Court Opinion

ID: 9691025
Source: CourtListenerOpinion
Date Created: 2023-08-24 20:02:27.786692+00
Date Added: 2024-06-11T18:19:09.197003
License: Public Domain

GREENWALD, Bankruptcy Judge,
dissenting:
I respectfully dissent from the majority opinion and would REVERSE the bankruptcy court’s decision.
In rendering its decision, the bankruptcy court determined that on the petition date, there existed surplus equity in the Residence to which the Keheher judgment hen attached. Therefore, the bankruptcy court applied 11 U.S.C. § 522(f) in rebanee on the Ninth Circuit’s decision in In re Chabot, 992 F.2d 891 (9th Cir.1993) and found that this judgment hen could not be avoided.
In Chabot, the Ninth Circuit found that City National Bank’s judgment hen did not impair the debtor’s claimed homestead exemption. Therefore, it could not be avoided under § 522(f). In reaching its decision, the Ninth Circuit determined that the apphcation of § 522(f) required a two-step analysis. Initially, a bankruptcy court must determine whether, under state law, the judgment hen in question attached to the property. Chabot, 992 F.2d at 893-94. If there exists a valid hen under state law, it then must be determined whether, under federal bankruptcy law, the hen impairs the exemption and therefore must be avoided under § 522(f). Id. at 894.
In addressing the first question, the Ninth Circuit made reference to California law, in particular, California Code of Civil Procedure, Section 704.950(e), stating as follows:
C. Did CNB’s Lien Attach to the Cha-bots’ Residence under California Law?
The Chabots claim CNB’s hen never attached to their residence and was discharged as a personal liability. Pursuant to California Code of Civil Procedure section 704.950, a judgment hen will generally not attach to a declared homestead recorded prior to the recordation of the abstract of judgment. Subsection (c) of section 704.950, however, provides that,
*581A judgment lien attaches to a declared homestead in the amount of any surplus over the total of the following:
(1) All liens and encumbrances on the declared homestead at the time the abstract of judgment or certified copy of the judgment is recorded to create the judgment lien.
(2) The homestead exemption set forth in Section 704.730.
Id. at 893. The Ninth Circuit then determined that there existed surplus equity, applying the hens and the encumbrances, the exemption, as weh as the Residence’s value, as of the petition date. Aside from describing these amounts, the Court, however, did not set forth any specific reasons regarding its application of C.C.P. § 704.950(c). It is unclear from the Opinion whether there also existed surplus equity on the date the abstract of judgment was recorded, as required by C.C.P. § 704.950(c).
I submit that the majority’s holding requires bankruptcy courts to utilize the petition date when determining the extent and validity of hens pursuant to Rule 7001, Federal Rules of Bankruptcy Procedure (“Rule 7001”). In accordance with this interpretation, the majority affirmed the bankruptcy court’s decision, finding that the Kelleher judgment hen attached to the Residence because surplus equity existed in the Residence on the petition date.
I disagree with this result as the Chabot court specifically apphed state law when determining whether a hen attached to property. The Chabot case should not be apphed to cases involving hen validity under Rule 7001, utilizing the petition date, where a different date is mandated under apphcable state law. Therefore, for purposes of determining whether, in the instant case, the Kelleher judgment hen attached to the Residence, the majority should look exclusively to the applicable state law, as mandated by Chabot, in this ease C.C.P. § 704.950(c).
Under California law, an abstract of a money judgment that is enforceable in California may be recorded to create a judgment hen on real property. C.C.P. § 697.060(a). A judgment hen on real property is created by recording an abstract of a money judgment with the county recorder, except as otherwise provided by statute. C.C.P. § 697.310(a).
Once a judgment hen on real property is created pursuant to C.C.P. § 697.310, it attaches to ah present and future interests in real property that are subject to enforcement of the money judgment against the judgment debtor in the county where the hen is created. C.C.P. § 697.340(b). This hen continues for 10 years from the date of the entry of the judgment. C.C.P. § 697.310(b).
A judgment hen created pursuant to C.C.P. § 697.310, et seq., generally does not attach to a declared homestead which meets the requirements of C.C.P. § 704.950(a)1. However, C.C.P. 704.950(c) does provide an exception to this general rule, stating as follows:
(c) A judgment hen attaches to a declared homestead in the amount of any surplus over the total of the following:
(1) All hens and encumbrances on the declared homestead at the time the abstract of judgment or certified copy of the judgment is recorded to create the judgment hen.
(2) The homestead exemption set forth in Section 704.730.
Under this section
[I]t finally became possible to create a judgment hen on homesteaded property. The hen is created by recording an abstract of judgment (citations omitted) and attaches to the value of the property in excess of the statutory homestead exemp*582tion and all liens and encumbrances in existence when the abstract of judgment is recorded (Code Civ.Proc., 704.950, subd. (c)).
Stoffel v. Dutton, 175 Cal.App.3d 1185, 1187, 221 Cal.Rptr. 346, 348 (1985).
A plain reading of C.C.P. § 704.950(c) requires that surplus equity be determined on the date the abstract of judgment is recorded. As this court pointed out in the case of In re Shaw, 157 B.R. 151 (9th Cir. BAP 1993):
The starting point in every case involving construction of a statute is the language itself. “In determining the meaning of any statute, the words of the statute are ‘the primary, and ordinarily the most reliable, source of interpreting’ its meaning.” Thus, when the language of the statutes is plain, “the sole function of the courts is to enforce it according to its terms.”
Id. at 153 (citations omitted).
Though the statute is silent regarding the value of the declared homestead, implicit in the formula for determining surplus equity is the value of the declared homestead on the recordation date. This interpretation is necessary and consistent with the statute’s clear requirement that all liens and encumbrances are required to be determined on the recor-dation date. In addition, it is in accordance with the definition of equity, i.e., “[t]he money value of a property beyond any mortgage or liabilities existing on it”. Webster’s II New Riverside University Dictionary 440 (1988). .
In the instant case, the Debtor recorded a declaration of homestead in November of 1986. When Kelleher recorded an abstract of its $29,882,50 judgment in June of 1987, the encumbrances on the property totalled $313,800. The amount of the declared homestead exemption was $45,000. As the Residence’s value was only worth $250,000 at the time, the Kelleher judgment lien did not attach to the Debtor’s Residence because there did not exist any surplus equity in the property, i.e., the sum total of the encumbrances and liens and the homestead exemption was $358,800, exceeding the Residence’s value of $250,000 by $108,800.
Despite the fact that Kelleher’s judgment lien did not attach to the Debtor’s homesteaded property as of the recordation date, under California law, the unattached lien still remained of record and could attach to other real property in which the Debtor had an interest. Schwartz & Ahart, California Practice Guide: Enforcing Judgments & Debts § 6:1058 (TRG 1991). “A lack of equity in the property simply means that the hen has little or no value. It does not, however, render the hen unenforceable.” In re Morgan, 157 B.R. 467, 470 (Bankr.C.D.Cal.1993).
