Memorandum of Decision Re: Homestead Exemption

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re ROBERT and GENEVIEVE                                                 No. 93-11112 BELLEFEUILLE,      Debtors. ___________________________/
Memorandum of Decision
     At the time the debtors filed their Chapter 7 petition, they had a lawsuit pending in state court against the persons who sold them their home. In the complaint, the debtors alleged that defendants concealed and/or failed to discover and disclose termite damage, recurring water leaks, and other structural problems; they sought damages on fraud, negligence, breach of contract and statutory liability theories. The issue now before the court is whether this complaint, as well as a potential cause of action against their attorney for possibly failing to file it in time, are exempt under California Code of Civil Procedure section 704.720(b).      Section 704.720(b) allows the debtors to exempt the proceeds of insurance or other indemnification for damage or destruction to their homestead. The trustee argues that a cause of action is not "proceeds," but this distinction escapes the court since to be worth anything the cause of action must be turned into proceeds. Using the trustee's analysis, if the debtors were forced to file a bankruptcy the day after wind blew their roof off the insurance check cut a week later would not be exempt because on the date of filing the debtors only had an unpaid claim. This is clearly contrary to the intent of the law.      The more difficult question is whether a claim based on misrepresentation and concealment of damage to the home is the same thing as an action for indemnification for damage to the home. However, the complaint makes it clear that it is based on termite, water, and structural damage; read liberally, the action is covered by the statute. Homestead statutes are to be interpreted liberally.      The potential malpractice claim against the lawyer seeks the same damages as the complaint: indemnification for damage to the home. A malpractice action of this nature is really just a substitution of defendants; the underlying case and its damages remain the same. Accordingly, the malpractice action is exempt as well.      For the foregoing reasons, the trustee's objection to the claims of exemption will be overruled. Counsel for the debtor shall submit an appropriate form of order.
Dated: October 27, 1994                                                                                                   _______________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy