Transfer but Keeping Equitable Interest, 1215 days, and Homestead

A look whether a refinance or transfer to a LLC, will, or trust restarts the 1,215 days for a homestead exemption in California

The maximum California homestead exemption now protects over $600,000 of home equity. However, there are conditions for a debtor to protect this amount in a bankruptcy. One of these is that the homeowner must have acquired the interest over 1,215 days ago. Does a refinance or transfer to a will, trust, or LLC restart this crucial timer? Let’s take a look.

Why It Matters – 11 USC 522(p)

Section 522(p)(1)(A) of the Bankruptcy Code says

Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value in—
(A) real or personal property that the debtor or a dependent of the debtor uses as a residence…

(emphasis added)

Note that the $125,000 has been adjusted up to $189,050, effective for the three-year period ending March 31, 2025, where it will be adjusted again based on the three-year changes to the CPI pursuant to 11 USC 104(b).  But I digress.

This becomes extremely important for the homeowner with equity filing Chapter 7 bankruptcy.  If they want to keep their home and the potential for the maximum homestead exemption, they forfeit that if the interest was acquired during the 1215 days before filing.

Learn if they actually have to live there during the 1215-day period, or if ownership is enough.

If the interest was acquired in the last 1215 days, they lose the maximum homestead exemption. In fact, they don’t even get the minimum California homestead exemption of $300,000 (adjusted for inflation).  Instead, they get the exemption cut to about $190,000 of home equity protection.

Caldwell: Equitable interest or acquired interest with transfers to an LLC or trust?

In re Caldwell – basic facts

Meet the Caldwells. They’re a married couple who purchased their home in Las Vegas, Nevada in 1994. They lived there continuously for over twenty years before filing bankruptcy in 2014.  Further, they made all mortgage payments, paid all property taxes, maintained insurance, and assumed all other obligations of someone who owns real estate.

When they filed the 2014 bankruptcy, the Caldwells valued their home at almost $1,100,000, encumbered by liens of just over $500,000. This left about $550,000 of equity, and the Nevada homestead exemption was, coincidentally, $550,000.

No problem, slam dunk, easiest case ever, where’s my discharge.

The Caldwell transfers

The wrinkle (and you knew there had to be a wrinkle) is that there was a prepetition transfer. In fact, from the time of purchase until filing the bankruptcy, there were seven (7) transfers to and from their trust and their LLC.

These transfers were for no consideration and for estate planning purposes.  They involved quitclaim deeds by debtors in transfers to the trust, where the Caldwells were the only trustees. They formed a Delaware corporation where they were the only owners, and transferred the LLC by quitclaim deed. On and on it went, back and forth the residence goes.

As fortune (or misfortune) would have it, one of these transfers (from LLC to Trust) was within the 1215 days prior to filing bankruptcy. The Chapter 7 trustee objected to the claim of exemption of $550,000, seeking to limit it to the fallback number of 522(p) at that time of about $155,000. 

Mr. Caldwell responded that he was just transferring title from himself to an entity owned by him, and in doing so, interests weren’t acquired, but retained. During the 1215-day transfer in question, he didn’t acquire any interest.

Court Rulings in Caldwell

Bankruptcy Court: LLC is a separate Legal Entity

The bankruptcy court sustained the trustee’s objection to the objection. In doing so, it ruled that an interest was acquired in the 1215 days before filing. Among other things, a rationale was that an LLC is a distinct and separate legal entity which is personal property.  Debtor appealed to the BAP.

The BAP: Equitable Interest Sufficient & Debtor Was Always Entitled to the Homestead

The Bankruptcy Appellate Panel for the Ninth Circuit reversed. Looking at state law, the BAP found in the statutes, that “Homestead” is broadly, with no designation how title to the property is to be held, and they do not limit the estate that must be owned. Further, the BAP noted that Nevada courts held that the exemption should be liberally and beneficially construed in favor of the debtor and protecting the family home.

The BAP for the Ninth Circuit then wrapped it up with this (and forgive the extended quote):

“The record shows that the interest Debtor retained in the Property after the transfer of legal title to the LLC was more than a general interest or the mere right to exclusive possession. According to the record, he retained all the indicia of ownership by his possession and use of the Property along with the payment of the mortgage, taxes, and insurance. Plainly, the “equity” in the Property which is subject to the exemption was the result of payments made by Debtor over the years. Trustee did not present any evidence to controvert these facts. We thus conclude that Debtor was not divested of all interests in the Property by the transfer of legal title to the Property to the LLC. Accordingly, Debtor’s homestead rights in the Property before and after the transfers of title remained unchanged.

“Finally, it does not matter that a declaration of homestead with respect to the Property was filed on October 10, 2011, within 1061 days of the filing of the petition. The filing of a homestead declaration does not trigger the statutory cap under § 522(p)(1). Greene v. Savage (In re Greene), 583 F.3d 614, 620 (9th Cir. 2009). Like the debtor in Greene, Debtor acquired his exemptible interest in the Property in 1994, well outside the statutory period contained in § 522(p)(1), and, as discussed above, that exemptible interest never changed.

“In enacting § 522(p)(1), we do not believe that Congress envisioned limiting a debtor’s homestead exemption where as here (1) debtor purchased the property in 1994, well before the start of the 1215-day period, (2) continuously possessed and occupied the Property as his homestead, and (3) accumulated the “equity” by making regular mortgage payments throughout his occupancy.

“In sum, we conclude that the transfer of title from the LLC to the Trust did not constitute an “interest” that was “acquired” by Debtor to limit his homestead claim, within the meaning of § 522(p)(1). As discussed above, Nevada law protected Debtor’s homestead rights in the Property throughout the various transfers of title. Therefore, the statutory cap does not apply.”

In re Caldwell, 545 BR 605, 612 (BAP 9th Cir, 2016).

In short, the Ninth Circuit BAP ruled that an equitable interest is sufficient for a homestead under Nevada state law. The debtors did not acquire an interest with the transfer; they always had the necessary interest.

But Caldwell is Nevada, what about California

A careful eye would note that the BAP looked carefully at Nevada state law and court rulings to interpret the Nevada homestead exemption. Would the result be any different for California, how our homestead statute is phrased or our courts’ interpretation of it?

Liberally construed exemption

First, the 9th Cir BAP found that the Nevada courts have liberally construed the exemption in favor of the debtor.  Similarly, California courts have interpreted the California homestead exemption liberally in favor of the homeowner debtor.

For example: “In reaching this conclusion we are mindful of the long-standing policy of the California courts in favor of liberally construing the exemption statutes in favor of the debtor.  Bank of California v. Virtue & Scheck, Inc., 140 Cal. App. 3d 1026 (Cal Ct of Appeal, 4th App Dist., 2nd Div. 1983).  The Ninth Circuit BAP echoed this recently: “California exemptions are to be broadly and liberally construed in favor of the debtor.” In re Elliott, 523 BR 188, 192 (BAP 9th Cir, 2014).

Limits on the homestead exemption?

Second, the BAP found that “homestead” was interpreted broadly in the Nevada statute, with no limitation on how it’s held. In California, this is complicated by the California Code of Civil Procedure. At CCP § 704.740, subsection (a) says, in pertinent part:

“…the interest of a natural person in a dwelling may not be sold under this division to enforce a money judgment except pursuant to a court order for sale obtained under this article and the dwelling exemption shall be determined under this article.”

It would seem that the California homestead, unlike that of Nevada, is limited to natural persons. As such, an LLC or trust can’t be the owner of a property to which a homestead exemption is claimed under California law. Perhaps the Caldwells would have had a different result had they lived in California. But wait, there’s more.

Nolan: like Nevada, equitable interest is sufficient for a homestead exemption in California

Ninth Circuit says equitable theory is enough in California case

Finally, we land on In re Nolan, 618 BR 860 (Bankr Ct, CDCA 2020). This was a situation where a debtor with a 50% beneficiary in a trust claimed a homestead exemption, and trustee objected. Judge Clarkson ruled that an equitable interest was sufficient for claiming the California homestead exemption.  Id. at 868-869.

The Nolan decision (like Caldwell for Nevada’s homestead) holds that equitable interest is enough for a homestead in California. So, if there were a transfer to and from a trust in California within the 1215-day period, we don’t even reach the enforcement provisions of 522. Why? The answer floats above 522(p): because the debtor always had an equitable interest, he didn’t acquire anything new with the transfer. He was always the equitable owner and, thus, always entitled to the homestead.

Judge Clarkson’s Nolan case was affirmed by the district court on appeal, and affirmed again by the Ninth Circuit. In an unpublished opinion, the Ninth Circuit Court of Appeals wrote, “The district court properly held that the Debtor’s equitable interest fell within the automatic prong of the homestead exemption, which is designed to protect a debtor living in a dwelling who is subject to a forced sale.”

A mortgage refi doesn’t restart the clock of 1,215 days, because the debtor doesn’t acquire anything with the refinance; he always has an equitable interest before and after the refi. 

Spouse quitclaim of community property at divorce

What about when husband and wife own a house as community property, then, during divorce, husband quitclaims to wife and fewer than 1215 days later she then files bankruptcy ? Is her getting solely her name on the title an act that “acquires an interest” for 522(p) purposes?

There’s no case in the Ninth Circuit directly on point yet interpreting California law with these facts, so the following is a best guess, do your own research, and your mileage may vary. Trustees can still take the chance on a challenge when a lot of equity is at stake.

However, California Family Code 751 says, “”The respective interests of each spouse in community property during continuance of the marriage relation are present, existing, and equal interests.” 

That means that both spouses own community property in full and that equitable interest is present and continuing during the marriage. So, when one spouse later quitclaims to the other spouse, the “receiving” spouse didn’t really acquire anything new that they didn’t already own. 

The Nolan case above, again affirmed by the Ninth Circuit, says that equitable interest is sufficient for a homestead. Therefore, title changing due to a quitclaming from husband or wife to the other spouse isn’t the deciding factor.

Because the spouse who ‘got’ the quitclaim always had a present and equitable interest in the property per FC 751, Section 522(p) of the Bankruptcy Code wouldn’t apply.

Summing it all up

Because of In re Nolan, a Central District of California case affirmed by the Ninth Circuit Court of Appeals, we have an holding that an equitable interest in property is sufficient for the California homestead exemption. 

As such, transfers back and forth where debtor always had an equitable interest don’t trigger the enforcement provision of 522(p). The 1215-day rule never is a factor in transfers where debtor always had an equitable interest. Nothing new is acquired.

This is consistent with the 9th Circuit BAP’s holding in Caldwell, which also held that because debtor always had an equitable interest, nothing is acquired when there is a transfer to or from something in which debtor has an equitable interest.