Case Brief – In re Diaz, a different view of the homestead exemption

The Diaz case (In re Diaz, 547 B.R. 329, 9th Cir. BAP), has not received enough love but I find it to be too fascinating not to write about because of its potential for so much advantage!

There were essentially two holdings in the case:

  1. The California homestead exemption contains a “residence” requirement which includes an “intent” component; and
  2. The burden is on the Debtor to prove intent.

The intent component of the residence requirement requires that debtors have a bona fide intention to make the premises their home or residence.

This is not as clear cut as one may believe. For example, in a case where a declarant testified that the debtor had stated to him that he had a good lawyer and that he was going to “beat” plaintiff’s levy of attachment by living in the house on the property and declaring a homestead thereon, the Court found there was no intention to live there despite uncontroverted testimony by debtor that he intended to live there. Lakas v. Archambault, 38 Cal.App. 365, 371-372.

Under similar circumstances, in anticipation of a stipulated judgment, defendants moved into real property they owned right before entry of judgment. The Court found that their hasty move into the property could be construed as an intention to “beat” the execution of the judgment. Ellsworth v. Marshall, 196 Cal.App.2d 471 (1961).

Take all the above, and shift the burden onto the Debtor to prove his intention.

Suppose a Debtor owns three real properties, two of them underwater and one with equity. Debtor moves into the property with equity and files for Chapter 7 Bankruptcy claiming a homestead exemption.

Most Chapter 7 Trustees will compare the address where Debtor currently resides, as listed in the schedules, with the exemption claimed in Schedule C and will conclude the case if Debtor testifies that he lives in the property. In light of Diaz, I do not believe this is enough. There should, or could, be an inquiry into the Debtor’s plans. Why did you move into this property? The wrong answer could have devastating consequences for the Debtor.

This leads me to a question about Section 1123 which contains an antimodification clause under subsection (b)(5). The antimodification clause applies to the debtor’s principal residence which is defined in Section 101(13)(A). The debtor’s principal residence is defined as a residential structure used by the debtor as a principal residence (seems a bit circular). To “reside” is not defined anywhere, so could that mean a court has to use California’s definition which includes an intention element? If so, that could change the landscape of certain prepetition practices where Debtor’s artificially change their primary residence to avoid the antimodification clause.

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