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Ninth Circuit Bankruptcy Appellate Panel:
Fraudster’s California Homestead Exemption Improperly Limited Under Federal Statute
By a MetNews Staff Writer
A federal statute limiting a state’s homestead exemption to $189,050 where a debt stems from “fraud, deceit, or manipulation in a fiduciary capacity” does not apply—despite a Los Angeles Superior Court judgment establishing that the debtor committed elder financial fraud—the Ninth U.S. Circuit Court of Appeals’s Bankruptcy Appellate Panel has held, explaining that the deception preceded the perpetrator having gained control of the victim’s family trust.
It is not enough, the court declared, that fraud leads to the creation of a “fiduciary capacity.” Sensibly read, the panel concluded, the statute requires that the trickery occur while the tortfeasor presently holds a position of trust in financial matters.
Bankruptcy Court Judge Scott H. Gan, a member of the panel, authored the opinion, filed Monday. It reverses an order by Bankruptcy Court Judge Deborah J Saltzman of the Central District of California limiting the homestead exemption of debtor Diane Ida Uriostegui.
Saltzman applied a Bankruptcy Code provision, 11 U.S.C. §522(q)(i)(B)(ii), which sets forth the limitation on homestead exemptions.
House’s Ruling
Then-Los Angeles Superior Court Judge Mary Thornton House (now with a dispute resolution firm) in 2018 found that Uriostegui, through fraudulent representations, induced Prescott Dowling to disinherit his son, Gregory Dowling, and other family members and to make Uriostegui the successor trustee and sole beneficiary of his trust. Prescott Dowling in 2015, had substituted her as trustee, succeeding him, and died in 2016.
In 2023, faced with the state-court judgment, Uriostegui declared Chapter 7 bankruptcy, reporting the value of her home to be $950,000, and other assets to be of minimal value, and claiming a homestead exemption of $687,378. Gregory Dowling, who had become trustee of the trust, filed a claim for $2,076,124 and contested applicability of §522(q)(i)(B)(ii).
Saltzman held that the Los Angeles Superior Court judgment establishes that the debtor became trustee as the result of fraud, rendering the homestead-exemption limitation applicable.
Gan’s Opinion
Disagreeing, Gan wrote:
“To sustain his objection under § 522(q)(i)(B)(ii), Gregory must prove that: (i) Ms. Uriostegui owes a debt arising from ‘fraud, deceit, or manipulation,’ and (2) that her wrongful actions occurred while she was acting in a fiduciary capacity….Gregory asserts that the state court judgment satisfies these elements.
“It is undisputed that the judgment debt arose from Ms. Uriostegui’s fraud. But the judgment does not establish that she was acting in a fiduciary capacity when she made the fraudulent statements to Prescott. Ms. Uriostegui committed fraud to induce Prescott to amend the trust, but that occurred prior to the amendment, while Prescott was trustee.”
Gan advised:
“We publish to clarify that, for purposes of § 522(q)(1)(B)(ii), fraud must be in a fiduciary capacity, which requires an express or technical trust imposed prior to the wrongdoing that created the debt.”
The case is Uriostegui v. Dowling, CC-24-1174.
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