Menu   4 ABR 163 

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

In re
ROBERT M. JANES, and
BAMBY L. JANES,

                                 Debtors
Case No. A94-00166-HAR
Chapter 7

MEMORANDUM DECISION DENYING MOTION TO AVOID JUDICIAL LIEN OF SBA


Contents Page
1.  INTRODUCTION 163
2.  BACKGROUND163
3.  ANALYSIS 164
    3.1 The In re Cabot Case
    3.2.  In Re Chabot Cannot Be Distinguished Because Of Differences In The Alaska And California Exemption Statute
    3.3.  In Re Kopstein Does Not Correctly Distinguish Chabot
164
166

172
4.  CONCLUSION 172


  Contents   1. INTRODUCTION - The Chapter 7 debtors filed a motion to avoid the judicial lien of the Small Business Administration (SBA). Although the facts indicate that, as of the date the Chapter 7 petition was filed, the amount of prior deeds of trust and the debtors' homestead exemption exceed the value of the property, before taking into account the SBA loan (in other words, the SBA's judgement lien is completely under water). I hold that the SBA lien is nonetheless non-avoidable under § 522(f) of the Bankruptcy Code given the 9th Circuit decision in In re Chabot, 992 F2d 891 (9th Cir 1993).

  Contents   2. BACKGROUND - The debtors filed a voluntary Chapter 7 petition on March 9, 1994. On the petition date, they owned a family home located at Lot 10, Block 1, Loma Estates Subdivision, Anchorage Recording   TOP    4 ABR 164  District, Alaska. The SBA and debtors agree that the fair market value of the residence was $238,500 on the date of filing.

There are two deeds of trust ahead of the SBA's judgment lien. The first is for $166,700 and the second is for $10,777.77. Next in priority of liens is the SBA lien. The SBA said the amount owed on that judgment is currently $134,920.28, and there is some additional collateral covering the SBA's lien.

The difference between the two deeds of trust and the fair market value of the property is $61,022.23:

      1st Deed of Trust $ 166,700.00
      2nd Deed of Trust 10,777.77
      SUBTOTAL of Consensual Liens 177,477.77
      Available for AK Homestead Exemption 61,022.23
      TOTAL Available (Up to FMV) $ 238,500.00

The $61,022.23 is the balance of the equity after the consensual liens, which is available for the debtors' allowable $62,000 homestead exemption under AS 09.38.010(c), leaving nothing to cover the SBA's $134,920.28 judgment lien.

The debtors filed a motion to avoid the judicial lien of the SBA pursuant to § 522(f) of the Bankruptcy Code which provides:

(f) Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section if such lien is -

(1) a judicial lien;

The SBA opposed the motion to avoid its judgment lien, relying principally on the Chabot case.

  Contents   3. ANALYSIS -

  Contents   3.1. The In Re Chabot Case - In re Chabot involved a situation similar, in some respects, to the case at bar. It involved the California homestead exemption law. One difference is that the judgement creditor's lien was only slightly under-secured.

The judgement lien creditor had a claim for $241,579.08 and, after

the $45,000 California homestead exemption, there was sufficient equity   TOP    4 ABR 165  to cover $230,046.70 (disregarding any transaction costs). The value of the property was $400,000, so only $11,532.38 of the $241,579.08 was unsecured (as compared to the case at bar in which the entire amount of the SBA's $135,000 judgment lien is unsecured at this time).

This is more graphically shown by the following calculations:

      1st Deed of Trust$ 86,412.42
      2nd Deed of Trust38,540.88
      California Homestead Exemption45,000.00
      Available for Judgement Lien Creditor 230,046.70
      TOTAL Available (Up to FMV)$400,000.00

One may wonder why this case was even appealed given the relatively slight impairment of the judgement lien. Maybe the reason was that when the Chabot lower court case was filed there was an issue regarding a $170,000 deed of trust given by the debtors to an insider (apparently to insulate any equity in the property from judgment lien or other creditors). During the course of the adversary proceeding or the appeal, this $170,000 deed of trust was stipulated to be subordinated to the judgement lien creditor.

Nonetheless, the Chabots made the argument that the judgement lien should be avoided. It is hard to tell from the facts whether Chabots' intent was to avoid the judgment lien in full or only the relatively minor $11,532.38 figure. The opinion is not clear what amount was at issue.

The Chabots had moved under § 522(f) to avoid the judgement lien. They said that it "impaired" their exemption.

Chabot held at 895:

Under the plain meaning of the statute, then, an exemption is not impaired unless its amount is diminished in value. CNB's [the judgement creditor] lien has no impact on the Chabots' ability to recover their $45,000 homestead exemption. Therefore it is not impaired and cannot be avoided. [Footnotes omitted].

Responding to the Chabots' claim that such a ruling would deny them their entitlement to post-petition appreciation, the court continued:

We disagree with the Chabots' claim that they must receive post-petition appreciation in their property in order to be afforded their right to a fresh start. The Bankruptcy Code allows debtors certain exemptions to ensure they receive a fresh start after bankruptcy. These exemptions are not   TOP    4 ABR 166  unlimited, however. In this case, where the debtors claimed state, rather than federal exemptions, the homestead exemption is limited to $45,000 by California law. The Chabots are entitled to this amount and no more. There is no basis for the proposition that the homestead exemption provides ownership benefits, such as the right to appreciation, beyond the set amount.

