Court Opinion

ID: 9521651
Source: CourtListenerOpinion
Date Created: 2023-08-07 02:09:24.408038+00
Date Added: 2024-06-11T12:50:02.951395
License: Public Domain

MONTALI, Bankruptcy Judge,
concurring and dissenting:
I concur with the opinion’s analysis in Part II regarding the proper way to apply § 522(f)(2),1 when a debtor seeks to avoid *95a judicial lien impairing an exemption in partially owned property. This analysis responds to a situation crying out for resolution in our circuit, namely, how to protect a debtor’s exemption, and no more, in the all-too-common joint ownership single debtor situation. However, I believe remand should be a mere formality, as I believe the law compels, and we should direct, entry of an order avoiding the two judicial liens except to the extent of $91,497.50 in favor of All Points. I also concur with something unspoken by the majority, but questioned by Judge Klein in his concurrence: the notion that All Points has standing to prosecute this appeal.
Otherwise I dissent from the opinion and feel obliged to respond to Judge Klein’s observations in his concurrence about what he calls inconsistent outcomes and his views about California procedural law. The opinion takes judicial activism to a new level — judicial advocacy — by rewarding American Capital, an absentee litigant who has had not one, but several bites of the apple, and hands it an undeserved partial victory. In doing so it misstates controlling precedent on how courts should deal with multiple liens impairing exemption. Further, the concurrence invokes an inapplicable doctrine prohibiting inconsistent outcomes when no one else has. Then it suggests an improper mandatory state-federal service procedure that can only confuse bankruptcy practitioners and bankruptcy judges who are used to well-established and unequivocal federal procedures.
1. Standing
All Points held a judicial lien which the record suggests was valid but for the powerful weapon individual debtors have to avoid judicial liens to the extent that they impair exemptions under Section 522(f)(1).
Debtor moved (the “Motion”) to avoid All Points’ and American Capital’s judicial liens because they impaired his claimed exemption in his residence. For reasons known only to American Capital, it did not oppose Debtor’s Motion. Maybe the lien had been satisfied- by a third party. Maybe American Capital’s judgment also created a lien on other property with sufficient value. Maybe American Capital feared the outcome the bankruptcy court reached here and had no economic incentive to fight. Maybe American Capital had little hope for a third position lien on a fractional interest of a debtor in Chapter 7 bankruptcy. It really does not matter. Regardless of American Capital’s reasons, its non-opposition to the Motion left All Points “in the money” to the extent of $91,497.50 but for the bankruptcy court’s ruling. By that ruling All Points’ economic interest was adversely and pecuniarily affected. See Fondiller v. Robertson (In re Fondiller), 707 F.2d 441, 443 (9th Cir. 1983). A “person aggrieved” is one who is “directly and adversely affected pecuniarily by an order of the bankruptcy court.” Id. at 442. The order “must diminish the appellant’s property, increase its burdens, or detrimentally affects its rights.” Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774, 777 (9th Cir.1999). The order stripped both judicial liens and American Capital did not appeal. All Points had standing to defend the Motion and to prosecute this appeal.2
*962. Rewarding The Absent Party
The law of the Ninth Circuit prescribes that when calculating exemption impairment, liens are to be “subtracted in order of reverse priority and that those which are avoided not be included in the calculation.”3 Bank of Am. Nat’l Trust & Sav. Ass’n v. Hanger (In re Hanger), 217 B.R. 592, 595 (9th Cir. BAP 1997), aff'd, 196 F.3d 1292 (9th Cir.1999) (emphasis added). This approach is consistent with section 522(f)(2)(B), which provides that liens that have been avoided are not included in the calculation of other liens. Id.; 11 U.S.C. § 522(f)(2)(B).
Ordinarily, when a debtor seeks to avoid more than one judicial lien at the same time under section 522(f), the liens are to be “subtracted in order of reverse priority.” Id. Thus, if American Capital had opposed Debtor’s Motion, the court would have avoided any junior liens (viz. the lien of All Points) before determining whether the American Capital lien impaired the Debtor’s exemption.
Here American Capital, properly served, did not oppose Debtor’s Motion and its lien was effectively avoided by default at the same time the court was considering whether to avoid All Points’ lien over its objection.4 That the order was actually entered later is of no consequence; the court was obligated not to consider the avoided lien under section 522(f)(2)(B). That portion of the order is final as to American Capital, and should not be disturbed on appeal. Thus, under Hanger, the avoided American Capital lien should not be included in the section 522(f)(2) calculation vis-a-vis All Points.
As that case points out the purpose of section 522(f) is not to avoid all liens, but simply to protect a debtor’s exemption. Simply avoiding the lien of the American Capital and deleting it from the All Points’ calculation would protect Debtor’s exemption in full. It is inaccurate to characterize All Points as “stepping into the shoes” of American Capital. That is a subrogation concept. Here the statute and Hanger instruct that the avoided lien not be counted. We should follow that instruction here. The opinion’s result rewards American Capital for its silence at the bankruptcy court and before us by restoring its lien position ahead of All Points. The suggestion that All Points can acquire American Capital’s position is hardly a comfort to it.
3. The Default
Part I-B of the opinion suggests that the two-step process for entry of default judgments in adversary proceedings under Rule 7055 (incorporating Fed.R.Civ.P. 55) applies to the Motion. I disagree. Rule 9014 provides that “unless the court directs otherwise,” Rule 7055 applies in contested matters. In other words, if a bankruptcy court has established local rules for obtaining an order by default in a contested matter, those rules (and not the “black-*97letter” law two-step default process of Rule 7055) govern.
Here, LBR 9013-1 establishes the procedure for obtaining defaults in contested matters and those procedures do not involve a two-step process. Subsection (g)(1)(F) of LBR 9013-1 specifically provides that an order granting a motion to avoid a hen under section 522(f) may be obtained without a hearing unless one is “specifically requested by filing and serving a written response” complying with subsection (a)(7) within fifteen days of service of the notice.5 In addition, if the movant wants to set the matter for hearing, LBR 9013-1(a) requires all opposition papers to be filed no later than fourteen days prior to the hearing date and provides that papers “not timely filed and served may be deemed by the court to be consent to the granting or denial of the motion, as the case may be.” LBR 9013-1(a)(7) and (11) (emphasis added). “Failure of any counsel to appear [at the hearing], unless excused by the court in advance, may be deemed consent to a ruling upon the motion adverse to that counsel’s position.” LBR 9013-l(a)(14).
The bankruptcy court, through its local rules, directed a procedure for obtaining default relief on motions to avoid judicial hens pursuant to section 522(f). Consequently, under the language of Rule 9014 itself (“unless the court directs otherwise”), the two-step default procedures of Rule 7055 are inapplicable here. In addition, with one exception in favor of the United States only, I could locate no case involving a contested matter where a preliminary default was entered pursuant to Rule 7055 and followed by a default judgment or order.6
I therefore believe the opinion is incorrect in intimating, if not outright holding, that unopposed contested matter motions must be disposed of by Rule 7055’s two step process, especially where that process is inconsistent with local rules. Such an approach would create an unnecessary step in what is a tried and true well-designed, efficient and expedient system for disposing of routine contested matter motions. Debtor’s Motion was one of those routine motions.
4. No Inconsistency In Outcomes
The concurrence cites a very old Supreme Court case, Frow v. De La Vega, 15 Wall. 552, 82 U.S. 552, 21 L.Ed. 60 (1872), for the unremarkable proposition that a decree of a court sustaining a charge of joint fraud committed by defendants is inconsistent with another decree disaffirm-ing that charge and declaring it to be unfounded. The Supreme Court said “such a result would be unseemly and absurd, as well as unauthorized by law.” 82 U.S. at 554, 21 L.Ed. 60. Moving to a more current time, the concurrence cites an application of the Frow doctrine in a bankruptcy setting in Neilson v. Chang (In re First T.D. & Investment, Inc.), 253 F.3d 520 (9th Cir.2001). There the Ninth Circuit required that a pure point of law, viz. whether a provision of California law providing a safe harbor for an otherwise unperfected security interest, be applied consistently as to certain answering defen*98dants and other defendants whose defaults had been entered.
It is important to note that the parties who invoked the Frow rule were themselves appellants, complaining about the default judgments against them because they were inconsistent with the court’s earlier summary judgment in favor of the defendants who invoked the statutory safe harbor.
Here, American Capital (not before us) is the beneficiary of the Frow rule. But as the Bankruptcy Court’s analysis and the opinion’s interpretation of the applicable substantive law both demonstrate, the relative positions of American Capital and All Points versus the Debtor here involved mixed questions of law and fact, turning on specific valuations and interests and unsettled principles of law dealing with lien avoidance on fractional interests in jointly owned property. More importantly, the bankruptcy court here was completely consistent in its disposition, avoiding both judicial liens for the same reason. Thus, not only does the Frow doctrine not apply, but the invocation of it in favor of a nonparty to this appeal is unjustified. There is no intimation anywhere that an incorrect decision such as the Bankruptcy Court made in T & D Investment was void ab initio requiring an appellate court to examine the propriety of the outcome sua sponte. It is for American Capital, and no one else, to raise this issue; otherwise it has been waived and should not be raised now.
