” test requires the Plan to make payments
to unsecured creditors with a present value equal to the payments
they would receive in a chapter 7 liquidation. 	See 11 U.S.C. §
1325(a)(4).
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captioned 	case. 	The 	City 	filed 	a 	motion 	to 	dismiss 	based 	on 	the
Debtor’s 	failure 	to 	list 	DuFauchard’s 	income 	on 	Schedule 	I, 	among
other 	things. 	This 	motion 	was 	withdrawn 	when 	the 	Debtor 	filed 	an
amended Schedule I.
The 	Debtor 	filed 	the 	Plan 	on 	the 	petition 	date. 	The 	Plan
proposed to pay the chapter 13 trustee $500 per month for 60 months
for a total of $30,000. 	The City filed an objection to confirmation
on 	the 	ground, 	among 	other 	things, 	that 	the 	Plan 	did 	not 	meet 	the
“best 	interests” 	test. 1 	The 	City 	asserted 	that, 	according 	to 	its
calculations, the Plan would pay only approximately 11.6 percent of
its claim. 	It contended that the bankruptcy estate had an interest
in 	the 	House 	and 	that 	the 	House 	had 	been 	undervalued 	in 	the
Schedules. 	It 	claimed 	that, 	if 	the 	Debtor’s 	interest 	in 	the 	House
were liquidated, unsecured creditors could be paid in full.
B. 	STATEMENT OF ISSUES AND LEGAL ANALYSIS
1. 	Is the House Property of the Estate?
Under California law, there is a presumption that real property
acquired during marriage is community property. 	See Cal. Fam. Code
§ 760. 	However, property purchased with the separate property funds
of 	one 	spouse 	is 	ordinarily 	the 	separate 	property 	of 	that 	spouse.
See In re Marriage of Mix, 14 Cal. 3d 604, 610 (1975); In re Marriage
of Aufmuth, 89 Cal. App. 3d 446, 454 (1979). 	Here, the evidence is
undisputed 	that 	DuFauchard 	purchased 	the 	House 	with 	his 	separate
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2Under California law, income from either spouse’s personal
services is community property. 	State Board of Equalization v.
Woo, 82 Cal. App. 4 th 481, 483 (2000). 	The Debtor and DuFauchard
attempted to persuade the Court that they had agreed to keep their
income as their separate property. The Court believed them.
However, under California law, their agreement was not effective
law because it was not in writing. 	See Cal. Fam. Code § 852(a).
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property 	funds 	and 	that 	he 	was 	the 	sole 	person 	obligated 	for 	the
promissory note evidencing the debt for the balance of the purchase
price. 	Moreover, the Debtor repeatedly executed deeds disclaiming
any interest in the House. 	This evidence compels the conclusion that
the House at all times remained DuFauchard’s separate property.
However, 	California 	law 	holds 	that, 	when 	community 	property
income 	is 	used 	to 	pay 	down 	the 	principal 	on 	a 	debt 	secured 	by 	real
property that is the separate property of one spouse, the community
obtains 	an 	interest 	in 	the 	real 	property 	to 	the 	extent 	of 	the
community 	property 	contributions 	plus 	a 	proportionate 	share 	in 	any
appreciation. 2 	The 	proportionate 	share 	in 	the 	appreciation 	is
determined 	by 	comparing 	the 	amount 	of 	the 	community 	property
contributions with the amount of the separate property contributions.
The 	separate 	property 	contributions 	include 	both 	the 	separate
property 	down 	payment 	and 	any 	remaining 	balance 	on 	the 	promissory
note for which the one spouse is solely liable. 	See In re Marriage
of 	Moore, 	28 	Cal. 	3d 	366, 	373-74 	(1980) 	and 	In 	re 	Marriage 	of
Marsden, 	130 	Cal. 	App. 	3d 	426 	(1982)(hereinafter 	“Moore-Marsden”).
Moreover, 	the 	entire 	community 	property 	interest 	in 	the 	House 	is
property 	of 	the 	Debtor’s 	bankruptcy 	estate, 	not 	just 	the 	Debtor’s
one-half share of that interest. 	See 11 U.S.C. § 541(a)(2).
