Court Opinion

ID: 2759511
Source: CourtListenerOpinion
Date Created: 2014-12-11 00:01:16.374349+00
Date Added: 2024-06-11T10:38:08.347355
License: Public Domain

FILED
                                                            DEC 10 2014
                                                        SUSAN M. SPRAUL, CLERK
 1                                                        U.S. BKCY. APP. PANEL
                                                          OF THE NINTH CIRCUIT

 2
 3                   UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                             OF THE NINTH CIRCUIT
 5   In re:                        )      BAP Nos.    CC-14-1050-KiTaD
                                   )                  CC-14-1059-KiTaD
 6   EDWARD E. ELLIOTT,            )                  (Consolidated)
                                   )
 7                  Debtor.        )      Bk. No.     SV 11-23855-VK
                                   )
 8                                 )
                                   )
 9   EDWARD E. ELLIOTT,            )
                                   )
10                  Appellant,     )
                                   )            O P I N I O N
11   v.                            )
                                   )
12   DIANE C. WEIL, Chapter 7      )
     Trustee,                      )
13                                 )
                    Appellee.      )
14   ______________________________)
15                  Argued and Submitted on October 23, 2014,
                               at Malibu, California
16
                            Filed - December 10, 2014
17
               Appeal from the United States Bankruptcy Court
18                 for the Central District of California
19       Honorable Victoria S. Kaufman, Bankruptcy Judge, Presiding
20
21   Appearances:     Andrew E. Smyth, Esq. of Smyth Law Office argued
                      for appellant, Edward E. Elliott; Alla Tenina, Esq.
22                    of Tenina Law, Inc. argued for appellee, Diane C.
                      Weil, Chapter 7 Trustee.
23
24   Before:   KIRSCHER, TAYLOR and DUNN, Bankruptcy Judges.
25
26
27
28
 1   KIRSCHER, Bankruptcy Judge:
 2
 3        Debtor Edward E. Elliott (“Elliott”) appeals an order
 4   sustaining the objection of appellee, chapter 71 trustee Diane C.
 5   Weil (“Trustee”), to his claimed homestead exemption under CAL.
 6   CIV. PROC. CODE § 704.730(a)(3).   The bankruptcy court sustained
 7   Trustee’s objection on the basis that Elliott had claimed the
 8   exemption in bad faith.   Elliott contends that despite his
 9   misconduct, he is nevertheless entitled to the exemption due to an
10   intervening change in the controlling law while this appeal was
11   pending.
12        We conclude that Law v. Siegel, 134 S. Ct. 1188 (2014), has
13   abrogated Ninth Circuit law such that unless statutory power
14   exists to do so, a bankruptcy court may not deny a debtor’s
15   exemption claim or bar a debtor’s exemption claim amendment on the
16   basis of bad faith or of prejudice to creditors.     Martinson v.
17   Michael (In re Michael), 163 F.3d 526, 529 (9th Cir. 1998)
18   (adopting test set forth in Doan v. Hudgins (In re Doan), 672 F.2d
19   831, 833 (11th Cir. 1982)).    However, a statutory basis may exist
20   to deny Elliott’s claimed homestead exemption.     We VACATE and
21   REMAND for further proceedings by the bankruptcy court.2
22
23
          1
             Unless specified otherwise, all chapter, code and rule
24   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
     the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
25
          2
             We exercised our discretion to review documents that were
26   electronically filed in the bankruptcy court but were not included
     in Elliott’s excerpts of the record. See O’Rourke v. Seaboard
27   Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957–58 (9th Cir.
     1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293
28 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

                                        -2-
 1                I.   FACTUAL BACKGROUND AND PROCEDURAL HISTORY
 2           Elliott filed a chapter 7 bankruptcy case on December 1,
 3   2011.    On his bankruptcy petition, Elliott listed his address as
 4   Hiawatha Street.     On Schedules A and D, Elliott did not list any
 5   real property in which he had an interest or list any real
 6   property in which creditors held secured claims.     Elliott did not
 7   claim entitlement to a homestead exemption in his Schedule C and
 8   he did not list any ownership interest in an incorporated business
 9   on Schedule B.     Additionally, Elliott omitted certain judgment
10   lien creditors (the “Judgment Creditors”) who obtained a judgment
11   against him in 2006 for fraud and negligent misrepresentation.
12           At the § 341(a) meeting of creditors, Elliott confirmed his
13   address as Hiawatha Street and claimed that his bankruptcy
14   petition, schedules and statement of financial affairs were true
15   and complete.     Furthermore, Elliott asserted that he did not own
16   any real property and had not transferred or given away anything
17   of value in the last four years.
18           Based on the information disclosed in Elliott’s bankruptcy
19   schedules and corresponding testimony, Trustee issued a “No
20   Distribution” report.     Elliott was granted a discharge on March 8,
21   2012, and the bankruptcy case was closed on March 13, 2012.
22           On March 26, 2012, Lee Wong Investments, Inc. (“LWI”)
23   transferred by quitclaim deed real property located in Los Angeles
24   (the “Buckingham Property”) to Elliott as a gift.     Elliott does
25   not dispute that LWI is a Nevada corporation which he organized
26   and controls.
27           Following this transaction, Elliott sent a letter to counsel
28   for the Judgment Creditors, who were never informed of the

