Can the debtor claim the “carve-out” amount for the estate as exempt when the Chp. 7 trustee proposes to sell property of the estate in a “short-sale?”

In re Wilson,  — B.R. — , 2013 WL ————- (Bkrtcy, C. D. Ca. June, 2013  Clarkson.J.)

Issue:   Where the trustee proposes to sell property of the estate in a “short-sale,” can the debtor claim the “carve-out” for the estate as exempt?

Holding:   Yes.  The proceeds of the sale are exempt irrespective of the fact that the property was underwater on the petition date.

Judge Scott Clarkson

The chapter 7 debtor here owned a home and a rental property.  Neither property had any equity on the petition date.  The debtor did not claim an exemption in either property.  The trustee listed the properties for sale and obtained offers.  The trustee then made a deal with the lienholders to complete a “shortsale” giving the estate $15,000 from the sale of one property and $21,250 from the other.  The debtor then amended her exemptions and claimed the wildcard amount of $26,328.  The trustee objected to the exemptions.  “The Trustee asserts that the Debtor may not claim exemptions which did not exist as of the Petition Date and that the claimed exemptions exceeds the maximum amount the Debtor is entitled to under CCP Sections 703.140(b)(1) and (5).”

Judge Clarkson agreed that the exemption exceeded the maximum amount available since the wildcard amount on the petition date was $23,350.  But he overruled the trustee’s objection otherwise.  He says, “apparently the lenders are willing to ‘tip’ the estate so that they will not have to foreclose on these Properties.”  “The Trustee does not object to the exemptions because they were filed late, or that they were made in bad faith, or that they cause prejudice to the Trustee or the creditors of the estate.  No evidence of such issues or allegations was presented to the Court by the Trustee, and that burden is squarely on the Trustee when raising such objections.  ‘The bankruptcy court has no discretion to disallow amended exemptions, unless the amendment has been made in bad faith….’ In re Arnold, 252 B.R. 778, 784 (9th Cir. BAP 2000).”  He says the debtor is not claiming an exemption in the “carve-out” but in the property itself.

“Both of the homes were in existence and owned by the Debtor on the Petition Date.  The Debtor did not believe that the exemption interests available to the Debtor were worthy of a declared exemption on the Petition Date.  However, now that the Debtor believes that there may be exemption value because the lenders may pay a tip to the estate for the privilege of avoiding foreclosure proceedings and the consumer protection requirements imposed by the State of California, the Debtor is entitled to file her amended Schedule C to include exemptions relevant to the Properties.”

“It does not matter how funds are generated by the estate through a Section 363 sale, including if derived from a ‘tip’ from Bank of America or Wachovia so that they will not have to undertake a foreclosure proceeding under California law.  Funds derived from these sales are property of the estate and are subject to valid exemptions.  The wild card exemption is designed precisely for this purpose – to attach to any estate property that the Debtor designates in her Schedule C form.  In this instance, the Debtor has designated funds derived from the sale of the Properties for exemption, and she is entitled to the exemption.”

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