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26 	3Although there is no controlling precedent on this issue, the
bulk of the reported cases that the Court could find concluded that
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The 	evidence 	presented 	established 	that 	DuFauchard 	made 	a
$14,000 down payment for the House from his separate property funds
and 	that 	there 	was 	a 	$197,000 	balance 	on 	the 	promissory 	note 	for 	a
total of $211,000 in separate property contributions. 	The evidence
presented 	established 	that 	the 	community 	property 	contributions,
consisting 	of 	payments 	on 	the 	promissory 	note 	from 	DuFauchard’s
income, totalled $69,000. 	The total of the contributions, from both
community and separate property, is $280,000. 	The community property
contributions 	represent 	24.6 	percent 	of 	this 	amount. 	Thus, 	the
bankruptcy 	estate 	is 	entitled 	to 	reimbursement 	of 	the 	$69,000 	in
contributions plus 24.6 percent of any appreciation.
It is undisputed that the original purchase price was $280,000.
However, the current value of the House was a hotly contested issue.
Both 	the 	Debtor 	and 	the 	City 	called 	appraisers 	as 	expert 	witnesses
and introduced their appraisal reports into evidence. 	The Debtor’s
appraiser 	appraised 	the 	House 	as 	having 	a 	value 	of 	$430,000 	as 	of
March 17, 2009. 	The City’s appraiser appraised the House as having
a value of $710,000 as of December 16, 2008. 	The City contended that
the 	earlier 	date, 	which 	was 	the 	date 	the 	bankruptcy 	petition 	was
filed, was the appropriate one to use.
The 	City 	contended 	the 	petition 	date 	was 	the 	proper 	date 	for
valuation. 	The 	Court 	has 	researched 	the 	issue 	of 	the 	appropriate
date 	to 	use 	for 	valuation 	purposes. 	It 	concludes 	that 	the 	proper
date is the hearing date of June 17, 2009. 3 	Because neither appraiser
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either the hearing date or a later date, such as the date the plan
was confirmed or the date the confirmation became final, as the
appropriate date for valuation. 	See In re Blobaum, 34 B.R. 962,
964 (Bankr. W.D.Mo. 1983); In re Fulcher, 15 B.R. 446, 448 (Bankr.
D.Kan. 1981); see also In re Crain, 243 B.R. 75, 85 (Bankr. C.D.
Cal. 1999)(holding that the effective date of the plan was the
appropriate date but using the hearing date for practical reasons);
accord See In re Hopwood, 124 B.R. 82, 85 (E.D. Mo. 1991)(affirming
the bankruptcy court).
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used this date as the date for his valuation, the Court is forced to
speculate 	to 	some 	extent 	about 	the 	value 	of 	the 	House 	as 	of 	the
hearing date.
The Court found the City’s appraiser’s testimony and report more
persuasive. 	There is a well known adage that one picture is worth a
thousand 	words. 	A 	comparison 	of 	the 	photographs 	of 	the 	House 	with
the photographs of the Debtor’s appraiser’s comparables persuaded the
Court 	that 	the 	valuation 	placed 	on 	the 	House 	by 	the 	Debtor’s
appraiser 	was 	substantially 	too 	low. 	As 	a 	consequence, 	the 	Court
will use the City’s $710,000 appraisal as a starting point.
The 	Debtor’s 	appraiser 	testified 	that 	property 	values 	in 	the
general area were declining during the relevant period by as much as
thirty 	percent. 	However, 	the 	Court 	was 	persuaded 	by 	the 	City’s
appraiser’s 	testimony 	that 	this 	figure 	was 	skewed 	because 	the 	area
used 	to 	calculate 	it 	was 	too 	large. 	While 	many 	areas 	were
experiencing substantially declining values, the values of the area
where the House was located were dropping only slightly.
