Court Opinion

ID: 4638689
Source: CourtListenerOpinion
Date Created: 2020-12-02 01:00:54.990395+00
Date Added: 2024-06-11T07:58:50.689967
License: Public Domain

FILED
                                                                             DEC 1 2020
                           NOT FOR PUBLICATION                          SUSAN M. SPRAUL, CLERK
                                                                          U.S. BKCY. APP. PANEL
                                                                          OF THE NINTH CIRCUIT

          UNITED STATES BANKRUPTCY APPELLATE PANEL
                    OF THE NINTH CIRCUIT

In re:                                               BAP No. CC- 20-1067-SGL
BERND SCHAEFERS,
            Debtor.                                  Bk. No. 9:19-bk-11163-MB

BERND SCHAEFERS,
            Appellant,
v.                                                   MEMORANDUM*
BLIZZARD ENERGY, INC.; FRANZISKA
SHEPARD,
            Appellees.

               Appeal from the United States Bankruptcy Court
                     for the Central District of California
                Martin R. Barash, Bankruptcy Judge, Presiding

Before: SPRAKER, GAN, and LAFFERTY, Bankruptcy Judges.

                                 INTRODUCTION

      Chapter 71 debtor Bernd Schaefers appeals from the bankruptcy

court’s denial of his homestead exemption claim – asserted not in any real

property but in a limited liability company known as BKS Cambria LLC

      *
        This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
      1
       Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
(“LLC”), which he owns with his wife. The LLC owns real property located

in Cambria, California (“Property”), where Schaefers has lived since 2014.

Schaefers relies on a state court ruling, which held that the LLC is liable

under a reverse alter ego theory for the individual debt he owes to his

largest creditor. In other words, Schaefers argues that the reverse alter ego

ruling based on his inequitable conduct establishes his “equitable” interest

in the Property and establishes his right to claim a homestead exemption in

it under California law. It does not. Schaefers’ argument runs contrary to

the equitable purpose underlying alter ego doctrine: to extend liability

beyond a debtor to avoid injustice. To recognize a homestead exemption in

the Property owned by the LLC Schaefers created would reward him for

the inequitable conduct that warranted extension of his individual liability

to the LLC. Because he has not established an interest in the Property

sufficient to support a homestead exemption, we AFFIRM.

                                   FACTS

      In July 2019, Schaefers commenced his bankruptcy case by filing a

voluntary chapter 11 petition. In December 2019, a chapter 11 trustee was

appointed, and his case subsequently was converted to chapter 7.

      Schaefers’ schedules identified Blizzard Energy, Inc. (“Blizzard”) as

his largest creditor, with a disputed judgment claim of $3,825,000

                                       2
(“Blizzard Judgment”).2 Elsewhere in his schedules, he asserted that

Blizzard and its principal Franziska Shepard (jointly, “Blizzard Parties”)

obtained the Blizzard Judgment as a result of fraud, perjury, witness

tampering, and abuse of process. He thus listed a cause of action against

Shepard for the same amount as the judgment. The only other asset of

significance he listed in his schedules was his 50% membership interest in

the LLC, which he valued at $5,000,000.3 Schaefers did not list any interest

in real property. In his original schedules, he asserted only two exemption

claims: one for his automobile and another for his furniture and clothing.

       The bankruptcy court granted the Blizzard Parties relief from the

automatic stay to proceed in the San Luis Obispo County Superior Court

(“Superior Court”) with a prepetition motion to amend the Blizzard

Judgment to include the LLC as an additional judgment debtor under a

theory of reverse alter ego.4 The state court entered a tentative decision

       2
         We exercise our discretion to take judicial notice of documents electronically
filed in Schaefers’ bankruptcy case. See Atwood v. Chase Manhattan Mortg. Co. (In re
Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
       3
        Schaefers later disclosed that the other 50% of the LLC is owned by his
estranged wife Karin Schaefers.
       4
        Traditionally, courts have used alter ego liability to “hold an individual
responsible for the acts of an entity.” Curci Invs., LLC v. Baldwin, 14 Cal. App. 5th 214,
221 (2017). In this instance the Superior Court employed “reverse veil piercing” to hold
the LLC liable for Schaefers’ individual debt. California recognizes that “[r]everse veil
piercing is similar to traditional veil piercing in that when the ends of justice so require,
                                                                                (continued...)

