The debtor’s unfair manipulation of her state homestead exemption claim justified denial of the claim under principles of equitable estoppel. Lua v. Miller (In re Lua), No. 15-04026 (C.D. Cal. Nov. 10, 2015).
In her initial petition Ms. Lua claimed a homestead exemption in property she co-owned with her non-filing spouse. In amended schedules the debtor removed the claimed exemption stating that her only interest in the property was a potential community interest out of a divorce proceeding. The trustee explored the value of the property and determined that Ms. Lua in fact had an interest that would suffice to pay off unsecured creditors in full. The trustee commenced discussions with Ms. Lua and her husband to liquidate the asset for the benefit of the estate. Negotiations failed and the trustee filed an adversary proceeding against the husband to obtain an accounting. Despite default judgment against him, Mr. Lua failed to provide the information and the trustee moved for an order declaring the entire property community property which could then be administered by the estate. In the meantime, the trustee and the husband reached an agreement whereby the trustee would sell the property and divide the proceeds between the husband and Ms. Lua. Ms. Lua took various measures to thwart the sale of the property. She also again claimed an exemption in the property under the state homestead exemption provision. Application of the exemption would preclude any recovery by unsecured creditors. The bankruptcy court sustained the chapter 7 trustee’s objection to the homestead exemption under principles of equitable estoppel.
The court noted initially that Law v. Siegel, 134 S. Ct. 1188 (2014), which held that section 105(a) does not empower a bankruptcy court to deny an exemption for reasons not otherwise specified in the Code, does not affect this case. (Quoting: “It is of course true that when a debtor claims a state-created exemption, the exemption’s scope is determined by state law, which may provide that certain types of debtor misconduct warrant denial of the exemption.” Law v. Siegel, 134 S. Ct. 1188, 1196-97 (2014)). Ms. Lua did not contest the non-applicability of Law.
The court turned to whether equitable estoppel was properly applied to the facts of the case. “To invoke equitable estoppel under California law, a party must show: ‘(a) a representation or concealment of material facts; (b) made with knowledge, actual or virtual, of the facts; (c) to a party ignorant, actually and permissibly, of the truth; (d) with the intention, actual or virtual, that the ignorant party act on it; and (e) that party was induced to act on it.’ Simmons v. Ghaderi, 44 Cal. 4th 570, 584 (2008).”
Walking through these considerations, the court found Ms. Lua’s initial failure to claim the property as exempt was a misrepresentation as to her actual intent. Her continued failure to claim her ownership interest and her right to the exemption despite years of effort on the part of the trustee to value the property constituted concealment. Requisite knowledge of the facts was evidenced by the debtor’s initial exemption claim. Her assertion that it was only later that she learned that she had a community interest in the property rendering the exemption applicable was a “mistake” that should not work to the detriment of the trustee and creditors. Nor did the court credit Ms. Lua’s assertion that she did not know of her entitlement to the exemption until the property was sold and trustee divided the funds. In fact, the debtor knew for approximately two years, when the trustee filed the adversary complaint, that she had some interest in the property. The court found intent where Ms. Lua “took the wild card exemption instead of the homestead exemption, clearly putting the Property up for grabs and intending that the Trustee take her best shot at the Property, and not her personal property. . . . The Debtor announced that she was not taking a homestead exemption, watched the Trustee spend three years and considerable resources trying to extract value from the Debtor’s only non-exempt assets, and now claims that the Trustee should not have acted on the Debtor’s assertion that she was not taking a homestead exemption.” In contrast, the court found that the trustee did not know and had no reason to know that the debtor would make a belated claim for the exemption. The trustee’s efforts and persistence were sufficient evidence of reliance.
Thus, the court concluded that the bankruptcy court did not err in finding Ms. Lua’s extended period of silence in the face of concerted and costly efforts by the trustee to wring value out of the property for the benefit of creditors merited a finding that she should be equitably estopped under state law from claiming her homestead exemption.
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