IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
ROBERT and GENEVIEVE No. 93-11112
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
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
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 _______________________