FOR THE NORTHERN DISTRICT OF CALIFORNIA
PETER GUS KERSTON, No. 91-10896
Memorandum of Decision
Before he filed his Chapter 11 petition, debtor Peter Kerston was an active plaintiff in a class
action lawsuit against the developer who built a residence owned by Kerston (although not
scheduled by Kerston). Kerston admits that he "forgot" to schedule the lawsuit as an asset or
mention it in his statement of affairs or at his meeting of creditors, nor did he ever take steps
to have counsel appointed to represent him. The case was subsequently converted to Chapter
7. The Chapter 7 Trustee learned of the existence of the lawsuit from a creditor.
A settlement of the lawsuit resulted in a recovery of about $80,000.00, less attorneys' fees
and litigation costs of about $37,000.00. The debtor has asserted a claim to $50,000.00 of the
proceeds as exempt pursuant to California Civil Code section 704.720(b), which allows the
debtor to claim as exempt the proceeds of insurance or other indemnification if his home is
damaged or destroyed. The Trustee has filed a timely objection. For the reasons set forth
below, the court sustains the objection.
The court does not need to address the issue of whether section 704.720(b) covers
construction defects, as opposed to damage or destruction, because it appears from the file that
the property in question (since lost to foreclosure) was not the debtor's residence on the date he
filed his bankruptcy petition. The address of the property subject to the litigation was 35
Cavalla Cay, Novato. This property is not mentioned in the schedules at all. The debtor gave
his address in his petition as 10 Horseshoe Bay Court, Petaluma, and never claimed the Cavalla
property as exempt. In Chapter 11 cases, exemption rights are fixed as of the filing and the
debtor must actually reside in the property at that time in order to assert an exemption. Matter
, 804 F.2d 1355 (5th Cir. 1986); In re Anderson
, 824 F.2d 754 (9th Cir.1987).
Accordingly, there is no basis for Kerston to assert an interest in the litigation proceeds even
if such proceeds might be the subject of exemption under section 704.720(b) in a proper case.
Moreover, by failing to schedule the litigation Kerston has forfeited any right to the
proceeds of the litigation as a matter of equity. Kerston is not an unsophisticated wage earner,
but rather a real estate broker who owned numerous properties and was involved in at least
eight other lawsuits when he filed his bankruptcy petition. The court will not allow him to
attempt to hide an asset from his creditors and then claim it as exempt when his creditors
discover it. A debtor's right to exempt assets may be denied upon a showing that the debtor
perjured himself in his schedules and withheld mention of the asset. In re Fabian
, 122 B.R. 678
(Bkrtcy.W.D.Pa. 1990); In re Roberts
, 81 B.R. 354 (Bkrtcy.W.D.Pa.1987); 3 Collier On
, (15th Ed.), para. 522.08.
For the foregoing reasons, the objection to the claim of exemption will be sustained.
Counsel for the Trustee shall submit an appropriate form of judgment.
Dated: April 9, 1993 _______________________