Opinion
MEMORANDUM DECISION RE CROSS-MOTIONS FOR SUMMARY JUDGMENT
The above-captioned adversary proceeding came on for hearing before the United States Bankruptcy Judge on November 13, 2012 on the cross-motions of Plaintiff David A. Gill, Chapter 7 Trustee ("Trustee"), and Defendant John M. Woodburn, Debtor, ("Debtor") for summary judgment regarding Trustee's Complaint for Turnover of Estate Funds ("Complaint"). Helen R. Frazer, of the law firm of Atkinson, Andelson, Loya, Ruud & Romo, appeared for Trustee. Barry R. Wegman, of the Law Offices of David A. Tilem, appeared for Debtor. Jacqueline H. Choi, of the law firm of Steckbauer Weinhart Jaffe, LLP, appeared for the Los Angeles County Sheriffs Department (the "Sheriffs Department").
Having considered the moving and opposing papers and the arguments of the parties, the court issues this memorandum decision granting the motion of Debtor for summary judgment and denying the cross-motion of Trustee for summary judgment.
FACTUAL BACKGROUND
The facts in this adversary proceeding are uncontested by the parties as reflected in the Joint Statement of Stipulated Facts ("Stipulation") filed on October 19, 2012.
Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C, on July 28, 2010. The case was converted to Chapter 7 on June 10, 2011, and David A. Gill was appointed as the Chapter 7 Trustee. Stipulation, ¶ 2. When Debtor filed his bankruptcy petition on July 28, 2010, he owned certain real property located at 2050 E. Mountain Street, Pasadena, CA 91104 (the "Pasadena Property"). Stipulation ¶1, 3. On December 15, 2010, the court granted relief from the automatic stay to Creditor Najila Brent, allowing her to sell the Pasadena Property. Stipulation, ¶ 3. The Pasadena Property was sold at an execution sale on March 16, 2011. Stipulation, ¶4.
Prior to the execution sale of the Pasadena Property, Debtor claimed a homestead exemption in the amount of $75,000. Stipulation, ¶ 5. The Superior Court of California for the County of Los Angeles made a ruling limiting Debtor's homestead exemption to $50,000. Stipulation, ¶ 6. Following the sale of the Property on March 16, 2011, the Sheriffs Department held proceeds from the sale of the Property in the amount of $50,000 allocated to Debtor's homestead funds. Id.
The Sheriff's Department told Debtor that he would need to obtain an order of the Bankruptcy Court for release of the homestead funds to him. Stipulation, ¶ 7. In his complaint, Trustee alleges that Debtor had the ability and legal right to demand release of these funds from the Sheriffs Department, but has declined to do so. Complaint at 3:4-6.
On August 15, 2012, Trustee initiated this adversary proceeding by filing an adversary complaint, pursuant to 11 U.S.C. § 542, seeking turnover of the funds claimed by Debtor to be subject to his homestead exemption. In other words, Trustee sought the amount of $50,000 held by the Sheriff's Department attributable to Debtor's homestead exemption to be turned over as property of the bankruptcy estate. In the complaint, Trustee alleged that Debtor's homestead exemption expired under California Code of Civil Procedure, § 704.720.
On September 13, 2012, Debtor filed a motion to dismiss the complaint pursuant to Rule 7012(b) of the Federal Rules of Bankruptcy Procedure, incorporating by reference Rule 12(b)(6) of the Federal Rules of Civil Procedure, asserting that Trustee was not entitled to a turnover of the homestead funds. In the motion to dismiss, Debtor stated that he did not dispute the facts alleged in the Complaint, but contended that these factual allegations failed to state a claim for relief under California Code of Civil Procedure, § 704.720.
On October 9, 2012, a hearing was conducted before the court on the motion to dismiss. At the suggestion of the court, the parties agreed to make cross-motions for summary judgment based on their respective papers on the motion to dismiss and a stipulation of facts to be filed by the parties, which essentially converted Debtor's motion to dismiss into a cross-motion for summary judgment. Fed.R.Bankr.P. 7012(d), incorporating by reference Fed.R.Civ.P. 12(d). On October 23, 2012, the parties filed their stipulation of facts.
