In re Morgan
| Decision Date | 12 January 1993 |
| Docket Number | Bankruptcy No. LA91-83895-LF.,BAP No. CC-91-2288-JVP |
| Citation | 149 BR 147 |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
| Parties | In re: Thomas K. MORGAN, Debtor. Thomas K. MORGAN, Appellant, v. FEDERAL DEPOSIT INSURANCE CORP., as Receiver for Heritage Bank; Bank of America, NT & SA; Merchants Recovery Services, Inc.; and Household Finance Corp., Appellees. |
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Carl F. Agren, Orange, CA, for Thomas K. Morgan.
Paula Scotland, Newport Beach, CA, for FDIC (as Receiver of Heritage Bank).
Before JONES, VOLINN and PERRIS, Bankruptcy Judges.
On or about June 9, 1986, the Federal Deposit Insurance Corporation, as receiver for Heritage Bank ("FDIC"), obtained a judgment against debtor Thomas Morgan ("Morgan") in the amount of $53,174.18. After recording an abstract of judgment, the FDIC initiated a proceeding in California state court to levy on real property owned by Morgan.
On February 21, 1990, the California court held a show cause hearing to determine whether an execution sale should be held. Morgan appeared at the show cause hearing and argued for a homestead declaration which would prohibit the sale, but presented no evidence to support that position. The state court granted Morgan additional time to submit evidence in support of his homestead declaration.
Morgan did submit evidence, but at a subsequent hearing the state court determined that the evidence was insufficient to support Morgan's homestead declaration and ordered the property sold. Morgan appealed that decision and the California Court of Appeals affirmed, finding that Morgan had failed to satisfy his burden of proving a homestead even though the state trial court had "bent over backward" to accommodate him.
The FDIC calendared a trustee's sale of the property, but that sale was stayed when Morgan filed a petition under Chapter 11 of the Bankruptcy Code1 on July 19, 1991. In conjunction with the bankruptcy petition, Morgan filed a schedule A-2 (creditors holding security) on which he listed the subject real property. Morgan listed the property as having a value of $165,000 and the encumbrances on the property (including that of the FDIC) as totaling $285,000. Morgan also filed a schedule B-4 (property claimed as exempt) on which he listed the subject property and claimed a homestead exemption of $100,000.
On or about September 6, 1991, Morgan filed a motion to avoid judicial liens in which he sought to avoid, inter alia, the FDIC lien. On or about September 20, 1991, the FDIC filed an opposition to the motion in which it argued that the state court order concluding that Morgan was not entitled to a homestead exemption should be given full faith and credit.
At a hearing on October 1, 1991, the court denied the relief requested by the motion because (1) it was not supported by competent evidence, (2) it did not appear that Morgan was entitled to a homestead exemption, and (3) the state court determination that Morgan was not entitled to a homestead was entitled to full faith and credit.
Morgan subsequently filed a motion for reconsideration, which the court denied. Morgan then filed a timely notice of appeal.
A. Whether the failure of a party in interest to timely object to Morgan's claim of exemption results in the exemption being valid by default.
B. Whether the default validation of Morgan's exemption prevents the FDIC from challenging the validity of the exemption in defense of a motion to avoid its lien.
C. Whether the trial court correctly determined that Morgan was barred from relitigating the validity of his claimed exemption.
Resolving the first two issues identified above requires us to interpret Bankruptcy Code § 522. We review questions of statutory construction de novo. See In re Rubottom, 134 B.R. 641, 643 (9th Cir. BAP 1991). We also review de novo the trial court's ruling on the availability of res judicata as to both claim and issue preclusion. See Guild Wineries and Distilleries v. Whitehall Co., 853 F.2d 755, 758 (9th Cir.1988).
The case at bar involves an analysis of the interplay between subsections (f) and (1) of Bankruptcy Code § 522 and Bankruptcy Rule 4003(b). Section 522(f) provides:
11 U.S.C. § 522(f). Section 522(l) requires that the debtor file a list of property in which the debtor claims an exemption and provides that unless a party in interest objects to a claim of exemption, the property claimed exempt is exempt. 11 U.S.C. § 522(l). Rule 4003(b) gives parties in interest 30 days from the date of the § 341 meeting to file objections to a claim of exemption.
