Case No. 16-12687-B-7
NOT FOR PUBLICATION DC No. TGM-2
MEMORANDUM OF DECISION
This decision holds that the debtor did not meet her burden of proof to establish a claim of exemption in funds held by an escrow holder even though the original source of those funds may have been a benefit from the Public Employee Retirement System. This decision also holds that even if the Debtor had met her burden of proof and all excluded evidence was admitted, the proceeds held by the escrow holder were not exempt even if those proceeds were properly traced from the retirement benefit.
The following are the court's findings of fact and conclusions of law under Fed. R. Civ. P. 52 made applicable to contested matters under Fed. R. Bankr. P. 7052 and 9014(c). If any of the following facts are deemed conclusions of law, the court adopts those facts as conclusions of law. If any of the following conclusions of law are deemed findings of fact, the court adopts those conclusions as findings of fact.
Dr. Loraine Goodwin-Miller worked as a physician for the California Department of Corrections and Rehabilitation (CDCR) for fourteen years. She also operated the Weight Management Center in the city of Madera, California and is on the "Central Air Board" (Document No. 1). She is the sole proprietor of "Goodwin Greenhouse" which is a non-profit domestic violence shelter in Madera (Document No. 1).
In April 2014, Dr. Goodwin-Miller signed a contract to buy a building located at 801 W. Yosemite in Madera, California from James E. Walters for $205,000.00. An escrow was opened at Placer Title Company. Dr. Goodwin-Miller was to put $20,000.00 down. The remaining $185,000.00 was to be financed by Mr. Walters. The origin of the $20,000.00 and its character when Dr. Goodwin-Miller filed this bankruptcy case is this proceeding's pivotal issue.
Dr. Goodwin-Miller was eligible for Public Employment Retirement System benefits since she had been employed by CDCR. She withdrew $25,000.00 (less Federal withholding and a check processing fee) from her account at Savings Plus. The Debtor deposited the net withdrawal ($19,997.50) into a dormant Weight Management Center business account at Wells Fargo. One day later, the Debtor tendered a $5,000.00 cashier's check to real estate agent, Nellie Begley, of Begley Properties, which was deposited into an escrow account at Placer Title Company. Less than two months later, on June 2, 2014, the Debtor tendered a cashier's check for $14,960.00 from the Wells Fargo account and other cash to Placer Title to fund the down payment for the Walters/Goodwin-Miller escrow. The purchase never finalized. Litigation ensued. The Debtor did not prevail on her specific performance claim in Madera County Superior Court and Mr. Walters' was awarded $50,000.00 against the Debtor. The court has no evidence that the escrow ever closed.
Future references to Dr. Goodwin-Miller will be to "Debtor." This is for ease of reference only and no disrespect is intended by the court to Dr. Goodwin-Miller or her professional status.
The Savings Plus account was actually a "401K" account. While not clear from the testimony at the hearing, the court presumes that the Debtor's PERS retirement benefits were at least in part "rolled over" into a 401K.
There is no evidence as to why or how this award was made. It is not relevant to these proceedings.
The Debtor filed this bankruptcy case, pro se, on July 26, 2016. James Salven was appointed Chapter 7 Trustee ("Trustee"). The schedules included a list of exemptions which were amended on June 6, 2016. Among the exemptions claimed by the Debtor was "100%" of the escrow funds. The parties have agreed that the amount held by Placer Title for the Debtor's and the Trustee's benefit is $20,119.11 ("escrow funds"). The Debtor claims the escrow funds are traceable private and public retirement benefits; disability benefits; worker's compensation benefits; are in a deposit account; is a personal injury award and are social security benefits.
The Trustee hired counsel. The Trustee filed objections to the Debtor's exemptions on March 29, 2017 (Document No. 55). Three exemption claims were challenged: a 1999 Lexus, the Debtor's homestead, and the escrow funds. The objections to the 1999 Lexus, and the Debtor's homestead exemptions, were eventually dropped by the Trustee after discovery proceedings. This matter only proceeded on the Trustee's objection to the Debtor's claimed exemption in the escrow funds.
The Debtor opposed the Trustee's objection (Document No. 61) and attached numerous exhibits to her response. The parties engaged in discovery. The court scheduled an evidentiary hearing, which was held February 2, 2018.
A review of the docket will reflect the Trustee did file motions to compel the Debtor's compliance with certain discovery demands. The court has entered separate orders on those matters.
At the hearing, the Debtor offered several documents as exhibits. The exhibits were marked. The exhibits showed the net withdrawal of $20,000.00 from the Savings Plus account; deposit into the Wells Fargo account; withdrawals from the Wells Fargo account; payment of $5,000.00 to Nellie Begley and the remaining down payment balance deposited into the escrow two months later by the Debtor. The Trustee objected to the admission of those exhibits for lack of foundation and hearsay. The court sustained those objections. The Debtor testified about the various transactions. The Trustee objected to some of the testimony. The court made various rulings on those objections.
CONTENTIONS OF THE PARTIES
The Debtor contends that the escrow funds are directly traceable to the withdrawal from the Savings Plus 401K account and that the funds in that account were derived from her PERS retirement benefits. Consequently, the Debtor claims, under Cal. Civ. Proc. §§ 704.110 and 703.080 the $20,119.11 is fully exempt.
The Trustee counters, contending the Debtor has not met her burden of proof to establish tracing into the escrow account and that the escrow account is not the same as other accounts to which exempt property proceeds can be traced under California law.
The United States District Court for the Eastern District of California has jurisdiction of this bankruptcy proceeding under 28 U.S.C. § 1334(b) in that this is a civil proceeding arising under Title 11 of the United States Code. The District Court has referred this matter to this court under 28 U.S.C. § 157(a). This is a "core" proceeding under 28 U.S.C. § 157(b)(2)(B).
1. The Debtor did not meet her burden of proof that the escrow funds were exempt when the petition was filed.
When a Debtor files a Chapter 7 petition, all of the Debtor's legal or equitable interests in property become property of the estate, subject to the Debtor's right to reclaim certain property as exempt. Schwab v. Reilly, 560 U.S. 770, 774 (2010). 11 U.S.C § 522 provides a default list of exemptions, but allows states to opt out of the Federal scheme and define their own exemptions. 11 U.S.C. § 522(b)(2), (b)(3)(A), (d). California has opted out of the Federal exemptions scheme and permits its Debtors only the exemptions allowable under state law. Cal. Civ. Proc. § 703.130. The bankruptcy court decides the merits of state exemptions, but the validity of the exemption is controlled by California law. Diaz v. Kosmala (In re Diaz), 547 B.R. 329, 334 (9th Cir. B.A.P. 2016) (citing LaFortune v. Naval Weapons Ctr. Fed. Credit Union (In re LaFortune), 652 F.2d 842, 846 (9th Cir. 1981)). California exemptions are to be broadly and liberally construed in favor of the Debtor. Elliott v. Weil (In re Elliott), 523 B.R. 188, 192 (9th Cir. B.A.P. 2014).
A Debtor's exemption rights are determined as of the petition date. Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193, 1199 (9th Cir. 2012) ("under the so-called 'snapshot' rule, bankruptcy exemptions are fixed at the time of the bankruptcy petition."); Gose v. McGranahan (In re Gose), 308 B.R. 41, 45 note 7 (9th Cir. B.A.P. 2004). So, the Debtor's exemption rights were fixed on the day she filed the bankruptcy petition, July 26, 2016 (Document No. 1). On that date it is beyond dispute that the escrow funds at issue were being held by Placer Title Company for the benefit of the Debtor, the Debtor's estate, and Mr. Walters.,
The Trustee filed an adversary proceeding against Placer Title and others for turnover. See Fed. R. Bankr. P. 7001. That adversary proceeding (17-01039) is abated pending the outcome of this contested matter.
Generally, a Debtor's claimed exemption is presumptively valid, and the objecting party has the burden of proving that the exemption is improper. In re Diaz, 547 B.R. 336 (citing Carter v. Anderson (In re Carter), 182 F.3d 1027, 1029 note 3 (9th Cir. 1999); Fed. R. Bankr. P. 4003(c)). However, where a state law exemption statute specifically allocates the burden of proof to the Debtor, as California has done here, Rule 4003(c) does not change that allocation. Diaz, 547 B.R. 337; Cal. Civ. Proc. § 703.580(b). Thus, the Debtor here has the burden to prove that she is entitled to the exemptions she claims.
