In re Hanson

In re: WILLIAM E. HANSON; SHARON D. HANSON, Debtor. WILLIAM E. HANSON; SHARON D. HANSON, Appellants, v. DAVID DOBBS; AMRANE COHEN, Trustee, Appellees BAP No. CC-06-1299-DMoPa United States Bankruptcy Appellate Panel of the Ninth Circuit April 2, 2007

NOT FOR PUBLICATION

Argued and Submitted at Pasadena, California: March 22, 2007

Before: DUNN, MONTALI and PAPPAS, Bankruptcy Judges.

MEMORANDUM

Debtors William E. and Sharon D. Hanson (the " Hansons") appeal the bankruptcy court's Order Granting Motion for Order Directing Trustee to Pay Over to David Dobbs the Money Due Him (the " Disbursement Order"), directing the chapter 13 trustee to pay to judgment lien creditor David Dobbs (" Dobbs") $252, 008.56 from the proceeds from sale of the Hansons' residence. We AFFIRM.

I. FACTS

The facts are not in dispute. Dobbs obtained an Alaska judgment for fraud plus punitive damages in the amount of $54, 973.95 against the Hansons in 1979. Dobbs obtained a " sister-state judgment" (the " Judgment") for the same amount in California on or about February 29, 1980. Dobbs renewed the Judgment in 1990 and 2000, and it became a lien (" Judgment Lien") on the Hansons' residence property in Irvine, California (the " Residence"). The Hansons never filed a declaration of homestead on the Residence.

Apparently, the Hansons experienced financial difficulties, because they stopped making mortgage payments on the Residence in December 2004. The Hansons filed a chapter 13 bankruptcy petition (the " First Chapter 13 Case") on May 10, 2005, in order to stop a foreclosure sale of the Residence. The First Chapter 13 Case was dismissed on August 23, 2005, based on the inability of the Hansons to propose a feasible chapter 13 plan.

Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date of most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23 (" BAPCPA"), because the case from which this appeal arises was filed before the BAPCPA effective date (generally October 17, 2005).

The Hansons filed a chapter 7 bankruptcy petition on September 15, 2005 (the " Second Bankruptcy Case"). Over Dobbs' objections, the Hansons were allowed to convert the Second Bankruptcy Case to chapter 13 on March 8, 2006.

On March 24, 2006, the Hansons filed a motion to avoid the Judgment Lien pursuant to § 522(f) (the " Lien Avoidance Motion"). Dobbs opposed the Lien Avoidance Motion. Before Dobbs' opposition to the Lien Avoidance Motion could be heard, the Hansons filed a motion to authorize a sale of the Residence free and clear of liens, pursuant to § 363(f) (the " Sale Motion"). The Sale Motion was heard and granted on May 23, 2006. The order approving the Sale Motion was entered on June 14, 2006, providing that 1) undisputed liens and encumbrances and costs of sale would be paid and 2) remaining sale proceeds would be held by the chapter 13 trustee pending resolution of any outstanding lien disputes. At Dobbs' request, the Sale Order provided that " [a]ll remaining claims of lien shall attach to proceeds." The Sale Order was not appealed.

The Lien Avoidance Motion was heard on June 20, 2006, and the bankruptcy court entered its Order Re Debtors' Motion to Avoid Lien of David Dobbs Under 11 U.S.C. § 522(f) (the " § 522(f) Order") on July 7, 2006. In the § 522(f) Order, the bankruptcy court determined 1) that the appropriate date to use in establishing the value of the Residence was the filing date of the Second Bankruptcy Case, 2) that the value of the Residence on that date was $815, 000, and 3) that the Judgment Lien was " avoided to the extent that it exceeds the sum of $252, 008.56." The § 522(f) Order was not appealed.

Thereafter, Dobbs filed a Motion For Order Directing Trustee To Pay Over To David Dobbs The Money Due Him (the " Disbursement Motion"), that was heard on July 26, 2006. The bankruptcy court granted the Disbursement Motion and entered the Disbursement Order, requiring the chapter 13 trustee to pay $252, 008.56 to Dobbs, on August 10, 2006. The bankruptcy court supported the Disbursement Order with a Memorandum of Decision that also was entered on August 10, 2006.

