In re Watts
| Decision Date | 06 August 2002 |
| Docket Number | No. 00-55207.,00-55207. |
| Citation | 298 F.3d 1077 |
| Parties | In re Ronald Gary WATTS; In re Yee Kome Kathy Watts, Debtors, Phillip J. Wolfson, Appellant, v. Ronald Gary Watts; Yee Kome Kathy Watts, Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
J. Edward Switzer, Jr., Vista, CA, for the appellant.
Brian M. Mahoney, San Diego, CA, for the appellees.
Appeal from the Ninth Circuit Bankruptcy Appellate Panel, Perris, Klein and Ryan, Bankruptcy Judges, Presiding. BAP No. SC-99-01344-KPRy.
Before: O'SCANNLAIN and PAEZ, Circuit Judges, and KING, District Judge.*
Phillip J. Wolfson, a judgment creditor, appeals the Bankruptcy Appellate Panel's ("BAP") decision affirming the cancellation of his judgment lien on debtors Ronald Gary Watts's and Yee Kome Kathy Watts's (collectively, "Debtors") declared homestead. At the time Wolfson recorded his abstract of judgment, the value of the preexisting lien on Debtors' homestead, together with the homestead exemption, exceeded the fair market value of Debtors' real property. The bankruptcy court canceled Wolfson's judgment lien in an avoidance proceeding pursuant to 11 U.S.C. § 522(f) under the rationale of Jones v. Heskett (In re Jones), 106 F.3d 923 (9th Cir.1997).
In Jones, we held that, under California Code of Civil Procedure ("CCP") § 704.950(c), a judgment creditor's lien does not attach to a declared homestead unless surplus equity exists in the homestead at the time the creditor records an abstract of judgment. After Jones, two California appellate courts rejected our interpretation of section 704.950(c) and concluded that a judgment creditor is entitled to surplus equity that accrues after the abstract of judgment is recorded. In light of the intervening California authority, which the California Supreme Court would likely follow, we overrule Jones. Accordingly, we reverse and remand.
In 1994, Debtors recorded a declaration of homestead, which protected $75,000 of equity in their principal residence from execution by creditors. CCP §§ 704.710(c) (defining homestead), 704.730(a). In 1995, Wolfson recorded an abstract of judgment against Debtors' real property for $38,752.47. At the time Wolfson recorded the abstract of judgment, the sum of the debt on the first deed of trust and the homestead exemption exceeded the fair market value of Debtors' home. Thus, there was no surplus equity at that time to satisfy the judgment.
When Debtors filed a Chapter 7 bankruptcy petition in 1998, however, there was surplus equity. At that time, the fair market value of the house was $295,000 and the debt on the first deed of trust was $188,000. Thus, there was $32,000 in surplus equity unencumbered by the first deed of trust and the homestead exemption ($295,000 — $188,000 — $75,000 = $32,000).
In 1999, Debtors moved to avoid Wolfson's judgment lien in the bankruptcy court pursuant to 11 U.S.C. § 522(f).1 Following Jones's interpretation of section 704.950(c), the bankruptcy court found that Wolfson's judgment lien had not attached and could never attach to Debtors' residence because there was no surplus equity in the residence when Wolfson recorded the abstract of judgment. Accordingly, the bankruptcy court canceled Wolfson's lien under § 522(f). The bankruptcy court, however, expressed its disapproval of the result, explaining that it agreed with two subsequent California appellate court opinions, Smith v. Merrill, 64 Cal.App.4th 94, 75 Cal.Rptr.2d 108 (Ct.App.1998), and Teaman v. Wilkinson, 59 Cal.App.4th 1259, 69 Cal.Rptr.2d 705 (Ct.App.1997), both of which disagreed with Jones's interpretation of section 704.950(c).
On appeal, the BAP agreed with the bankruptcy court that it could not "cast off the bonds imposed by Jones." The BAP reasoned that the California Supreme Court, which had not had the opportunity to interpret section 704.950(c), could conceivably disagree with the California appellate court rulings in Smith and Teaman. Accordingly, the BAP affirmed the bankruptcy court's ruling.
This appeal followed.
We review de novo the BAP's legal conclusions. Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th Cir. 1997) (en banc). We also review de novo decisions regarding stare decisis. Baker v. Delta Air Lines, Inc., 6 F.3d 632, 637 (9th Cir.1993).
Federal bankruptcy laws provide debtors with various exemptions, which exclude certain property from the bankruptcy estate. Kendall v. Pladson (In re Pladson), 35 F.3d 462, 464 (9th Cir.1994); 11 U.S.C. § 522(d). Pursuant to 11 U.S.C. § 522(b)(1), California opted out of the federal exemptions and enacted its own exemptions. CCP § 703.130; Little v. Reaves (In re Reaves), 285 F.3d 1152, 1155 (9th Cir.2002).
