Automatic Homestead Exemption Applies to Trust Interest

Posted by NCBRC - April 15, 2021

A debtor may claim the California automatic homestead exemption with respect to property where he resides even though the property was owned by a trust created by his father and he and his brother were equal beneficiaries of the trust. In re Nolan, 2021 WL 528679, No. 20-1496 (C.D. Cal. 2021). The Ninth Circuit affirmed in Anderson v. Nolan (In re Nolan), No. 21-55204 (9th Cir. Feb. 3, 2022) (unpublished).

The debtor was trustee of the living trust which owned the property where he lived. In July, 2019, the debtor’s brother sought a ruling from the probate court removing the debtor as trustee and appointing a new trustee. While that action was pending, the debtor filed for chapter 7 bankruptcy. He claimed a homestead exemption in the residence under California law. The chapter 7 trustee objected to the debtor’s claimed homestead exemption and the bankruptcy court overruled the objection.

On appeal, the district court noted that applicable California exemption law contemplates both declared and automatic homestead exemptions. “The automatic homestead exemption is available when a party has continuously resided in a dwelling from the time that a creditors’ lien attaches until a court’s determination in the forced sale process that the exemption does not apply.” The court further noted that a claimed exemption is presumptively valid.

The trustee argued that the probate exception precluded the bankruptcy court from interfering with property in the state’s custody. For that exception to apply, however, the probate court must have exclusive jurisdiction over the property. A federal court retains jurisdiction to determine the rights of creditors against the probate estate so long as it does not interfere with probate proceedings. The court ultimately concluded that the trustee waived this argument as he “did not sufficiently argue the point during the Bankruptcy court proceedings, during his Objection pleadings, or during his Opening Brief. Appellant’s objection to Appellee’s claimed exemption generally references the relevant facts relating to the probate action that was ongoing at the time of the Bankruptcy Court case. . . . Otherwise, the Appellant’s Reply does not provide legal analysis to support its applicability.”

The court next turned to whether the debtor’s “beneficiary interest in the Trust can allow him to claim a homestead exemption in the Property.” That exemption protects a debtor from forced sale of his residence. In the bankruptcy context, the date of the petition is considered both a “hypothetical levy” against the property as well as the “operative date of the exemption.” The court emphasized that the automatic homestead exemption does not require ownership of the property but instead, requires that the debtor reside on the property from the date the lien attaches until such time as the exemption is found inapplicable.

The court found that, while California courts have not decided the issue of whether a debtor may have an automatic homestead exemption in property where his interest in that property is as a beneficiary to a trust, the state courts apply a liberal standard to application of the exemption. Against this backdrop, the court found that the debtor’s beneficiary interest and the fact that he was living on the property were sufficient for the court to find that the automatic homestead exemption applied.

Nolan CD Cal 2021

Nolan 9th Cir Feb 2022


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