Court Opinion

ID: 9686580
Source: CourtListenerOpinion
Date Created: 2023-08-24 15:56:30.238514+00
Date Added: 2024-06-11T18:18:20.456630
License: Public Domain

KATZ, Bankruptcy Judge
(dissenting):
As evidenced by the majority and concurring opinions, no two issues addressed in this case have received unanimous approval by the Panel. The reason for this is that the inter-relationship between California’s peculiar dwelling-house exemption and the operation of several sections of the Code is hard to define. The ability to differentiate between operation of law and achievement of desired results is key to reaching a proper decision in this case. While I agree with the concurring opinion that § 522(f) is ineffective as against a lien created under California Code of Civil Procedure § 674(c), I part sides with the majority on the issue of whether or not the trustee receives a lien, which could eventually reach some if not all of the debtor’s equity in his dwelling house after the bankruptcy is filed.
In my opinion the practical effect of the majority opinion is to elevate the California automatic homestead to a position far superior than was ever intended by the California Legislature. While I further agree that the fresh start of the debtor is particularly important to preserve, I believe the Code and the confines of due process limit our ability to grant exemptions beyond that which is embraced by the exemption chosen by the debtor.
The basis for my dissent is an acute understanding of the nature and purposes of both the limited nature of the California dwelling-house exemption and the operation of the Bankruptcy Code. This understanding for the most part is brought out by a historical and logical analysis of the provisions in question.
California Constitution, Article XX, Section 1.5 provides: “The legislature shall protect, by law, from forced sale a certain portion of the homestead and other property of all heads of families.” [Emphasis added.] In 1872 California Civil Code § 1237 et seq., was created to provide a strict scheme by which a homeowner could formally record a homestead on a residence and exempt his home from execution of a judgment and forced sale. See San Diego County Carpenters Group Ins. v. Lorea, 112 Cal.App.3d 221, 169 Cal.Rptr. 157 (1980).
In 1975, California Code of Civil Procedure § 690.235, now Code of Civil Procedure § 690.31, was enacted as an alternative method to protect a homeowner’s homestead exemption. Code of Civil Procedure § 690.31 provides in part:
“(a)(1) A dwelling house in which the debtor or the family of the debtor actually resides shall be exempt from execution, *55to the same extent and in the same amount except as otherwise provided in this section, as the debtor or the spouse of the debtor would be entitled to select as a homestead pursuant to Title 5 (commencing with Section 1237 .... ” [Emphasis added.]
The new dwelling-house exemption was automatic in that no formal declaration of homestead needs to be recorded to gain the protection of the homestead. San Diego White Truck Company v. Swift, 96 Cal. App.3d 88, 92, 157 Cal.Rptr. 745 (1979). The legislative purpose behind the dwelling-house exemption was to ensure that a homestead exemption was not a mere formality available only to the knowledgeable, but to make sure that all who are entitled to it had an opportunity to secure the exemption.1 National Collection Agency v. Fabila, 93 Cal.App.3d Supp. 1, 155 Cal.Rptr. 356 (1979).
The net effect of the dwelling-house exemption is that every dwelling house in California in which the debtor or the debt- or’s family actually resides is exempt from execution by any creditor unless that creditor would have been entitled to execute his judgment against the property even if it had been properly homesteaded at the time the judgment became a lien. See In re Sanford, 8 B.R. 761 (D.C.N.D.Cal.1981). This application, however, is tempered by the major difference between the two homestead laws in that a judgment lien will attach to a dwelling exempt under Code of Civil Procedure § 690.31, but will not attach to a dwelling which has been formally homesteaded. Code of Civil Procedure § 674(c); Krause v. Superior Court, 78 Cal. App.3d 499, 144 Cal.Rptr. 194 (1978); Engelman v. Gordon, 82 Cal.App.3d 174, 178, 146 Cal.Rptr. 835 (1978).
The major issue herein is where do the trustee and creditors stand in relationship to a dwelling-house exemption when bankruptcy law is superimposed on the operation of the exemption. The law has long been well settled that the trustee and creditors in bankruptcy stand junior to a property recorded homestead. The law with respect to the automatic dwelling-house exemption is in need of clarification.