Subsequent events affecting one or more of the surplus equity elements, such as increases in value and/or decreases in the number or balances of the encumbrances, may create surplus equity necessitating the rerecording of an abstract of judgment. This creates a new hen on the homesteaded property, the prior hen being unenforceable against the homesteaded property due to lack of surplus equity on the date the abstract was recorded. In the instant case, the undisputed facts are that on the petition date, the Kelleher judgment hen did attach to the Residence, as there was surplus equity in the amount of $32,000, though this was not the case on the date the abstract of judgment was recorded. The Residence increased in value from $250,000 on the recordation date to $325,000 on the petition date, with the hens and encumbrances decreasing from $313,800 to $248,000, the exemption of $45,-000 remaining unchanged. Though the record is not precise as to when in point of time these changes occurred, they did take place subsequent to the recordation date. However, Kelleher did not take advantage of the increase in value and/or decrease in the amounts of the hens and encumbrances by rerecording the abstract of judgment. Were the new abstract recorded, a new judgment hen would have been created and attached to the Residence. Further, the new judgment hen’s priority under state law would relate back to the date the original abstract of judgment was recorded pursuant to C.C.P. *583§ 697.020,2 thus preserving the priority created by the recordation of the earlier abstract of judgment.
The majority contends that this Panel should ignore the plain reading of C.C.P. § 704.950 because (i) it conflicts with California statutory system governing the priorities of liens; (ii) it is convenient to use the petition date to determine the validity of liens on the Debtor’s property because, under the Bankruptcy Code, the petition date is used to measure exemptions and to determine which property may be claimed as exempt; (iii) it would be impractical to demand evidence of all senior liens on the date the abstract was recorded, as well as on the petition date; and (iv) the Debtor’s position would generate a constant rerecording of the abstract based upon creditors’ speculation as to surplus equity which would unduly increase the cost of collection, as well as create confusion in reviewing title to property.
Following the plain language of C.C.P. § 704.950 does not conflict with California’s lien priority system. First, as previously illustrated, the priority of a rerecorded judgment lien is preserved by the relation-back provisions contained in C.C.P. § 697.020(b). Therefore, there is no conflict with C.C.C. § 28973. Second, I am not persuaded that California’s statutory scheme discourages judgment creditors from rerecording an abstract of judgment. C.C.P. § 697.020(b) indicates that the legislators actually contemplated that a creditor would rerecord the same judgment to create a new judgment lien on the same real property.
Additionally, I am not persuaded that it is more convenient for bankruptcy courts to determine whether a lien has attached to exempt property when considering exemptions and determining which property may be claimed as exempt. I recognize that in applying § 522(f), and the required analysis mandated by the Chabot case, a bankruptcy court will have to consider the value of the declared homestead, all liens and encumbrances and the amount of the homestead exemption for two periods of time (1) the date the abstract is recorded for purposes of lien attachment or validity under state law and (2) the date the petition was filed for purposes of lien avoidance under federal law. I believe however, that it is not impractical to demand evidence of all senior liens on the date the abstract was recorded, as well as on the petition date because these are evidentia-ry matters, which can be addressed by a bankruptcy court in the same manner as other factual considerations.
The majority suggests that had the bankruptcy court determined that the Kelleher lien had not attached, then the Haley lien, recorded after the Kelleher hen, could have been given priority over the Kelleher hen.
A review of the record in this case indicates to the contrary. In approximately April of 1988, the holder of the Haley deed of trust sued the Debtor on the underlying obligation, obtaining a judgment in the amount of $66,900 and recording an abstract of judgment. At that time, the residence had a value of $275,000. As of June of 1987, when Kelleher recorded its abstract of judgment, the value of the Residence was $250,000. Senior encumbrances totalled $313,800. There is no evidence in the record to indicate that these encumbrances declined measurably between June of 1987 and April of 1988. Nor did the amount of the declared homestead change. As the value of the Residence *584increased by only $25,000 as of April of 1988, there was no surplus equity for the Haley hen to attach to when the abstract was recorded, the encumbrances, hens and homestead éxemption exceeding the Residence’s value by $83,800. Therefore, as the Haley hen did not attach to the Residence, it acquired no priority over the Keheher hen. Creditors who properly recorded their hen would still benefit from any surplus equity generated thereafter. Haley’s failure to appeal the bankruptcy court’s order is of no consequence.
In addition, I take exception to the majority’s conclusions that the Debtor’s position would result in a constant rerecording of the abstract based upon a creditor’s speculation as to the existence of surplus equity in the debtor’s property, or that the rerecording of an abstract would unduly increase the costs of pursuing judgments and create confusion in reviewing title to property.
Secured lenders who have voluntary hens on a debtor’s property periodically evaluate the worth of their collateral and the burdens that may encumber this collateral because of changing market conditions and/or the debt- or’s business practices. It is neither absurd nor unreasonable to expect that a judgment creditor, in order to protect his claim, would make similar evaluations and, if necessary, rerecord an abstract in order to increase the likelihood of collecting the judgment. This evaluation process is neither speculative, nor an undue burden, but in reality, a prudent practice by a creditor who desires to advance the collection of his judgment.
Nor is there any support for the conclusion that this process would unduly increase collection costs. In all likelihood, the creditor has already incurred substantial costs in securing the judgment. The rerecording process is a foreseeable extension of a creditor’s collection efforts, increasing the probability of collection. Any costs related to this process would not be unduly burdensome or excessive when considering alternative methods of attempting to collect a judgment which would otherwise remain unsecured.
Further, the evaluation process is not one requiring constant rerecording. It is unlikely that a creditor will attempt to rerecord when he has determined that there is no surplus equity. Once the creditor determines the existence of surplus equity and records the abstract, the creditor’s lien will attach to the property with no further recording required.
Finally, the majority gives no explanation as to how a rerecording of the abstract would create confusion in the change of title, particularly where, in California, there exists title insurance.