                                        -3-
 1   bankruptcy, stating that he acquired the Buckingham Property after
 2   the bankruptcy and demanding that their judicial liens be removed.
 3   This demand triggered an investigation by the Judgment Creditors,
 4   which revealed the history of Elliott’s continuous interest in the
 5   Buckingham Property through numerous sophisticated transfers of
 6   title.   The Buckingham Property was first transferred from Elliott
 7   to 1019 South Central Associates Ltd. (“S. Central”), a business
 8   that, according to information Trustee received from the
 9   California Secretary of State, was organized by the son of
10   Elliott’s deceased partner.   This initial transfer occurred on
11   August 14, 2006, just a few months after the judgment was entered
12   against Elliott in the state court fraud case.   Then, on February
13   13, 2007, S. Central transferred the Buckingham Property to LWI,
14   the corporation organized and controlled by Elliott.3   Finally, on
15   March 26, 2012, the Buckingham Property was transferred back to
16   Elliott in his individual capacity, following his discharge.
17        When the Judgment Creditors discovered Elliott’s continuous
18   interest in the Buckingham Property, they moved to reopen the
19   bankruptcy case.   The bankruptcy court granted their motion and
20   ordered that the case be reopened.
21        Nearly one year after the bankruptcy case was reopened,
22   Elliott amended his schedules to disclose his interest in the
23   Buckingham Property.   He valued the property at $360,000 and
24
25        3
             In her objection to Elliott’s homestead exemption, Trustee
     provided records from the Nevada Secretary of State as evidence of
26   Elliott’s ownership interest in LWI, the company which held title
     to the Buckingham Property on the petition date. These records
27   showed that when the Buckingham Property was transferred from S.
     Central to LWI, Elliott was LWI’s president, treasurer and
28   director.

                                     -4-
 1   indicated that Bank of America held a $120,826 secured claim
 2   against it.   He also claimed a homestead exemption for the
 3   Buckingham Property under CAL. CIV. PROC. CODE § 704.730(a)(3).
 4        Trustee objected to Elliott’s claimed homestead exemption on
 5   the basis of bad faith.   She outlined the pattern of affiliate
 6   transfers of the Buckingham Property to advance the proposition
 7   that Elliott never really relinquished control of it, but instead
 8   utilized these transfers to shield it from creditors, Trustee and
 9   the bankruptcy court.
10        In response, Elliott filed declarations from his friend
11   Juanita A. Jehdian (“Jehdian”) and his attorney Andrew E. Smyth
12   (“Smyth”).    Jehdian asserted that she currently lived at the
13   Buckingham Property with Elliott.      Although she admitted not
14   living there on the petition date, Jehdian claimed that she had
15   frequently visited the Buckingham Property during the month of
16   December 2011, and in doing so, knew that Elliott had “resided at
17   the [Buckingham Property] in December 2011.”     Smyth declared that
18   Elliott “has a homestead exemption on file.”     In support, Smyth
19   attached a copy of a homestead declaration filed by Elliott with
20   the state of California on October 18, 2005, where he claimed as a
21   declared homestead the Buckingham Property.
22        In reply, Trustee refuted Elliott’s suggestion that the 2005
23   homestead declaration protected his entitlement to a homestead
24   exemption.    Specifically, Trustee argued that because Elliott did
25   not hold title to the Buckingham Property on the petition date, he
26   could not claim the homestead exemption.     Thus, Trustee maintained
27   that notwithstanding Elliott’s bad faith, the bankruptcy court
28   could nevertheless sustain her objection on the basis that Elliott

