Ninth Circuit Rejects Chapter 7 Trustee Claims for Home Sale But Not Rental Income - In re Jacobson

April 30, 2012

Vincent Howard and our Moreno Valley individual bankruptcy lawyers were interested to see a partial victory for a Chapter 7 bankruptcy filer whose trustee challenged exemptions for certain real estate assets. In In re Jacobson, the Ninth U.S. Circuit Court of Appeals found Myrna Jacobson was not required to relinquish rental income from property, and the property itself, owned by her husband, non-debtor Donald Jacobson. However, the court did find that Jacobson should turn over proceeds from the sale of her homestead even though it was jointly owned with Donald. In so ruling, the Ninth Circuit reversed in part and upheld in part its Bankruptcy Appellate Panel and the bankruptcy court, both of which rejected all claims in the trustee's adversary proceedings.

Jacobson's bankruptcy stems from lengthy litigation between the Jacobsons and a man named Larry Cunningham, who sued them over the construction and sale of a beach home in Orange County. Cunningham ultimately won his case in 2000; he won enforcement of the judgment in 2006, by which time the debt had grown to $1.3 million. To stay a judicial sale of her home in Los Alamitos, Myrna filed the instant Chapter 7 bankruptcy, but the home was ultimately sold anyway. The Jacobsons received a portion of the proceeds as their homestead exemption. However, they did not reinvest the proceeds in a new homestead within six months, as required to maintain the exemption under California law. In 2007, the bankruptcy trustee filed an adversary proceeding seeking that money, as well as a rental home in Los Alamitos, which was only in Donald's name, and the rental income from that property. The bankruptcy court denied all claims, finding the rental property was Donald's alone and that the homestead exemption was fixed at the time of filing. The BAP affirmed.

The Ninth Circuit agreed as to the rental property, but found no homestead exemption could be applied to the proceeds of the home's sale. When that sale went through, the Jacobsons received $150,000 per the California homestead exemption. As the opinion noted, however, they failed to reinvest that money in a new home within six months of receiving it. Under California law, the court said, this meant they had lost the money's exempt status. While bankruptcy exemptions are fixed at the time of the filing, the court said, this includes all applicable state laws, including the law putting an expiration date on the exemption. Thus, the trustee was free to include that $150,000 in the estate. In so ruling, the court noted that it contradicted a 1990 BAP ruling and a 2007 ruling from the Oregon bankruptcy court, but found them unpersuasive. However, it agreed with the lower courts that the rental property and its income were not available to the court because it is Donald's separate property. Myrna is not estopped from claiming this despite Donald's reliance on her to run his affairs, the court said; Donald is free to continue owning property.

At Howard Law, P.C., our Dana Point personal bankruptcy attorneys would be interested in seeing more about the issue of expiration of the homestead proceeds. Particularly while the housing market remains less than robust, there are a lot of reasons to delay reinvesting homestead proceeds in a new home. (And in any case, the $150,000 was likely to be a fraction of the price of the home the Jacobsons lost.) It's possible that the law allows reinvestment in something other than a home, but the Ninth didn't discuss what investments are acceptable. It's also worth asking whether the purpose of a homestead exemption is served by putting a deadline on it, a question asked by the earlier cases the Ninth disregarded. The BAP found that enforcing the deadline denied debtors the fresh start that is the point of bankruptcy; the Oregon bankruptcy court said it throws debtors' rights into limbo. Vincent Howard and our West Covina consumer bankruptcy lawyers would welcome more discussion of the issue.

If you're facing foreclosure or another serious threat to your property and you're considering bankruptcy as a way to handle it, you should call Vincent Howard and the experienced attorneys at Howard Law. For a consultation or to learn more, you can call toll-free at 1-800-872-5925 or send us a message through our website.

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