In re Chiu
| Decision Date | 23 August 2001 |
| Docket Number | Bankruptcy No. SA 95-17494 JB.,BAP No. CC-00-1339-MAPB |
| Parties | In re Thomas Kai-Ming CHIU; Linda Luk Chiu, Debtors. Culver, LLC, Appellant, v. Thomas Kai-Ming Chiu; Linda Luk Chiu, Appellees. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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James A. Hayes, Ashworth, Hayes & Moran, Laguna Niguel, CA, for Culver, LLC.
Halli B. Heston, Heston & Heston, Newport Beach, CA, for Thomas Kai-Ming Chiu and Linda Luk Chiu.
Before: MARLAR, PERRIS, and BRANDT, Bankruptcy Judges.
The bankruptcy court avoided the lien of Culver, LLC ("Culver") on the debtors' former homestead property, which had been voluntarily sold to a third party before the reopening of the debtors' bankruptcy case. The bankruptcy court ruled that such lien avoidance related back to the date of the filing of the bankruptcy petition. Culver appeals, and contends that the plain language of § 522(f)(1)1 required the debtors to have an ownership interest in the homestead property at the time that they filed the motion to avoid the lien. We AFFIRM.
When the debtors filed a chapter 7 petition on July 25, 1995, they owned a residence on which they claimed an unopposed homestead exemption. The debtors had also recorded a declaration of homestead.
According to the debtors' bankruptcy schedules, the homestead property was worth $220,000 and was encumbered by a first mortgage in the amount of $190,000 in favor of Weyerhaeuser Mortgage Co., and by a judgment lien in favor of Heritage Square ("Heritage") in the approximate amount of $48,000. Culver is the successor-in-interest to Heritage. The debtors did not take any action to avoid the Heritage/Culver lien during the bankruptcy case. The debtors received their discharge, and the case was closed in December 1995.
In December of 1999, the debtors sold their residence to a third party, and a Grant Deed was recorded on January 14, 2000. It was undisputed that the lien passed with title to the property, and did not attach to the proceeds. See Cal.Civ. Proc.Code § 697.390(a). However, in order to permit closing and deliver clear title to their buyers, the debtors allowed proceeds sufficient to cover the Culver lien to be retained in escrow.2
On January 20, 2000, the debtors filed (1) a motion to reopen their chapter 7 case and (2) a motion to avoid Culver's lien on the residence. The bankruptcy court reopened the case on February 18, 2000.3
The debtors did not disclose, in the lien avoidance motion, that they had sold the residence one month prior to filing the motion. The court learned about the sale from Culver's attorney at a March 22, 2000 hearing, when the debtors admitted that the property had been sold. The debtors argued, however, that the sale was irrelevant because federal law controlled, and that all determinations were to be made as of the petition date, when the debtors owned the property. Culver objected to the debtors' standing to bring the motion since they no longer owned the property. The bankruptcy court then continued the hearing for further briefing on the issue of the debtors' standing.
On April 21, 2000, the debtors filed an amended motion seeking to avoid the Culver lien on the real property and/or the sale proceeds. They attached a copy of the Grant Deed, which indicated the involvement of Orange Coast Title Co. and the existence of the escrow account. The debtors argued that they had standing to avoid the lien because they still had an economic interest in the homestead property by virtue of its mutation into proceeds.
At a hearing held on May 24, 2000, the bankruptcy court did not make any findings regarding the characterization of the proceeds, but ruled that the debtors had proved their standing to avoid the Culver lien, as well as the right to urge impairment of their homestead exemption under federal law, which determines impairment as of the time of the bankruptcy filing. The bankruptcy court followed the reasoning of In re Herman, 120 B.R. 127 (9th Cir. BAP 1990), and held that, in the Ninth Circuit, "a debtor may file a motion to avoid a judicial lien notwithstanding the fact that he has disposed of the property claimed exempt post-petition because the nature and extent of a debtor's rights are determined as of the date of the petition."
Then, applying the statutory formula, the bankruptcy court determined that the Culver lien was avoidable in its entirety because it impaired the debtors' homestead exemption. The judgment was entered on May 25, 2000, and Culver timely appealed.
