An attorney named Kevan Gilman filed a Chapter 7 bankruptcy. Relying on California law, he asserted he was disabled and claimed an “enhanced” residential homestead exemption. The author's firm, representing judgment creditors of Gilman, took the exemption claim to trial to establish Gilman was not disabled and therefore ineligible for a larger homestead exemption.
One of the most startling aspects about the matter was not case-specific. To the knowledge of this firm, nowhere in the law--- insurance law, state disability benefit programs, social security—is a person claiming disability benefits entitled to those benefits upon nothing more than a naked assertion of disability. At the time Gilman filed his petition, however, bankruptcy courts within the Ninth Circuit were following In re Carter, 182 F.3d 1027 (9th Cir. 1999). Pursuant to Carter, they were holding that a debtor is entitled to a claimed exemption unless an opponent (a trustee or creditor) objects and proves the exemption does not apply. That burden framework incites fraudulent exemption claims, particularly when it is unlikely anybody but the debtor and his or her confidants (e.g. physicians) will have access to relevant information. This firm was appalled when the Chapter 7 Trustee (Amy Goldman) did not ask the debtor a single question about his disability claims in the Section 341 meeting of creditors!
Business litigation magically became something else as the author's firm set about litigating a social security disability case-within-a-case. After obtaining discovery indicating the debtor’s representations about his medical conditions were untrue, the firm pursued its adversary complaint by charging the debtor with “false oaths.” See 11 U.S.C. § 727(a)(4).
At trial, the author's firm re-asserted its contention that all debtors asserting California objections in bankruptcy bear the burden of proof on their exemption claims. The bankruptcy judge (Hon. Victoria Kaufman) declined to adopt that position, holding it was unnecessary to take that position given her finding the debtor was not entitled to a disability enhancement no matter who bore the burden of proof.
Various legal periodicals (West’s Bankruptcy Newsletter, Consumer Bankruptcy News) picked up the written decision. It was published as In re Gilman, 544 B.R. 184 (Bankr. C.D. Cal. 2016). About two months later the Bankruptcy Appellate Panel for the Ninth Circuit “rebelled” against the Ninth Circuit and said (very politely) the Ninth Circuit’s decision in Carter was no longer good law. See In re Diaz, 547 B.R. 329, 336-37 (9th Cir. BAP 2016). We would like to think the facts of Mr. Gilman’s exemption claim -- the madness of allowing debtors to keep up to $ 75,000 from creditors by a self-serving assertion of disability—constituted the unacknowledged “straw that broke the camel’s back” of Carter.
The decision finding Gilman was not disabled is now appearing in annotations in American Jurisprudence 2d, A.L.R. (American Law Reports), the Rutter Group Practice Guides on Judgment Enforcement and Bankruptcy, and sundry treatises on Fraudulent Transfers and Asset Protection Planning. The big winners are California creditors. There should be no doubt that Carter has fostered more than fifteen years of bogus exemption claims from debtors.
The author would be remiss if he did not acknowledge the work of Judges Christopher Klein (a long-suffering voice in the wilderness on this issue) and Christopher Jaime of the U.S. Bankruptcy Court for the Eastern District of California. Their work was seminal in encouraging the BAP’s decision in Diaz. There is presently pending in the U.S. Court of Appeal for the Ninth Circuit an appeal disputing Mr. Gilman's eligibility for any homestead exemption whatsoever. We are hopeful the Ninth Circuit may take the occasion to acknowledge Carter is no longer good law for the reasons stated in Diaz.
For anybody wondering about it, the “false oaths” claim never made it to trial because the bankruptcy judge denied Mr. Gilman a bankruptcy discharge under Section 727(a)(2)(B), relating to fraudulent transfers. See Phillips v. Gilman (In re Gilman), 2016 WL 8115713 (Bankr. C.D. Cal. 2016).
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