Equitable Estoppel vs. Right to Amend Schedules

Posted by NCBRC - June 29, 2017

Where new facts arose to support a claim for homestead exemption and the debtor did not make any misrepresentation upon which the trustee reasonably relied, the bankruptcy court erred in disallowing the exemption on the basis of equitable estoppel. Lua v. Miller (In re Lua), No. 15-56814 (9th Cir. June 27, 2017) (unpublished).

Rosalva Lua  claimed a homestead exemption in her initial bankruptcy schedules, removed the claim in her First Amended Schedules, and reasserted it in her Second Amended Schedules approximately three years later. The bankruptcy court sustained the trustee’s objection to the exemption on the basis of equitable estoppel. The district court affirmed.

A party claiming equitable estoppel must provide evidence of: “(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.” The bankruptcy court found that when Ms. Lua removed her exemption claim in her First Amended Schedules, she represented to the trustee that she would not assert the exemption and that the trustee relied on that representation by making efforts over the next three years to maximize the value of the property for the benefit of the estate.

The Ninth Circuit disagreed saying: “The First Amended Schedules cannot form the basis of an estoppel because they set forth all of the existing facts known to Lua. Those same facts were readily available to the Trustee, and the Trustee was fully aware of them.” Moreover, the trustee knew that a debtor has a right to amend her schedules at any time before a case is closed and, therefore, could not reasonably have relied on any expectation that Ms. Lua would not amend. Nor was there any indication that Ms. Lua knew, when she filed her First Amended Schedules, that she would amend a second time. Finally, the court noted that Ms. Lua’s second amendment to her schedules was prompted by an order by the court, made three years after her First Amended Schedules and at the request of the trustee, that the property in question was 100% community property.

The court reversed and remanded.

Judge Callahan dissented on the basis that, applying the abuse of discretion standard applicable to review of a finding of equitable estoppel, the appellate court could not reverse without a “clear and definite conviction that the bankruptcy court committed clear error in judgment.” The dissent was persuaded that the bankruptcy court did not commit reversible error by the fact of Ms. Lua’s removal of the homestead exemption claim in her First Amended Schedules and her failure to intervene when the trustee commenced to expend effort over the next three to maximize the value of the property for the benefit of the estate.

Lua 9th Dissent Lua 9th Opinion

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