On November 13, 2012, the court approved a stipulation between Trustee and the Sheriff's Department, in which the Sheriff's Department agreed to turn over the homestead funds to Trustee on behalf of the bankruptcy estate, pending further order of the court. Following the transfer of the funds by the Sheriff's Department to Trustee pursuant to this stipulation, Trustee filed a dismissal of the Sheriff's Department as a defendant in this adversary proceeding.
II. DISCUSSION
The court has jurisdiction over this adversary proceeding under 28 U.S.C. §§ 157(a), (b)(1), (2)(e) and § 1334. Venue is proper in this judicial district.
For the reasons discussed herein, the court holds that Debtor's homestead exemption has not expired under California Code of Civil Procedure, § 704.720. Thus, Debtor is entitled to summary judgment on grounds that the funds are exempt, and Debtor is further entitled to distribution of the amount of $50,000 from the estate based on his unexpired homestead exemption.
A. SUMMARY JUDGMENT STANDARD
A party is entitled to summary judgment when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Fed.R.Bankr.P. 7056. A fact is "material" if it might affect the outcome of the suit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute over such facts is "genuine" if the evidence is such that a reasonable trier of fact could find in favor of the nonmoving party. Id. Thus, to the extent that there is a "mixed question of fact and law and the only disputes relate to the legal significance of undisputed facts, the controversy collapses into a question of law suitable to a disposition on summary judgment." Thrifty Oil Co. v. Bank of America National Trust & Savings Assn., 322 F.3d 1039, 1046 (9th Cir. 2003).
The moving party must show from the record that there is an absence of evidence to support the non-moving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). In determining whether genuine issues of material fact exist, the evidence must be viewed in the light most favorable to the non-moving party. Tarin v. County of Los Angeles, 123 F.3d 1259, 1263 (9th Cir. 1997). Once the moving party has demonstrated that no genuine issue of material fact exists, the nonmoving party "must go beyond the pleadings and . . . designate specific facts showing that there is a genuine issue for trial." Celotex Corp. v. Catrett, 477 U.S. at 324.
B. REQUIREMENT FOR TURNOVER
Section 542 of the Bankruptcy Code, 11 U.S.C., requires that any entity, other than a custodian, turn over property that the bankruptcy trustee may use, sell, or lease under 11 U.S.C. § 363 or that the debtor may exempt under 11 U.S.C. § 522. Homestead funds are exempt under 11 U.S.C. § 522(b)(3)(A). However, states can opt out of the federal rules for homestead exemptions, an option that the California legislature has previously decided to take. California Code of Civil Procedure, § 703.130; Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193, 1198 (9th Cir. 2012). In California, homestead funds or proceeds are exempt under several provisions of the California Code of Civil Procedure, §§ 704.710-704.850. If a bankruptcy debtor properly claims the homestead exemption, then the covered property is not subject to turnover to the trustee as it is no longer property of the bankruptcy estate. See Sticka v. Casserino (In re Casserino), 379 F.3d 1069, 1075 (9th Cir. 2004).
C. STATE HOMESTEAD EXEMPTION STANDARD
California Code of Civil Procedure, § 704.720, sets forth the rule for homestead exemptions for involuntary sales, with the exemption amount determined by California Code of Civil Procedure, § 704.730. Debtor claimed a homestead exemption pursuant to California Code of Civil Procedure, § 704.720, which provides in pertinent part:
If a homestead is sold under this division . . . the proceeds of sale . . . are exempt in the amount of the homestead exemption provided in Section 704.730. The proceeds are exempt for a period of six months after the time the proceeds are actually received by the judgment debtor . . . .
