The U.S. Court of Appeals for the Ninth Circuit recently affirmed a bankruptcy court's judgment in favor of a debtor who sought to avoid a judgment lien under California's homestead exemption law.
In so ruling, the Ninth Circuit held that, when a judgment lien impairs a debtor's state-law homestead exemption, the Bankruptcy Code requires courts to determine the exemption to which the debtor would have been entitled in the absence of the lien.
Here, Ninth Circuit held, the California exemption amount in effect at the time of the filing of the bankruptcy petition applied, even though the language of the California exemption for judgment liens would have required calculation of the amount of the exemption as of a different date.
A copy of the opinion is available at: Link to Opinion
In 2014, a creditor filed a judgment lien for $256,075.95 against a debtor's home in California ("judgment lien"). Seven years later, in 2021, the debtor filed a Chapter 7 bankruptcy petition. Before the debtor's bankruptcy petition was filed, California amended its bankruptcy laws to substantially increase the homestead exemption to the greater of one (1) the "median sale price for a single-family home" in the debtor's county the year before the debtor claims the exemption, "not to exceed" $600,000; or (2) $300,000. See Cal. Civ. Proc. Code § 704.730(a) (2021).
California opted out of the default exemptions provided in the Bankruptcy Code, and California's homestead exemption prescribes a set exemption amount based on the characteristics of the property and homeowner.
Based on the homestead exemption in effect at the time the debtor filed bankruptcy, the debtor claimed a $600,000 homestead exemption and sought to avoid the entire judgment lien. However, the trustee argued that California Code of Civil Procedure § 703.050(a) requires that "the amount of an exemption shall be made by application of the exemption statutes in effect . . . at the time the judgment creditor's lien on the property was created". Therefore, the trustee argued, the debtor was only entitled to the $100,000 homestead exemption available when the judgment lien was originally recorded in 2014.
The debtor's calculation valued the homestead exemption at $600,000 which would result in the avoidance of the entire judgment lien. The trustee calculated the homestead exemption at $100,000.00 which would result in the creditor receiving $434,029.72.
The bankruptcy court held that 11 U.S.C. § 522(f) required application of the $600,000 homestead exemption in effect in 2021, when the bankruptcy petition was filed, and that the debtor could therefore avoid the entire judgment lien. The trustee appealed.
On appeal, the Ninth Circuit examined how the Bankruptcy Code's lien avoidance procedure applies to liens that "impair an exemption to which the debtor would have been entitled" under 11 U.S.C. § 522(f)(1).
Under Section 522, a lien may be avoided when "the sum of (i) the lien; (ii) all other liens on the property; and (iii) the amount of the exemption that the debtor could claim if there were no liens on the property" is greater than "the value that the debtor's interest in the property would have in the absence of any liens." Id. § 522(f)(2)(A).
The Ninth Circuit held that the Supreme Court of the United States' ruling in Owen v. Owen, 500 U.S. 305 (1991), controlled here. Relying on Owen, the Ninth Circuit held that Section 522(f) requires courts to determine the exemption to which the debtor would have been entitled but for the existence of the judicial lien at issue. The Court of Appeals noted the importance of the phrase "would have been" entitled to in the absence of any judgment liens.
Based on this language, Owen held that Section 522(f) "establishes as the baseline, against which impairment is to be measured, not an exemption to which the debtor 'is entitled,' but one to which he 'would have been entitled.'" Id. at 311. Based on the holding in Owen, the Court of Appeals determined that at the time of the debtor's bankruptcy filing, absent the judgment lien, debtor could claim a $600,000.00 homestead exemption under Cal. Civ. Proc. Code § 704.730 (2021).
The trustee argued that under existing Ninth Circuit precedent the bankruptcy court had to apply the state exemption law with all its restrictions and limitations. Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193 (9th Cir. 2012). The Ninth Circuit in In re Jacobson held that "it is the entire state law applicable on the filing date that is determinative of whether an exemption applies".
The Ninth Circuit disagreed because, under Owen, the Bankruptcy Code's policy of permitting state-defined exemptions is not "absolute" and must be applied along with whatever competing or limiting policies are in the Bankruptcy Code." 500 U.S. at 313. In addition, the Court of Appeals noted, In re Jacobson addressed "whether certain funds belonged to a Chapter 7 estate," and "[n]othing in the case concerned the lien avoidance procedures at issue here." Therefore, the Ninth Circuit held, Owen and not In re Jacobson was "the relevant precedent".
Accordingly, the Ninth Circuit affirmed the bankruptcy court's ruling.
Ralph T. Wutscher
Maurice Wutscher LLP
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