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In re Gebhart

September 14, 2010

IN THE MATTER OF: NIKALOUS G. GEBHART, DEBTOR,
NIKALOUS G. GEBHART, APPELLANT,
v.
MAUREEN GAUGHAN, TRUSTEE-APPELLEE.
IN THE MATTER OF: STEVEN JAY CHAPPELL; JULIE LYNN CHAPPELL, DEBTORS,
STEVEN JAY CHAPPELL; JULIE LYNN CHAPPELL, APPELLANTS,
v.
MICHAEL P. KLEIN, CHAPTER 7 TRUSTEE, APPELLEE.



Appeal from the United States District Court for the District of Arizona Roslyn O. Silver, District Judge, Presiding D.C. No. CV-07-0193 ROS. Appeal from the Ninth Circuit Bankruptcy Appellate Panel Riblet, Klein, and Montali, Bankruptcy Judges, Presiding BAP No. WW 06-1435 RKMo.

The opinion of the court was delivered by: Tashima, Circuit Judge

FOR PUBLICATION

Argued and Submitted December 12, 2008 -- San Francisco, California

Submission Vacated August 27, 2009

Resubmitted July 30, 2010

Before: A. Wallace Tashima and Marsha S. Berzon, Circuit Judges, and Robert J. Timlin,*fn1 District Judge.

OPINION

These consolidated appeals present the question of how to construe the homestead exemption in bankruptcy. In both cases, the debtors filed for Chapter 7 bankruptcy at a time when the value of the equity in their homes was less than the amount they were eligible to claim under the state or federal homestead exemption. There was no value in the homestead properties that could be claimed by the bankruptcy estate, and the debtors therefore anticipated that they would be able to retain ownership of their homes, subject to the terms of their mortgages, after the bankruptcy closed. The value of the homes subsequently increased so that the debtors had equity in excess of the homestead exemptions. Our question is whether the bankruptcy Trustees may force a sale of the homestead properties in order to recover the excess equity, or whether instead the debtors should be allowed to retain any postpetition increase in the fair market value of their homes.

We have jurisdiction over these appeals pursuant to 28 U.S.C. §§ 158(d)(1), 1291.

BACKGROUND

The Gebhart Bankruptcy

On August 8, 2003, Nikalous Gebhart ("Gebhart"), a resident of Arizona, filed for Chapter 7 bankruptcy protection. As part of his bankruptcy petition, he claimed an exemption in the amount of $89,703 for the house he owned in Phoenix. According to the petition, the market value of the property at the time of filing was $210,000, and it was encumbered by mortgages in the amount of $120,297. The $89,703 figure represents the difference between the value of the homestead and the mortgages with which it was encumbered. Gebhart claimed the exemption pursuant to ARIZ. REV. STAT. § 33-1101(A), which at the time of the bankruptcy filing provided that an Arizona resident "may hold as a homestead exempt from attachment, execution and forced sale, not exceeding one hundred thousand dollars in value... [t]he person's interest in real property in one compact body upon which exists a dwelling house in which the person resides."*fn2 The Trustee did not object to Gebhart's claim of a homestead exemption in the property.

Gebhart received his discharge under 11 U.S.C. § 727 on December 12, 2003. He continued to reside in his house and even refinanced his mortgage with a lender who apparently believed Gebhart owned the property free and clear of any claims by the bankruptcy estate. In fact, however, the bankruptcy case was not closed. On November 10, 2006, the Trustee asked the bankruptcy court to approve the appointment of a real estate broker to sell the home for the benefit of the estate.*fn3 The Trustee believed that the value of the house had increased substantially since the time of the bankruptcy filing, and that if it were sold, the estate would recover a great deal of money, even after paying off the mortgage and the expenses of the sale and paying Gebhart the value he had claimed for his homestead exemption. Gebhart responded by moving that the court order the Trustee to abandon the homestead as valueless to the estate, or, in the alternative, that the court determine that the estate no longer had any interest in the homestead. Gebhart argued that the value of the homestead for the purposes of the bankruptcy case had been locked in at the time of the bankruptcy filing, and that because the entire value at that time had been covered by mortgages and the homestead exemption, there was no value left for the estate to recover.

The bankruptcy court ruled in favor of the Trustee, ordering the appointment of a real estate broker and denying the motion for abandonment. Gebhart appealed to the district court, which affirmed ...


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