Following entry of the Disbursement Order, the Hansons converted the Second Bankruptcy Case back to chapter 7 by a Notice of Conversion to Chapter 7, filed on August 14, 2006. On the same day, the Hansons filed a timely appeal of the Disbursement Order. The funds in dispute between the Hansons and Dobbs ($69, 400) are being held in the bankruptcy court's registry account pending resolution of this appeal, by order of the bankruptcy court.

The chapter 7 trustee has not appeared in this appeal. There is nothing in the record before us indicating that the chapter 7 trustee claims an interest in the remaining proceeds from sale of the Residence on behalf of the estate.

II. JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § § 1334 and 157(b)(1) and (b)(2)(K) and (O). We have jurisdiction over this appeal pursuant to 28 U.S.C. § 158.

III. ISSUE

Once the unavoided amount of a judgment lien has been finally determined pursuant to § 522(f), can the amount to be paid the judgment lien creditor from a voluntary sale of the liened property be reduced in order to preserve the debtor's homestead exemption?

IV. STANDARDS OF REVIEW

Interpretation of provisions of the Bankruptcy Code presents issues of law that we review de novo. Fireman's Fund Ins. Co. v. Grover (In re Woodson Co.), 813 F.2d 266, 270 (9th Cir. 1986). Considering payment of the unavoided amount of a judicial lien in the context of an approved § 363(f) sale presents mixed questions of law and fact. " Where the facts are established and the rule of law is undisputed, whether the facts satisfy the legal rule is a mixed question of law and fact that we review de novo." Jacoway v. Wolfe (In re Jacoway), 255 B.R. 234, 237 (9th Cir. BAP 2000).

V. DISCUSSION

The problem in this case is that after the bankruptcy court made a final determination of the unavoided amount of Dobbs' Judgment Lien, there were not enough proceeds remaining from the sale of the Residence pursuant to § 363(f) to pay the unavoided Judgment Lien and the Hansons' homestead exemption in full. The Hansons interpret relevant case law as precluding their homestead exemption from being " taxed" by costs of sale and depreciation in value from the petition date. While recognizing the important policy objectives behind protecting the homestead exemption, we are bound by the provisions of the Bankruptcy Code and are not free to follow policy preferences beyond the limits of statutory authority. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 969, 99 L.Ed.2d 169 (1988) (" [W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code."); In re Plaza de Diego Shopping Ctr., Inc., 911 F.2d 820, 830-31 (1st Cir. 1990) (" [T]he bankruptcy court's equitable discretion is limited and cannot be used in a manner inconsistent with the commands of the Bankruptcy Code.").

The avoidance of judicial liens in bankruptcy is governed by federal law, specifically, the provisions of § 522(f). Owen v. Owen, 500 U.S. 305, 309-14, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991). Section 522(f) provides in relevant part as follows:

(1) Notwithstanding any waiver of exemptions . .., the debtor may avoid the fixing of a lien on an interest of the debtor 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--

(A) a judicial lien. . . .

(2)(A) For purposes of this subsection, a lien shall be considered to impair an exemption to the extent that 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; exceeds the value that the debtor's interest in the property would have in the absence of any liens. . . .

As noted above, the bankruptcy court decided the Lien Avoidance Motion and held that the Judgment Lien was avoided to the extent that it exceeded $252, 008.56, and that decision was not appealed. However, the Hansons argue that the bankruptcy court's lien avoidance decision was based on a hypothetical lien foreclosure sale on the petition date, and that decision must be revisited in light of the net proceeds realized from the actual sale that was approved postpetition pursuant to § 363(f).

Thus, as of the petition date, Dobbs had a judicial determination that he held an unavoidable judgment lien to the extent of $252, 008.56.

Before the bankruptcy court, the Hansons argued that three amounts needed to be deducted from the unavoided portion of the Judicial Lien in order to preserve the full amount of the Hansons' homestead exemption: 1) postpetition mortgage payments that the Hansons did not make; 2) postpetition depreciation in the value of the Residence; and 3) costs of sale. In this appeal, the Hansons have abandoned their argument that the unavoided portion of the Judgment Lien should be surcharged for mortgage payments that the Hansons failed to make postpetition. However, they continue to pursue their arguments that postpetition depreciation in the value of the Residence and costs of a voluntary sale of the Residence should be borne by Dobbs and charged against the unavoided portion of the Judgment Lien.