Cal. Code Civ. P., §704.720(b). The six-month timeframe is designed to allow a debtor to reinvest the funds toward another homestead. Chase v. Bank of America, 227 Cal.App.2d 259, 264 (1964), citing, Thorsby v. Babcock, 36 Cal.2d 202, 205-206 (1950) ("[O]bviously the true purpose of giving the owner that time is to permit him to move his family to another home with the retention of protection from forced sale. . . . Clearly, the Legislature has not required a purchase of other property immediately. Rather it has given the seller the reasonable time of six months within which to complete the transaction."). Should this time period expire before reinvestment of the homestead funds, the debtor forfeits the right to exempt the homestead funds from bankruptcy. In re Jacobson, 676 F.3d at 1199. In such case, this would allow the homestead funds to be claimed by the bankruptcy trustee and distributed to the bankruptcy estate.
The parties dispute a narrow legal issue - the meaning of the phrase "actually received" in California Code of Civil Procedure, § 704.720. In support of his position that turnover of the funds is required under 11 U.S.C. § 542, Trustee argues that Debtor "actually received" the homestead funds for purposes of California Code of Civil Procedure, § 704.720, because he had the ability to obtain the homestead proceeds from the Sheriff's Department after the execution sale. Opposition to Motion to Dismiss Complaint ("Opposition") at 3:25-4:3. In essence, Trustee contends that the meaning of the phrase "actually received" should include constructive receipt, which would cause the six-month reinvestment period to start running the moment the owner of homestead funds has the opportunity to receive those funds as opposed to the moment that the owner obtains physical possession of the funds. Opposition at 3:10-13, 3:25-4:3; Oral Argument, November 13, 2012, at 4:11-4:28 p.m. If Trustee's statutory interpretation of California Code of Civil Procedure, § 704.720, is correct, the six-month "clock" would have begun once Debtor had constructive receipt of the homestead funds. That starting point under Trustee's position would have been the date of the forced sale on March 16, 2011, which would mean that Debtor's homestead exemption expired more than one year ago on September 16, 2011. Debtor argues to the contrary that under the plain language of California Code of Civil Procedure, § 704.720, the phrase "actually received" is unambiguous and does not mean constructive receipt as argued by Trustee. Reply to Opposition to Motion to Dismiss ("Reply") at 3:18-5:3; Oral Argument, November 13, 2012, at 4:11-4:28 p.m. Under Debtor's view, the six-month reinvestment requirement for the homestead proceeds from an involuntary sale does not apply until he "actually received" the funds; it is undisputed that the Sheriff's Department had the funds until the funds were turned over to Trustee pursuant to the stipulated transfer of the funds.
In resolving a question of statutory construction, courts must first consider the plain meaning of the particular statute. United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989) ("The task of resolving the dispute over the meaning of [a statute] begins where all such inquiries must begin: with the language of the statute itself.") (citation omitted). "[W]here . . . the statute's language is plain, the sole function of the courts is to enforce it according to its terms." Id. (citation and internal quotation marks omitted). "[C]ourts must presume that a legislature says in a statute what it means and means in a statute what it says there." Connecticut National Bank v. Germain, 503 U.S. 249, 253-254 (1992) (citations and internal quotation marks omitted). "When the words of a statute are unambiguous, then, this first canon is also the last: judicial inquiry is complete." Id. at 254 (citation and internal quotation marks omitted). It is also "[a] fundamental canon of statutory construction . . . that, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning." Perrin v. United States, 444 U.S. 37, 42 (1979) (citation omitted).
