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California Bankruptcy Court Considers Whether a Debtor Has the Burden of Proof in Claiming an Exemption Under State Law

GotCredit [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrA bankruptcy judge in California considered a Chapter 7 trustee’s objection to a debtor’s exemption claim. The debtor claimed that a large retirement account was exempt from Chapter 7 liquidation under California law. The court identified two factual questions, but found that it first had to address a legal question:  who has the burden of proof in an objection to an exemption claimed under state law? The court ultimately ruled that, while the objecting party usually has the burden of proof under federal law, the debtor bears this burden for exemptions under California law. It set the case for an evidentiary hearing on the exemption. In re Pashenee, No. 14-30386-5-7, opinion (Bankr. E.D. Cal., Jun. 8, 2015).

The debtor filed a Chapter 7 bankruptcy petition in October 2014. She claimed an individual retirement account (IRA) with a balance in excess of $380,000 as exempt in her schedules. She cited a provision of California law that states that payments from a pension, annuity, “or similar plan or contract on account of illness, disability, death, age, or length of service,” are exempt in a bankruptcy proceeding, with some exceptions, to the extent that payments are “reasonably necessary for the support of the debtor” and the debtor’s dependents. Cal. Code Civ. P. § 703.140(b)(10)(E).

The Chapter 7 trustee objected to the exemption and alleged that the debtor is required to prove that the IRA qualifies for an exemption and that the amount of the claimed exemption is “reasonably necessary” as stated in the statute. The trustee argued that the debtor has the burden of proof under state law. Cal. Code Civ. P. § 703.580(b). The debtor, citing federal bankruptcy rules, claimed that the trustee, as the objecting party, has the burden of proving that the debtor’s claimed exemptions are improper. Fed. R. Bankr. P. 4003(c). The court determined that it must resolve the burden of proof question before considering the exemption itself.

The court noted that the U.S. Supreme Court has held that “the burden of proof is a substantive element of a claim,” which “remains the same as under the applicable substantive nonbankruptcy law.” Pashenee, order at 3, citing Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15 (2000). The Ninth Circuit had generally held that the objecting party has the burden of proof with regard to exemptions, In re Carter, 182 F.3d 1027 (9th Cir. 1999), and the court cited several decisions from the Bankruptcy Appellate Panel saying the same. These cases, however, did not address the burden of proof for an exemption claimed under state law, as opposed to federal law.

Since the Supreme Court decided Raleigh, several California courts have held that the burden of proof is on the debtor in exemption claims made under state law. In re Barnes, 275 B.R. 889 (Bankr. E.D. Cal. 2002); In re Davis, 323 B.R. 732 (B.A.P. 9th Cir. 2005) (Klein, J., concurring) (PDF file). The court in Pashenee followed the holdings in these cases and ruled that the debtor has the burden of proving that her IRA qualifies for an exemption, and in what amount.

Bankruptcy lawyer Devin Sawdayi has represented individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcy cases since 1997. Contact us today online or at (310) 475-939 to schedule a free and confidential consultation with a member of our team.

More Blog Posts:

Exemption of Annuities Allowed in Chapter 7 Bankruptcy Case, Over Trustee’s Objection, Los Angeles Bankruptcy Lawyer Blawg, April 27, 2015

Embezzlement Judgment Does Not Prevent Debtor From Exempting Proceeds of Civil Lawsuit Against Creditor, Los Angeles Bankruptcy Lawyer Blawg, November 14, 2014

Bankruptcy Appellate Panel Applies State Law in Determining Homestead Exemption, Los Angeles Bankruptcy Lawyer Blawg, November 1, 2014

Photo credit: GotCredit [CC BY 2.0], via Flickr.