Court Opinion

ID: 818062
Source: CourtListenerOpinion
Date Created: 2013-02-01 22:30:15.884121+00
Date Added: 2024-06-11T15:22:38.488505
License: Public Domain

FILED
                                                            JAN 04 2013
 1
                                                        SUSAN M SPRAUL, CLERK
                                                          U.S. BKCY. APP. PANEL
 2                                                        OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.     SC-12-1218-JuMkPa
                                   )
 6   CONRAD J. KUIKEN, JR.,        )      Bk. No.     11-17454
                                   )
 7                  Debtor.        )
                                   )
 8   ______________________________)
                                   )
 9   DANIEL T. MCCOY,              )
                                   )
10                  Appellant,     )
     v.                            )      OPINION
11                                 )
     CONRAD J. KUIKEN, JR.,        )
12                                 )
                    Appellee.      )
13   ______________________________)
14
15            Submitted Without Oral Argument on November 15, 2012*
16                          Filed - January 4, 2013
17              Appeal from the United States Bankruptcy Court
                    for the Southern District of California
18
          Honorable Margaret M. Mann, Bankruptcy Judge, Presiding
19
                      _____________________________________
20
21   Appearances:     James C. Mitchell, Esq. on brief for appellant
                      Daniel T. McCoy.
22                    ____________________________________
23
24   Before:    JURY, MARKELL, and PAPPAS Bankruptcy Judges.
25
26        *
             On October 30, 2012, appellant moved to submit this
27   appeal without oral argument. The Panel unanimously determined
     that oral argument was not needed by order entered on October 31,
28   2012.
 1   JURY, Bankruptcy Judge:
 2
 3            Judgment creditor Daniel T. McCoy appeals from the
 4   bankruptcy court’s order granting debtor Conrad J. Kuiken, Jr.’s
 5   motion to avoid McCoy’s judicial lien under § 522(f).1        In a
 6   case of first impression in this circuit, we hold that because
 7   the debtor did not maintain a continuous interest in the
 8   property subject to the lien from the time the lien fixed until
 9   the petition date, he is not entitled to avoid the lien based on
10   his homestead exemption.     Therefore, we REVERSE.
11                                  I. FACTS2
12            On August 18, 2003, debtor acquired fee title to real
13   property located in San Diego, California.
14            On June 4, 2009, McCoy obtained a judgment against debtor
15   in the San Diego Superior Court, Civil Case No. 37-2007-0052760.
16            On October 9, 2009, McCoy recorded with the San Diego
17   County Recorder’s Office a $16,838 judgment lien in the form of
18   an abstract of judgment.
19            On July 5, 2011, debtor executed a grant deed conveying fee
20   title to the property to Bayview Resources, LLC (Bayview), for
21   valuable consideration.     The deed was duly recorded on July 15,
22
23
          1
             Unless otherwise indicated, all chapter and section
24   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
     “Rule” references are to the Federal Rules of Bankruptcy
25
     Procedure.
26        2
             McCoy contends that the facts are undisputed. Debtor has
27   not participated in this appeal.

28                                     -2-
 1   2011.
 2            On September 28, 2011, Bayview executed a grant deed
 3   conveying fee title to the property to debtor as a gift. The
 4   deed was duly recorded on October 11, 2011.
 5            On October 24, 2011, debtor filed his chapter 7 petition.
 6   In Schedule A, debtor listed the property as owned by Bayview3
 7   and showed the value of the property as $530,000 encumbered with
 8   a secured claim in the amount of $532,969.     In Schedule C,
 9   debtor claimed the property exempt under Cal. Civ. Proc. Code
10   (CCP) § 704.730(a)(1)4 in the amount of $13,869.     No objections
11   to his claim of exemption were filed.     In Schedule D, debtor
12   listed McCoy as a secured creditor with an October 9, 2009
13   judgment lien for $16,838 in the form of an abstract of judgment
14   against the property.
15            On January 19, 2012, debtor filed a motion to avoid McCoy’s
16   judicial lien under § 522(f).     In the accompanying declaration,
17
          3
             This listing was most likely an error as the record shows
18
     Bayview transferred the property back to debtor prior to his
19   bankruptcy.
          4
20           CCP § 704.730 only specifies the amount of an exemption.
     From the record provided, it appears that debtor relied on
21   California’s automatic homestead exemption. The requirements to
     qualify for an automatic homestead exemption are set forth in
22
     CCP § 704.710(c):
23
          Homestead means the principal dwelling (1) in which the
24        judgment debtor or the judgment debtor’s spouse resided
          on the date the judgment creditor’s lien attached to
25        the dwelling, and (2) in which the judgment debtor or
26        the judgment debtor’s spouse resided continuously
          thereafter until the date of the court determination
27        that the dwelling is a homestead.