                                      -5-
 1   was never entitled to a homestead exemption in the first place.
 2        At the exemption hearing, the bankruptcy court sustained
 3   Trustee’s objection to Elliott’s claimed homestead exemption on
 4   the basis of bad faith.    The court focused on:    Elliott’s failure
 5   to disclose his correct address as the Buckingham Property; his
 6   misleading testimony at the § 341(a) meeting; the suspicious
 7   timing of the property transfer following discharge; and Elliott’s
 8   subsequent amendments claiming a right to exempt a property he had
 9   initially concealed.    The court ultimately concluded that “this is
10   not just about delay.   This is about bad faith of a Debtor who
11   misrepresented where he lives, who waited until after he got
12   discharged to disclose his residency in the property, and this is
13   not an appropriate use of the bankruptcy code.”      Hr’g Tr. (Jan. 9,
14   2014) 3:4-8.
15        The order denying Elliott’s claimed homestead exemption was
16   entered “on the basis that the debtor belatedly claimed the
17   exemption in bad faith.”    Elliott timely appealed.
18                              II.    JURISDICTION
19        The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
20   and 157(b)(2)(B).   An order denying a debtor’s claim of exemption
21   constitutes a final order.       Preblich v. Battley, 181 F.3d 1048,
22   1056 (9th Cir. 1999).   Therefore, we have jurisdiction under 28
23   U.S.C. § 158.
24                                    III.    ISSUES
25   1.   Did the United States Supreme Court’s decision in Law v.
26   Siegel, entered while this appeal was pending, abrogate the
27   bankruptcy court’s “bad faith” basis for denying Elliott’s claimed
28   homestead exemption under CAL. CIV. PROC. CODE § 704.730(a)(3)?

                                             -6-
 1   2.   Bad faith notwithstanding, is there a statutory basis to deny
 2   Elliott’s claimed homestead exemption?
 3                          IV.   STANDARDS OF REVIEW
 4        The right of a debtor to claim an exemption is a question of
 5   law we review de novo.   Kelley v. Locke (In re Kelley), 300 B.R.
6   11, 16 (9th Cir. BAP 2003).    The bankruptcy court’s findings of
 7   fact with respect to a claimed exemption, including a debtor’s
 8   intent, are reviewed for clear error.    Id.   Factual findings are
 9   clearly erroneous if illogical, implausible or without support in
10   the record.    Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th
11   Cir. 2010).
12                                V. DISCUSSION
13   A.   Exemptions generally
14        When a debtor files a bankruptcy petition, all of his assets
15   become property of the estate and may be used to pay creditors,
16   subject to the debtor’s ability to reclaim specified property as
17   exempt.   Schwab v. Reilly, 560 U.S. 770, 774 (2010).   “Exemptions
18   serve to protect and foster a debtor’s fresh start from
19   bankruptcy.”   In re Rolland, 317 B.R. 402, 412-13 (Bankr. C.D.
20 Cal. 2004).
21        A claimed exemption is “presumptively valid.”    Carter v.
22   Anderson (In re Carter), 182 F.3d 1027, 1029 n.3 (9th Cir. 1999).
23   Once an exemption has been claimed, “the objecting party has the
24   burden of proving that the exemptions are not properly claimed.”
25   Rule 4003(c); Gonzalez v. Davis (In re Davis), 323 B.R. 732, 736
26   (9th Cir. BAP 2005).   Initially, this means the objecting party
27   has the burden of production and the burden of persuasion.    In re
28   Carter, 182 F.3d at 1029 n.3.    If the objecting party produces

                                       -7-
 1   evidence to rebut the presumptively valid exemption, the burden of
 2   production then shifts to the debtor to produce unequivocal
 3   evidence to demonstrate the exemption is proper.      Id.   The burden
 4   of persuasion, however, always remains with the objecting party.
 5   Id.
 6         California has opted out of the federal exemption scheme and
 7   permits its debtors only the exemptions allowable under state law.
 8   CAL. CIV. PROC. CODE § 703.130.   Therefore, while “the federal
 9   courts decide the merits of state exemptions, . . . the validity
10   of the claimed state exemption is controlled by the applicable
11   state law.”   In re Kelley, 300 B.R. at 16.    California exemptions
12   are to be broadly and liberally construed in favor of the debtor.
13   In re Gardiner, 332 B.R. 891, 894 (Bankr. S.D. Cal. 2005); In re
14   Rolland, 317 B.R. at 413.
15         Elliott contends he is entitled to apply the homestead
16   exemption provided by CAL. CIV. PROC. CODE § 704.730(a)(3) to the
17   Buckingham Property.    That statute provides in pertinent part that
18   a homestead exemption of $175,000 is allowed if:
19         (3)   [T]he judgment debtor . . . who resides in the
           homestead is at the time of the attempted sale of the
20         homestead any one of the following:
21              (A)   A person 65 years of age or older.
22              (B) A person physically or mentally disabled who as
                a result of that disability is unable to engage in
23              substantial gainful employment. There is a rebuttable
                presumption affecting the burden of proof that a
24              person   receiving   disability   insurance   benefit
                payments under Title II or supplemental security
25              income payments under Title XVI of the federal Social
                Security Act satisfies the requirements of this
26              paragraph as to his or her inability to engage in
                substantial gainful employment.
27
                (C) A person 55 years of age or older with a gross
28              annual income of not more than twenty-five thousand
                dollars ($25,000) or, if the judgment debtor is

                                        -8-
 1                married, a gross annual income, including the gross
                  annual income of the judgment debtor’s spouse, of not
 2                more than thirty-five thousand dollars ($35,000) and
                  the sale is an involuntary sale.
 3
 4   CAL. CIV. PROC. CODE § 704.730(a)(3).    Trustee objected to Elliott’s
 5   claimed exemption both on the grounds that it was made in bad
 6   faith and that his statutory right to the exemption was destroyed
 7   prepetition due to his frequent title transfers with respect to
 8   the Buckingham Property.     The bankruptcy court sustained Trustee’s
 9   objection on the basis of bad faith, but did not address the
10   alternative basis for denying the exemption on statutory grounds.
11   B.   The effect of Law v. Siegel on the bankruptcy court’s denial
          of Elliott’s claimed homestead exemption based on his bad
12        faith misconduct
13        Elliott contends that Law v. Siegel, 134 S. Ct. 1188 (2014),
14   has overruled the bankruptcy court’s authority to deny his
15   homestead exemption on the basis of bad faith.      We agree.
16        Prior to being abrogated by Law v. Siegel, law within the
17   Ninth Circuit gave a bankruptcy court the authority to deny an
18   amended exemption claim if the trustee or another party in
19   interest timely objected and showed, by a preponderance of the
20   evidence, that the debtor had acted in bad faith or that the
21   creditors had been prejudiced.     In re Michael, 163 F.3d at 529
22   (adopting test set forth in In re Doan, 672 F.2d at 833; Tyner v.
23   Nicholson (In re Nicholson), 435 B.R. 622, 630 (9th Cir. BAP
24   2010); Arnold v. Gill (In re Arnold), 252 B.R. 778, 784 (9th Cir.
25   BAP 2000).     Under this line of authority, a debtor’s intentional
26   attempt to conceal estate assets was a recognized basis to support
27   a court’s finding of bad faith and, thus, sufficient grounds to
28   deny a debtor’s claimed exemption.

                                        -9-
 1        When considering whether to deny Elliott’s claimed homestead
 2   exemption, the bankruptcy court properly applied the equitable
 3   principals of the law available at the time to the facts it
 4   believed demonstrated Elliott’s misconduct.    At the exemption
 5   hearing, the court explained that Elliott’s misconduct,
 6   established by his concealment of the Buckingham Property through
 7   omissions in his initial schedules, his misrepresentations at the
 8   § 341(a) meeting and his calculated title transfers, was
 9   sufficient to establish Elliott’s bad faith.    Therefore, the order
10   denying Elliott’s claimed homestead exemption in its entirety was
11   well supported by valid Ninth Circuit precedents.
12        However, Law v. Siegel, entered on March 4, 2014, while this
13   appeal was pending, abrogated our authority to deny exemptions or
14   amendments to exemptions based on a debtor’s bad faith.    There,
15   the Supreme Court considered whether the bankruptcy court could
16   rely on § 105(a) to confer a general equitable power to surcharge
17   the debtor’s $75,000 homestead exemption to partially compensate
18   the estate for over $500,000 in administrative expenses resulting
19   from the debtor’s bad faith conduct, which, in effect, amounted to
20   a denial of his homestead exemption. 134 S. Ct. at 1194-95.   The
21   Supreme Court rejected such a remedy, finding that surcharging an
22   exemption contravened specific provisions in the Bankruptcy Code,
23   and no statutory basis in the Bankruptcy Code allowed for the
24   surcharge on equitable grounds.    Id. at 1195-96.
25        Specifically, the Court noted that the surcharge conflicted
26   with two subsections of § 522:    § 522(b), which allows a debtor to
27   exempt estate property; and § 522(k), which expressly limits the
28   use of exempt property to pay for administrative expenses.       Id. at

                                       -10-
 1   1195.    The Court reasoned that § 522, with its “carefully
 2   calibrated exceptions and limitations,” did “not give courts
 3   discretion to grant or withhold exemptions based on whatever
 4   considerations they deem appropriate,” such as the debtor’s bad
 5   faith conduct.    Id. at 1196.   Furthermore, outside of § 522, the
 6   Code did not confer “a general, equitable power in bankruptcy
 7   courts to deny exemptions based on a debtor’s bad-faith conduct.”
 8   Id.
 9           Although the bankruptcy court’s denial of Elliott’s claimed
10   homestead exemption did not involve precisely the same context of
11   surcharging an exemption to pay administrative expenses as in Law
12   v. Siegel, the same rationale that prohibited the equitable
13   surcharge of exemptions in that case must also apply to the denial
14   of amended exemptions based on Elliott’s misconduct here.     The
15   Code specifically provides that exempt property “is not liable”
16   for the payment of “any [prepetition] debt.”     Id. at 1192 (citing
17   § 522(c)).    The bankruptcy court’s denial of Elliott’s homestead
18   exemption allows the sale proceeds from the claimed homestead to
19   pay prepetition debts.    However, under Law v. Siegel, the court
20   cannot contravene the § 522(c) mandate in this way “absent a valid
21   statutory basis for doing so.”    Id. at 1196.
22           A debtor’s bad faith is not a statutorily created exception
23   to the exemption but rather is a judge-made exception under Ninth
24   Circuit authority.    The Supreme Court has now mandated in Law v.
25   Siegel that “[t]he Code’s meticulous . . . enumeration of
26   exemptions and exceptions to those exemptions confirms that courts
27   are not authorized to create additional exceptions.”    Id.
28   Accordingly, courts can no longer deny claimed exemptions or bar

                                       -11-
 1   amendments to exemptions on the ground that the debtor acted in
 2   bad faith, when no statutory basis exists for doing so.      As such,
 3   despite Elliott’s apparent bad faith, his claimed homestead
 4   exemption must stand absent some statutory basis for its denial.
 5   See also In re Arellano, 517 B.R. 228, 229-32 (Bankr. S.D. Cal.
 6   2014)(containing comprehensive discussion of the impact of Law v.
 7   Siegel).
 8   C.   A statutory basis to deny Elliott’s claimed homestead
          exemption may exist.
 9
10        Although Law v. Siegel no longer allows the bankruptcy court
11   to deny a debtor’s claimed exemption based on bad faith conduct or
12   prejudice to creditors, the Supreme Court has affirmed the
13   principle that a “valid statutory basis” is sufficient grounds to
14   deny a debtor’s homestead exemption. 134 S. Ct. at 1196.   Thus, in
15   the case at bar, state law governing California’s homestead
16   exemption criteria and the Code’s limitations on exemptions may
17   provide another basis to deny Elliott’s claimed homestead
18   exemption in the Buckingham Property.
19        1.    California’s criteria for homestead exemptions
20        Trustee argues that even if the bankruptcy court’s authority
21   to deny Elliott’s homestead exemption based on bad faith has been
22   abrogated, Elliott is still not entitled to the claimed exemption
23   because he did not have legal or equitable title to the Buckingham
24   Property on the petition date.   Specifically, Trustee asserts that
25   Elliott’s declared homestead exemption was destroyed by his
26   conveyance of the Buckingham Property’s title to a third party
27   prepetition.   While we agree with Trustee, Elliott’s loss of the
28   declared homestead is not dispositive of his right to a homestead