Based on this testimony, the Court concludes that the $710,000
figure 	should 	be 	reduced 	by 	five 	percent 	to 	account 	for 	the 	six
months that elapsed between the effective date of the valuation and
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the hearing date. 	Thus, the Court finds that the value of the House
on the hearing date was $674,500 ($710,000 less $35,500). 	This means
that 	the 	House 	has 	appreciated 	in 	value 	by 	$394,500 	($674,500 	less
$280,000). 	The 	estate’s 	interest 	in 	the 	appreciation 	is 	24.6
percent of this amount or $97,047. 	However, the estate’s interest in
the 	House 	also 	includes 	the 	$69,000 	in 	community 	property
contributions 	for 	a 	total 	of 	$166,047. 	Since 	the 	Court 	has
determined that the value of the House is $674,500, this represents
24.6 percent of its value.
In a chapter 7 case, the trustee would probably be able to sell
the 	House 	as 	co-owned 	property 	so 	as 	to 	realize 	the 	value 	of 	the
estate’s 	interest 	for 	the 	benefit 	of 	creditors. 	See 	11 	U.S.C. 	§
363(h). 	However, 	the 	liquidation 	proceeds 	would 	be 	reduced 	by 	any
liens 	against 	the 	House 	and 	by 	the 	costs 	of 	sale 	as 	well 	as 	other
administrative 	expenses. 	Evidence 	was 	presented 	that 	the 	liens
against the House total $413,000. 	The Court estimates that the sale
proceeds would be further reduced by costs of sale which are normally
calculated as eight percent of the sale price or $53,960. 	Thus, the
net sale proceeds would be $674,500 less $466,960 or $207,540.
However, the bankruptcy estate would not be entitled to take its
$166,047 	share 	of 	the 	appreciation 	from 	the 	net 	sale 	proceeds,
effectively requiring DuFauchard’s separate property interest to bear
the 	entire 	burden 	of 	the 	liens 	and 	costs 	of 	sale. 	Instead, 	the
estate’s $166,047 interest must be compared to the current value to
determine the percentage of the net sale proceeds to which the estate
would 	be 	entitled. 	As 	stated 	above, 	$166,047 	equals 	approximately
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24.6 percent of the $674,500 current value of the House. 	Thus, the
bankruptcy estate would be entitled to claim only 24.6 percent of the
$207,540 	in 	net 	sale 	proceeds 	or 	$51,054.84. 	From 	this 	amount,
administrative 	expenses 	would 	be 	deducted, 	including 	the 	trustee’s
fees and undoubtedly also legal expenses for litigating the
adversary 	proceeding 	seeking 	to 	sell 	co-owned 	property. 	The 	Court
estimates 	that 	these 	fees 	and 	expenses 	would 	be 	at 	least 	$7,500.
Thus, in chapter 7 the unsecured creditors would be likely to receive
$43,554.84.
The 	Plan 	proposes 	to 	pay 	the 	chapter 	13 	trustee 	only 	$30,000
over 	60 	months, 	which 	is 	less 	than 	the 	unsecured 	creditors 	would
receive in a chapter 7 case according to this calculation. 	Moreover,
the 	present 	value 	of 	the 	proposed 	payments 	is 	not 	equal 	to 	even
$30,000 and there is no assurance that the unsecured creditors would
receive 	even 	$30,000 	in 	payments. 	As 	a 	result, 	the 	objection 	to
confirmation 	of 	the 	Plan 	must 	be 	sustained. 	Unless 	the 	Debtor 	is
able to modify the Plan to satisfy this legal requirement, the case
will have to be dismissed or converted to chapter 7 of the Bankruptcy
Code.
CONCLUSION
The 	City’s 	objection 	to 	confirmation 	will 	be 	sustained. 	The
City 	is 	directed 	to 	submit 	a 	proposed 	form 	of 	order 	in 	accordance
with this decision.
END OF DOCUMENT
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COURT SERVICE LIST
Marylon M. Boyd
11230 Elvessa Street
Oakland, CA 94605
Fayedine Coulter
Law Offices of Fayedine Coulter
1425 Leimert Bl., #306
Oakland, CA 94602
David J. Cook
Cook Collection Attorneys
165 Fell St.
San Francisco, CA 94102
Martha G. Bronitsky
P.O. Box 5004
Hayward, CA 94540-5004
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