In re Frost

• Decision Date: 23 January 1990
• Docket Number: LA 87-23645-NRE,Bankruptcy No. LA 87-23747-NRE,88-00377-NRE.,Adv. No. 88-00378-NRE
• Citation: 111 BR 306
• Parties: In re Larry Edwin FROST, Kathleen Frost, Debtors. In re John D. KNIEP, Sandra B. Kniep, Debtors. Larry Edwin FROST, Kathleen Frost, Plaintiffs, v. COUNTY OF SANTA BARBARA, Defendants. In re John D. KNIEP, Sandra B. Kniep, Plaintiffs, v. COUNTY OF SANTA BARBARA, Defendants.
• Court: U.S. Bankruptcy Court — Central District of California

111 B.R. 306 (1990)

In re Larry Edwin FROST, Kathleen Frost, Debtors.

In re John D. KNIEP, Sandra B. Kniep, Debtors.

Larry Edwin FROST, Kathleen Frost, Plaintiffs, v. COUNTY OF SANTA BARBARA, Defendants.

In re John D. KNIEP, Sandra B. Kniep, Plaintiffs, v. COUNTY OF SANTA BARBARA, Defendants.

Bankruptcy Nos. LA 87-23747-NRE, LA 87-23645-NRE, Adv. Nos. 88-00378-NRE, 88-00377-NRE.

United States Bankruptcy Court, C.D. California.

January 23, 1990.

Thomas M. Hinshaw, Michaelson, Susi & Michaelson, Santa Barbara, Cal., for debtors.

Enrique Sanchez, County of Santa Barbara County Counsel, Santa Barbara, Cal., for city of Santa Barbara (creditor).

David Farmer, Farmer & Ready, San Luis Obispo, Cal., for trustee.

OPINION DECLARING AVOIDANCE OF TAX LIEN PURSUANT TO 11 U.S.C. § 522(f) PROPER AND DECLARING UNSECURED DEBT FOR PROPERTY TAXES DISCHARGED PURSUANT TO 11 U.S.C. § 727(b).

ROBERT L. EISEN, Bankruptcy Judge.

I Introduction

These adversary proceedings were consolidated for trial pursuant to Rules of Civ.Proc., Rule 42, 28 U.S.C., as incorporated by Rules Bankr.Proc., Rule 7042, 11 U.S.C., on the ground that they present a common question of law. Plaintiffs Larry Edwin Frost, Kathleen Frost, John D. Kniep, and Sandra B. Kniep (herein referred to collectively as "Debtors") seek an order declaring that, pursuant to 11 U.S.C. § 522(f), they are entitled to avoid various personal property tax liens imposed by the County of Santa Barbara (herein referred to as the "County") which impair their respective personal property exemptions, claimed pursuant to California Code of Civil Procedure §§ 703.140, 704.010, 704.020, 704.040, and 704.060. The County, however, maintains that section 522(f) does not enable Debtors to avoid a "statutory tax lien" in order to preserve their impaired personal property exemptions.

Debtors further seek an order declaring that, pursuant to 11 U.S.C. § 727(b), their respective indebtedness to the County is discharged to the extent the County's claim is declared unsecured. The County concedes that Debtors' tax indebtedness is dischargeable to the extent adjudicated unsecured by this Court.¹

II Statement of Facts

These proceedings were tried upon stipulated facts. Debtors in their capacity as general partners of Santa Maria Airport Hotel Associates, Ltd., are jointly and severally liable for approximately $43,671.63 in personal property taxes for the 1986-87 fiscal year. Debtors' tax obligation first became delinquent in August of 1986. Debtors were unable to pay their taxes when due in one payment; consequently, Debtors and the County entered into an installment payment agreement. Debtors made several payments under the agreement; however, in February of 1987, Debtors defaulted on the payment plan. As a result, in September of 1987, the County recorded Certificates of Delinquency of Personal Property Tax in Santa Barbara and Contra Costa Counties against all of Debtors' real and personal property pursuant to California Revenue and Taxation Code § 2191.3.

Debtors Larry Edwin Frost and Kathleen Frost (herein referred to collectively as the "Frosts") own one parcel of real property valued at $350,000.00. At the time the County recorded its certificate of delinquency, the Frosts held this parcel subject to a first deed of trust in the amount of $280,000.00, a second deed of trust in the amount of $30,833.00, and a California State Board of Equalization tax lien in the amount of $51,218.24. These three encumbrances, totaling $362,051.24, exceed the value of this parcel of real property by over $12,000.00. The Frosts have no equity in this parcel of real property to which the County's lien can attach. The Frosts, however, own personal property valued at $18,801.91 subject to a lien in the amount of $8,500.00. In sum, the Frosts have $10,301.91 in personal property equity to which the County's lien has attached.

