Believe it or not: Even if state law says that the amount of an exemption is the amount in effect when the lien was created, the Bankruptcy Code allows the debtor to avoid the lien under Section 522(f) based on the amount of the exemption at the time of the bankruptcy filing, according to the Ninth Circuit.
The debtor in California was hit with a judgment for about $250,000 in 2014. The judgment became a lien on the debtor’s home.
California has opted out of federal exemptions. In 2014, the state homestead exemption was only $75,000.
The debtor filed a chapter 7 petition in 2021, claimed a homestead exemption and scheduled his home as being worth about $1.1 million. By the time of filing, the judgment lien had risen to about $475,000 with interest.
The value of the home wasn’t the only thing that had risen in seven years. Before the filing date, California raised the applicable homestead exemption to $600,000. However, California law provides that the amount of an exemption is the amount in effect at the time the lien is created.
The debtor moved to avoid the lien as impairing his homestead exemption under Section 522(f). The debtor calculated that $550,000 in mortgages on the home plus his $600,000 exemption and the $475,000 judgment totaled about $1.6 million. The total was about $540,000 more than the debtor’s interest in the home.
Because the $540,000 was more than the $475,000 judgment lien, the debtor contended that he could avoid the entire judgment lien as impairing his homestead exemption.
The judgment lien creditor objected, arguing that the applicable homestead exemption under state law should be $75,000, the amount of the exemption when the lien was created. Under the lien creditor’s theory, the debtor could only avoid about $45,000 of the judgment lien.
Chief Bankruptcy Judge Christopher B. Latham of San Diego agreed with the debtor and avoided the entire judgment lien. Judge Latham certified a direct appeal, which the Ninth Circuit accepted.
The appeals court heard argument on September 23 and affirmed on November 14 in an opinion by Circuit Judge Holly A. Thomas.
The Supreme Court’s Owen Controls
As Judge Thomas said, the outcome turned on the language of Section 522(f), which says 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.” [Emphasis added.]
The Supreme Court interpreted the italicized language in Owen v. Owen, 500 U.S. 505 (1991).
Under Section 522(f), Judge Thomas said that Owen “requires courts to determine the exemption to which the debtor would have been entitled but for the existence of the judicial lien at issue. 500 U.S. at 310-11.” She quoted portions of Owen that said that Section 522(f) measures impairment not by the amount of the exemption to which the debtor is entitled, but by the amount to which the debtor would have been entitled were it not for the judgment lien. Id.
The lien creditor contended that the outcome should instead be governed by Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193 (9th Cir. 2012), handed down by the Ninth Circuit after Owen.
Indeed, the Ninth Circuit had said in Jacobson that exemptions must be determined under state law on the date of filing. However, Judge Thomas said that Jacobson did not concern lien avoidance. Rather, the case dealt with “a different question: whether certain funds belonged to the chapter 7 estate.”
Furthermore, Judge Thomas quoted Owen for saying that state law exemptions are not “absolute” but must be applied alongside competing or limiting policies in the Bankruptcy Code. Owen, supra, 500 U.S. at 313.
Judge Thomas said that “Owen resolves the matter before us,” not Jacobson. “[W]e must look,” she said, “to the amount of the homestead exemption that [the debtor] could have claimed if . . . the . . . lien against his property is disregarded.”
Judge Thomas therefore “arrive[d] at exactly where the bankruptcy court did.” She affirmed the bankruptcy court and allowed the debtor to avoid the judgment lien “in its entirety.”
Believe it or not: Even if state law says that the amount of an exemption is the amount in effect when the lien was created, the Bankruptcy Code allows the debtor to avoid the lien under Section 522(f) based on the amount of the exemption at the time of the bankruptcy filing, according to the Ninth Circuit.
The debtor in California was hit with a judgment for about $250,000 in 2014. The judgment became a lien on the debtor’s home.
California has opted out of federal exemptions. In 2014, the state homestead exemption was only $75,000.
The debtor filed a chapter 7 petition in 2021, claimed a homestead exemption and scheduled his home as being worth about $1.1 million. By the time of filing, the judgment lien had risen to about $475,000 with interest.