28                                     -3-
 1   debtor declared that he resided in the property at the time of
 2   filing his petition.
 3        On February 6, 2012, McCoy objected to debtor’s motion on
 4   the grounds that (1) McCoy’s judicial lien became a consensual
 5   lien when debtor conveyed the property to a third party for
 6   valuable consideration and reacquired it subject to the judicial
 7   lien and (2) McCoy’s judicial lien had priority under California
 8   law over debtor’s interest in the property and his homestead
 9   exemption when debtor reacquired the property from Bayview.
10        On February 21, 2012, the bankruptcy court issued a
11   tentative ruling rejecting McCoy’s arguments.   The bankruptcy
12   court found no authority for the premise that a judicial lien is
13   transformed into a consensual lien due to the transfers of the
14   property.   In addition, the court found that the parties agree
15   that debtor owned his house both when the lien attached and when
16   the motion to avoid the lien was brought.   The court noted that
17   in Culver, LLC v. Kai-Ming Chiu (In re Chiu), 304 F.3d 905 (9th
18   Cir. 2002), the debtor owned his residence at the time the
19   judgment lien was fixed to it and could avoid the lien even
20   though he no longer owned the house at the time he filed the
21   motion to avoid the lien.   The bankruptcy court found that
22   Chiu’s reasoning applied “with equal force here.”
23        After McCoy filed a supplemental opposition, the bankruptcy
24   court issued a second tentative ruling on March 21, 2012.     The
25   bankruptcy court reiterated that at all times McCoy’s judicial
26   lien remained a judicial lien upon the property.    Citing Law
27   Offices of Moore & Moore v. Stoneking (In re Stoneking), 225
28   B.R. 690, 696 (9th Cir. BAP 1998), the court further found that

                                    -4-
 1   although debtor’s property interest may have changed after
 2   McCoy’s lien fixed, it did not affect debtor’s ability to avoid
 3   the lien.       Because the debtor’s homestead exemption was
 4   applicable as of the petition date, the court further found that
 5   debtor was entitled to avoid McCoy’s judicial lien at that time.
 6
 7              The bankruptcy court entered the order granting debtor’s
 8   motion to avoid McCoy’s judicial lien on April 13, 2012.                 McCoy
 9   timely appealed the order.5
10                                   II.    JURISDICTION
11              The bankruptcy court had jurisdiction over this proceeding
12   under 28 U.S.C. §§ 1334 and 157(b)(2)(K).                 We have jurisdiction
13   under 28 U.S.C. § 158.
14                                         III.    ISSUE
15              Whether the bankruptcy court erred in granting debtor’s
16   motion to avoid McCoy’s judicial lien under § 522(f)(1).
17                             IV.    STANDARD OF REVIEW
18              Where there are no material disputed facts, whether a
19   creditor’s judicial lien is avoidable under § 522(f) is a
20   question of law reviewed de novo.                  In re Stoneking, 225 B.R. at
21   692.
22                                    V.     DISCUSSION
23              Section 522(f)(1) provides, in pertinent part, that a
24
            5
25           9th Cir. BAP Rule 8006-1 provides: “The excerpts of the
     record shall include the transcripts necessary for adequate
26   review in light of the standard of review to be applied to the
     issues before the Panel. . . .” McCoy did not include a
27   transcript in the record on appeal. Because our review is de
     novo, we have determined the transcript is not necessary to our
28
     review.