The Frosts, however, assert that they are entitled to avoid the County's tax lien pursuant to section 522(f) in order to preserve their claimed personal property exemptions in the amount of $9,500.00. If the Frosts are entitled to avoid the County's tax lien to preserve their personal property exemption, the County will have a secured claim in the amount of $801.91 and an unsecured, dischargeable claim in the amount of $42,869.72.

Debtors John D. Kniep and Sandra B. Kniep (herein referred to collectively as the "Knieps") do not own any real property. The Knieps, however, own personal property valued at $18,720.00 subject to a senior lien in the amount of $6,700.00. In sum, the Knieps have $12,020.00 in personal property equity to which the County's lien has attached.

Like the Frosts, however, the Knieps contend that they are entitled to avoid the County's tax lien pursuant to section 522(f) in order to preserve their $13,720.00 personal property exemption. The Knieps also contend that the County's tax claim is dischargeable to the extent it is adjudicated unsecured, a claim which the County does not dispute. If the Knieps are entitled to avoid the County's tax lien to preserve their claimed personal property exemption, the County will be left with a completely unsecured, dischargeable claim in the amount of $43,671.63.

The common question of law presented by these consolidated proceedings is whether a tax lien arising under California Revenue and Taxation Code § 2191.3 is voidable pursuant to section 522(f) to the extent it impairs a debtor's exemption.

III

Discussion of Issue Presented: A tax lien arising under California Revenue and Taxation Code § 2191.3 is avoidable pursuant to section 522(f) to the extent it impairs a debtor's exemptions.

Section 522(f) does not, on its face, allow a debtor to avoid a tax lien in order to preserve an 11 U.S.C. § 522(b) exemption. Section 522(f) provides that,

"Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is —

(1) a judicial lien; or

(2) a nonpossessory, nonpurchase-money security interest . . . "

Traditionally, tax liens are neither viewed nor treated as "judicial liens" or "nonpossessory, nonpurchase-money security interests".²

Most tax liens come with the Bankruptcy Code's definition of "statutory lien". 11 U.S.C. § 101(47) defines a statutory lien as a lien,

". . . arising solely by force of a statute on specified circumstances or conditions, or lien of distress for rent, whether or not statutory, but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute." 11 U.S.C. § 101(47).

The tax liens in the case at bar, for example, arose pursuant to California Revenue and Taxation Code § 2191.3, as a result of Debtors' failure to pay their personal property taxes (i.e., "by force of statute on specified circumstances"). The County is correct when it points out the subject tax liens come within the Code's definition of "statutory lien".

The state of California, however, has chosen to treat California Revenue and Taxation Code § 2191.3 tax liens as "judicial liens". California Revenue and Taxation Code § 2191.4 provides that a tax lien arising from section 2191.3,

". . . has the force, effect, and priority of a judgment lien and continues for ten years from the time of the recording of the certificate unless sooner released or otherwise discharged."

Debtors maintain that the County's tax liens, which pursuant to state law have the same "force, effect, and priority of . . . judgment liens", are avoidable under section 522(f)(1) given that section 522(f)(1) allows a debtor to avoid a "judicial lien" to the extent the lien impairs a claimed exemption. This provision of state law presents a compelling basis or argument for allowing Debtors to utilize section 522(f)(1) to avoid what is admittedly on its face a "statutory lien".

The County contends that notwithstanding its manner of enforcement, a California Revenue and Taxation Code § 2191.3 tax lien is a "statutory lien"; and as such, the County maintains, it cannot be avoided pursuant to section 522(f).³ The County's contention, however, is not persuasive in light of California case law holding that state law exemptions take priority over section 2191.3 tax liens. See Ada Elizabeth Curtis v. County of Kern, 37 Cal.App.3d 704, 113 Cal.Rptr. 41 (1974).

In Curtis, plaintiff filed an action for declaratory relief seeking an order declaring that a prior recorded homestead took precedence over a tax lien recorded pursuant to section 2191.3. Kern County invoked the general rule that a tax lien takes priority over a prior recorded homestead. California Revenue and Taxation Code § 2192.1. The trial court entered summary judgment against Kern County, declaring, in substance, that a prior recorded homestead took precedence over a tax lien recorded by the County pursuant to section 2191.4. Curtis v. County of Kern, 37 Cal. App.3d at 706, 113 Cal.Rptr. 41. The California Court of Appeals for the Fifth Circuit affirmed the trial court's ruling, noting that,

"The lien created under Revenue and Taxation Code section 2191.4 is treated as a judgment lien. (citations omitted) A judgment lien does not take priority over a prior recorded declaration of homestead. (citations omitted) It follows that a prior recorded homestead takes precedence over a tax lien under Revenue and Taxation Code section 2191.4 since such a lien is treated as a judgment lien." Curtis v. County of Kern, 37 Cal.App.3d at 706, 113 Cal.Rptr. 41.

The court further noted that "the legislative intent of section 2191.4 is clear and explicit, leaving no latitude for judicial construction or arguments relative to general principles of tax law in situations not...