In re Wenner, Bankruptcy No. 82-01936

• Decision Date: 29 February 1984
• Docket Number: Bankruptcy No. 82-01936,Adv. No. A83-0515.
• Citation: 39 BR 288
• Court: U.S. Bankruptcy Court — Western District of Washington
• Parties: In re Harry WENNER, wwi Elayne Beverly Wenner, and the marital community composed thereof, Debtor. Warren Lief ERICKSON, Trustee, Plaintiff, v. Harry WENNER, wwi Elayne Beverly Wenner; University Federal Savings and Loan Association; Michael R. Mastro and Joan K. Mastro, husband and wife; Isaac S. Gamel and Nancy Gamel, husband and wife; KRJ, a Washington general partnership; Burl R. Pettibon and Audrey Pettibon, husband and wife; and Karen L. Gillies, Defendants.

39 B.R. 288 (1984)

In re Harry WENNER, wwi Elayne Beverly Wenner, and the marital community composed thereof, Debtor Warren Lief ERICKSON, Trustee, Plaintiff, v. Harry WENNER, wwi Elayne Beverly Wenner; University Federal Savings and Loan Association; Michael R. Mastro and Joan K. Mastro, husband and wife; Isaac S. Gamel and Nancy Gamel, husband and wife; KRJ, a Washington general partnership; Burl R. Pettibon and Audrey Pettibon, husband and wife; and Karen L. Gillies, Defendants.

Bankruptcy No. 82-01936, Adv. No. A83-0515.

United States Bankruptcy Court, W.D. Washington, at Seattle.

February 29, 1984.

Donald E. Elliott, Seattle, Wash., for plaintiff/trustee Warren Lief Erickson.

Patrick C. Comfort, Tacoma, Wash., for defendants Burl R. and Audrey Pettibon.

MEMORANDUM DECISION

SIDNEY C. VOLINN, Bankruptcy Judge.

Two basic questions are presented here. First, does an amendment to the homestead statute creating an automatic homestead have retroactive effect as to pre-existing judgments. Second, whether a judgment lien attaches to excess value above the homestead so as to defeat the claim, under 11 U.S.C. § 544(a)(3), of a trustee in a bankruptcy filed subsequent to the judgment. Implicit in the foregoing issue is whether the judgment lien would prevail over a subsequent transfer from the owner of a bona fide purchaser or encumbrancer.

This decision holds that the amendment is retroactive and that the trustee in bankruptcy takes the excess value over the homestead free of the claim of judgment lien.

I. BACKGROUND

The issues were presented by cross motions for summary judgment arising out of the trustee's Complaint to Determine the Validity of Judgment Lien and Sell Property Free and Clear of Liens. The debtor, Harry Wenner, filed his petition for relief under Chapter 7 of the Bankruptcy Code on June 30, 1982. Among his assets was a purchaser's interest in a condominium at Mercer Island, Washington, acquired by a real estate contract dated December 20, 1975. The condominium was subject to various liens and encumbrances at the time the debtor's petition was filed, including a judgment lien of $23,700, in favor of defendant Burl R. Pettibon et ux, which was filed in King County on August 29, 1980, in the sum of $23,700. Thereafter the debtor filed a Declaration of Homestead on December 1, 1980.

At all times material hereto the debtor resided at the condominium. The Pettibons admit in their answer that they took no steps to enforce their judgment against any of the excess value of the subject property, pursuant to RCW 6.12.140-200. The property has been sold and the claims of various parties, including the debtor's homestead, have been transferred to the proceeds of sale by agreed order and pursuant to 11 U.S.C. § 363(f).

II. CONTENTIONS OF PARTIES

A. The Trustee

The trustee's position is that the judgment of defendants Pettibon should not attach to the proceeds of sale of the condominium because enforcement of the judgment under the excess value provisions of the homestead statute had not been instituted by the time the bankruptcy petition was filed. The trustee relies on a recent Washington Supreme Court decision, Mahalko v. Arctic Trading Co., 99 Wash.2d 30, 659 P.2d 502 (1983). He relates Mahalko to an early Washington case, Traders' National Bank v. Schorr, 20 Wash. 1, 54 P. 543 (1898), which stated:

. . . A general judgment lien does not operate upon, and does not attach to, premises which constitute a homestead. . . . Traders\' Nat. Bank v. Schorr, supra, p. 8-9, 54 P. 543.

The trustee also argues that the 1981 Amendments to the Homestead Act establish that the creation of a homestead begins ". . . at the time the property is occupied as a permanent residence by the owner. RCW 6.12.080." Under RCW 6.12.050 the amendments also provide for an automatic homestead declaration if the debtor resides at and occupies the homestead property. The trustee asserts that the automatic homestead, under the laws of the State of Washington, should have retroactive application pursuant to Macumber v. Shafer, 96 Wash.2d 568, 637 P.2d 645 (1981). That case held the 1977 increase in the homestead exemption from $10,000 to $20,000, had retroactive effect as to debts incurred prior to the amendment which was considered remedial in nature and therefore not violative of the contract clause of the United States Constitution.