                                              3
detailing its reasons why it intended to hold the LLC liable for Schaefers’

individual judgment debt to the Blizzard Parties.

       The day after the Superior Court hearing, Schaefers amended his

exemptions. As part of his amendment, Schaefers added a $175,000

exemption claim in the LLC (“LLC Exemption”) based on Cal. Code of

Civil Procedure (“C.C.P.”) § 704.730 – also known as California’s automatic

or “residential” homestead exemption. According to Schaefers, the

Property owned by the LLC is a decommissioned U.S. Air Force base,

which includes officers’ quarters consisting of a four-bedroom residence,

where he has lived continuously since 2014.

       The Blizzard Parties timely objected to the LLC Exemption. They

argued that Schaefers could not claim a homestead exemption in the LLC

because he did not own the Property. As they pointed out, Schaefers’

interest was in the LLC and not the Property. They further contended that

the interest in the LLC did not qualify as a dwelling under California law,

       4
        (...continued)
a court will disregard the separation between an individual and a business entity. But,
the two serve unique purposes and are used in different contexts.” Id. Though courts
may need to consider additional or different factors before applying reverse veil
piercing, id. at 222-24, that analysis was performed by the Superior Court and is not
before us. Here, we are concerned only with the impact of the Superior Court’s decision
to apply reverse piercing. To evaluate Schaefers’ contention that this reverse piercing
effectively gave him an equitable interest in the LLC’s assets, we rely on traditional alter
ego cases without drawing any distinction based on whose liability was extended to
whom.

                                             4
so he could not claim a homestead exemption in the LLC.

       The Blizzard Parties also anticipated that Schaefers would argue that

he now qualified as the “owner” of the Property based on the Superior

Court’s finding that the LLC was his alter ego. They maintained that the

alter ego ruling could not be invoked by Schaefers as grounds for

concluding that he personally owned the Property.

       Schaefers opposed the objection to his LLC Exemption. He reasoned

that the Property qualified as a dwelling for purposes of California’s

homestead exemption law by virtue of his residing there. He therefore

concluded that the Blizzard Parties’ objection should be overruled.

       As for the fact that the LLC owned the Property rather than him,

Schaefers devoted a single sentence to this issue: “A Superior Court has

determined that they will recognize the LLC as Mr. Schaefers [sic] alter

ego.” Schaefers attached to his opposition a declaration, which included as

an exhibit a copy of the Superior Court’s tentative alter ego ruling. 5

       5
         The only evidence before the bankruptcy court regarding the alter ego issue
was the Superior Court’s tentative ruling. On appeal, Schaefers has attempted to
present as part of his appendix a number of documents that were not before the
bankruptcy court, including: (1) the LLC’s Operating Agreement; (2) a non-conformed
copy of the Superior Court’s tentative alter ego ruling; (3) the Superior Court’s final
alter ego ruling; and (4) a 1996 Separation and Property Settlement Agreement between
Schaefers and his estranged wife. We decline to consider any of these documents
because they were not available for the bankruptcy court to consider. See Castro v.
Terhune, 712 F.3d 1304, 1316 n.5 (9th Cir. 2013) (citing Kirshner v. Uniden Corp. of Am.,
842 F.2d 1074, 1077 (9th Cir.1988)). Still, for purposes of this appeal, we will assume
                                                                               (continued...)

                                             5
      In March 2020, the bankruptcy court held a hearing on the objection

to the LLC Exemption. After considering the parties’ papers and oral

argument, the court sustained the objection. As the court explained,

Schaefers did not own the Property. Rather, the LLC owned it.

Additionally, his membership interest in the LLC was not real property in

which California law would permit a judgment debtor to claim a

homestead interest. The court also rejected Schaefers’ argument that the

Blizzard Parties’ success in piercing the veil of the LLC to make it liable for

Schaefers’ debt meant that he now owned the LLC’s assets, including the

Property.

      On March 18, 2020, the bankruptcy court entered its order sustaining

the objection to Schaefers’ homestead exemption claim. Schaefers timely

appealed.

                                  JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.

      5
       (...continued)
without deciding that Schaefers established that the Superior Court reverse pierced the
LLC’s veil. In their responsive brief, the Blizzard Parties moved to strike the above-
referenced excerpts of record. We grant this motion for the reason stated. All of the
Blizzard Parties’ other procedural objections are hereby overruled because they did not
demonstrate that any of Schaefers’ other procedural missteps prejudiced them.