A California debtor in bankruptcy must elect between two sets of exemptions under California law, one which applies to debtors generally and the other which applies to debtors in bankruptcy. CCP § 703.140(a); Farrar v. McKown (In re McKown), 203 F.3d 1188, 1189 (9th Cir. 2000). The homestead exemption available to judgment debtors, CCP § 704.730, is more generous than the exemption that applies to debtors in bankruptcy, id. § 703.140(b)(1). Here, prior to filing for bankruptcy, Debtors recorded a declaration of homestead available to judgment debtors, thereby entitling Debtors to a $75,000 homestead exemption, id. § 704.730(a), which remained effective after they filed their bankruptcy petition.2
After filing for bankruptcy, Debtors sought to avoid Wolfson's judgment lien pursuant to 11 U.S.C. § 522(f) on the ground that it impaired their homestead exemption. To determine whether or to what extent Wolfson's judgment lien could be avoided under § 522(f) because it impaired Debtors' state-law homestead exemption, the bankruptcy court had to (1) apply California law to determine whether Wolfson's lien attached to Debtors' residence, and (2) if the lien attached, determine under federal bankruptcy law whether or to what extent the lien impaired Debtors' homestead exemption. See Wiget v. Nielsen (In re Nielsen), 197 B.R. 665, 667-68 (B.A.P. 9th Cir.1996); see also Bank of Am. Nat'l Trust & Sav. Ass'n v. Hanger (In re Hanger), 217 B.R. 592, 594-95 (B.A.P. 9th Cir.1997) (). We address only the first inquiry here.
Prior to 1982, if a homeowner recorded a declaration of homestead in California, the California homestead exemption protected the entire value of the residence. Jones, 106 F.3d at 926. Thus, no judgment lien could attach, and a creditor's only option to enforce his judgment was to seek a judicial sale of the property. Id. In 1982, however, the California Legislature enacted the Enforcement of Judgments Law, CCP §§ 680.010-724.260, which amended the declared homestead provisions. Pursuant to section 704.950, judgment liens could now attach to declared homesteads if there was surplus equity in excess of the total amount of liens and encumbrances and the homestead exemption. Section 704.950 provides in pertinent part:
(a) Except as provided in subdivision[]... (c), a judgment lien on real property... does not attach to a declared homestead if both of the following requirements are satisfied:
(1) A homestead declaration describing the declared homestead was recorded prior to the time the abstract or certified copy of the judgment was recorded to create the judgment lien.
(2) The homestead declaration names the judgment debtor or the spouse of the judgment debtor as a declared homestead owner.
. . .
(c) A judgment lien attaches to a declared homestead in the amount of any surplus over the total of the following:
(1) All liens and encumbrances on the declared homestead at the time the abstract of judgment or certified copy of the judgment is recorded to create the judgment lien.
(2) The homestead exemption set forth in Section 704.730.3
In Jones, without the benefit of any California cases to guide our interpretation of section 704.950(c), we addressed whether a judgment lien could attach to a declared homestead if there was no surplus equity at the time the abstract of judgment was recorded. We held that a judgment creditor's lien attaches only if (1) surplus equity exists at the time the creditor records the abstract of judgment, or (2) the creditor executes on the judgment, thereby creating a lien that has a two-year life. 106 F.3d at 927. Thus, under Jones, even if surplus equity accrues after a creditor records an abstract of judgment, the judgment creditor, confronted with a bankruptcy petition, is not entitled to any surplus equity.
We reasoned in Jones that the California homestead exemption laws were designed to prevent individuals from losing their homes, and thus the homestead laws should be liberally construed in favor of homesteaders. Id. at 925, 927. We reviewed the history of the 1982 legislative amendments to the homestead statutes as reflected in the Comment of the California Law Revision Commission, 16 Cal. L. Revision Comm'n Reports 1438 (1982) ("Comment"). The Comment explained that judgment liens do not attach to property that is subject to a prior homestead declaration, but that, similar to the law prior to the 1982 amendments, a judgment creditor could reach any equity value in excess of the homestead exemption by levy of execution on the property. Jones, 106 F.3d at 926. We specifically noted that the Comment "was not revised to reflect the addition of subdivision (c) to Section 704.950[.]" Id. Thus, we concluded that subsection (c) was an "afterthought" and that it "carve[d] out a narrow exception to the general and long-standing California rule that judgment...
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