The evidence submitted before the court is scant. The Debtor was a believable, intelligent, and articulate witness. She appeared before the court to be calm, well-organized, and credible. No proper foundation was laid for the admission of the documents evidencing tracing from the 401K account directly into the escrow account and temporarily passing through Weight Management's Wells Fargo Bank account. No foundation was presented for the tendering of the $5,000 check to Begley Properties or the funding of the escrow included in the escrow closing statement. The Trustee made foundation objections to the admission of all of those documents. Even if a proper foundation was presented, establishing that the documents were what the Debtor purported them to be, Fed. R. Evid. 901(a), the documents offered by the Debtor are almost entirely hearsay and excluded by Fed. R. Evid. 802. No testimony of the custodian of the business records at issue was presented by the Debtor, nor a certification in compliance with Fed. R. Evid. 902(11) or (12), 803(6). Thus, there is no applicable exception to the rule against hearsay permitting the admission of the documents under Fed. R. Evid. 803.
The court is constrained to point out though that a few days after the matter was submitted, the Debtor tendered a declaration to the court stating facts she claims she remembered since the hearing. Six days after the matter was submitted the Debtor submitted an additional declaration (again, her own). The declarations and accompanying documents were apparently not served on the trustee or his counsel, were not filed as part of the record, and are improper ex parte communications. They have not been considered. Even pro se litigants must comply with court rules. Clinton v. Deutsche Bank Nat'l Trust Co. (In re Clinton), 449 B.R. 79, 83 (9th Cir. B.A.P. 2011).
When asked by the court, the Debtor did state that both Wells Fargo and Nationwide Retirement Solutions (apparently a successor or other corporate "relation" to Savings Plus) were served with a subpoena to testify. The court was not provided with copies of the subpoenas. However, the Debtor did provide copies of proofs of service that show both parties were tendered a $50 witness fee and a subpoena to appear and testify at a hearing or trial in a bankruptcy case and to produce documents. But, both proofs of service show service on an agent for service of process not delivery to a named person since the subpoenas purportedly required attendance. See Fed. R. Civ. Proc. 45(b)(1) (applicable to bankruptcy proceedings by Fed. R. Bankr. P. 9016). In sum, Debtor did not meet her burden of proof to establish tracing from the 401K account to the escrow account. So, the Debtor's claim of exemption under Cal. Civ. Proc. § 704.110 fails for lack of proof.
The same infirmity applies to the Debtor's proof under the other exemptions claimed for the escrow funds. Cal. Civ. Proc. § 704.115(b) states that amounts "held, controlled, or in process of distribution, by a private retirement plan for the payment of benefits and after payments, those funds are exempt." But, the Debtor failed to prove that the escrow funds were in fact retirement benefits even if they could be deemed from a "private retirement account." Cal. Civ. Proc. § 704.130(a) states that "[b]efore payment, benefits from a disability or health insurance policy or program are exempt without making a claim. After payment, the benefits are exempt." There was no evidence before the court that any funds at issue were payments from a disability or health insurance policy. Cal. Civ. Proc. § 704.140(a) states that "except as provided in Article 5 of Chapter 6, a cause of action for personal injury is exempt without making a claim." Subsection b states that "except as provided in subdivisions (c) and (d), an award of damages or a settlement arising out of personal injury is exempt to the extent necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor." There is no evidence that any of the benefits at issue were from a personal injury claim. The Debtor's schedules do not reveal a personal injury claim.
The Debtor does receive Social Security Disability Income. However, the Debtor has always maintained that the source of the funds in the escrow account were originally from her PERS benefits.
At the conclusion of the evidentiary hearing, the Debtor did request additional time to present the subpoenaed witness testimony. But, since the court did not have the actual subpoena to review and since the subpoenas were not likely served correctly, the court declined the Debtor's request. The evidentiary hearing had been on calendar for quite some time - since the fall of 2017. The Debtor had sufficient time to engage in and complete discovery which may have abrogated the need to have custodial witnesses testify concerning the documents offered.