The issues are (1) whether the debtors have standing, and (2) whether § 522(f) provides for the avoidance of a judicial lien on homestead property which has been sold, postpetition, to a third party.4
Standing is a jurisdictional issue which is reviewed de novo. In re Am. Eagle Mfg., Inc., 231 B.R. 320, 327 (9th Cir. BAP 1999) (citing Nat'l Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 255, 114 S.Ct. 798, 127 L.Ed.2d 99 (1994)). The application of § 522(f) is statutory construction, which is reviewed de novo. In re Pike, 243 B.R. 66, 69 (9th Cir. BAP 1999).
Section 522(f)(1) provides, in pertinent part, that a debtor:
11 U.S.C. § 522.
Section 522(f)(1) is part of the provisions dealing with property exemptions in bankruptcy. It provides that a debtor may set aside certain property as exempt from creditors' claims. See 4 COLLIER ON BANKRUPTCY §§ 522.01, 522.11 (15th ed.2001). It is well-established that § 522 is to be interpreted liberally in favor of debtors in order to facilitate their "fresh start." In addition, all parts of a statute are to be read as a whole, and in harmony with one another. Kelly v. Robinson, 479 U.S. 36, 43, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986); In re Hougland, 886 F.2d 1182, 1184 (9th Cir.1989) (citing Davis v. Mich. Dept. of Treas., 489 U.S. 803, 809, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989)).
Lien avoidance is governed by federal, not state law. However, state law determines the extent of a debtor's property interest. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (); In re Catli, 999 F.2d 1405, 1406 (9th Cir.1993). "Under § 522(f)(1), a debtor may avoid a lien if three conditions are met: (1) there was a fixing of a lien on an interest of the debtor in property; (2) such lien impairs an exemption to which the debtor would have been entitled; and (3) such lien is a judicial lien." Id. The debtors have the burden of demonstrating that they are entitled to avoid Culver's lien. Id.
Culver contends that the first requirement of the "fixing of a lien on an interest of the debtor in property" was not met because a plain reading of § 522(f)(1) required the debtors to have an interest in the homestead property at the time they filed the motion to avoid the lien. Culver further contends that the second requirement, of exemption impairment, was not met because once the debtors sold the property, their homestead exemption was no longer impaired.
The debtors argue that the bankruptcy court correctly determined that they had standing and that their lien avoidance rights related back to the petition date. Thus, they maintain that a postpetition sale is an immaterial fact.
The debtors must have standing in order to invoke federal jurisdiction and obtain relief from the bankruptcy court. Standing has both constitutional and prudential dimensions. Wedges/Ledges of Cal., Inc. v. City of Phoenix, Ariz., 24 F.3d 56, 61 (9th Cir.1994); McMichael v. County of Napa, 709 F.2d 1268, 1269 (9th Cir. 1983) ().
For constitutional standing, the debtors must allege an actual or imminent personal injury, which is fairly traceable to the alleged unlawful conduct, and which is likely to be redressed by the requested relief. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992); Allen v. Wright, 468 U.S. 737, 751-52, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984); In re P.R.T.C., Inc., 177 F.3d 774, 777 (9th Cir. 1999) (). Constitutional standing involves asking whether the debtors have "`alleged such a personal stake in the outcome of the controversy' as to warrant their invocation of federal-court jurisdiction and to justify exercise of the court's remedial powers on their behalf." Warth v. Seldin, 422 U.S. 490, 498-99, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975) (citation omitted). Thus, Article III standing reflects the limitation of the judicial power to actual cases and controversies. See Flast v. Cohen, 392 U.S. 83, 94, 88 S.Ct. 1942, 20 L.Ed.2d 947 (1968).
Debtors who have sold homestead property postpetition may still have constitutional standing to use § 522(f) if, absent avoidance, the sale proceeds would be applied to pay off a lien that previously impaired their homestead exemption. The loss of the economic benefit of the homestead exemption which they had on the date of the bankruptcy filing is the "personal stake" that supports the debtors' use of the federal court to obtain relief.
The first question, then, is whether at the time they requested lien avoidance, the debtors had an economic interest that could be protected by the bankruptcy court. The debtors alleged, and it was undisputed, that on the petition date they owned their homestead...
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