                                           6
                                      ISSUE

      Did the bankruptcy court commit reversible error when it disallowed

Schaefers’ homestead exemption claim?

                          STANDARD OF REVIEW

      A debtor’s entitlement to claim an exemption from estate property is

a question of law, which we review de novo. Diaz v. Kosmala (In re Diaz),

547 B.R. 329, 333 (9th Cir. BAP 2016) (citing Elliott v. Weil (In re Elliott), 523

B.R. 188, 191 (9th Cir. BAP 2014)). The construction of state exemption laws

also is reviewed de novo. Id. (citing Calderon v. Lang (In re Calderon), 507

B.R. 724, 728 (9th Cir. BAP 2014). De novo review means that we consider

the matter without giving any deference to the bankruptcy court’s decision.

Id.

                                 DISCUSSION

      “When a debtor files a bankruptcy petition, all of his assets become

property of the estate and may be used to pay creditors, subject to the

debtor’s ability to reclaim specified property as exempt.” In re Elliott, 523

B.R. at 192 (citing Schwab v. Reilly, 560 U.S. 770, 774 (2010)).

      The Bankruptcy Code provides that debtors may exempt certain

“property of the estate.” § 522(b)(1). A state may choose to permit

bankruptcy debtors to use the federal exemptions contained in the

Bankruptcy Code in § 522(d). See 522(b)(2). Alternatively, a state may “opt

out” of the exemptions provided by the Bankruptcy Code and allow their

                                         7
debtors to use instead the exemptions provided by state law (and allowable

by federal non-bankruptcy law). See §§ 522(b)(2) and (3); 4 Collier on

Bankruptcy ¶ 522.01 (16th ed. 2020). California has opted out of the

Bankruptcy Code’s list of exemptions. See C.C.P. § 703.130. As a result,

California exemption law controls the resolution of Schaefers’ homestead

exemption claim. In re Elliott, 523 B.R. at 192 (citing Kelley v. Locke (In re

Kelley), 300 B.R. 11, 16 (9th Cir. BAP 2003)).

      California defines a homestead as a dwelling where a person resides.

C.C.P. § 704.710(a) and (c). Californians may, therefore, claim a homestead

exemption without holding a fee simple interest in the subject real

property. In re Elliott, 523 B.R. at 196 & n.4; see also Phillips v. Gilman (In re

Gilman), 887 F.3d 956, 965 (9th Cir. 2018) (“California law rejects Phillips’

argument that title to the property is necessary to claim a homestead

exemption.”). Even so, they must have some legal or equitable interest in

the real property. In re Elliott, 523 B.R. at 196 & n.4; see also Fontaine v. Conn

(In re Fontaine), BAP No. CC-10–1003–MkHKi, 2010 WL 6259993, at *10 (9th

Cir. BAP Nov. 26, 2010), aff'd, 472 F. App’x 738 (9th Cir. 2012) (“Without

any legal or equitable interest in the Property, Ramona was not entitled to a

homestead exemption. A legal or equitable interest in the property must

exist for a homestead exemption to attach to that property.” (citing Alan M.

Ahart, California Practice Guide: Enforcing Judgments & Debts ¶ 6:1021.1 (The

Rutter Group 2010))).

                                          8
      Schaefers contends that California requires mere residence alone to

establish a homestead exemption. In support of this argument, he cites to

Tarlesson v. Broadway Foreclosure Investments, LLC, 184 Cal. App. 4th 931,

936–38 (2010). However, the debtor in Tarlesson held a beneficial interest in

her residence sufficient to support a homestead exemption. She owned the

real property but had temporarily conveyed title to her homestead to a

relative to facilitate refinancing. Id. at 935. Significantly, the debtor-

transferor and the cousin-transferee agreed that the debtor always retained

the full beneficial interest in the property. Id.; see also In re Fontaine, 2010

WL 6259993 at *10-11 & n.16 (rejecting argument that California’s

homestead exemption requires only mere possession under Tarlesson).

      Unlike the debtor in Tarlesson, Schaefers has never identified any

beneficial or equitable interest in the Property to support his homestead

exemption claim and concedes that he has no legal interest in it. Instead, he

listed his interest in the LLC as exempt under California’s residential

exemption, C.C.P. § 704.730. But under California law a limited liability

company is a separate and distinct legal entity from its owners or members.