In the recent case of In re Martin, (9th Cir. BAP 1982), this Panel held that 11 U.S.C. § 544 cannot be invoked by the trustee to defeat the debtor’s dwelling-house exemption. Unlike the adverse result under the Act, the dwelling-house exemption prevents the trustee from achieving outright ownership of the dwelling on the date of the bankruptcy is filed. Compare In re Martin, supra and In re Campbell, 5 BCD 6 (S.D.Cal.1978). Notwithstanding this holding, I believe the trustee is vested with certain rights which preserve equity in the dwelling for the estate to be realized at a point in time when the equity in the dwelling is no longer protected. This result is reached through the interplay between 11 U.S.C. § 544 and the limited nature of the California dwelling-house exemption.
In addition to the rights conferred on the trustee in §§ 541 and 363, the trustee also derives the right to proceed against property under § 544 (11 U.S.C. § 544). Section 544(a)(1) gives the trustee the rights and powers of a creditor who obtains a judicial lien on all property on which a creditor on a simple contract could have obtained a lien. See also In re Sanford, supra. Similar to the dwelling-house exemption, the nature and purpose of the trustee’s § 544 powers are better defined by a historical review of the section’s derivation.
*56Section 544 is the descendant of over eighty years of case law interpretation and statutory evolution. In 1910 Section 47, cl.2(a) [11 U.S.C. § 75(a)(2)] was amended such as to vest in the trustee for the interest of all creditors the potential rights of creditors possessing or holding liens upon the property coming into his custody by legal or equitable proceedings. Pacific State Bank v. Coats, 205 F. 618 (9th Cir. 1913). The major purpose of this amendment was to allow the trustee to cut off secret and undisclosed claims against the property. By cutting off these secret interests the bankruptcy laws brought about uniformity in administration and equalized the distribution of assets to all unsecured creditors. In re Floyd-Scott Co., 224 F. 987 (D.Mass.1915); In re Horton, 31 F.2d 795 (W.D.La.1928). By placing the trustee in the status of a lien creditor, the 1910 amendment sought to vest the trustee with the rights of those creditors who had yet to obtain liens either by equitable or legal proceedings. See Pacific State Bank v. Coats, supra, at 622.
Under the Act the trustee could exercise his rights as a lien creditor to reach any asset which an ideal lien creditor could reach. Bass v. Aetna Factors Co., 272 F.2d 707 (9th Cir. 1959). Thus, the trustee could either bring into the estate, or preserve for the estate, any and all property available at the time the petition was filed, to which his lien rights attached. See In re Carl, 38 F.Supp. 414 (W.D.Ark.1941); Commercial Credit Co. v. Davidson, 112 F.2d 54 (5th Cir. 1940); Bass v. Aetna Factors Co., supra.
The enactment of § 544 in effect broadened the rights which were available to the trustee under prior §§ 70(c), 70(e) and 60(a)(4) of the Act. [11 U.S.C. §§ 110(c)(e), 96(a)(4); 124 Cong.Rec.H. 11,097 (Sept. 28, 1978); S. 17, 413 (Oct. 6, 1978).] Under § 544(a) the trustee not only may seek to avoid transfers of property, but is additionally vested with any rights available to a creditor holding a judicial lien obtained in an action on a simple contract, whether or not such a creditor exists.
When viewing the powers of the trustee under § 544 along with prior case law discussions and other provisions of the Code, a clear pattern emerges. The § 544 powers given to the trustee are a form of bankruptcy trade-off. In exchange for having their debts discharged, the unsecured creditors are given certain rights, albeit artificial rights, which have the effect of bringing into the estate all property which could have been available to them on the day bankruptcy was filed. The debtor, on the other hand, is given a discharge of his debts and receives a fresh start through the election of exemptions under § 522.
Given the purposes of the trustee’s rights under § 544(a) and the trade-offs inherent in the bankruptcy laws, it makes good sense to apply these considerations in determining a value for the trustee’s lien. Consistent with these considerations and purposes I would hold that the value of the lien obtained under § 544(a) is the lesser of the total of all unsecured claims or the amount of equity in the property upon which the § 544(a) lien could attach on the date the petition is filed. By limiting the value of the lien to the value of property available on the date the petition was filed, the rights of creditors to secure equality in distribution and the legislative priority of preserving to the debtor a fresh start are fully balanced.
Under a normal absolute exemption statute a lien valuation would not be necessary. The peculiar limited nature of the California dwelling-house exemption, however, requires that the lien of the trustee be valued currently such that it can be paid in the future when the exemption no longer prevents execution on the property.
Having reached this point the question arises as to the length of time the trustee should be able to exercise his rights in the equity preserved for the estate.
