HomeIf you sell your home, can the cash proceeds be exempted using the homeowner’s equity exemption?  That was the subject of two questions that a fellow bankruptcy attorney recently asked me.  I found the exchange interesting, so I am posting it for your edification.

Question 1:

If the proceeds from the sale of the domicile are held in escrow or my client trust account — and the Debtor is required to seek further court approval before being allowed to touch them, would that mean the Debtor never “actually received” them in the sense of Cal. Civ. Proc. Code § 704.720, so that the statutory time did not begin to run?

I.          Exempt Status If Debtor Did Not Have Immediate Access To The Proceeds

We first turn to the statute (with emphasis added):

If a homestead is sold . . . 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, except that, if a homestead exemption is applied to other property of the judgment debtor or the judgment debtor’s spouse during that period, the proceeds thereafter are not exempt.

Cal. Civ. Proc. Code § 704.720(b).

Based on this language, the California Supreme Court’s holding in Thorsby v. Babcock, 36 Cal. 2d 202 (Cal. 1950) answers the question.

Babcock was the judgment debtor in this case, and Thorsby was the judgment creditor.  Babcock sold his home on which he had a homestead exemption.  However, due to the litigation with Thorsby the sale proceeds were placed in an escrow account for eight months.  Thus, Babcock didn’t have access to the sale proceeds for eight months, so he couldn’t reinvest the proceeds in a new domicile during the six-month postsale period.  Thorsby challenged the legitimacy of the exemption based on the fact that the proceeds hadn’t been reinvested in a domicile during the six-month postsale period.
Continue Reading Homestead Exemption After Sale Of The Residence

small pile of penniesHere is the eighth defense against preference avoidance actions, the so-called de minimis transfer defense.  This defense has two versions.

Defenses To Preference Avoidance Actions, Part VIII:

The De Minimis Transfer Defense

A.        The De Minimis Transfer Defense, Part I

Suppose an individual with primarily consumer debt files a personal bankruptcy.  And suppose that debtor

Here is the sixth defense against preference avoidance actions, the so-called domestic support defense.  This one is short.

Defenses To Preference Avoidance Actions, Part VII:

The Domestic Support Defense

A comparison of the Bankruptcy Code prior to October 17, 2005 with its current incarnation (the 2005 law that changed the Code is the Bankruptcy Abuse

Man reading legal docsHere is the sixth defense against preference avoidance actions, the so-called statutory lien defense.

Defenses To Preference Avoidance Actions, Part VI:

The Statutory Lien Defense

Some liens are voluntary, the result of the debtor voluntarily granting a lien to a creditor.  Examples include home mortgages and car loans.

Other liens are involuntary and are recorded against the debtor’s wishes.  For example, if a creditor obtains a judgment against the debtor, the creditor can record a judgment lien against an asset — such as the debtor’s home.

Another type of involuntary lien is a statutory lien, which is a lien that arises by operation of some statute.  For example, if a homeowner is behind on homeowners association dues, the HOA can record a lien pursuant to a statute.  See, e.g., Cal. Civ. Code § 1367.1.  Statutory liens are the focus of § 547(c)(6):  “The trustee may not avoid under this section a transfer — . . . that is the fixing of a statutory lien that is not avoidable under section 545 of this title.”  Thus, if the statutory lien is not avoidable under § 545, it is not avoidable.  (One of the challenges in understanding statutes is having to follow chains of references from one part of the statute to another.  This is one of those challenges.)

Section 545 provides:
Continue Reading Preferential Transfers IV: Defenses To Preference Avoidance Actions (Part VI)

Floating Lien Defense does not actually float on waterHere is the fifth defense against preference avoidance actions, the so-called floating lien defense.

Defenses To Preference Avoidance Actions, Part V:

The Floating Lien Defense

In my last post I discussed the security interest defense, and noted that § 547(c)(3) requires that the security agreement must clearly identify the collateral securing the debt.  The example that set the stage for the discussion of § 547(c)(3) was of the purchase of a car.  The debtor took possession of the car and at the same time transferred a security interest in the car to the creditor.  Thus, the debtor had the car at the time of the transfer.

However, a lien can be created even before the debtor has the collateral, or even before the collateral comes into existence.  Such a lien is called a floating lien.

For example, suppose the debtor is a business that  regularly purchases widgets from a supplier, and then resells them at its retail outlets.  The parties can create a lien that specifies that all future deliveries of widgets become collateral securing a floating debt the debtor has to the supplier.  As the inventory is sold, the debt is paid from the proceeds, with the unsold inventory serving as collateral for the unpaid portion of the debt.
Continue Reading Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part V)

If you’ve been following my blog posts on preferential transfers and would like more in-depth coverage, I will be speaking on this topic on May 8 in Orange, California and again on May 15 in Pasadena, California.  In addition to the topic of Preferential Transfers: Preference Actions and Substantive Defenses, I will also cover the

Here is the fourth defense against preference avoidance actions, the so-called net result defense.

Defenses To Preference Avoidance Actions, Part IV:

The Net Result Defense

Suppose you borrowed $10,000 from ABC Bank.  After paying back ABC Bank the $10,000, you borrowed another $7,000 from ABC Bank.  And suppose you filed for bankruptcy protection less than ninety days after repaying the $10,000 to ABC Bank.  Can the trustee assigned to your case avoid the $10,000 payment as a preference?  The answer to this question is the point of § 547(c)(4):

The trustee may not avoid under this section a transfer — . . . to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor —

(A) not secured by an otherwise unavoidable security interest; and (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.

Based on our discussion of § 547(b), we might conclude that the trustee can recover the entire $10,000.  However, § 547(c)(4) limits the recover to the net preference, which is $3,000.  Thus, while you repaid $10,000, the net benefit that ABC Bank derived from the transaction was only $3,000 because it gave you $7,000 after the repayment.

Put another way, when you paid the bank $10,000, your subsequent bankruptcy estate was diminished by $10,000.  When the bank later gave you $7,000, the subsequent bankruptcy estate was replenished by $7,000, leaving a net shortfall of $3,000.  Therefore, the trustee would only be able to recover $3,000 rather than the entire $10,000.
Continue Reading Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part IV)

Here is the third defense against preference avoidance actions, the so-called security interest defense.

Defenses To Preference Avoidance Actions, Part III:

The Security Interest Defense

Suppose you wish to buy a new car that costs $30,000, but you don’t have $30,000.  Your solution is to borrow money for the purchase.  The lender wants some assurance

This is the second post devoted to defenses against preference avoidance actions.  It covers the so-called ordinary course of business defense.

Defenses To Preference Avoidance Actions, Part II:

The Ordinary Course Of Business Defense

Suppose a corporate debtor in Chapter 11 has a lease on the building in which it conducts its business.  Suppose the debtor has lease payments of $25,000 per month.  If it makes its usual on-time payments during the ninety-day prepetition period — i.e., a total of $75,000 — will the DIP (the Debtor-in-Possession, who is the debtor serving as a quasi-trustee) successfully avoid those payments?  Based on 11 U.S.C. § 547(c)(2), the answer is “no”:

The trustee may not avoid under this section a transfer — . . . to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was —

(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or

(B) made according to ordinary business terms.

Although this Code subsection appears to have two possible conditions ((A) and (B)), each of which focuses on the nature of the payments, there is a third crucial requirement embedded in the introductory language:  the underlying debt itself must have been incurred in the ordinary course of business. 
Continue Reading Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part II)