                                                  -5-
 1   debtor:
 2            [M]ay avoid the fixing of a lien on an interest of the
              debtor in property to the extent that such lien
 3            impairs an exemption to which the debtor would have
              been entitled under subsection (b) of this section, if
 4            such lien is
 5            (A) a judicial lien. . . .
 6   “[U]nder § 522(f)(1), a debtor may avoid a lien if three
 7   conditions are met: (1) there was a fixing of a lien on an
 8   interest of the debtor in property; (2) such lien impairs an
 9   exemption to which the debtor would have been entitled; and
10   (3) such lien is a judicial lien.”      In re Chiu, 304 F.3d at 908
11   (quoting Catli v. Catli (In re Catli), 999 F.2d 1405, 1406 (9th
12   Cir.1993)).     On appeal, McCoy contends that the first and third
13   conditions have not been met.6
14            McCoy does not dispute that debtor held an interest in the
15   property before McCoy’s lien fixed.      Nonetheless, McCoy contends
16   that debtor’s conveyance of the property to Bayview resulted in
17   a termination of debtor’s previous interest and then, when
18   debtor reacquired the property from Bayview, debtor obtained a
19   “new interest” in the property which came after the fixing of
20   McCoy’s lien.     According to McCoy, these facts fall squarely
21   within the holding of Farrey v. Sanderfoot, 500 U.S. 291 (1991)
22   which makes his lien unavoidable.       As a result, McCoy argues
23   that the bankruptcy court erred in relying on the holdings in
24   Stoneking and Chiu for its decision.
25            McCoy is correct that the debtor’s conveyance of the
26   property to Bayview terminated his existing interest in the
27
          6
             The second condition, that the debtor had an exemption
28
     which was impaired, is not challenged.

                                       -6-
 1   property.   Bayview is a limited liability company organized
 2   under the laws of the State of California, of which debtor was a
 3   member.   A membership interest in a limited liability company is
 4   personal property and is not a direct interest in real property
 5   owned by the company.   Cal. Corp. Code § 17300 (“A membership
 6   interest and an economic interest in a limited liability company
 7   constitute personal property of the member or assignee”).
 8        We also agree that the three most relevant published
 9   opinions on this issue in the Ninth Circuit, Stoneking, Chiu,
10   and Weeks v. Pederson (In re Pederson), 230 B.R. 158 (9th Cir.
11   BAP 1999), discussed below, do not address a situation where the
12   debtor’s interest in the property at the time the judicial lien
13   fixed was extinguished and replaced by a different interest
14   before the bankruptcy petition is filed.   Farrey and a
15   bankruptcy case it cited with favor, Stephens v Walter E. Heller
16   W., Ltd. (In re Stephens), 15 B.R. 485 (Bankr. W.D. N.C. 1981),
17   with facts similar to ours, more directly address the ability of
18   a debtor to avoid the lien using § 522(f).
19        The issue in Farrey was whether § 522(f) allowed a debtor
20   to avoid the fixing of a lien on a homestead, where the lien was
21   granted to the debtor’s former spouse under a divorce decree
22   that extinguished all previous interests the parties had in the
23   property.   500 U.S. at 292.   After examining the language of
24   § 522(f)(1) and the purpose and history surrounding Congress’
25   enactment of § 522(f), the Supreme Court stated:
26        [I]t is settled that a debtor cannot use § 522(f)(1)
          to avoid a lien on an interest acquired after the lien
27        attached. See, e.g., In re McCormick, [18 B.R. 911,
          913-14 (Bkrtcy. Ct. WD Pa. 1982)]; In re Stephens, 15
28        B.R. 485 (Bkrtcy. Ct. WD NC 1981); In re Scott, 12

                                     -7-
 1        B.R. 613 (Bkrtcy. Ct. WD Okla.1981). As before, the
          critical inquiry remains whether the debtor ever
 2        possessed the interest to which the lien fixed, before
          it fixed. If he or she did not, § 522(f)(1) does not
 3        permit the debtor to avoid the fixing of the lien on
          that interest.
 4
 5   500 U.S. at 299.
 6        Under the “critical inquiry” analysis, the Supreme Court
 7   found that under controlling nonbankruptcy law the divorce
 8   decree (1) extinguished the previous interests of the parties;
 9   (2) created a new fee simple interest in the homestead in favor
10   of the ex-husband; and (3) imposed a lien in favor of the ex-
11   wife on that homestead.   Under those facts, the Court found that
12   the husband did not have an interest in the property before the
13   ex-wife’s lien fixed and, as a result, the husband could not
14   avoid the ex-wife’s lien under § 522(f)(1).   In the end, the
15   Supreme Court stated:   “We hold that § 522(f)(1) requires a
16   debtor to have possessed an interest to which a lien attached,
17   before it attached, to avoid the fixing of the lien on that
18   interest.”   Farrey, 500 U.S. at 301.
19        The facts in Stephens are remarkably similar to ours.
20   There, judgments were docketed against the debtor while he held
21   title to certain real property.   15 B.R. at 486.   The debtor
22   subsequently conveyed the property to his brother.   Four days
23   before the debtor filed for bankruptcy, his brother conveyed the
24   property back to him.   Id.   The bankruptcy court held that the
25   debtor could not avoid the judgment creditors’ liens under
26   § 522(f).    In so holding, the bankruptcy court reasoned that
27   (1) when the debtor conveyed the property to his brother, it was
28   subject to the creditor’s judgment liens; (2) the transfer to

