California Court Allows Debtor to Create Exemption with Non-Exempt Assets
Homestead exemption laws can be used by debtors to shield real property assets from collection by creditors. A recent federal district court decision held that such exemptions take priority over fraudulent transfer laws where the exemptions and the fraudulent transfer laws may conflict.
In Hinds & Shankman, LLP v. Lapides, 2019 WL 4955148, 67 Bankr.Ct.Dec. 207 (C.D. Cal. 2019), the United States District Court for the Central District of California held that the unlimited homestead exemption, provided under the Texas Constitution, protects homestead real estate in Texas which was obtained through a potentially fraudulent conveyance. The Court found that the purpose of the homestead exemption, to provide a secure home for a debtor’s family against creditors, was to be construed broadly, even when it assists a dishonest debtor in wrongfully defeating a creditor.
The defendant, Richard Lapides, originally sought the services of plaintiff, Hinds & Shankman, LLP, as legal counsel to pursue a nondischargeability claim against a bankruptcy debtor that owed Lapides a substantial amount of money. The bankruptcy court ruled against the claim of Lapides, but not before Lapides incurred over $850,000 in legal fees and costs with Hinds & Shankman. Hinds & Shankman obtained a money judgment against Lapides for its fees and then sought to collect the judgment debt against Lapides.
During the time when the debt of Lapides to Hinds & Shankman was being incurred, Lapides sold two valuable parcels of real estate in California, a state with limits on homestead exemptions, and purchased a $1.2 million property in Texas, a state with an unlimited homestead exemption. Hinds & Shankman brought suit against Lapides in the United States District Court for the Central District of California, under the California fraudulent transfer act, seeking to freeze the prior transfer of equity from the California parcels, which could have been used towards satisfying the judgment debt owed by Lapides. Lapides argued that such relief was barred by the homestead exemption in the Texas Constitution.
The Court agreed with the argument of Lapides that the Texas homestead exemption did not contain an exception for a lien arising from an alleged fraudulent transfer of non-exempt funds into the homestead. Hinds & Shankman unsuccessfully argued that a constructive trust should have been imposed on the Texas real estate. However, the cases relied upon by Hinds & Shankman, where such constructive trusts were imposed, involved stolen or misappropriated funds that never rightfully belonged to the debtor in the first place. The Court held that Lapides rightfully owned the funds from the two California parcels that he used to purchase the Texas parcel.
Accordingly, the Court ruled that the Texas unlimited homestead exemption applies even when the debtor acquires the homestead using non-exempt funds with the intent of hindering creditors. Hinds & Shankman has provided its notice to the Court of its intentions to appeal the decision.
Based on the decision of the Court in Hinds & Shankman, LLP v. Lapides, creditors should be diligent in pursuing their claims and in monitoring any actions taken by debtors to dispose of their assets. Creditors can remain proactive by engaging legal counsel to expedite obtaining and collecting judgments, and to use resources available to locate and pursue assets of debtors.
If you have any questions on this topic or other creditors’ rights matters, feel free to contact attorney Eric von Helms via email or call (414) 962-5110.
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