Debtor points out that the precise language of the statute provides that "[homestead] proceeds are exempt for a period of six months after the time the proceeds are actually received by the judgment debtor" under California Code of Civil Procedure, § 704.720 (emphasis added). To determine whether Debtor's plain meaning argument is correct, the court must analyze the meaning of the words "actually" and received" in the statute. The Enforcement of Judgments Law, Part 2, Title 9 of the California Code of Civil Procedure, which includes § 704.720, does not define "actual" or "receipt, " so the court must look to the ordinary meaning of the words. See Cal. Code Civ. P., §§ 680.010-724.260; Taniguchi v. Kan.Pacific Saipan, Ltd., 132 S.Ct. 1997, 2002 (2012). The American Heritage Dictionary defines the word "actual" as something that is "existing and not merely potential or possible" as well as something "based on fact." American Heritage Dictionary of the English Language 18 (4th ed. 2006). Black's Law Dictionary defines "actual" as "[e]xisting in fact, real." Garner, Black's Law Dictionary 40 (9th ed. 2009). "Receipt" is defined as "the act of receiving, " American Heritage Dictionary of the English Language at 1458, or "[t]he act of receiving something." Garner, Black's Law Dictionary at 1382. The word "receive, " in turn, is defined as "to acquire or to get; to be a recipient." American Heritage Dictionary of the English Language at 1458. In California Code of Civil Procedure, § 704.720, the word "actually" modifies the word "receipt" as part of the phrase that pertains to homestead exemption proceeds. Therefore, the phrase means that the statute applies to proceeds that have been acquired and are existing, which contradicts Trustee's interpretation of the statute. The meaning of constructive receipt directly conflicts with the definition of "actually, " which is "not merely potential or possible." American Heritage Dictionary of the English Language at 18 (definition of "actual"). "Potential" and "possible" are terms that succinctly describe what constructive receipt entails. Id. The word "constructive" means "[l]egally imputed; existing by virtue of legal fiction through not existing in fact." Garner, Black's Law Dictionary at 356. Given the ordinary meaning of the words in the statute, "actually received, " the court should interpret the statute that actual receipt of the sales proceeds rather than constructive receipt is required to start the six-month time period for reinvestment under California Code of Civil Procedure, § 704.720. Construing "actually receiving" to include constructive receipt is not the ordinary meaning of these words. Moreover, such a broad interpretation of the words in the statute, "actually receiving, " to include constructive receipt is inconsistent with the legislative policy for liberally construing the statutory language on homestead exemptions in favor of created exemptions. Chase v. Bank of America, 227 Cal.App.2d at 264, citing, Thorsby v. Babcock, 36 Cal.2d at 205-206. Accordingly, the court concludes that based on the plain meaning of the language of California Code of Civil Procedure, § 704.720, the phrase "actually received" does not include constructive receipt.
D. RELEVANT CASE LAW DOES NOT SUPPORT TRUSTEE'S POSITION
Trustee also relies on several cases to support his argument that the six-month window for Debtor to reinvest the homestead funds has expired based on a constructive receipt of the funds. Trustee contends that the interpretation of homestead exemptions in the case law provides an opening that more than just physical possession marks the start of the six-month clock for homestead exemptions to expire and that constructive receipt can suffice. Trustee relies upon the case of In re Cumberbatch, 302 B.R. 675 (Bankr. C.D. Cal. 2003) to support his position, arguing that the six-month reinvestment period begins at the date of sale, which is when funds become available. In Cumberbatch, the court held that a bankruptcy debtor may properly claim the automatic homestead exemption in proceeds of the sale of her home ordered by a family law court as involuntary within the meaning of California Code of Civil Procedure, § 704.720. Id. at 681.
Courts have generally upheld the six-month reinvestment requirement of California Code of Civil Procedure, §704.720, in order to preserve the exempt status of sales proceeds from an involuntary sale of a homestead dwelling, but these courts have not definitively addressed when the six-month time period from receipt begins. See, e.g., In re Jacobson, 676 at 1198 (holding that when a couple's dwelling was sold in an execution sale and they received the homestead funds, the exempt status of the funds was lost if they were not reinvested "within six months, " but the court did not specifically address the issue of when the period started); see also, In re Cumberbatch, 302 B.R. at 681 (holding that a debtor was entitled to a homestead exemption because the sale of her home- ordered by the family law court-was involuntary for purposes of claiming the homestead exemption under California Code of Civil Procedure, § 704.720). The Cumberbatch court held that "the proceeds of sale of the homestead are exempt for up to six months after receipt, " but did not definitively speak to whether "receipt" referred to physical possession or could simply refer to the ability to receive possession. 302 B.R. at 681.