                                     -8-
 1   the debtor’s brother divested the debtor of all interest in the
 2   subject property; and (3) when the debtor re-obtained the
 3   property, he did so subject to the judgment liens.
 4        We examined the reach of Farrey’s holding in In re
 5   Stoneking, 225 B.R. 690.   There, the judicial lien of a creditor
 6   fixed on the community property of a husband and wife before the
 7   state court awarded the property to the husband in a divorce
 8   decree.   After the husband filed for bankruptcy, the attorney
 9   who held the judicial lien argued that under Farrey, the debtor
10   acquired his interest after the fixing of the lien, and
11   therefore could not avoid it.   The bankruptcy court concluded
12   that Farrey was inapplicable under the circumstances and granted
13   the debtor’s motion to avoid the lien.   Id. at 692.
14        We affirmed, noting that the facts of the case were
15   distinguishable from those in Farrey.    Unlike Farrey, where the
16   lien attached to a newly-created interest which the debtor did
17   not hold before the fixing of the lien because the divorce
18   decree extinguished his prior property interest, the judicial
19   lien in Stoneking fixed upon the debtor’s community property
20   interest which, under controlling nonbankruptcy law, was later
21   transformed, not eliminated, when in the course of divorce
22   proceedings the court changed it from a community property
23   interest to a fee interest.   Due to this distinction, the Panel
24   held that the debtor could avoid the lien under the “critical
25   inquiry” of Farrey:   whether the debtor possessed the interest
26   to which the lien fixed, before it fixed.   225 B.R. at 693.
27        The Panel reasoned:
28        While a debtor may not avoid a lien that attached

                                     -9-
 1           before he held any interest in the property, it does
             not necessarily follow that a debtor cannot avoid a
 2           lien merely because his property interests were
             augmented after attachment of the lien. If a debtor
 3           could have avoided such a lien on community-held real
             property pursuant to section 522(f)(1) before
 4           acquiring sole ownership of the property, that debtor
             should not lose the right to avoid that same lien
 5           after acquiring sole ownership . . . . Applying
             Farrey under such circumstances to preclude the
 6           avoidance of a third-party lien “is inconsistent with
             [section 522(f)’s] main purpose, is not fair, and is
 7           contrary to common sense.”
 8   Id. at 695 (citation omitted).    The Stoneking Panel simply did
 9   not address a circumstance where the debtor was divested
10   entirely of the interest he held after the lien fixed.
11           The Ninth Circuit came to a similar conclusion in Chiu,
12   albeit on different facts from those in Stoneking.      In Chiu,
13   there was no dispute that the debtors owned the subject property
14   before the lien fixed.    Debtors did not avoid the lien during
15   the bankruptcy and subsequently sold the property, at which time
16   they were notified that the lien had to be paid.     The debtors
17   reopened their case and filed a motion to avoid the lien,
18   claiming that it impaired their homestead exemption.     The
19   bankruptcy court determined that the lien avoidance related back
20   to the date of the filing and granted the motion to avoid the
21   lien.    The Panel affirmed on appeal.   The Ninth Circuit
22   affirmed, holding that a debtor must possess an interest to
23   which the lien fixed before it fixed and when the bankruptcy
24   petition is filed, but need not possess an interest in the
25   property at the time of avoidance.      304 F.3d at 908-09.   The
26   Ninth Circuit in Chiu did not face a situation where the
27   interest the debtors held on the petition date was not the same
28   interest they held when the lien fixed.

                                      -10-
 1        Under a different set of facts, our Panel followed Farrey
 2   when it denied the debtor’s lien avoidance in Pederson.     When
 3   creditor Weeks obtained a state court judgment against the
 4   debtor in 1993 and recorded an abstract in Contra Costa County,
 5   the debtor owned no real property.    A year later the debtor
 6   acquired title to real property in the county.   Under California
 7   law, the judgment lien created by the recording of the abstract
 8   of judgment attached to her interest in the property when she
 9   acquired it.   Debtor filed a chapter 13 petition in 1997 and
10   moved to avoid the lien, which the bankruptcy court granted.
11   Relying on Farrey, the Panel reversed because the debtor did not
12   have the property interest to which the lien attached at some
13   time before the lien attached, holding that the critical inquiry
14   was whether the debtor ever possessed the interest to which the
15   lien fixed before it fixed.   Pederson, 230 B.R. at 164.    Again,
16   although instructive, Pederson described a situation where the
17   debtor never had any interest in the property before the lien
18   recorded, different from this case where debtor had a fee
19   interest when the lien fixed, voluntarily granted it away
20   entirely, then reacquired the fee interest before seeking
21   bankruptcy relief.
22        Thus, Stoneking, Chiu and Pederson are distinguishable, and
23   Farrey and Stephens control here, because the debtor’s interest
24   in the property when he filed bankruptcy was a different and
25   discontinuous interest from the one he held when McCoy’s lien
26   affixed.   When the interest once held is entirely extinguished
27   by transfer, voluntary or as a matter of law, a judicial lien
28   which attached when a debtor had that interest cannot be avoided