Our holding is consistent with the recent Supreme Court case Dewsnup v. Timm, --- U.S. ----, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). Although the Court was considering section 506(d) of the Bankruptcy Code, the issue before the Court was lien avoidance. The Court in Dewsnup reasoned that "[t]he practical effect of petitioner's argument is to freeze the creditor's secured interest at the judicially determined valuation. By this approach, the creditor would lose the benefit of any increase in the value of the property.... The increase would accrue to the benefit of the debtor." Id. --- U.S. at ----, 112 S.Ct. at 778. The Court disagreed with such a result and noted that the lien stays with the property until foreclosure. Id. The Court declared that "[a]ny increase over the judicially determined valuation during bankruptcy rightly accrues to the benefit of the creditor, not to the benefit of the debtor...." Id.

This circuit spoke to the issue of who receives the benefit of post-petition appreciation in In re Hyman, 967 F.2d 1316 (9th Cir.1992). Although the issue was not central to the decision, the court said, "[w]ere we to accept the [debtors'] argument that they're entitled to post-filing appreciation, we would also have to hold that a debtor is subject to post-filing depreciation." Id. at 1321. Clearly the Bankruptcy Code does not envision such fluctuations in the value of an exemption. Debtors are entitled to the set amount of the exemption, no more and no less. If debtors wish to realize any appreciation, they can sell the property, receive the exempt amount from the proceeds, and invest it as they see fit.

We hold that the debtors' homestead exemption will not be diminished in value by the creditor's judicial lien. Thus, it is not impaired; therefore, the judicial lien may not be avoided pursuant to 11 U.S.C. § 522(f).

  TOP    4 ABR 167 

  Contents   3.2.  In Re Chabot Cannot Be Distinguished Because Of Differences In The Alaska And California Exemption Statute - The Janes have selected the Alaska Exemption Act, AS 09.38.010 - .510 as a basis for their exemptions. See, § 522(b)(2) of the Bankruptcy Code.

They argue that the Alaska statutory scheme is more solicitous to the homestead needs of Alaskan debtors than is the California statute. In short, they imply that the Alaska homestead exemption, AS 09.38.010, covers the dirt, mortar, nails, and wood of a residence, as opposed to just the dollars and cents homestead amount (the parties agree $62,000 is the appropriate homestead allowance in this case).

On the other hand, they argue that the California statute covers only a fixed dollar amount. They cite In re Hyman, 123 BR 342, 346 (9th Cir BAP 1991), aff'd 967 F2d 1316 (9th Cir 1992):

It is not logically possible to reconcile the explicit limitation on exemption value with a notion that the property itself is exempt except by requiring the debtor to reimburse the estate for the excess value of a retained homestead dwelling. No California case suggests such a solution. Rather, by setting a maximum on what can be claimed the legislature recognized that the property may be subjected to a forced sale. The procedure for such forced sales is set forth in the exemption statutes at Cal.Code Civ.Proc. §§ 704.740-.850.

The Janes argue that Alaska's exemption statute, on the other hand, is clearly aimed at preserving the family home itself and allows a debtor to redeem property by paying the amount of the claim up until 60 days after the sale, or the excess value up to the amount of the sale price, whichever is less. See, Debtor's Post-Hearing Brief Regarding Motion To Avoid Judicial Lien Of United States Of America (SBA), filed September 6, 1994.

I think the Janes are reading too much into the BAP's statement in Hyman.

For one thing, California is not oblivious or unsympathetic to a debtor's need for or attachment to a homestead. § 1.5 of the California Constitution provides:

The Legislature shall protect, by law, from forced sale a certain portion of the homestead and other property of all heads of families.

  TOP    4 ABR 168 

One annotation to the Constitutional section under the heading "Purpose" states that:

Broad purpose of homestead laws is to promote security of home, and to place such property beyond reach of consequences of home owner's economic misfortune. Schoenfeld v. Norberg (1968) 72 Cal.Rptr. 924, 267 C.A.2d 496, reversed and remanded on other grounds on appeal after remand 90 Cal.Rptr. 47, 11 C.A.3d 755.

The main statutory scheme regarding the protection of homestead exemptions from execution is found in §§ 704.710-.850 of the 2M2.25

California Code of Civil Procedure.

Thus, the BAP's statement in Hyman that only money, not the residence itself, is protected must be read in light of these California statutes which obviously show a concern for protecting the ambience of a debtor's residence, subject to loss of that home if it can be replaced with cash. There is an acknowledgment by the California Constitution and the California legislature of a judgement debtor's interest in the property itself.

The Alaska statute likewise shows a concern for the debtor's interest in a specific residence. The residence can be lost, however, in a judicial sale in which the judgment debtor must take cash in lieu of keeping the residence, just like California.

