In re Mulch
| Decision Date | 04 May 1995 |
| Docket Number | Bankruptcy No. 94-50437-JRG. |
| Citation | 182 BR 569 |
| Court | U.S. Bankruptcy Court — Northern District of California |
| Parties | In re Raymond Charles MULCH and Cheryl Renee Mulch, Debtors. |
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David B. Rao, Binder & Malter, San Jose, CA, for lienholder Baugh.
Merrill E. Zimmershead, A Professional Law Corp., Gilroy, CA, for debtors.
On January 21, 1994 the debtors filed a Chapter 7 bankruptcy petition. Thereafter, the debtors brought this motion to avoid judicial liens pursuant to 11 U.S.C. § 522(f)(1).1 One of the lienholders, Bradford Baugh, contested the motion. The fair market value of the subject property, known as 345 Leavesley Road, Gilroy, California is disputed as is the precise amount of the liens encumbering it. Before litigating this dispute, the parties requested that the court decide two threshold legal issues which Mr. Baugh believed would resolve the motion.
First, Mr. Baugh points out that the debtors have not recorded a declaration of homestead under C.C.P. § 704.920. Rather, they have claimed an exemption under the "automatic" homestead provision of C.C.P. § 704.720. However, there is no pending forced sale of the property and therefore Mr. Baugh argues the debtors are not entitled to the "automatic" homestead exemption under California law. As bankruptcy law cannot increase the exemption rights held by debtors under state law, he believes the motion must be denied.
Secondly, Mr. Baugh argues that the homestead exemption of the debtors, if any, is not impaired by his lien under controlling Ninth Circuit authority and therefore the lien cannot be avoided. In support of this argument he cites In re Chabot, 992 F.2d 891 (9th Cir.1993), which is applicable to this case.2
Pursuant to the authority of § 522(b)(1), the California legislature has elected to "opt out" of the federal bankruptcy exemptions set forth in § 522(d) such that the federal exemptions are expressly not authorized in California. C.C.P. § 703.130. Because California has opted out of the federal exemption scheme, the Court must initially determine the scope of the debtors' homestead exemption by reference to state law. 11 U.S.C. § 522(b)(1).
Unlike many other states, California's current statutory scheme addressing exemptions contemplates that a person may assert an entitlement to the homestead exemption3 in either of two ways. First, C.C.P. § 704.920 authorizes a declared homestead exemption.4 Entitlement to the declared homestead exemption requires that a person comply with certain procedural requirements, including recordation of a declaration of homestead in the office of the county recorder. C.C.P. §§ 704.920-704.930. The recorded homestead declaration protects the property from execution by certain creditors to the extent of the amount of the homestead exemption. 5 Miller & Starr, California Real Estate § 13.1 (2d ed. 1989).
However, many judgment debtors failed to execute a declaration of homestead on their property notwithstanding the availability of the exemption. Webb v. Trippet, 235 Cal. App.3d 647, 650, 286 Cal.Rptr. 742 (1991). The unintended result was that only the more sophisticated homeowner, who had followed the statutory procedure, obtained the exemption. Id. Because the fundamental purpose behind the exemption was largely frustrated, the California legislature in 1974 enacted legislation creating the automatic homestead exemption where no homestead declaration had been filed. Id.
C.C.P. § 704.720 provides a homeowner with a residential homestead exemption which may be claimed upon a forced sale of the property.5 This exemption is often referred to as the automatic homestead since the homeowner need not file a declaration of homestead to be entitled to this exemption. The automatic homestead exemption is available when a party has continuously resided in a dwelling from the time that a creditor's lien attaches until a court's determination in the forced sale process that the exemption does not apply. Webb v. Trippet, 235 Cal. App.3d at 651, 286 Cal.Rptr. 742; C.C.P. § 704.710(c). In the forced sale process, the homestead shall not be sold unless there is a bid that exceeds the amount of the homestead exemption plus any additional amount necessary to satisfy the liens and encumbrances on the property senior to the executing creditor's lien. C.C.P. § 704.800. Absent sufficient value in the property, the sale cannot go forward but the judgment lien is otherwise unaffected.
The legislature chose not to repeal the declared homestead exemption in favor of the newly created residential exemption and instead elected to create two separate protections. 5 Miller & Starr, California Real Estate § 13.1. The clear public policy of these two exemptions is to provide that one or the other exemption applies if a dwelling qualifies as a homestead. Id.