We must first determine whether Morgan had a valid homestead exemption under § 522(l). We must then determine whether Morgan may use § 522(f) to avoid the FDIC's lien. See In re Galvan, 110 B.R. 446, 450 (9th Cir. BAP 1990) (). Finally, we must decide whether the trial court erred in ruling that the state court judgment denying Morgan a homestead exemption prevented him from asserting the exemption as a basis for avoiding the FDIC lien.
After the briefing of this appeal was complete, the Supreme Court decided Taylor v. Freeland & Kronz, ___ U.S. ___, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). Taylor resolved a split of authority regarding whether a claim of exemption to which no timely objection is filed automatically results in the property being exempt from inclusion in the bankruptcy estate, ___ U.S. at ___, 112 S.Ct. at 1648, and resolves the first issue presented by this appeal.
In Taylor, the debtor filed a list of exempt assets as required by § 522(l) and included the proceeds of a sexual discrimination lawsuit against a former employer. Id. at ___, 112 S.Ct. at 1646. Neither the bankruptcy trustee, Robert Taylor, nor any creditor objected to the exemption within 30 days after the conclusion of the § 341(a) meeting of creditors as required by Bankruptcy Rule 4003(b). Id. at ___, 112 S.Ct. at 1647. There clearly was no basis for the claimed exemption under federal or state law except for a small portion of the recovery. Id.
After the debtor obtained a $110,000 settlement, Taylor sought to recover part of the proceeds from the law firm that had represented the debtor.2 The firm responded that the settlement proceeds were not property of the estate because the debtor had claimed them exempt and that claim had not been challenged. The bankruptcy court sided with Taylor and the district court affirmed, but the Third Circuit Court of Appeals reversed. The court of appeals held that the settlement proceeds were exempt because the debtor's claim of exemption had not been timely challenged. Id. The Supreme Court granted certiorari and affirmed.
The Court noted that Bankruptcy Code § 522(l) provides that "unless a party in interest objects, the property claimed as exempt . . . is exempt." The Court further noted that Bankruptcy Rule 4003(b) only gives the trustee 30 days after the conclusion of the meeting of creditors to file an objection to a claimed exemption. Id. The Court concluded that because Taylor had not objected to the exemption within the 30 day period, he "cannot contest the exemption at this time whether or not the debtor had a colorable statutory basis for claiming it." Id. at 1648. Under Taylor, even an exemption claim that is totally baseless will result in the property at issue being exempt if neither the trustee nor another party in interest timely objects to the exemption.
In the case at bar, Morgan's list of exempt property included a homestead exemption for his residence. No party in interest objected within the time allowed by Bankruptcy Rule 4003(b). Under Taylor, even though Morgan may not have had a good faith basis for claiming it, his homestead exemption is valid pursuant to § 522(l). This determination, however, does not end our inquiry.
The remaining question is whether the validation of Morgan's homestead exemption, based solely on the failure of a party in interest to object to it, precludes a judicial lien holder from defending a lien avoidance motion by challenging the exemption.
The statutory language of § 522(f) yields a four-part test for avoidance of a lien:
In re Mohring, 142 B.R. 389, 392 (Bankr. E.D.Cal.1992). In the case at bar, the property at issue was listed on Morgan's schedules and claimed as exempt; and the FDIC's lien is a judicial lien that impairs the exemption. Thus, the second through fourth elements of this test are met.
Morgan argues that the validation of his homestead exemption under § 522(l) satisfies the first element. Some courts have concluded that a judicial lien creditor who fails to object to a debtor's claim of exemption in a timely fashion may not raise the alleged invalidity of the exemption as a defense to a lien avoidance action. See In re Indvik, 118 B.R. 993, 1004 (Bankr. N.D.Iowa 1990); In re Caruthers, 87 B.R. 723, 725-726 (Bankr.N.D.Ga.1988); In re Hahn, 60 B.R. 69, 74-76 (Bankr.D.Minn. 1985); In re Towns, 74 B.R. 563, 566-567 (Bankr.S.D.Iowa 1987). Courts adopting this position have concluded that the...
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In re Cloutier
...Anchorage 1. Docket No. 42. 2. AS 09.38.010(b). 3. 503 U.S. 638 (1992). 4. 11 USC § 522(l) and FRBP 4003(b). 5. In re Morgan, 149 BR 147, 151 (9th Cir. BAP 1993). 6. Docket No. ...