                                    -11-
 1   when the debtor acquires a new interest.       The interest held when
 2   the lien fixed is gone and the debtor reacquires a different
 3   interest subject to the judicial lien, just as McCoy argues.7
 4            Beyond Stephens, our holding is consistent with the outcome
 5   of several bankruptcy court decisions from other jurisdictions.
 6   The trial court in In re Jackaman, 2000 WL 192973 (Bankr. E.D.
 7   Pa. 2000), denied lien avoidance where the debtor had sole
 8   ownership in real property when the judgment lien fixed but
 9   conveyed his fee simple interest to himself and his spouse as
10   tenants in the entirety.     The court reasoned that under
11   controlling nonbankruptcy law debtor’s prior interest was
12   extinguished by the transfer and his new interest was
13   “different” and would not support avoidance.       Relying on Farrey,
14   the court reasoned that § 522(f) only entitles the debtor to
15   avoid the fixing of a lien “on the same interest to which it
16   fixed.”     Id. at *6.
17            Similarly, the bankruptcy court in The Cradle Co. v. Banner
18   (In re Banner), 394 B.R. 292 (Bankr. D. Conn. 2008), denied lien
19   avoidance where the debtor owned property in joint tenancy with
20   her then-husband when the lien recorded.       After a divorce, the
21   debtor and her ex-husband quitclaimed the property to her
22   boyfriend for financing purposes.        Prior to the debtor’s
23   bankruptcy petition, her boyfriend deeded a one-half interest in
24
25        7
             Although Stephens and some other bankruptcy court cases
26   which have decided this issue for the creditors have based their
     reasoning in part on bad faith or fraudulent conduct of the
27   debtor in conveying the real property, our record does not
     support a bad faith analysis, nor does our decision rely on any
28
     such determination.

                                       -12-
 1   the property back to her and she attempted to use § 522(f) to
 2   avoid the impairment on her homestead.      Reasoning that the
 3   debtor reacquired her interest in the property subject to the
 4   judicial lien, the bankruptcy court found under controlling
 5   nonbankruptcy law the new interest was not the “same” interest
 6   held when the lien affixed and avoidance was not allowed.        Id.
 7   at 306-07.   The court relied on Farrey and Jackaman to support
 8   its decision.
 9        Because we reverse on the reasoning above, we need not
10   address in any detail McCoy’s argument that his judicial lien
11   became a consensual lien when Bayview took a fee title interest
12   in the property subject to McCoy’s lien.     Suffice it to say we
13   do not find the argument persuasive.    Here, the origin of
14   McCoy’s lien was through the legal process.     A “judicial lien”
15   is defined as a “lien obtained by judgment, levy, sequestration,
16   or other legal or equitable process or proceeding.”     § 101(36).
17   Therefore, McCoy’s lien meets the statutory definition of a
18   judicial lien.   Finally, there is no evidence in the record to
19   support a voluntary and contractually binding agreement between
20   Bayview and McCoy regarding his lien.    Rather, the record
21   suggests that Bayview took the property subject to the lien not
22   because of any agreement, but by operation of law.     McCoy’s lien
23   remained on the property until it was satisfied.     CCP § 697.390.
24   Accordingly, because McCoy’s lien is a judicial lien, the third
25   condition for the avoidance of McCoy’s lien has been met.
26   However, as analyzed above, the first prong was not.
27                            VI.   CONCLUSION
28        In this case, debtor transferred and then reacquired his

                                    -13-
 1   interest in the real property after McCoy’s lien fixed.   Under
 2   applicable nonbankruptcy law, this meant that the debtor had no
 3   interest in the property in the interim.   He thus acquired a
 4   different interest - one to which a lien had already affixed -
 5   when he later reacquired the property.   As a result, debtor may
 6   not avoid the lien under § 522(f)and we REVERSE.
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                                   -14-