CONCLUSION

The instant case involves a determination under California law as to the validity of the Kelleher judgment hen. A plain reading of C.C.P. § 704.950(c) requires that surplus equity be determined as of the date the abstract of judgment is recorded and not the petition date, as determined by the bankruptcy court. The undisputed facts establish that there was no surplus equity on the date the abstract of judgment was recorded. As the judgment hen did not attach to the Residence, the Keheher judgment , hen is invahd. Accordingly, I would REVERSE the bankruptcy court’s judgment with respect to the Keheher judgment hen.

. § 704.950. Judgment lien on real property; attachment to declared homestead
(a) Except as provided in subdivisions (b) and (c), a judgment lien on real property created pursuant to Article 2 (commencing with Section 697.310) of Chapter 2 does not attach to a declared homestead if both of the following requirements are satisfied:
(1) A homestead declaration describing the declared homestead was recorded prior to the time the abstract or certified copy of the judgment was recorded to create the judgment lien.
(2) The homestead declaration names the judgment debtor or the spouse of the judgment debt- or as a declared homestead owner.

. § 697.020. Priorities; third party rights
(a) If a lien is created on property pursuant to Title 6.5 (commencing with Section 481.010) (attachment) and after judgment in the action a lien is created pursuant to this division on the same property under the same claim while the earlier lien is ip effect, the priority of the later lien relates back to the date the earlier lien was created.
(b) If a lien is created on property pursuant to this division and a later lien of the same or a different type is created pursuant to this division on the same property under the same judgment while the earlier lien is in effect, the priority of the later lien relates back to the date the earlier lien was created.
(c)Nothing in this section affects priorities or rights of third persons established while the earlier lien was in effect under the law. governing the earlier lien.

. § 2897. Time of creation; exception
PRIORITY OF LIENS. Other things being equal, different liens upon the same property have priority according to the time of their creation, except in cases of bottomry and respon-dentia.