Curci Invs., LLC, 14 Cal. App. 5th at 220-21 (citing Cal. Corp. Code §

17701.04(a)). Consequently, limited liability company members have no

interest in the company’s assets. Abrahim & Sons Enters. v. Equilon Enters.,

LLC, 292 F.3d 958, 963 & n.21 (9th Cir. 2002); see also Swart Enters., Inc. v.

Franchise Tax Bd., 7 Cal. App. 5th 497, 510 (2017) (citing former Cal. Corp.

                                         9
Code § 17300 and stating that “Members in an LLC . . . hold no direct

ownership interest in the company’s specific property.”). California’s

residential exemption is inapplicable to Schaefers’ interest in the LLC,

which constitutes a personal property interest outside the statutory

definition of a homestead under C.C.P. § 704.710(c). See In re Bell, No.

04–45847 EDJ, 2007 WL 4190686 at *2-3 (Bankr. N.D. Cal. Nov. 21, 2007)

(holding that a partnership interest was not a dwelling and hence did not

qualify for a homestead exemption).

      Schaefers has suggested that the LLC’s ownership of the Property did

not preclude his homestead exemption because California permits

individuals to maintain a homestead exemption even when legal title to the

subject real property is held in the individuals’ revocable trust. In support

of this argument, he cites to Fisch, Spiegler, Ginsburg & Ladner v. Appel, 10

Cal. App. 4th 1810, 1811 (1992). The Appel court reasoned that the

individual trustees still retained an equitable interest in their residence

based on their undisputed ability to revoke the trust and their resulting

contingent reversionary interest in the real property. Id. at 1813. This

interest, together with a stated life estate, established “an interest in the

property supporting their homestead exemption.” Id. As explained in

Appel, the extensive use of revocable trusts for estate planning also

weighed heavily in favor of recognizing the trustees’ continued interest to

support their homestead exemption. Id.

                                       10
       Schaefers offered at oral argument that he had chosen to place the

Property in the LLC for a similar reason. No such evidence was presented

to the bankruptcy court on this issue, and we fail to see the similarities

between a revocable living trust and Schaefers’ LLC.6 There is nothing

before us to suggest that limited liability companies are commonly used for

estate planning purposes like revocable trusts or that their members should

be permitted to disregard the entities’ separate identity. See Curci Invs.,

LLC, 14 Cal. App. 5th at 220-21. As such, Schaeffers’ interest in the LLC

does not demonstrate an equitable interest to support his homestead

exemption claim.7

       The California requirement that the debtor must have some interest

in the homestead property is consistent with the scope of the Bankruptcy

Code’s exemption statute, which only applies to property of the estate. See

       6
        Limited liability companies are a form of hybrid business entity that generally
allows its members to participate in management of the company’s operations without
exposing themselves to personal liability for the company’s debts and therefore are a
preferred means of conducting business under many circumstances. J. William Callison
& Maureen A. Sullivan, Limited Liability Companies: A State-by-State Guide To Law
And Practice, § 2:5 (2020 ed.).
       7
         See In re Bell, 2007 WL 4190686, at *3 (distinguishing Appel and holding that
debtor’s interest in a partnership that owned his residence was not sufficient to support
his homestead exemption claim, when he held no interest in the real property and no
right to acquire the partnership’s title to it by revocation); see also In re Breece, 487 B.R.
599 (table), 2013 WL 197399 at *8 (6th Cir. BAP Jan. 18, 2013) (denying homestead
exemption under Ohio law to individual debtor who resided in property owned by her
limited liability company).

                                              11
§ 522(b)(1); see also Schwab, 560 U.S. at 774 (holding that unopposed

exemption claims “exclude the subject property from the estate”). Aside

from certain nuances not relevant here, property of the estate only includes

property in which the debtor has a legal, equitable, or community property

interest. § 541(a); see also Jess v. Carey (In re Jess), 169 F.3d 1204, 1207 (9th

Cir. 1999) (“Notwithstanding certain specified exceptions, the bankruptcy

estate includes all legal and equitable interests in property held by the

debtor at the time of filing.”). Schaefers failed to prove that he held any

equitable or legal interest in the Property. Accordingly, it is not property of

the estate, and he cannot claim any exemption in it. See In re Breece, 487 B.R.