In addition to the basis for the exemption claims discussed, the Debtor's amended claim of exemption also claimed the escrow funds were exempt as worker's compensation or social security benefits. The same proof problems apply to those claims as well. No worker's compensation claim was listed in the Debtor's schedules. The Debtor has also maintained that the source of the funds at issue was not social security benefits. --------
2. Even if the offered documents and testimony had been admitted, it would not change the court's ruling.
Judges can reasonably differ about evidentiary rulings. Another judge could find that the evidence offered here by the Debtor was sufficiently authenticated. After all, Fed. R. Evid. 903 provides that a subscribing witnesses' testimony is not always necessary to authenticate documents (see also Fed. R. Evid. 901(a)); Melridge v. Heublein, 125 B.R. 825, 829 (D. Or. 1991); Zenith Radio Corp. v. Matsushita Elec. Indus. Co., 505 F. Supp. 1190 (E.D. Pa. 1980). It is the Debtor's burden here as proponent of the evidence to establish that the evidence is authentic. The Debtor, however, could rely on circumstantial evidence and need not present the testimony of the original custodian of records. Melridge, 125 B.R. at 828. The sufficiency of authentication is always discretionary with the court. Security Farms v. International Bhd. of Teamsters, 124 F.3d 999 (9th Cir. 1997). Another judge may, for example, note that the distinctive characteristics of the documents presented and all the circumstances surrounding their presentation would be sufficient authentication. See Fed. R. Evid. 901(b)(4). The documents offered by the Debtor consisted largely of copies of bank or account statements that displayed familiar trade dress and appeared to be prepared in the ordinary course of the business of the statement preparers. Also, the signatures on the cashier's checks and money orders may in fact be self-authenticating. See Fed. R. Evid. 902(9); Cal. Comm. Code §§ 3302, 3308, 8107(b).
Another judge may find the hearsay problem solvable by applying the "residual hearsay" exception under Fed. R. Evid. 807. The elements of the exception could be found to be present. The documents appear to be trustworthy based on circumstantial evidence. The copies presented to the court appear to be originally prepared in the ordinary course of business and the Trustee did not dispute the journey of the funds urged by the Debtor or the authenticity of the copies offered. The documents do relate to a material fact in dispute - the tracing of exempt retirement proceeds. The documents are also more probative than other evidence the Debtor could obtain through reasonable efforts. Here, the Debtor did serve a subpoena (albeit improperly) on two potential witnesses who did not appear and whose testimony would not likely be contradicted by the Trustee who had planned to call no witnesses except perhaps an unidentified rebuttal witness. Finally, the admission of the documents could be found to be in the interest of justice and consistent with the manner in which the rules of evidence should be applied. See Fed. R. Evid. 102.
In fact, the Trustee who objected to the admission of the evidence never raised a question as to the reliability of any of the offered documents. To be sure, the Trustee did not waive his objections to their admission but they were before the Trustee very early in the proceedings. They were part of what was originally filed by the Debtor in opposition to the Trustee's objection. (Document No. 61). The opposition was filed on April 11, 2017, which is nearly ten months before the evidentiary hearing. The Trustee certainly had an opportunity to explore and examine the reliability of the documents when he deposed the Debtor.
The court asked the Debtor at the evidentiary hearing what she hoped to prove through the witnesses who did not appear. The court allowed the Debtor to make her offer of proof and asked if the Trustee would stipulate to the admission of the evidence and to the facts the Debtor hoped to prove. He would not. In any event, the admission of all the documents, and the testimony of the absent witnesses, would not change the result since the retirement funds lost their exempt character when they were used to fund the purchase of the building.
First, the escrow account is not a "deposit account" subject to the tracing of an exempt fund under California law. Cal. Civ. Proc. § 703.080(a) provides, "Subject to any limitation provided in the particular exemption, a fund that is exempt remains exempt to the extent that it can be traced into deposit accounts or in the form of cash or its equivalent."