Trustee's argument based on Cumberbatch misses the mark because the holding in that case as the issue in Cumberbatch was whether a debtor's claim of homestead exemption in bankruptcy was proper where the property was sold prepetition pursuant to a marital dissolution judgment. That case did not specifically address the issue of when was the starting point of the six-month reinvestment period under California Code of Civil Procedure, § 704.720. See id. at 678-679. Rather, the court determined whether the homestead exemption was proper based on a finding that the sale of a dwelling, which was ordered by a family law court in a marital dissolution, was involuntary rather than voluntary. Id. at 681. The court stated that "the proceeds of sale of the homestead are exempt for up to six months after receipt, " but did not precisely address whether its interpretation of "receipt" would permit constructive receipt or possession or, even what would trigger a "receipt." Id. at 678 (emphasis added).
In this case, Trustee contends that the "actually received" phrase in California Code of Civil Procedure, § 704.720, relates to the date the Debtor's property sold. Trustee apparently draws an inference from the court's opinion in Cumberbatch, stating, "Debtor filed her [bankruptcy] petition within a month after escrow closed" in the next paragraph as the implied reason the debtor can receive an exemption. Id. Trustee would tie this inference from Cumberbatch to Debtor's case by pointing to a possible connection between the funds from the homestead sale placed into an escrow account in Cumberbatch as analogous to funds held by the Sheriff's Department. Trustee argues that "[t]he result would have been different if the bankruptcy filing had not occurred within the [six]-month period after the funds were deposited in the escrow account, " but provides no authority for such a conclusion. Opposition at 3:20-21. Trustee's reliance on Cumberbatch is misplaced because that court did not specifically address the issue of whether the date of sale, or another event, was determinant in deciding the starting point of "receipt."
California Code of Civil Procedure, § 704.720, specifically states that the homestead exemption's six-month reinvestment "clock" starts when homestead proceeds are "actually received." On the other hand, California Code of Civil Procedure, § 704.960, starts the six-month "clock" at the date of the sale. In this regard, Chase v. Bank of America is instructive. Chase involved a judgment debtor whose homestead dwelling was sold in a foreclosure sale, but after the sale, the foreclosure trustee held onto the sales proceeds, including the amount claimed by the debtor as exempt under her homestead. 227 Cal.App.2d at 261. Similar to the Trustee's argument in the case at bar, the trial court in Chase concluded that the debtor lost the homestead exemption in the sales proceeds because "[s]he took no effective steps to gain possession of the funds within the six months period or within any reasonable extension thereof." Id. at 263. The appellate court reversed the trial court and held that the debtor was entitled to homestead funds, even though six months had passed since the date of an involuntary sale of her dwelling because under the statute, "in the case of a forced or involuntary sale, the owner has no control over the excess proceeds, if any, and must wait to obtain them from the sheriff, commissioner, trustee, etc. It would be manifestly unreasonable to commence the running of the [six-month] exemption period before the homestead claimant obtains payment." 227 Cal.App. 2d at 264. As noted in Chase, in contrast, "[i]n the case of a voluntary sale, the owner has control of the sale and can usually obtain the proceeds thereof without delay." Id. at 263. Thus, the appellate court in Chase recognized the use of the words "actually received" in former California Civil Code, § 1257, the predecessor statute to California Code of Civil Procedure, § 704.720, as having significance because of the homeowner's lack of control over a forced sale and the inherent delay in payment of the homestead proceeds. 27 Cal.App.2d at 263-264, citing inter alia, Thorsby v. Babcock, 36 Cal. 2d at 205-206. In the case at bar, Debtor had no control over the forced sale of his dwelling or over the homestead proceeds as indicated by the Sheriff's Department's refusal to turn over the funds to him without an order of this court.