5. Inapplicable California Rules of Procedure
I also disagree with the concurrence’s inference that American Capital could obtain relief from its default based upon an expectation that its California attorney would be served in accordance with inapplicable state law procedures that have nothing to do with avoidance of liens that impair homestead exemptions. We have nothing but speculation as to whether or how American Capital was misled. Where is this expectation in the record?
The concurrence reluctantly acknowledges that Debtor’s counsel properly served the Motion on American Capital in accordance with Rule 7004(b)(3) and Beneficial Cal. Inc. v. Villar (In re Villar), 317 B.R. 88 (9th Cir. BAP 2004).7 It then presumes, without support, both confusion by state court attorneys and American Capital’s reasonable ignoring of a federal bankruptcy court motion not served in accordance with state law. Then playing the “due process card” the concurrence infers that there has been a lack of due process to American Capital and argues for a rule that requires compliance with a state rule of procedure notwithstanding Hanna v. Plumer, 380 U.S. 460, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965)8. This is not only misguided based upon the inapplicability of *99those state court rules, but amounts to a “slippery slope” which can only confuse the issue further about where and when bankruptcy practitioners should follow state law even when they comply with applicable bankruptcy rules.
California Code of Civil Procedure § 684.010 requires service of papers under Title 9, Enforcement of Judgments, on the judgment creditors’ attorneys of record. Title 9 covers a multitude of subjects, including enforcement of money judgments, enforcement of non-money judgments, third party claims and related procedures, and satisfaction of judgments. There is nothing in Title 9 (or as far as I know anywhere in California law) permitting a judgment debtor to eliminate all or a portion of a judgment lien to the extent it impairs the judgment debtor’s exemption. Yet the concurrence urges that federal lien avoidance practice comply with state law service rules that do not encompass lien avoidance. In fact, enforcement of judgments necessarily occurs after an action has been commenced and has gone to judgment. The idea that counsel of record on a judgment must be served is quite sensible, given the state of any particular lawsuit and post-judgment activity. The procedural rule imposed by the California legislature appears to be more a matter of convenience than of fundamental due process. Thus, while a great number of state court procedures embraced within Title 9 require service of papers on counsel, there is no hint that California law must be complied with when a party avails itself of a right found exclusively within the Bankruptcy Code.
As previously noted, avoidance of a lien that impairs an exemption is accomplished by the initiation of a contested matter and is governed by Rule 9014. See Rule 4003(d).9 Service of motions initiating contested matters is governed by Rule 9014(b), which requires service in accordance with Rule 7004. Effectively it is the commencement of a new matter, called a contested matter, but functionally no different from the initiation of process. While under certain circumstances service in accordance with state rules of procedure is permitted (See Rule 7004(a), incorporating Federal Rule of Civil Procedure 4(h)), nowhere in federal practice (except in the concurrence) is it required.
Apart from the debate of whether inapplicable state rules of procedure are necessary to graft onto well developed federal rules, here the concurrence on its own has decided to render an advisory opinion that somehow under Supreme Court precedent, due process requires compliance with inapplicable state rule of procedure. This is so notwithstanding the fact that no party has raised this matter on appeal, and only American Capital can possibly benefit by this outcome. By no means is this view the holding of this decision.
In conclusion, it is error to remand and relieve American Capital of its inattention and punish All Points for its diligence. Neither party asked us to do that, and doing so is gratuitous. We should avoid the anomaly of an aggrieved creditor versus a successful debtor on an appeal resulting in not the creditor winning and the debtor losing (as I would rule) but rather the debtor losing and American Capital winning by being invited back into the battle to have the benefit of All Points’ advocacy, perhaps to assure it the benefit of a lien being brought back from the dead. This result is not in response to a *100Federal Rule of Civil Procedure 60(b) motion but rather this panel’s decision that American Capital should be returned to an approximately $91,000 lien position already avoided by an order that is final as to it. This is inconsistent with Ninth Circuit precedent and is inappropriate.10 In the highly unlikely event American Capital someday could convince the bankruptcy court that it is entitled to some post-judgment relief, that court would need to address just how to fashion an appropriate remedy. That is not our concern now.
We should REVERSE and REMAND in favor of All Points in accordance with the foregoing.

. 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, *95Rules 1001-9036, as enacted and promulgated prior to the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. 109-8, 119 Stat. 23 (Apr. 20, 2005).

. The opinion's concerns about dysfunction reigning and debtors colluding with junior lienors is nothing more than speculation. The bankruptcy court has many tools in its toolbox of remedies to deal with such nefari*96ous conduct. No such conduct is present here.

. The opinion cites this same phrase from Hanger; regrettably, it does not address the critical words after “and”.

. This is the same result that would follow had Debtor filed two separate, but similar, motions. Had he done so, with the motion directed at American Capital set earlier, there is little doubt that the court would have defaulted American Capital and avoided its lien. See discussion of Local Bankruptcy Rule 9013-1 (“LBR 9013-1”) of the Central District of California, infra. When the motion directed at All Points came before the court, there would be no justification to consider American Capital's then avoided lien. To reject this same result when Debtor’s counsel filed the Motion directed at two respondents elevates form over substance and punishes effective and efficient lawyering.

. LBR 9013 — l(i) reiterates that a section 522(f) motion is a contested matter and describes what information should be set forth in the motion and supporting papers.

. Fed.R.Civ.P. 55(e)(and thus Rule 7055)pro-hibits default judgments against the United States unless the claimant establishes a claim or right to relief by evidence satisfactory to the court. In Gadoury v. United States (In re Gadoury), 187 B.R. 816 (D.R.I.1995), the court upheld the two-step process on a debt- or’s motion against the United States to determine tax liability.

. The record before us reflects that American Capital was properly served with Debtor’s Motion, All Points’ Response and Objections to Evidence, the Order on Appeal, All Points’ Notice of Appeal, and Debtor’s Motion for Leave to Appeal.

. In Hanna the Supreme Court upheld the adoption of Federal Rule of Civil Procedure 4(d)(1) to control service of process in diversity cases notwithstanding a state law that required a different method. It noted that to hold that a federal service rule ceases to function when it alters the mode of enforcing state created rights would be to
”... disembowel either the Constitution's grant of power over federal procedure or Congress' attempt to exercise that power in the Enabling Act.” Hanna, 380 U.S. at 473-74, 85 S.Ct. 1136 (footnote omitted).
While the concurrence does not purport to replace Rule 7004 with California Code of Civil Procedure § 684.010, its reliance on California law certainly is inconsistent with Hanna and should be disregarded.

. Rule 4003(d) provides as follows:
Avoidance by Debtor of Transfers of Exempt Property. A proceeding by the debtor to avoid a lien or other transfer of property exempt under § 522(f) of the Code shall be by motion in accordance with Rule 9014.

. As we observed in another, similar bankruptcy appeal, "[fjederal courts are not run like a casino game in which players may enter and exit on pure whim.” Investors Thrift v. Lam (In re Lam), 192 F.3d 1309, 1311 (9th Cir.1999). The Bank has forfeited its right to challenge value of the collateral as determined by the bankruptcy court.
Enewally v. Washington Mutual Bank (In re Enewally), 368 F.3d 1165, 1173 (9th Cir. 2004).