  TOP    4 ABR 170  Unlike California, Alaska also gives the judgment debtor something akin to a right of first refusal to match the judicial sale bid against a homestead. AS 09.38.010 provides (with emphasis added):

Sec. 09.38.010 Homestead exemption.

(a) An individual is entitled to an exemption as a homestead of the individual's interest in property in this state used as the principal residence of the individual or the dependents of the individual, but the value of the homestead exemption may not exceed $54,000.

(b). . .

(c) If property that includes a homestead is sold under an execution, the sale becomes effective upon confirmation by order of the court. The court shall enter the order of confirmation unless, within 60 days after the sale, the individual repurchases the property under this section or the court extends the time for confirmation upon the filing of a timely motion by a party in interest. The individual may repurchase property, including that individual's homestead, at a sale on execution before confirmation by paying into court the costs of the sale plus the lesser of either (1) the difference between the highest bid and the amount of the exemption in the property, or (2) the amount of the creditor's claim. If the individual does not exercise the repurchase right under this subsection, the clerk of the court shall first remit an amount determined to be exempt to the individual from the proceeds of sale and the balance less the cost of the sale to the creditor. For the purpose of collecting an amount remaining unpaid on a judgment after repurchase of property by an individual under this subsection, the creditor or the creditor's assignee may not make another levy on the property repurchased.

(d). . .

The $54,000 figure, established in 1982, has been increased periodically by an adjustment in the dollar amount of the allowed exemption based on an increase in the Consumer Price Index. See, AS 09.38.115 and 8 AAC 95.030.

In substance, the Janes are asking the court to find a distinction because the Alaska exemption statute grants a right of first refusal whereas the California homestead exemption apparently does not. I do not   TOP    4 ABR 171  think that this difference is sufficient to base a distinction from the Chabot case.

Under either the California or Alaska statutory schemes, the debtor would be allowed to a certain sum of money. There could be no sale in California unless it is sufficient to pay the homestead exemption. In Alaska, a judgment debtor can always recover the residence by matching the judicial sale price plus costs. The debtor still only gets the dollar amount allowed by statute (or credit for that amount against meeting the bid of the purchaser at a judicial sale).

The 9th Circuit in the affirmance of the BAP in Hyman found the statutes in California and Alaska to be similar (although the 9th Circuit held any issue regarding potential "appreciation" was premature). In re Hyman, 967 F2d 1316, 1319 fn 3:

Of the nine states in the Ninth Circuit, seven limit the dollar amount of the homestead allowance (Alaska, Arizona, California, Idaho, Montana, Nevada and Washington), while two limit both the dollar and the acreage amounts of the homestead allowance (Hawaii and Oregon).
The issue of whether the debtor or the judgment lien creditor gets the appreciation is in a sense a federal issue, and I do not anticipate an Alaska state court case will resolve the issue. In some respects comparing the functioning of the exemption process under state law and bankruptcy law is like comparing apples to oranges.

For example, under Alaska law, a judgment lien creditor causes the sale of the property through execution. Any value over the homestead exemption would automatically go to the judgment lien creditor. There is no artificial valuation date under AS 09.38.010 for fixing a value at some time before the judicial sale which would segregate any appreciation which might have accrued over the passage of time.

Nor can the judgment debtor force a valuation to sell the property free of the excess judgment lien. Thus, there is little likelihood that the question will be raised outside bankruptcy.

  TOP    4 ABR 172    Contents   3.3.  In Re Kopstein Does Not Correctly Distinguish Chabot - The Janes seek to distinguish Chabot by the fact the SBA lien in the case at bar is completely undersecured, whereas the judgement creditor's lien in the Chabot case was almost totally secured.

They cite the bankruptcy judge in In re Kopstein, 163 BR 573, 574-575 (Bank ND Cal 1994) which found such a distinction. Unfortunately for the Janes, Kopstein was reversed by the District Court for the Northern District of California. Ellson v Kopstein (In re Kopstein), 1994 WL 456859 (ND Cal, 08/10/94) (Judge Lynch).

In Chabot, the 9th Circuit opinion does not itself make the distinction that the bankruptcy judge did in Kopstein (that Chabot only applies to cases where there is only a slight portion of the judgment lien undersecured).

Kopstein appears to reach too far in finding a distinction. Another bankruptcy judge in the Northern District of California concurred that Kopstein went too far. In re Wilson, 167 BR 599, 602 (Bankr ND Cal 1994).

  Contents   4.  CONCLUSION - Were I not governed by Chabot, I would find that the SBA lien does impair the Janes' homestead exemption. Chabot is, in my opinion, controlling. Therefore, I deny the motion to avoid the SBA's lien. This is not in anyway intended to diminish the exemption debtors may be entitled to have under state law when the time to claim that exemption arises. The problem that judgement debtors in Alaska have is that they may not be able to force a sale on the judgment lien creditor. The judgment debtor can realize the exemption upon an execution, however, if an execution sale yields enough to pay the residential exemption.

The order in this case will be entered on or shortly after November 6, 1995, giving the parties 30 days from entry to appeal. A copy of the proposed order will be forwarded to counsel shortly.



    DATED: October 18, 1995



                HERBERT A. ROSS
                U.S. Bankruptcy Judge