In the § 522(f) Order, the bankruptcy court specifically held that the appropriate date to use in determining the value of the Residence for lien avoidance purposes was the petition date in the Second Bankruptcy Case. That holding was not appealed and is consistent with prior decisions of this court. " It is well established that the nature and extent of exemptions is determined as of the date that the bankruptcy petition is filed." Culver, LLC v. Chiu (In re Chiu), 266 B.R. 743, 751 (9th Cir. BAP 2001), citing White v. Stump, 266 U.S. 310, 313, 45 S.Ct. 103, 69 L.Ed. 301 (1924); In re Kim, 257 B.R. 680, 685 (9th Cir. BAP 2000); In re Wolf, 248 B.R. 365, 367-68 (9th Cir. BAP 2000); and In re Rowe, 236 B.R. 11, 14 (9th Cir. BAP 1999).

In the § 522(f) Order, the bankruptcy court also determined the value of the Residence to be $815, 000, and that determination was not appealed. The Hansons complain that since the § 363(f) sale price was $800, 000, they stand to lose the $15, 000 decrease in value, as a deduction from their homestead exemption, unless that amount is surcharged against the Judgment Lien.

Dobbs argues that the claimed $15, 000 decrease in value is in effect illusory because in the Addendum to the sale agreement for the Residence, the Hansons obtained the right to remain in the Residence for a period of six months following the sale without having to pay any rent. The record reflects that in bargaining between the Hansons and the buyers of the Residence, the buyers offered to purchase the Residence for $820, 000. Whether or not there actually was a decrease in value from the petition date to the closing of the Hansons' voluntary sale of the Residence is not material to our decision.

This issue raises a cautionary note with respect to which party bears the risk of a decrease in the value of partially exempt property postpetition in various circumstances. In a period of generally increasing real estate prices, in cases where the estate's interest in debtors' residential properties has been abandoned, debtors often have reaped the benefits of appreciating homestead properties. See, e.g., Chiu, 266 B.R. at 746 n. 2 and 751-52. Where the residential property is not abandoned, subsequent appreciation benefits the estate. See Hyman v. Plotkin (In re Hyman), 967 F.2d 1316 (9th Cir. 1992). However, the market forces influencing the values of real property do not operate as a one-way upward ratchet. Real estate prices are not exempt from the reality that what goes up may come down, and our decisions make clear that the operations of the market postpetition do not disturb determinations as to lien avoidance and exemption rights as of the petition date. See, e.g., Harris v. Herman (In re Herman), 120 B.R. 127, 130 (9th Cir. BAP 1990):

[A]ny post-petition disposition of the property or post-petition change in the identity of the property into proceeds has no impact upon the exemption analysis. (citations omitted) . . . The limitation upon the exemption of any proceeds from a subsequent sale of the residence is not relevant.

In Hyman, the Ninth Circuit analogized a postpetition forced sale of the debtors' residence by the chapter 7 trustee to an execution sale by a judgment lienholder and held that the debtors were entitled to the full amount of their homestead exemption under state law and no more. Hyman, 967 F.2d at 1321. Hyman did not address the situation before us, where the Hansons moved for approval of a voluntary sale of the Residence and also moved for avoidance of a judicial lien pursuant to § 522(f), securing final approval on both before the Disbursement Motion was filed.

If the value of the Residence fell postpetition, any such loss of value was for the account of the Hansons in the event of a voluntary sale, as the unavoided portion of the Judgment Lien was determined as of the petition date in the Second Bankruptcy Case. When the Hansons sought approval of their proposed sale of the Residence pursuant to § 363(f) postpetition, the unavoided portion of the Judgment Lien would have to be paid from the sale proceeds. Section 522(c)(2)(A)(i) provides:

Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose . . . before the commencement of the case except -

. . .

(2) a debt secured by a lien that is -

(A)(i) not avoided under subsection (f) . . . of this section. . . .

See, e.g., Katz v. Pike (In re Pike), 243 B.R. 66, 70 (9th Cir. BAP 1999) (" [I]n a voluntary sale, Katz's lien either would have to be satisfied by the proceeds or it would remain on the property."). The bankruptcy court did not err in declining to surcharge the unavoided portion of the Judgment Lien with any postpetition decrease in value of the Residence fixed through the Hansons' voluntary sale.