                                      -12-
 1   exemption under California law.
 2        Two types of homestead exemptions exist in California:           the
 3   declared homestead exemption governed by Article 5; and the
 4   automatic homestead exemption governed by Article 4.        In re
 5   Cumberbatch, 302 B.R. 675, 678 (Bankr. C.D. Cal. 2003).        The
 6   declared and automatic homestead exemptions are separate and
 7   distinct.    Katz v. Pike (In re Pike), 243 B.R. 66, 69 (9th Cir.
 8   BAP 1999).    While the amount of both homestead exemptions is the
 9   same, the appropriate context for applying each differs.        Id.
10                a.     Declared homestead exemption
11        The protections of an Article 5 declared homestead exemption
12   apply only in the context of voluntary sales.       In re Kelley, 300
13 B.R. at 19.       For a debtor to invoke the declared homestead
14   exemption he must record a declaration stating that the residence
15   is his principal dwelling.      See CAL. CIV. PROC. CODE §§ 704.920,
16   704.930(a)(3).       Once the declaration is duly recorded, the
17   declared homestead exemption continues thereafter even if the
18   debtor does not reside in the premises, unless the debtor has
19   abandoned the declared homestead.      See In re Kelley, 300 B.R. at
20   18 (emphasis added).
21        A declared homestead can be effectively abandoned or
22   destroyed where title to all or a portion of the homestead
23   property is transferred to a third party.       Knudsen v. Brock (In re
24   Knudsen), 80 B.R. 193, 195 (Bankr. C.D. Cal. 1987)(debtor ceases
25   to hold interest in declared homestead property for purposes of an
26   Article 5 exemption when debtor conveys title of subject property
27   to third party, and reconveying property from third party to
28   debtor does not “automatically resurrect” homestead declaration).

                                         -13-
 1   First Trust & Sav. Bank of Pasadena v. Warden, 18 Cal.App.2d. 131,
 2   134 (1936).   Elliott’s declared homestead for purposes of Article
 3   5 was effectively abandoned or destroyed when he conveyed title to
 4   the Buckingham Property to S. Central in 2006; it was not
 5   resurrected by his reacquisition of title from LWI in 2012.     Id.
 6        Nevertheless, the California declared homestead exemption is
 7   inapplicable here.   Elliott sought to exempt the Buckingham
 8   Property in the forced sale context of his bankruptcy case under
 9   CAL. CIV. PROC. CODE § 704.730(a)(3), not in the context of a
10   voluntary sale, where the Article 5 declared exemption would
11   apply.   This contextual distinction is critical because even if
12   Elliott’s declared homestead exemption was not abandoned, an
13   effective Article 5 exemption does not protect his interest in the
14   Buckingham Property in the forced sale context of his chapter 7
15   bankruptcy.   See In re Kelley, 300 B.R. at 20; In re Knudsen, 80
16 B.R. at 196-97.
17        Accordingly, the issue of whether Elliott’s homestead
18   declaration was abandoned or destroyed through prepetition title
19   transfers is irrelevant because “[i]n the context of bankruptcy
20   . . . [d]ebtor’s declaration of homestead helps him not at all, as
21   the additional benefits conferred in Article 5 would benefit him
22   only in the situation of a voluntary sale.”    In re Kelley, 300
23 B.R. at 21 (emphasis in original).
24        Therefore, despite Trustee’s correct assertion that Elliott’s
25   declared homestead exemption was destroyed prepetition, the issue
26   of whether he is entitled to a homestead exemption must be
27   assessed within the scope of the Article 4 automatic exemption.
28

                                     -14-
 1               b.   Automatic homestead exemption
 2        The Article 4 protections for automatic homestead exemptions
 3   are applicable in a forced sale context.     In re Kelley, 300 B.R.
4   at 19.    The filing of a bankruptcy petition constitutes such a
 5   “forced sale” to trigger the application of the automatic
 6   homestead exemption.    Id. at 17.   Distinct from the Article 5
 7   exemption, once triggered, the automatic homestead exemption need
 8   not be memorialized or recorded in a homestead declaration.      Wells
 9   Fargo Fin. Leasing, Inc. v. D & M Cabinets, 177 Cal. App. 4th 59, 68
10   (2009).
11        Elliott has claimed entitlement to the Article 4 automatic
12   homestead exemption by referencing CAL. CIV. PROC. CODE
13   § 704.730(a)(3) in his amended Schedule C.     Because Elliott’s
14   claim of exemption is presumed valid, Trustee had the burden to
15   prove it was not properly claimed.      See Rule 4003(c).   Trustee
16   argued that Elliott was not entitled to the homestead exemption
17   because he could not claim an exemption in property he did not own
18   on the petition date.   However, for purposes of CAL. CIV. PROC. CODE
19   § 704.730, Elliott’s conveyance of the Buckingham Property’s title
20   to a third party does not defeat his right to an automatic
21   exemption, because continuous residency, rather than continuous
22   ownership, controls the Article 4 analysis.
23        The statutory definition of “homestead” for purposes of the
24   Article 4 automatic exemption is set forth in CAL. CIV. PROC. CODE
25   § 704.710(c) and “requires only that the judgment debtor reside in
26   the property as his or her principal dwelling at the time the
27   judgment creditor’s lien attaches and continuously thereafter
28   until the court determines the dwelling is a homestead.”