The declared homestead and the automatic homestead are separate and distinct protections that operate differently. See 5 Miller & Starr, California Real Estate § 13.1. The declared homestead and the automatic exemption each confer different rights on the homesteader, and there is no overlap between these rights. In re Anderson, 824 F.2d 754, 756 (9th Cir.1987); Webb v. Trippet, 235 Cal.App.3d at 651, 286 Cal.Rptr. 742. One may have rights under the declared homestead law, or rights under the automatic exemption law, or both, or neither. Anderson, 824 F.2d at 756; Webb v. Trippet, 235 Cal.App.3d at 651, 286 Cal.Rptr. 742.
The declared homestead provides benefits in addition to those granted by the automatic homestead. Anderson, 824 F.2d at 757. First, the declared homestead provides protection of the proceeds from a voluntary sale of the homestead. Id. Second, judgment liens attach only to the equity in excess of consensual liens and the debtor's homestead. Id. Third, the protections of the declared homestead against attachment of judgment liens survive the death of the homestead owner. Id.
Perhaps the most significant difference between the automatic homestead and the declared homestead under California law is that the declared homestead entitles the debtor to the exemption upon a voluntary sale of the homestead property, and the proceeds remain exempt for six months.6 This allows the debtor to reinvest the proceeds in another residence. In re Cole, 93 B.R. 707, 708 (9th Cir. BAP 1988). On the other hand, the automatic homestead entitles the debtor to the exemption only upon a forced execution sale. C.C.P. § 704.720(b).7 The debtor is not entitled to the automatic homestead upon a voluntary sale of the property, or upon a sale pursuant to a consensual deed of trust. C.C.P. § 703.010(b); In re Anderson, 824 F.2d 754, 756 (9th Cir.1987); In re Cole, 93 B.R. at 708 n. 1; Spencer v. Lowery, 235 Cal.App.3d 1636, 1 Cal.Rptr.2d 795 (1991).
Thus, if Mr. and Mrs. Mulch attempted to voluntarily sell the property outside the protections afforded by bankruptcy it is clear that no homestead exemption would be available to them under state law.
State law generally determines the existence and scope of the debtor's interest in property. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917-18, 59 L.Ed.2d 136 (1979). Absent some compelling federal interest requiring a different result, there is no reason why property interests should be analyzed differently simply because one of the parties is in bankruptcy. Id. Notwithstanding this general proposition, the role of § 522(f) in providing the debtor a fresh start constitutes such a compelling federal interest that it provides a debtor with greater rights in bankruptcy than generally available under state law.
It is clear that the analysis of lien avoidance under § 522(f)(1) involves more than the determination of exemption rights under state law. Owen v. Owen, 500 U.S. 305, 309-12, 111 S.Ct. 1833, 1836-37, 114 L.Ed.2d 350 (1991); see also In re Morgan, 149 B.R. 147, 153 (9th Cir. BAP 1993). Owen explains that the state of affairs considered by a court is hypothetical, not actual. The question is not "whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he would have been entitled but for the lien itself." Owen at 310-11, 111 S.Ct. at 1836. Owen involved a judgment lien that could not be defeated by the debtor's homestead under Florida law. Nevertheless, the court allowed the debtor to avoid the lien under § 522(f)(1) because he would have been entitled to the exemption "but for the lien at issue." Id. In essence, we must "ask first whether avoiding the lien would entitle the debtor to an exemption, and if it would, then avoid and recover the lien." Id. at 312-13, 111 S.Ct. at 1837.
Absent the judgment liens on the debtors' residence, the Mulches were entitled to a homestead exemption. Had they recorded a homestead declaration prior to filing their bankruptcy petition, the Owen analysis would clearly have allowed them to avoid the judgment liens under § 522(f)(1).
Conversely, the debtors would not be entitled to claim the automatic homestead exemption outside of the protections afforded by bankruptcy because there is no forced sale. However, the Bankruptcy Appellate Panel has repeatedly held that the filing of the bankruptcy petition constitutes a hypothetical attempt by the trustee to levy on the property. See, e.g., In re Mayer, 167 B.R. 186, 189 (9th Cir. BAP 1994). For purposes of determining the debtor's entitlement to the automatic homestead exemption this hypothetical levy is the functional equivalent of a forced...
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