Finally, the trustee maintains that he has the rights and powers of a bona fide purchaser of real property by virtue of 11 U.S.C. § 544(a)(3) thereby rendering his interest in the condominium superior to that of Pettibon's.

B. The Judgment Creditor

The defendants Pettibon contend that the judgment lien should attach to the proceeds of sale of the condominium or, in the alternative, that they should be entitled to enforce their judgment under the excess value provisions of the homestead statute. The defendants argue that the judgment became a lien because no homestead had been filed prior to entry of the judgment in King County. The subsequent filing of the homestead has no retroactive effect, simply deferring the judgment lien's enforceability as to any excess value. Pettibons rely on the case of Locke v. Collins, 42 Wash.2d 532, 256 P.2d 832 (1953) which held that the subsequent filing of a declaration of homestead did not remove the judgment lien from the property. They further argue that Locke was affirmed by a later decision, Lien v. Hoffman, 49 Wash.2d 642, 306 P.2d 240 (1957).

As to the retroactivity of the statute, defendants attempt to distinguish Macumber on the basis that the 1981 amendments are penal and not remedial in nature because the net effect is to invalidate a substantive property right—the judgment creditor's lien provided for in RCW 4.56.190-200. In their first supplemental brief defendants argue that the case of U.S. v. Security Industrial Bank, 459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982) is applicable. In that case debtors invoked 11 U.S.C. § 522(f) to avoid security interests or liens encumbering otherwise exempt household goods as to a security interest which attached prior to the enactment of the Bankruptcy Reform Act of 1978. Security held that § 522(f) should not be given retroactive effect because the bankruptcy law should not "be construed to eliminate property rights which existed before the law was enacted . . . without . . . any explicit command from Congress. U.S. v. Security Industrial Bank, supra, 459 U.S. 81, 103 S.Ct. 414, 74 L.Ed.2d 245."

The trustee responded to the defendants' arguments in a supplemental brief. He contends that Locke v. Collins, supra, is inconsistent with Mahalko. Locke is not expressly discussed in the majority opinion (although it is cited in Justice Dore's Dissent). Therefore, the trustee maintains that it is overruled by implication.

It is apparent that there are no genuine issues of material fact to be resolved by the court. As such, the prevailing party will be entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c), (d).

III. DISCUSSION

A. Effect of Mahalko

At the outset it is important to recognize the basic character of the homestead. Generally speaking, a homestead is not an encumbrance or interest in land. Edgley v. Edgley, 31 Wash.App. 795, 797, 799, 644 P.2d 1208 (1982). Rather, it is a right of exemption from execution provided for in the Washington State Constitution, Article 19, § 1 (1889). The homestead plays an integral part in the debtor's relationship to his creditors. Essentially, the homestead is simply a sum of money. If the fair market value of the property, less liens entitled to priority under RCW 6.12.100, is below the statutory sum, the debtor may not be dislodged from the property by his creditors. However, if the fair market value of the property exceeds the total of the liens plus the homestead, a sale may be forced by the judgment creditor, subject to the debtor having a right to receive the sums due by way of homestead. The debtor may retain funds up to the homestead limit and reinvest same in another residence and still be afforded the protection of the homestead exemption.

In order to fully grasp the basis of the Washington Supreme Court's decision in Mahalko it is important to put the 1981 Amendments to the Homestead Act in historical perspective. Washington's first provision for a homestead is contained in the Code of 1881, § 342; 2 Hill's Code, § 481 (1891). The statute reads:

There shall be also exempt from execution and attachment to every householder, being the head of a family, a homestead not exceeding in value the sum of one thousand dollars while occupied as such by the owner thereof, or his or her family. Said homestead may consist of a house and lot or lots in any city, or a farm, consisting of any number of acres, so that the value of the same shall not exceed the aforesaid sum of one thousand dollars. Such homestead may be selected at any time before sale. (emphasis added). Code of 1881, § 342.

The 1881 enactment also contained provisions for creditors sale of the homestead property in the event there is any excess value above and beyond the amount of the exemption. Code of 1881, § 345. The case law interpreting the statute held that no formal declaration was necessary—mere occupancy was sufficient to declare a homestead. See Locke v. Collins, 42 Wash.2d 532, 534, 256 P.2d 832 (1953) and the cases cited therein.

Subsequently the method of formally selecting the homestead was added by the Homestead Act of 1895, Laws 1895, p. 109. The claimant was required to execute and acknowledge a written "declaration of homestead" and record same with the county auditor. Laws of 1895, p. 113, § 30; RCW 6.12.040; p. 114 § 32, RCW 6.12.070. This statute also contained a provision for execution against any excess value of the homestead property by general judgment creditors. RCW 6.12.140 et seq.

There have been various changes during the ensuing years reflecting the tension between...