                                      -15-
 1   Tarlesson v. Broadway Foreclosure Invs., LLC, 184 Cal. App. 4th 931,
 2   937 (2010)(citing CAL. CIV. PROC. CODE § 704.710(c))(emphasis added).
 3   Thus, based on the plain language of the statute, the automatic
 4   homestead exemption does not require that the judgment debtor
 5   continuously own the property.   See In re Donaldson, 156 B.R. 51,
 6   52 (Bankr. N.D. Cal. 1993)(by continuously residing in their home
 7   throughout the bankruptcy proceeding, debtors retained a
 8   possessory interest sufficient to establish their right to an
 9   automatic exemption despite their loss of title in a prepetition
10   foreclosure); Tarlesson, 184 Cal. App. 4th at 937-38 (where judgment
11   debtor conveyed her home’s title to a related party, debtor’s
12   continuous occupancy of the property was enough to retain a
13   sufficient equitable or beneficial interest in it to qualify as a
14   homestead under § 704.710(c) and thus claim an automatic homestead
15   exemption).
16        Accordingly, the automatic homestead exemption applies to any
17   interest in the property if the debtor satisfies the continuous
18   residency requirement set forth in CAL. CIV. PROC. CODE
19   § 704.710(c).4   The factors a court should consider in determining
20   whether the debtor has sufficient residency to establish an
21   exemptible interest in the property and, thus, to qualify for the
22   automatic homestead, are physical occupancy of the property and
23
24        4
             This principle is consistent with and explicitly echoed in
     sections of Article 4 other than CAL. CIV. PROC. CODE § 704.730(c).
25   For instance, CAL. CIV. PROC. CODE § 704.820 recognizes that debtors
     with less than a fee interest are still entitled to a homestead
26   exemption under Article 4, stating in the Commission Comments it
     “implements the intent of [Article 4] not to restrict the interest
27   of the judgment debtor for which a homestead exemption is
     available. A homestead exemption is available to a judgment
28   debtor regardless of whether the judgment debtor’s interest is a
     fee, leasehold, or lesser interest.”

                                      -16-
 1   the intention with which the property is occupied.    In re Kelley,
 2 300 B.R. at 21 (citing Ellsworth v. Marshall, 196 Cal. App. 2d 471,
 3   474 (1961)).
 4        Neither Elliott nor Trustee directly addressed before the
 5   bankruptcy court, or address on appeal, whether Elliott’s alleged
 6   residency at the Buckingham Property is sufficient to satisfy the
 7   continuous residency requirement to qualify for the automatic
 8   homestead exemption.   Trustee’s objection focused on Elliott’s bad
 9   faith in concealing the Buckingham Property and his destroyed
10   declaration of homestead.   Neither party provided any relevant
11   evidence to support a finding whether or not Elliott had satisfied
12   the continuous residency requirement.     Thus, as it stands, nothing
13   in the record confirms whether (1) Elliott resided at the
14   Buckingham Property at the time the Judgment Creditors’ lien(s)
15   attached and continued to reside there with the intent of
16   retaining it as his principal dwelling, and (2) whether he resided
17   there on the petition date.   In fact, Elliott confirmed in his
18   § 341(a) meeting testimony that he resided on Hiawatha Street on
19   the petition date.
20        Because the bankruptcy court confined its inquiry to
21   Elliott’s bad faith in concealing the Buckingham Property, it did
22   not make any factual findings relevant to whether Elliott
23   satisfied the continuous residency requirement set forth in CAL.
24   CIV. PROC. CODE § 704.730(a)(3).   Thus, material factual issues
25   exist that the court must consider in making this determination,
26   including the threshold determination that the Buckingham Property
27
28

