I HAVE two chapter 7 cases right now where the trustees are aggressively pursuing debtor houses. Trustees are tasked with the responsibility of getting whatever non-exempt asset they can get their hands on and sell them to liquidate them into cash for distribution to creditors. When the values of houses are high, the calculation of how much homestead equity is exempt because the bone of contention between trustee and debtor. The homestead exemptions at this time in California, although there is credible news that the limits are going to be increased next month are as follows: $75K for a single person without any other family living in the house; $100K for a person who has another family member who lives in the house who doesn’t own another house, $175K for seniors who are 65 irrespective of what their gross income is, and $175K for debtors who are 55 with household income that doesn’t exceed $35K annually. To be sure, most debtors still have homestead equities that are within these limits specially those who have HELOCs or 2nd trust deeds, or who recently obtained refinancing increasing their mortgage. But sometimes, we have clients who are borderline cases.
In borderline cases, a very aggressive trustee who really wants the house under any circumstances can turn into a nightmare for debtor. In one client’s case, there are two issues that argue in favor of a complete exemption of the $100K homestead claimed by debtor. One is the fact that when he bought his house, there were two partners who put in $50K each, and there was a written express trust agreement among the parties that allowed the debtor to hold legal title only in his name, as well, the mortgage was only in his name because the other two partners were foreigners who had no residency in the United States. But the agreement provides that once the property is sold, the profits will be divided 40% for debtor and the other partners 30% each. Property was bought 2.5 years ago, but the express trust agreement was not recorded. Since it was not recorded, the trustee’s position is that the agreement does not bind him. Debtor’s position is that he holds the property in trust for the other two partners and there is documentary proof of wire transfers from the two partners from abroad directly into escrow at the time of purchase of the property. Since the property is held in trust, irrespective of the unrecorded status of the agreement, 60% of the property is not property of the bankruptcy estate that is subject to administration by the trustee. Debtor’s 40 under this agreement is completely covered by his $100K exemption.
And should the trustee be correct in his legal position, debtor has a 2nd argument, stronger than the first and strong enough to defeat the trustee’s claim, and that is the fact that there is a judgment lien for $97K recorded in LA county six months before debtor’s bankruptcy was filed. This argument is very strong because the $97K recorded judgment lien effectively wipes out the $127K free equity that trustee is gunning for. If you add a 6% cost of sale, there is zero free equity. Thus, there is nothing for the trustee to liquidate for creditors.
Trustee filed an adversary proceeding even without asking for proof of the recorded judgment lien, and proof of the unrecorded trust agreement, claiming falsely that debtor lied in his petition, to hide non-exempt equity that debtor should be denied a discharge, for misrepresenting himself in the bankruptcy petition, and for the court to order debtor to transfer his house to trustee. I was really surprised by these allegations because these allegations have no credible factual basis. Trustee attached a preliminary report of title showing that there were no judgment liens on the property. Fortunately, debtor had copies of the recorded judgment lien for $97K and proof of the express trust agreement, and the wire transfers of $100K from his partners. Needless to say, we filed an answer to the complaint attaching all documentary exhibits to prove that debtor was not lying. Of course, this will take at least six months to go to trial, which may even take a year, depending on the court’s schedule. But this is an example of a debtor being demonized just because the trustee thinks there is free equity that he can take, when in fact, there is none. We expect to win this case at trial with our God’s help. We pray to Yahweh who loved us so that He sent his one and only beloved son Jesus Christ, who became man through the Immaculate Conception embodied by the blessed Virgin Mary, now Queen of heaven, and who was tortured & died for us on the cross, to redeem us from the consequences of sin, 2016 years ago today, and the Holy Spirit for total victory.
With the other client, we just went to his hearing this morning. His house is owned half by him and half by his son. His half is completely within his homestead exemption of $175K because he is 55 and he and his wife have income that is less than $35K a year. Indeed, debtor and his wife have zero income since he lost his business, which paid his salary in 2014. Since that time, his son, who is a US marine, has been paying the mortgage. The line of questioning by trustee was too aggressive, I thought. I knew what the trustee was trying to do. He wanted to elicit testimony that would show that debtor was actually receiving income, by way of support from his ex-wife, divorced 9 years ago. Trustee even questioned the rank of the US marine son and questioned if the son actually existed. I thought that was way overboard. He asked what was the rank of his son. Debtor answered he doesn’t know but said he has been with the marines for 9 years. Is he an officer? Debtor said yes, he is. What is his name? Debtor must have repeated his son’s name 3 times, but trustee still could not get the name right. So trustee shows a preliminary title report that states the name of the son as for example Sun Ning. Then, trustee shows debtor’s tax returns for 2014 and says, ‘How can your son be a US marine when you claim his name here on your tax returns (Adam Sun Ning, for example) as a dependent?’ Debtor says because Adam Sun Ning is my second son who was born in the United States and who is in high school, that’s why I called him Adam Sun Ning, while my older son was not born in the United States, that’s why I named him Sun Ning. What a perfect response because it’s the truth! Truth is stranger than fiction. Still, trustee asks for mortgage statements for last two years, tax returns for last two years, bank statements for last two years etc., and continues the hearing to next month. But the truth is, trustee cannot touch debtor’s house because he really does qualify for $175K homestead exemption.
Watch out also for tax refunds because it’s tax season now. If you expect a refund, you have to exempt it on schedule C; otherwise, you will be asked to turn over your refund to the trustee. Or get the refund first and use it to pay your rent or mortgage so it’s no longer a receivable that is part of the bankruptcy estate.
“Then pilate took Jesus and had Him flogged. The soldeirs twisted together a crown of thorns & put it on His head. They clothed Him in a purple robe and went up to Him & again, saying, “Hail, King of the Jews!” And they slapped Him in the face… carrying His own cross-, He went to Golgotha. There they crucified Him…” — John 19
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803