The Hansons further argue that the unavoided portion of the Judgment Lien should be surcharged with the costs of sale, relying heavily on our decision in Kenpak Converters, Inc. v. Patterson (In re Patterson), 139 B.R. 229 (9th Cir. BAP 1992). In Patterson, the debtors' home was sold free and clear of liens pursuant to § 363(f). " After undisputed senior encumbrances were paid, a balance of $122, 000 remained." Id. at 230. The Hansons assume that the " balance of $122, 000" referred to means net sale proceeds, and from that assumption, they conclude that the bankruptcy court and this Panel in Patterson " were confronted with the question of how to divide the net sales proceeds between debtors' homestead, a judicial lien, and a subordinate consensual lien." Appellants' Brief, p. 10 (emphasis in original).

Under the specific fact pattern in Patterson, this Panel reversed the bankruptcy court and held that the senior judgment lien of Kenpak Converters was avoided to the extent that it exceeded $122, 000 minus the amount of the debtors' $45, 000 homestead exemption, which was committed to payment of the subordinate consensual lien of Rolling Hills. Patterson, 139 B.R. at 231-32. Nothing in the Patterson decision suggests that any issue was raised before this Panel as to the appropriateness or necessity of deducting costs of sale in considering judicial lien avoidance. As a consequence, it provides no binding precedent as to the treatment of costs of sale in the lien avoidance context. Ball v. Payco-Gen. Am. Credits, Inc. (In re Ball), 185 B.R. 595 (9th Cir. BAP 1995).

The formula for judicial lien avoidance under § 522(f) is set forth in § 522(f)(2)(A), which totals all liens on the subject property and the amount a debtor could claim as a homestead exemption, and allows liens to be avoided to the extent that the total as so computed exceeds the value the debtor's interest in the property would have if there were no such liens. The statutory formula makes no mention and provides no deduction for costs of sale. As noted at the outset of this discussion, however much we sympathize with a policy objective, we are not authorized to implement any such policy objective in a manner that is not consistent with the provisions of the Bankruptcy Code.

The Ninth Circuit analyzed the California homestead exemption statutes in Hyman and found that costs of sale did not have to be accounted for in a forced sale under California law. See Hyman, 967 F.2d at 1320 (" There is no statutory requirement that the sale price also account for selling costs. . . .").

Section 363(f) clearly does not allow for further lien avoidance after a final lien avoidance determination has been made pursuant to § 522(f). A sale of property free and clear of liens can be approved pursuant to § 363(f) only if at least one of five conditions has been satisfied:

In their Reply Brief and at oral argument, the Hansons asserted that in proposing the sale of their residence pursuant to § 363(f), they were exercising a right or power of a trustee under § 1303. As a result, the Hansons argue that the sale should be viewed as involuntary and analogized to an execution sale, requiring that their homestead exemption be paid in full before claims of judgment lien creditors are paid, consistent with California law. See Cal. Code Civ. Proc.§ 704.850. This argument was not raised by the Hansons either before the bankruptcy court or in their opening Appellants' Brief. Generally, an appellate court will not " consider matters on appeal that are not specifically and distinctly argued in appellant's opening brief." U.S. v. Ullah, 976 F.2d 509, 514 (9th Cir. 1992), quoting Miller v. Fairchild Indus., Inc., 797 F.2d 727, 738 (9th Cir. 1986). However, even if we exercised our discretion to consider the Hansons' argument, they have not provided any explanation as to what difference it makes in this case whether they moved for approval of the Residence sale in their role as debtors or in the right of a trustee. They still proposed a voluntary sale, as they admitted before the bankruptcy court, and the sale had to satisfy the requirements of § 363(f), as discussed infra. While their argument is creative, it ultimately is powerless to overcome the fact that the amount of the Judgment Lien that could be avoided was finally determined in the § 522(f) Order.

(1) applicable nonbankruptcy law permits sale of such property free and clear of such [lien] interest;

(2) such entity [the lienholder] consents;

(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;

(4) such interest is in bona fide dispute; or

(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such [lien] interest.