                                        -17-
 1   is property of the estate.5   Accordingly, we must VACATE the order
 2   on appeal and REMAND to the bankruptcy court to resolve these
 3   factual issues and determine whether Elliott is entitled to an
 4   automatic homestead exemption under CAL. CIV. PROC. CODE
 5   § 704.730(a)(3).
 6        2.     The Bankruptcy Code’s statutory limitations of
                 exemptions
 7
 8        Even if on remand the bankruptcy court finds that Elliott
 9   retained, through continuous residency, a sufficient property
10   interest in the Buckingham Property to qualify for the automatic
11   homestead exemption under CAL. CIV. PROC. CODE § 704.730(a)(3), the
12   Code provides additional limitations which may function as a basis
13   to deny Elliott’s exemption given his misconduct.
14        As the Supreme Court acknowledged in Law v. Siegel, “§ 522
15   sets forth a number of carefully calibrated exceptions and
16   limitations, some of which relate to the debtor’s misconduct.”
17 134 S. Ct. at 1196.   Most relevant among them for our purposes is
18   § 522(g).
19        Section 522(g) limits the ability of a debtor to claim an
20   exemption where the trustee has recovered property for the benefit
21   of the estate.   Under § 522(g)(1), a debtor may claim an exemption
22   where the trustee has recovered property under §§ 510(c)(2), 542,
23   543, 550, 551 or 553 only if (1) the property was involuntarily
24   transferred, and (2) the debtor did not conceal the transfer or an
25
26        5
             It is a “well settled rule that property cannot be
     exempted unless it is first property of the estate.” Heintz v.
27   Carey (In re Heintz), 198 B.R. 581, 586 (9th Cir. BAP 1996). As
     discussed more thoroughly below, the bankruptcy court has since
28   determined that the Buckingham Property is property of the estate.

                                      -18-
 1   interest in the property.   Hitt v. Glass (In re Glass), 164 B.R.
2   759, 761 (9th Cir. BAP 1994), aff’d, 60 F.3d 565 (9th Cir. 1995).
 3   Thus, the debtor is not entitled to claim an exemption “[w]here a
 4   debtor voluntarily transfers property in a manner that triggers
 5   the trustee’s avoidance powers or the debtor knowingly conceals a
 6   prepetition transfer or an interest in property, and such property
 7   is returned to the estate as a result of the trustee’s actions
 8   directed toward either the debtor or the transferee[.]”     Id. at
 9   764-65.
10        In his opening appellant’s brief, Elliott identified § 522(g)
11   as a basis for denying a homestead exemption for the type of
12   misconduct involved here.   However, he contends that “while it can
13   be argued in this case that [he] did conceal the [Buckingham
14   Property], this is not a case where the Trustee ‘recovered’ the
15   property[,]” and therefore, § 522(g) is inapplicable.      We
16   disagree.
17        On June 4, 2013, Trustee filed a turnover action against
18   Elliott for the Buckingham Property under § 542.   See Adv. No.
19   SV 13-01118-VK.   Trustee has succeeded in that action.6    Hence,
20   this constitutes a “recovery” as contemplated by § 522(g), which
21   then brings the Buckingham Property within the scope of the
22   § 522(g)(1) limitation on Elliott’s right to claim an exemption in
23
24        6
             While this appeal was pending, on April 7, 2014, the
     bankruptcy court entered a judgment revoking Elliott’s discharge
25   and vesting title of the Buckingham Property in Trustee after
     finding “the debtor knowingly and fraudulently failed to disclose
26   a significant asset in his schedules, i.e., the debtor’s interest
     in a corporation that held title to his residence. For no
27   consideration, less than three weeks after the debtor obtained his
     discharge, the debtor obtained title to his residence from that
28   corporation.” Adv. No. SV 13-01118-VK, dkt. no. 63 at 2, ¶ 1. No
     appeal has been filed.

                                     -19-
 1   property he voluntarily transferred and concealed.
 2        The essence of Elliott’s appeal in utilizing Law v. Siegel to
 3   shield his misconduct from functioning as lawful grounds to deny
 4   his homestead exemption has led to, as Trustee bluntly but
 5   accurately asserts, Elliott practically admitting he concealed the
 6   asset and acted in bad faith.   Indeed, Elliott does not dispute
 7   that he failed to disclose his interest in the Buckingham Property
 8   in his original schedules.   He admits claiming Hiawatha Street as
 9   his “street address” on his petition even though he knew he did
10   not live there.   Elliott further acknowledges that at the § 341(a)
11   meeting he claimed his forms were true and complete, all the while
12   knowing the bankruptcy court had no knowledge of the Buckingham
13   Property he allegedly resides in and controlled through LWI.
14        Accordingly, we conclude that § 522(g)(1) is applicable and
15   an important limitation on Elliott’s claimed homestead exemption
16   for the bankruptcy court to consider on remand.
17                             IV.   CONCLUSION
18        For the reasons set forth above, we VACATE the bankruptcy
19   court’s order sustaining Trustee’s objection to Elliott’s claimed
20   homestead exemption and denying it in its entirety and REMAND for
21   a determination of whether Elliott is entitled to a homestead
22   exemption under CAL. CIV. PROC. CODE § 704.730(a)(3).
23
24
25
26
27
28

                                     -20-