599, 2013 WL 197399 at *9.

      Schaefers next contends that the Superior Court’s finding that the

LLC is his alter ego established his equitable interest in the Property for

purposes of validating his homestead exemption claim. As Schaefers put it:

“Principals of equity under lied [sic] the Order of finding alter ego but yet

principals of equity somehow have not been recognized with regard to the

Debtors [sic] equitable claim of homestead.” Aplt. Opn. Br. at 4:2-5.

However, Schaefers misapprehends the legal effect of the Superior Court’s

ruling.

      Common law principles of alter ego liability apply to limited liability

companies and their members. See Cal. Corp. Code § 17703.04(b). Under

California common law, a judgment creditor may allege that a member of a

                                         12
limited liability company is the company’s alter ego in order to reverse

pierce the company veil and reach its assets to enforce a judgment against

an individual member. Curci Invs., LLC, 14 Cal. App. 5th at 224. But alter

ego is not a claim or cause of action that, when successful, treats the owner

and the company as the same legal entity for all purposes. Ahcom, Ltd. v.

Smeding, 623 F.3d 1248, 1252 (9th Cir. 2010). Rather, it is a procedural

device that permits courts to disregard the legal separateness between a

business entity and an owner for limited purposes – such as “where the

corporate form is being used by the individuals to escape personal liability,

sanction a fraud, or promote injustice.” Hennessey's Tavern, Inc. v. Am. Air

Filter Co., 204 Cal. App. 3d 1351, 1359 (1988) (citing Taylor v. Newton, 117

Cal. App. 2d 752, 757 (1953)). Typically, the entity’s separate identity is

disregarded “so that the corporation will be liable for acts of the

stockholders or the stockholders liable for acts done in the name of the

corporation.” Shaoxing Cty. Huayue Imp. & Exp. v. Bhaumik, 191 Cal. App.

4th 1189, 1197-98 (2011) (citing Mesler v. Bragg Mgmt. Co., 39 Cal. 3d 290,

300 (1985)).

      Alter ego principles almost never enable ”the persons who actually

control the corporation to disregard the corporate form.” Capon v. Monopoly

Game LLC, 193 Cal. App. 4th 344, 357 (2011) (quoting Communist Party v.

522 Valencia, Inc., 35 Cal. App. 4th 980, 994 (1995)). As the California Courts

of Appeal have aptly observed, “[p]arties who determine to avail

                                       13
themselves of the right to do business by means of the establishment of a

corporate entity must assume the burdens thereof as well as the privileges.

The alter ego doctrine is applied to avoid inequitable results not to

eliminate the consequences of corporate operations.” Communist Party, 35

Cal. App. 4th at 994 (quoting Aladdin Oil Corp. v. Perluss, 230 Cal. App. 2d

603, 614 (1964)).

      California has recognized that in limited circumstances a corporation

may “disavow the corporate form where doing so prevents injustice.”

Brooklyn Navy Yard Cogeneration Partners, L.P. v. Sup. Ct., 60 Cal. App. 4th

248, 259 (1997) (collecting cases). Importantly, however, Schaefers did not

independently attempt to disavow his LLC’s separate identity. Nor did he

explain to the bankruptcy court why recognizing his choice to place the

Property in his LLC would result in injustice. Some explanation – and

evidence – of this type was required before the bankruptcy court properly

could pierce the LLC’s veil for Schaefers’ benefit. See, e.g., Capon, 193 Cal.

App. 4th at 357 (“defendants have not identified on appeal . . . any

inequitable results that would follow from rejecting defendants’ attempt to

disregard the legal separateness of [the business entity]”).

      Instead, Schaefers relied solely on the Superior Court’s extension to

the LLC of his individual liability for the Blizzard Judgment, which was

based on his inequitable conduct. He claims that this extension of liability is

a sufficient basis, by itself, to avoid the consequences of his decision to have

                                       14
the LLC own the Property. Based on the authorities cited above, we

disagree. The bankruptcy court properly held that the Superior Court’s

reverse alter ego finding did not consolidate the LLC’s assets into

Schaefers’ bankruptcy estate.

                                CONCLUSION

     For the reasons set forth above, we AFFIRM the bankruptcy court’s

order sustaining the exemption claim objection and disallowing Schaefers’

homestead exemption claim.

                                     15