The escrow is not a "deposit account." Cal. Civ. Proc. § 704.080 defines "deposit account" to mean a "deposit account in which payments of public benefits or social security benefits are directly deposited by the government or its agent." The Placer Title escrow for the purchase of the building is not an account where public benefits or social security benefits are directly deposited. Also, Cal. Comm. Code § 9102(a)(29) defines a "deposit account" as "demand, time, savings, passbook, or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument." The Placer Title escrow is not a demand, time, savings, passbook, or similar account. In particular, under California law, escrow holders are not demand depositories.
Second, an escrow holder cannot unilaterally dispose of funds that are subject to escrow. An escrow holder is the agent of all the parties to the escrow at all times prior to performance of the conditions of the escrow. Spaziani v. Millar, 215 Cal. App. 2d 667, 682 (1963) (citing Shreeves v. Pearson, 194 Cal. 699, 707 (1924)). An escrow holder requires consent of both parties before removal of property, documents, or instruments held by an escrow holder. Karras v. Title Ins. & Guar. Co., 118 Cal. App. 2d 659, 665 (1953). If an escrow holder disposes of property [in escrow] in violation of instructions, or otherwise breaches that duty, he will be responsible for any loss occasioned thereby. Spaziani, 215 Cal. App. 2d at 682 (citing Amen v. Merced Cty. Title Co. 58 Cal. 2d 528 (1962)). There is no evidence before the court here that Placer Title acted as anything other than an escrow holder in the property purchase transaction involving the Debtor and Mr. Walters. The application of California law thus establishes that the funds could not be unilaterally paid to the Debtor, or the Trustee, for that matter, without conditions that have not been proven to the court.
In fact, California law limits an escrow holder's duties concerning escrow funds. An escrow holder has no duty to deposit funds in an interest bearing account without an instruction to do so. Hannon v. W. Title Ins. Co., 211 Cal. App. 3d 1122, 1128 (1989). An escrowee is not a trustee of funds. Cal. Prob. Code § 82(b)(14) (West, 2018). "An escrow holder has no general duty to police the affairs of its depositors . . . an escrow holder's agency is limited to faithful compliance with instructions." Hannon, 211 Cal. App. 3d at 1128 (citing Schaefer v. Manufacturers Bank, 104 Cal. App. 3d 70, 77-78 (1980)); Summit Financial Holdings, Limited v. Cont'l Lawyers Title Co., 27 Cal. 4th 705, 711 (2002). Absent contrary escrow instructions, title to deposits vest in a seller when the seller accepts the underlying contract. Rutherford Holdings LLC v. Plaza Del Rey, 223 Cal. App. 4th 221, 233-34 (2014) abrogated on other grounds by Lee v. Hanley, 61 Cal. 4th 1225, 1240 (2015). Neither party presented any evidence of the terms of the escrow instructions for the Walters/Goodwin-Miller sale.
The retirement funds lost their exempt character when the Debtor paid $5,000.00 out of the Wells Fargo account to Begley Properties, which was deposited with Placer Title to open the escrow. Also, when the Debtor made the larger payment from the Wells Fargo account to Placer Title to fund her "down payment" those funds lost their character as retirement funds. Neither Ms. Begley nor Placer Title are "deposit accounts" to which exempt funds can be traced. Therefore, even if the Debtor's proffered documents and testimony were entertained by the court, the result remains the same. /// /// /// /// /// ///
For the foregoing reasons, the Trustee's Objection to the Debtor's Claim of Exemption in the $20,119.11, being held by Placer Title, is SUSTAINED. A separate order shall issue.
Instructions to Clerk of Court
Service List - Not Part of Order/Judgment
The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the parties below. The Clerk of Court will send the Order via the BNC or, if checked X, via the U.S. mail. Loraine Goodwin Miller
1625 Howard Rd #277
Madera CA 93637 James Edward Salven
PO Box 25970
Fresno CA 93729 Trudi G. Manfredo
377 W. Fallbrook Ave., Ste. 102
Fresno CA 93711 Office of the U.S. Trustee
United States Courthouse
2500 Tulare Street, Room 1401
Fresno CA 93721