Amount of Homestead Exemption Claim is Determined as of the Petition Date for Lien Avoidance Purposes

The following is a case update written by Kathleen A. Cashman-Kramer of Sullivan Hill in San Diego, California and Matt D. Resnik, Certified Bankruptcy Specialist at RHM Law, LLP in Los Angeles, California, analyzing a recent case of interest:

SUMMARY

On November 14, 2022, in a published decision, the United States Court of Appeals for the Ninth Circuit found that the bankruptcy court correctly applied the $600,000 homestead exemption in effect on the filing date of the bankruptcy petition, rather than the significantly lower homestead exemption available when the judgment lien was recorded seven years prior.  As a result, the judgment lien was avoided in its entirety. 

To review Barclay vs. Boskoski, 2022 WL 16911862 (9th Cir. November 14, 2022), click here.

FACTS

In 2014, Greek Village, LLC, Konstantinos Manassakis, and Aimilia Manassakis recorded a $256,075.95 judgment lien (“Greek Village Judgment Lien”) against Debtor Dejan Boskoski’s Carlsbad, California home. Because the debtor was married in 2014, the maximum homestead exemption applicable to the Greek Village Judgment Lien was $100,000. See Cal. Civ. Proc. Code § 704.730 (2013).  Following the perfection of the judgment, in 2021 California amended its exemption statute to allow debtors to claim the greater of (1) the “median sale price for a single-family home” in the debtor’s county the year before the debtor claims the exemption, “not to exceed” $600,000; or (2) $300,000. See Cal. Civ. Proc. Code § 704.730(a) (2021).

In August 2021 (seven years after the Greek Village Judgment Lien was perfected and eight months after California enacted the new homestead exemption), the debtor filed a chapter 7 case. The debtor claimed the $600,000 homestead exemption in his schedules and sought to avoid the Greek Village Judgment Lien, which exceeded $477,000 as of the petition date. The debtor argued that the Bankruptcy Code required the court to look to the exemption the debtor could have claimed, but for the lien, at the time he filed his bankruptcy petition, not when the judgment lien was created. The Greek Village Judgment Lien therefore impaired his homestead exemption by $543,897.20, as the home was subject to two deeds of trust totaling $551,720.47, the Greek Village Judgment Lien, and the $600,000 homestead exemption. In total, these equaled $1,629,647.20, an amount exceeding the value of the debtor’s home by $543,897.20.  The Chapter 7 trustee objected, arguing that the maximum homestead exemption available to the debtor was $100,000 because under California law the exemption the debtor could claim was fixed at the 2014 amount. See Cal. Civ. Proc. Code § 703.050(a).

The bankruptcy court agreed with the debtor’s argument that the exemption amount is fixed on the date of filing the petition. The net result was the avoidance of  the entire amount of the Greek Village Judgment Lien. Because the bankruptcy court believed it to be a “close call on an important question,” the decision was immediately certified to the Ninth Circuit as a case of first impression. 2022 WL 16911862 at *6.

REASONING

The Ninth Circuit affirmed the decision of the bankruptcy court and held that the debtor’s exemption amount was fixed on the date the petition was filed.

The Ninth Circuit based its decision on the meaning of 11 U.S.C. Section 522(f), which provides that a debtor may avoid a judgment lien to the extent that the lien “impairs an exemption to which the debtor would have been entitled.” Boskoski, 2022 WL 16911862 at * 8 (emphasis in original).  In interpreting Section 522(f), the panel reviewed the U.S. Supreme Court’s decision Owen v. Owen, 500 U.S. 305 (1991), in which it held that an exemption is fixed on the date of filing the petition. The Ninth Circuit acknowledged that in Owen the Supreme Court held that Section 522(f) established that the “baseline” against which impairment should be measured is not the exemption to which a debtor “is entitled” but is the exemption to which a debtor “would have been entitled.” Id. Relying on Owen, the panel therefore held that in deciding whether a judgment lien impairs a debtor’s California homestead exemption under Section 522(f), the Bankruptcy Code requires courts to determine the amount of the exemption to which the debtor would have been entitled in the absence of the lien at issue. The Ninth Circuit also noted that the exemptions available to the debtor are generally fixed as of the filing date of the bankruptcy petition, citing White v. Stump, 266 U.S. 310, 313 (1924) (describing the “snapshot rule”). Boskoski, 2022 WL 16911862 at *4.

The Ninth Circuit rejected the trustee’s argument that the bankruptcy court should have applied all of the limitations that states place on their exemptions as part of the calculation necessary to determine whether a judgment lien could be avoided. In doing so, it noted that the Supreme Court in Owen had addressed that very issue when it held that an applicable state exemption law “must be applied along with whatever other competing or limiting policies the Bankruptcy Code contains.” Id. at *9 (cleaned up). In this case, that meant the court applied the state exemption law in effect on the filing date of the bankruptcy petition, rather than on the creation date of the lien.

KATHLEEN CASHMAN-KRAMER’S COMMENTARY

The Ninth Circuit’s decision highlights the following: judgment liens affect exemption claims differently depending upon whether you are in state court or in bankruptcy court.  Had the trustee been attacking the debtor’s exemption claim amount in state court, chances are good that he would have prevailed, based upon the application of California Code of Civil Procedure section 703.050(a), which states that “the amount of an exemption shall be made by application of the exemption statutes in effect . . . at the time the judgment creditor’s lien on the property was created.”  While the Ninth Circuit did not specifically state that this was not relevant to its determination, it stated that “[a]nticipating the issue we address today, the Court held that it is not inconsistent for the Code to allow states to define their own exemptions but to have a policy disfavoring the impingement of certain types of liens upon exemptions, whether federal- or state- created.” Boskoski, 2022 WL 16911862 at *4 (citing Owen, 500 U.S. at 313) (cleaned up).  In light of controlling on-point U.S. Supreme Court authority, the Ninth Circuit’s decision appears to be correct. 

MATTHEW RESNIK’S COMMENTARY

The rationale is easy to follow—the panel, based on previous Supreme Court precedent, follows the Code’s requirement to determine an exemption to which the debtor would have been entitled in the absence of the lien at issue. Simply put: the date of filing rather than the date of recording the lien controls the application for the amount of the exemption used. Despite the trustee’s argument that Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193, 1198 (9th Cir. 2012) controlled and the “entire state law” should be followed with respect to the application of the exemption at the time of recording, the Ninth Circuit found such logic unconvincing. The panel was compelled by the Owen decision which was precisely on point: The Court must look to the amount of the homestead exemption that the debtor could have claimed “in the absence of the lien” at issue. Always keep in mind “opt out,” by its plain terms, applies only to the exemptions in 522(d).  It’s not an abdication of section 522 to the states.

These materials were jointly authored by ILC members Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com) and Matthew Resnik, Esq., managing partner at RHM Law LLP (matt@rhmfirm.com ),  with editorial contributions from ILC Publications Subcommittee Chair Meredith King, Attorney at Franklin, Soto, Leeds, LP in San Diego California (mking@fsl.law).