The U.S. Court of Appeals for the Ninth Circuit recently affirmed a bankruptcy court’s application of California’s increased homestead exemption amount in determining whether a debtor may avoid a lien created in 2013. In so ruling, the Ninth Circuit held that bankruptcy courts must apply the state exemption law in effect on the filing date of the bankruptcy petition, rather than on the creation date of the lien.
In 2013, a creditor recorded a $256,075.95 judgment lien against the debtor’s home. At the time, California’s homestead exemption was $75,000 for a single debtor, $100,000 for a married debtor, and $175,000 for certain classes of other debtors. In 2020, California increased its homestead exemption (effective January 1, 2021) to 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. (Cal. Civ. Proc. Code § 704.730, subd. (a).) In 2021, the debtor filed for bankruptcy.
As you may recall, the Bankruptcy Code allows debtors to exclude certain property from their bankruptcy estates using various exemptions. States may opt out of the bankruptcy code’s default list of exemptions and create their own list of exemptions.
The Bankruptcy Code allows a debtor to avoid a lien “to the extent that such lien impairs an exemption to which the debtor would have been entitled.” (11 U.S.C. § 522(f)(1).) Section 522(f) of the Bankruptcy Code sets forth a test for determining when a lien impairs an exemption: a lien may be avoided when “the sum of (i) the lien; (ii) all other liens on the property; and (iii) the amount of the exemption that the debtor could claim if there were no liens on the property” is greater than “the value that the debtor’s interest in the property would have in the absence of any liens.” (11 U.S.C. § 522(f)(2)(A).)
The trustee argued that the debtor’s homestead exemption should be limited to what was available in 2013 – when the creditor recorded its lien. The trustee pointed out that California law expressly limited its homestead exemption to “the exemption statutes in effect … at the time the judgment creditor’s lien on the property was created.” (Cal Code Civ. Proc., § 703.050, subd (a).)
The Ninth Circuit disagreed and found that the Supreme Court’s decision in Owen v. Owen controlled the issue. (Owen v. Owen (1991) 500 U.S. 305, 308.) There, the Supreme Court explained that Section 522(f) requires courts to determine the exemption to which the debtor would have been entitled but for the existence of the judicial lien at issue.
The Ninth Circuit reasoned that Owen requires bankruptcy courts to look to the amount of the applicable homestead exemption the debtor could have claimed, if the creditor’s lien was disregarded. As a result, the creditor’s recordation of its judgment lien before California increased the amount of its homeowner’s exemption was irrelevant to the bankruptcy court’s calculation under Section 522(f)(2)(A).
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