Under applicable nonbankruptcy law in California, a sale of real property can be closed free of judicial liens only if such liens are paid, or the judicial lien creditor consents to a sale that does not pay its lien in full. See, e.g., Cal. Code Civ. Proc. § 704.800 (Thomson/West 2007). Dobbs has not consented to the sale of the Residence without receiving payment in full of the unavoided amount of the Judgment Lien. The remaining proceeds from sale of the Residence are not sufficient to pay both the unavoided Judgment Lien and the Hansons' homestead claim in full. Since the § 522(f) Order finally determined the unavoided amount of the Judgment Lien, that amount is not in bona fide dispute. Dobbs could be compelled to accept a money satisfaction of the Judgment Lien, but not for less than the unavoided amount of the Judgment Lien. See Cal. Code Civ. Proc. § 704.800(a) (Thomson/West 2007). Accordingly, the requirements of § 363(f) are not met unless the unavoided Judgment Lien is paid in full, without deduction for costs of sale.

Cal. Code Civ. Proc. § 704.800 is titled " Insufficient sale bids" and provides:

The Hansons argue from the legislative history of the 1994 amendments to § 522(f) in support of their position that it is not appropriate for the bankruptcy court to order payment in full of the unavoided amount of the Judgment Lien at the expense of their homestead exemption:

The second situation is where the judicial lien the debtor seeks to avoid is partially secured. Again, in an example where the debtor has a $10, 000 homestead exemption, a $50, 000 house and a $40, 000 first mortgage, most commentators and courts would have said that a judicial lien of $20, 000 could be avoided in its entirety. Otherwise, the creditor would retain all or part of the lien and be able to threaten postbankruptcy execution against the debtor's interest which, at the time of the bankruptcy is totally exempt. However, a few courts, including the Ninth Circuit in In re Chabot, 992 F.2d 891 (9th Cir. 1992), held that the debtor could only avoid $10, 000 of the judicial lien in this situation, leaving the creditor after bankruptcy with a $10, 000 lien attached to the debtor's exempt interest in property. This in turn will result, at a minimum, in any equity created by mortgage payments from the debtor's postpetition income--income which the fresh start is supposed to protect--going to the benefit of the lienholder. It also may prevent the debtor from selling his or her home after bankruptcy without paying the lienholder, even if that payment must come from the debtor's $10, 000 exempt interest. The formula in the section would not permit this result.

H.R. Rep. 103-835, at pp. 52-54 (Oct. 4, 1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3361-63. The amendments to § 522(f) effectively overruled the decision in In re Chabot, but that is not the issue before us.

In this case, the Hansons apparently did not make postpetition mortgage payments; so, at least one of the interests Congress sought to protect through the 1994 amendments to § 522(f), as reflected in the foregoing quotation from the legislative history, is not concerned here.

VI. CONCLUSION

The bankruptcy court decided the Lien Avoidance Motion under the 1994 version of § 522(f) and determined that the Judgment Lien was avoided only to the extent it exceeded $252, 008.56. The § 522(f) Order incorporating that determination was not appealed and became final. Neither § 522(f) nor § 363(f) nor any other provision of the Bankruptcy Code authorizes us to give the Hansons a second bite at the apple. Once the unavoided portion of the Judgment Lien was finally determined pursuant to § 522(f), the bankruptcy court was not authorized to revisit the issue in order to avoid impairment of the Hansons' homestead exemption in light of a deficiency in proceeds remaining from the voluntary sale of the Residence. The bankruptcy court did not err in concluding that it was not appropriate to surcharge costs of sale or any depreciation in value of the Residence against the unavoided amount of the Judgment Lien.

We AFFIRM.

(a) If no bid is received at a sale of a homestead pursuant to a court order for sale that exceeds the amount of the homestead exemption plus any additional amount necessary to satisfy all liens and encumbrances on the property, including but not limited to any attachment or judgment lien, the homestead shall not be sold and shall be released and is not thereafter subject to a court order for sale upon subsequent application by the same judgment creditor for a period of one year. (b) If no bid is received at the sale of a homestead pursuant to a court order for sale that is 90 percent or more of the fair market value determined pursuant to Section 704.780, the homestead shall not be sold unless the court, upon motion of the judgment creditor, does one of the following:(1) Grants permission to accept the highest bid that exceeds the amount of the minimum bid required by subdivision (a). (2) Makes a new order for the sale of the homestead. Under this statute, the minimum bid must exceed the sum of amounts owed on senior liens and the amount of the judgment debtor's homestead exemption. See Bratcher v. Buckner, 90 Cal.App.4th 1177, 109 Cal.Rptr.2d 534, 542 (2001); Rourke v. Troy, 17 Cal.App.4th 880, 21 Cal.Rptr.2d 660 (1993).