Memorandum of Decision Re: Leasehold Interest as Homestead

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re RICHARD A. MARCZUK,                                       No. 1-88-02204      Debtor. ___________________________/
Memorandum of Decision
     On May 9, 1988, the debtor sold his then-homesteaded real property and realized $37,500.00 from the sale. On September 30, 1988, he entered into a lease agreement on a new residence. Under the agreement, he paid $30,000.00 in advance for a five year lease at $500.00 per month. The lease provided for a refund to the debtor of all prepaid and unearned rent upon his demand if he purchased a new home or if after April 1, 1991, he needed funds to pay any capital gains tax incurred as a result of the sale. The debtor filed his Chapter 7 petition on December 29, 1988, and declared his leasehold interest exempt. The Trustee objects.      The trustee has three grounds for objection. First, he argues that the debtor has used the wrong exemption statute. Second, he argues that the lease is illusory because the debtor has the right to recover prepaid but unearned rent. Third, he argues that the lease has been deemed rejected and therefore no longer exists. Since the first objection is technical and can readily be corrected, the Court addresses only the latter two issues.      For homestead exemption purposes, California Code of Civil Procedure section 704.910(c) defines an exemptible dwelling as "any interest in real property (whether present or future, vested or contingent, legal or equitable) . . . but does not include a leasehold estate with an unexpired term of less than two years . . . ." (emphasis added; parenthetical contents in the original). From the wording of the statute, it is clear that just about anything qualifies as a homestead and exceptions should therefore be narrowly construed.      The Court can see no reason why the debtor should lose his homestead rights merely because he may be able to convert the homestead to cash after bankruptcy, when any debtor with a homestead in any other form may freely do so. For instance, a fee homestead right would clearly not be lost merely because the seller promised to repurchase the property from the debtor upon the debtor's demand. Given the liberal wording of the statute, the Court declines to deem a five-year lease to be an 18-month lease merely because the debtor retained the contingent right to terminate the lease early and recover some of the prepaid rent.      The Court declines to give section 365(d)(1) any applicability at all to the exemption issue. Section 365 gives only the trustee, and not the debtor, the right to assume or reject executory contracts. Reading the statute as urged by the trustee would mean that every debtor who claimed an interest in a contract as exempt would be at the mercy of the trustee, and would lose his exemption rights if the trustee took no action to preserve them. This is not what Congress intended. Rather section 365(d)(1) merely means that if the trustee does not move to assume the lease within the time allowed it is deemed rejected insofar as the estate is concerned and the lessor is thereby limited in his claim rights against the estate. The debtor's exemption rights are not impaired by the estate's rejection of the lease.      For the foregoing reasons, upon amendment of the exemption schedule to claim the exemption under the proper statute the objection will be deemed overruled. The debtor shall submit an appropriate form of order.
Dated: July 21, 1989                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy