The California Homestead Exemption’s Requirements of Residing in the Home and Intending to Continue Doing So
The California homestead exemption amount’s huge increase at the beginning of 2021 has made it all the more important to understand when the exemption does apply to a home and when it does not. A number of practical issues about the homestead exemption deserve a closer look. For example, four plus years ago I wrote a blog post titled Can You Claim a Homestead Exemption If Not Living in Home? There have been a number of important court cases since then that shed more light on this and another closely related question.
These newer cases ask, under what circumstances can you:
- be physically living in your home but not legally own the home?
- be not physically living in your home at the time of your bankruptcy filing and still qualify for the homestead exemption?
WHAT’S GENERALLY REQUIRED ABOUT PHYSICALLY RESIDING AT THE HOMESTEAD AND THE INTENT TO CONTINUE DOING SO?
Before getting to the new cases, we need to set the scene by understanding California homestead exemption law about the requirements of physically residing at the home and the intent to continue doing so.
So first, about whether physically residing at the home is required,
California courts have long held that a lack of physical occupancy does not preclude a party from establishing actual residency and claiming the homestead, if the claimant intends to return.
In re Diaz, 547 B.R. 329, 335 (9th Cir. BAP, 2016)(the cases cited here go back to the mid-1800s). So, even though the pertinent California statute’s definition of homestead seems to require the person filing bankruptcy to be living at the home on the date of filing, there are exceptions tied to the intent of that person. The classic example is a person who does not currently live in the home but has clearly expressed—by word or action—the intent to return to live there.
And second, on the required intent,
[c]onversely, physical occupancy on the filing date without the requisite intent to live there, is not sufficient to establish residency.
. . .
[W]hether the debtor physically occupies the property or not, the debtor must have an intention to reside there.
In re Diaz, 547 B.R. 329, 336.
So now let’s look at three bankruptcy cases decided in the last couple years on qualifying for the homestead exemption. I provide enough details about the facts of these cases so that you can see how the homestead exemption law might be applied to your own circumstances.
WHAT HAPPENS IF YOU ARE PHYSICALLY OCCUPYING A HOME BUT ALSO SELLING IT WHEN FILING BANKRUPTCY?
Imagine a debtor in the process of selling his home, who has a buyer in escrow, and while still living in the home files bankruptcy. In such a bankruptcy case involving a home in Van Nuys, a creditor argued against that the debtor was not entitled to a homestead exemption because “title to the property is necessary to claim a homestead exemption.” In re Gilman, 887 F. 3d 956, 965 (9th Cir. 2018). This creditor further argued
that, at the time of filing bankruptcy, Gilman [the Chapter 7 debtor] only held the property in trust for [his] buyer; therefore, [the creditor] contends, Gilman lacked a sufficient ownership interest to support an exemption.
In re Gilman, 887 F. 3d 956, 965. The creditor also argued that the debtor showed his intention not to continue residing at the Van Nuys home by putting it on the market and getting to the brink of selling it.
In this case the debtor had lived in the home with his family as a child since the early 1960s when his parents were in title. He left for college but eventually returned to live there in 1998. Around 2002 he got title to the home and was living there at the time of the bankruptcy filing in 2011. He had lost a contentious lawsuit to a creditor—the same one which subsequently objected to his homestead exemption—and had decided to sell the home to satisfy his debt to that creditor. But after he’d found a buyer and the sale was in escrow, the same creditor failed or refused to provide a payoff demand. So debtor instead decided to cancel the home sale and file bankruptcy. On the date of filing the bankruptcy, the home sale was still pending; it was completely canceled about three weeks after the filing.
The bankruptcy court (in the San Fernando Valley Division of the Central District of California) decided that the debtor was entitled to a homestead exemption on the Van Nuys home. The creditor appealed, the U.S. District Court upheld the bankruptcy court’s decision, so the creditor appealed again to the 9th Circuit Court of Appeals. This court held that “California law rejects [creditor’s] argument that title to the property is necessary to claim a homestead exemption.” In re Gilman, 887 F. 3d 956, 965. It cited two cases interpreting California law to say, in effect, that what counts is not continuous ownership but continuous residency. However, the Court of Appeals decided that the original bankruptcy court had “made no determination whether [debtor] intended to continue to reside in the property.” 887 F. 3d at 966. So it sent the case back to the bankruptcy court to determine his intent.
After a trial on the issue, the bankruptcy court ruled that the debtor was in fact entitled to the homestead exemption on the Van Nuys home. In spite of his efforts to sell this home earlier,
[t]he Court finds credible Debtor’s testimony that, as of the petition date, Debtor believed he would be unable to satisfy the judgment in favor of Creditors and intended to retain his home and discharge the debt to Creditors through bankruptcy.
In fact, as of the date of trial, eight years after the petition date, Debtor continued to reside at the [Van Nuys] Property. Given Debtor’s strong family ties to his childhood home, his continuous residency at the . . . Property and Debtor’s testimony that he elected to proceed via bankruptcy instead of a sale of the . . . Property, the Court holds that Debtor intended to reside at the . . . Property as of the petition date.
In re Gilman, 608 BR 714, 721 (Bankruptcy Court, C. D. California, 2019).
WITH DEBTOR’S INTENT TO STAY IN THE HOME BEING SO IMPORTANT, WHAT IF DEBTORS INTEND TO SURRENDER THEIR HOME TO THE CHAPTER 7 TRUSTEE?
As this Gilman case makes so clear, a debtor’s intent to retain the home as his or her homestead is crucial to having a homestead exemption in that home. But as that case also shows, in real life a homeowner’s intent can evolve depending on the circumstances. The last sentence in the section quoted above focuses on the debtor’s intent as of the moment of the bankruptcy filing. So what happens in the following somewhat unusual but not uncommon circumstance: when there’s much more equity in a home than the homestead exemption amount, so that the owners file a Chapter 7 case understanding that they will very likely surrender the home to the bankruptcy trustee? Does debtor’s intent at the time of filing to surrender the home to the trustee during the bankruptcy mean that the debtor loses his or her rights to the homestead exemption amount?
The In re Johnson decision said no. The debtors retained their homestead exemption in a home that they would almost certainly be surrendering shortly to the Chapter 7 trustee.
After an in-depth analysis of the history and purpose of California homestead exemption law, the bankruptcy judge in San Diego ruled that
While . . . a debtor’s intent to reside in a home is a factor to be considered in determining entitlement to a homestead exemption, the Court concludes that for the purposes of the [California] automatic homestead exemption, which is triggered by the [bankruptcy] petition, the proper focus is on intent and residency prior to and as of the petition date. The Court concludes that the [debtors] clearly intended to reside in the Home from the date of purchase through the date of the bankruptcy filing.
In re Johnson, 604 B.R. 875, 887 ((Bankruptcy Court, S. D. California, 2019)(emphasis added).
This was in spite of the fact that the debtors had signed a rental lease at a different home three weeks before filing their Chapter 7 case, and a few days before that filing had signed an agreement with a moving company to move their belongings to that rental. They in fact moved to the rental “promptly” after the filing. The Chapter 7 trustee objected to the homestead exemption on the basis that the debtors “did not intend to reside in the Home after the [bankruptcy] petition date.” 604 B.R. at 882.
Note the difference between the intent to reside there “through the date of the bankruptcy filing” vs. “after the petition date.”
The bankruptcy court determined that the debtors had clearly intended to create a homestead by buying the house, living in it for about 5 years, and paying all but a single mortgage payment. The question was whether they had abandoned their homestead and thus lost rights to the homestead exemption. The court decided that they had not.
[T]he advent of bankruptcy created risks that justified [debtors] in seeking shelter in another place. First, there was a virtual certainty that the Trustee would sell the Home. Thus, they needed to ensure that a roof was over their children’s head. And . . . they did not leave with a fixed intent of never returning. Instead, they were clear in their evidence before the Court: if the Trustee refused or failed to sell the Home, they would do whatever they could to return to what had always been the family home.
604 B.R. at 886.
The bankruptcy judge concluded:
The Court cannot find that the [debtors’] prepetition planning and efforts to secure housing for their family was an abandonment of the homestead, particularly where they reasonably believed that the Home would be listed and sold promptly. An interpretation and application of an intent requirement that punishes the responsible [debtors] and rewards the unplanning, irrational, or obstreperous debtor cannot be what was intended by the California legislature or the courts of this Circuit.
604 B.R. at 887-888.
Note that this bankruptcy court case in San Diego was decided the same month as the above In re Gilman one in the San Fernando Valley.
CAN A DEBTOR WHO IS LIVING IN A HOME ILLEGALLY NEVERTHELESS HAVE A HOMESTEAD EXEMPTION IN THE HOME?
The answer is yes. Our third and last case is a very recent one (February 2021), an appeal of a decision from the bankruptcy court of the Riverside Division of the Central District of California. Judge Scott Clarkson had determined that a Chapter 7 debtor was entitled to a homestead exemption. The Chapter 7 trustee appealed and the U.S. District Court Judge Mark Scarsi affirmed Judge Clarkson’s decision. In re Nolan, Case No. 5:20-cv-01496-MCS (Feb. 12, 2021).
The case involved two brothers. One brother, Steven Nolan, lived in a home in Corona that was in a trust established by the father. The terms of the trust required the trust property, including the home, to be sold and the money distributed to the trust beneficiaries upon the father’s death. Steven was named the trustee of the trust. The father died in early 2017, but Steven continued to live in the property and did not sell it. Two and a half years later, and a few weeks after his brother took legal action in probate court to remove Steven as the trustee of the trust, Steven filed a Chapter 7 case claiming a homestead exemption in the home.
Steven’s Chapter 7 trustee objected to the homestead exemption, Bankruptcy Judge Clarkson overruled the objection, and the trustee appealed. District Court Judge Scarsi reviewed a number of appellate opinions interpreting California homestead exemption law, noting that neither the California Supreme Court nor the U.S. Ninth Circuit Court of Appeals has ruled on the issue. That issue was “the specific question whether [Steven’s] beneficiary interest in the Trust can allow him the right to claim the . . . homestead exemption” in the home. The judge highlighted cases holding that debtors are in various circumstances entitled to the California homestead exemption without holding title to the property. He concluded, first, that
the record clearly shows that Appellee possessed a beneficiary interest in the trust, and that he was residing in the Property during and after the Bankruptcy proceedings. Altogether, the Court holds that these factors support a finding that he was able to claim the automatic homestead exemption.
Then the question shifted to whether the Chapter 7 trustee was able to prove that Steven was not entitled to the claimed homestead exemption. The trustee
admitted that [Steven Nolan] resided in the Property at all relevant times and still appears to be there . . . .
. . .
[T]he record shows that it is uncontested that Appellee satisfied the dwelling and intention requirements . . . .
With Steven Nolan’s valid claim of a homestead exemption and the bankruptcy Trustee’s failure to meet the burden of showing he wasn’t entitled to the exemption, Judge Scarsi affirmed Steven’s homestead exemption.