The case of Thorsby v. Babcock cited in Chase further supports Debtor's position, though it involves a voluntary, rather than an involuntary, sale. In Thorsby, a homeowner who sold his dwelling to pay a judgment to creditors sought to obtain homestead funds from the escrow account holder based on his homestead exemption. 36 Cal. 2d at 203. Because the creditors had executed judgment levies on the escrowed funds, including the homestead funds, the escrow holder refused to pay the proceeds allocated to the homestead exemption to the homeowner. Id. The California Supreme Court held that the homeowner was still entitled to the homestead funds as exempt, even though six months had passed from the sale of the dwelling. Id. at 206 (explaining that "the legislative purpose [of the homestead exemption] is thwarted if the proceeds from the sale of the homestead cannot be obtained by the owner, through no fault of his own, during the six months' period. . . . During that time it [is] impossible for [the homeowner] to reinvest in a new home of his family and obtain exemption of it."). While interpreting California Civil Code, § 1265, a precursor statute to California Civil Procedure, §704.960, which is the current statute governing homestead exemptions for proceeds from voluntary, rather than involuntary, sales, Thorsby makes clear that in light of liberal policy towards the homestead exemption, the six-month time reinvestment period does not start if the homestead funds are not available to the homeowner to reinvest. It can thus be inferred from Thorsby that the reinvestment time period would only start once the homestead funds are available to the homeowner. Even though Thorsby involved a voluntary sale of a dwelling, the same rationale regarding the availability of the homestead funds to the homeowner applies here to Debtor who did not have the funds available to him to reinvest in a new dwelling because the funds were being held by an uncooperative third party, the Sheriff's Department.
Trustee relies on the Jacobson case to support his position, but that case is not helpful to Trustee. Jacobson involved the situation of a married couple attempting to claim a homestead exemption following an involuntary execution sale. 676 F.3d at 1197-1198. The Ninth Circuit held that if a bankruptcy debtor did not reinvest homestead proceeds in a new dwelling within six months of receipt, the proceeds would lose their exempt status. Id. at 1198-1199. However, the court in Jacobson said nothing to support Trustee's position argued in this case that constructive receipt is sufficient to begin the six-month reinvestment period under California Code of Civil Procedure, § 704.720. Moreover, the facts in Jacobson are distinguishable because that case involved the situation in which the debtor actually received the homestead funds from the execution sale and failed to reinvest the proceeds, which is not the situation here because Debtor never actually received the funds. 676 F.3d at 1197-1198.
The court concludes that there is no legal authority to support Trustee's interpretation contrary to the plain meaning of the statutory language that the phrase "actually received" in California Code of Civil Procedure, § 704.720, includes constructive receipt. Accordingly, the court holds that the six-month period for reinvestment of homestead funds before the homestead exemption for such funds expires in the case of an involuntary sale does not begin to run until the bankruptcy debtor has actual - meaning physical - possession of the homestead funds. The court further holds that Debtor is therefore entitled to the homestead funds totaling $50,000 based on his unexpired homestead exemption.
For the foregoing reasons, the court grants Debtor's motion for summary judgment and denies Trustee's cross-motion for summary judgment. Nothing in this memorandum decision, however, relieves Debtor from his obligation to comply with California Code of Civil Procedure, § 704.720(b) and reinvest the exempt funds within six months of actual receipt. See In re Jacobson, 676 F.3d at 1197-1200. Therefore, the denial of Trustee's motion for summary judgment is without prejudice to the right of Trustee to file a renewed turnover action if Debtor fails to comply with the California homestead exemption requirements to reinvest the homestead proceeds in a new dwelling under California Code of Civil Procedure, § 704.720. The court further orders Debtor to lodge and serve a proposed judgment consistent with this memorandum decision.
IT IS SO ORDERED.