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Flatt v. Mullen

United States District Court, D. Arizona

November 6, 2018

Christina C Flatt, et al., Appellants,
Brian J Mullen, Appellee.


          Douglas L. Rayes, United States District Judge.

         Appellants Christina and Robert Flatt appeal the bankruptcy court's turnover order and, in doing so, have moved to certify questions to the Arizona Supreme Court regarding Arizona's homestead statute, A.R.S. § 33-1101(C) (Doc. 6). For the reasons stated below, Appellants' motion to certify is denied and the bankruptcy court's order is affirmed.[1]

         I. Background

         Appellants filed their Chapter 7 bankruptcy petition on April 18, 2017. As of the petition date, the bankruptcy estate owned real property located in Glendale, Arizona. Appellee Brian J. Mullen was appointed acting trustee of the bankruptcy estate.

         On June 6, 2017, the bankruptcy court approved the sale of the real property, which generated proceeds of $59, 093.18. On June 9, 2017, relying on Arizona's homestead exemption, the proceeds were deposited into Appellants' checking account, which also contained other funds not originated from the sale. During the next several months, Appellants spent the proceeds on various expenditures, including groceries, dining, entertainment, clothing, insurance premiums, utility bills, apartment furnishings, auto loan payments, health care expenses, and veterinarian bills.

         On November 21, 2017, Appellee filed a motion requesting Appellants turn over all of the identified cash proceeds from the sale of the property, contending that Appellants were not entitled to a homestead exemption under Arizona law. Appellants timely opposed the motion, requested certification of pertinent questions to the Arizona Supreme Court, and sought a stay until the Arizona Supreme Court accepted certification and made a final ruling, or declined to do so. Appellee filed a reply memorandum, supporting turnover and opposing the motion for certification and stay.

         On February 27, 2018, after a hearing, the bankruptcy court granted Appellee's motion for turnover of cash proceeds from the sale of the property. On March 6, 2018, a written order followed, clarifying that Appellants were not entitled to the homestead exemption because they commingled the sale proceeds and spent them on non-exempt expenditures. The written order also clarified that the bankruptcy court denied Appellants' request for certification and stay. On March 8, 2018, Appellants noticed an appeal.

         II. Motion to Certify

         The Arizona Supreme Court may answer questions of law certified to it by a United States District Court if: (1) there are questions of state law that might be determinative of the case pending in the certifying court and (2) it appears to the certifying court that there is no controlling state court precedent. A.R.S. § 12-1861; see also Binford v. Rhode, 116 F.3d 396, 399 (9th Cir. 1997). Certification is not mandatory, however, simply because state law is unclear on a particular issue. Lehman Bros. v. Schein, 416 U.S. 386, 390-91 (1974). Whether to certify a question to the state's highest court is within the district court's discretion. Id. In determining whether certification is appropriate, courts look to “factors such as the complexity of the issue, the availability of precedent from lower courts or other jurisdictions, and the magnitude of disagreement on the issue . . . .” Smith v. Allstate Ins. Co., 202 F.Supp.2d 1061, 1064 (D. Ariz. 2002).

         Appellants raise two issues related to Arizona's homestead exemption, which generally exempts proceeds from the sale of certain delineated properties from a bankruptcy estate: (1) whether the homestead exemption is lost by commingling homestead proceeds with non-exempt funds, and (2) whether the homestead exemption is lost with respect to proceeds spent for non-exempt purposes. Neither issue is complex. Id. (finding issue non-complex when the court was not required to “wade into any intricate or abstruse administrative or statutory scheme”). Although Arizona courts have not weighed in on these particular issues, courts in other states with similar statutes have addressed both issues and have resolved them in a similar manner, indicating a lack of serious debate. See, e.g., In re Kierig, No. 99-21016, 2000 WL 33716966, at *3 (Bankr. D. Idaho Feb. 10, 2000); In re Ziegler, 239 B.R. 375, 379 (Bankr. C.D. Ill. 1999); In re Zibman, 268 F.3d 298, 305 (5th Cir. 2001) (Texas law); In re Golden, 789 F.2d 698, 700 (9th Cir. 1986) (California law). Moreover, bankruptcy courts applying the Arizona homestead statute have reached nearly uniform results. See, e.g., In re Smith, 515 B.R. 755, 762 (Bankr. D. Ariz. 2014); In re White, 389 B.R. 693, 704 (9th Cir. B.A.P. 2008); In re Hassett, No. 14-BK-12106-BKM (Bankr. D. Ariz. Mar. 13, 2017) (order denying debtors' motion for abandonment). Given these circumstances, the Court concludes that certification is not necessary and denies Appellants' motion.

         III. Appeal of Bankruptcy Court's Turnover Order

          “On appeal, a district court may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. A district courts review a bankruptcy court's . . . conclusions of law de novo.” Medina v. Vander Poel, 523 B.R. 820, 823 (E.D. Cal. 2015) (internal quotation and citation omitted).

         Appellants challenge the bankruptcy court's conclusion that Appellants waived their homestead exemption rights by commingling the proceeds with non-exempt funds and by spending proceeds on non-exempt expenditures. They do not challenge the bankruptcy court's factual findings that they commingled the proceeds with non-exempt funds and spent proceeds for non-exempt purposes. Instead, Appellants contend that the bankruptcy court erred as a matter of law when it concluded that § 33-1101(C) prohibits commingling and use of sales proceeds on non-exempt expenditures. The Court disagrees.

         The filing of a bankruptcy petition creates an estate that consists of all of the debtor's legal and equitable interests in property, including potentially exempt property. 11 U.S.C. § 541; Cusano v. Klein, 264 F.3d 936, 945-46 (9th Cir. 2001). Section 522(b) of the Bankruptcy Code allows a debtor to exempt property from the bankruptcy estate. Because Arizona has “opted out” of the federal ...

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