There is nothing in the Bankruptcy Code to indicate that the trustee’s rights as a judicial lien creditor are confined to the point in time when the bankruptcy case is commenced. That is merely the time the trustee’s rights are created. In re Bouchard, 11 B.R. 869 (Bkrtcy.S.D.Cal.1981). The *57trustee herein obtains a lien which is measured by the rights that a judicial lien creditor would have under the laws of California. In re Sanford, supra. Under California law a judicial lien exists a minimum of 10 years unless extended through supplemental proceedings. California Code of Civil Procedure §§ 674(a), 685. Therefore, I would hold that as long as the trustee remains in the case his lien could, be effective for more than 10 years.
Having discussed the trustee’s lien, its value, and effective life, we must now discern what effect California law would have on the trustee’s lien. Under California law, a lien creditor can execute against the dwelling house of the debtor after application has been made and the court finds that the current value of the dwelling house, over and above all liens and encumbrances thereon, exceeds the amount of the allowable exemption. Code of Civil Procedure § 690.31(c). Even though a judicial lien attaches to the property under Code of Civil Procedure § 674(c), it is clear that this lien is junior to the exemption amount as long as the debtor does not voluntarily sell the dwelling and reinvests the proceeds from any execution sale within six months into another dwelling in which the debtor or his family actually resides. See Code of Civil Procedure § 690.31(j), (k); Ortale v. Mulhern, 58 Cal.App.3d 861, 864, 130 Cal.Rptr. 277 (1976). Therefore, if there is excess equity above liens and the homestead amount, or the debtors sell the dwelling or voluntarily move out, the lien would need to be paid to the extent the proceeds would no longer be exempt. See CCP § 690.31(j)2
The concurring opinion claims that there is an inherent contradiction in allowing discharged creditors, by virtue of invoking § 544, to have access to the debtor’s post bankruptcy accruals in equity and future earnings. This proposition ignores the basis upon which the value of the trustee’s lien would be fixed. His rights would be set in an amount certain on the date of the filing of the petition. Thereafter, the creditors would only be entitled to the funds upon which the lien attached. Clearly, any post-bankruptcy accruals in equity or future earnings of the debtor would only inure to the benefit of the debtor and his fresh start.3
The majority claims that the result of imparting a lien to the trustee would bring about a result which is contrary to the fundamental fresh-start policy of the Bankruptcy Code. In rendering my opinion, I am mindful that it would open the door to the situation where a debtor moves from the dwelling house 10 years after bankruptcy, but finds the equity in his house suddenly levied upon by the trustee in bankruptcy. Surely a debtor’s fresh start is not well fostered by this possibility. Yet on the other hand the result is consistent with both the purposes of the Bankruptcy Code and the purpose of the California automatic dwelling-house exemption. It is consistent with the Code because it provides creditors with every bit of property they are legally entitled to in exchange for having their claims discharged. It is consistent with the California exemption chosen because it ful*58ly protects the debtor from the forced sale of a certain part of the homestead without providing an alternative chance to start over. See CCP § 690.31(j).
When the Bankruptcy Code was drafted, it did not have California particularly in mind. It was written as a universal document with the Code provisions exercised uniformly among the various states. If any result achieved under my view is contrary to a fresh-start policy, it is not because of the universal application of the Code, but instead caused by the peculiar nature of the state exemption relied upon. Any unfortunate result reached under the laws of California can be changed through consideration and action by the California Legislature. This Panel’s apparent authority to fractionalize the uniform operation of the Code to obtain a more desired result in California is, in my opinion, not warranted in this case. I would affirm the judgment below, with certain reservations relative to refinancing, and therefore respectfully dissent.

. In a nonbankruptcy case the exemption is secured by requiring a hearing before a writ of execution can be issued against a dwelling. Code of Civil Procedure § 690.31. An alternative procedure under Code of Civil Procedure § 690.31(h) may be utilized by the debtor to postpone an execution sale of the dwelling when the debtor failed to appear at the exemption hearing due to mistake, inadvertence, surprise or excusable neglect. The inclusion of these provisions in the dwelling-house exemption law indicates a strong legislative intent to give uninformed homeowners every possible chance to save a portion of their homesteads against execution.

. California Code of Civil Procedure § 690.310) provides:
“(j) In the event of an execution sale, the proceeds of the sale shall be applied in the following order and priority: First, to the discharge of all liens and encumbrances, if any, on the property; second, to the debtor, or the debtor’s spouse if such person is the exemption claimant, in the amount of the exemption if allowed pursuant to this section; third, to the satisfaction of the execution, and fourth, to the debtor, or the debtor’s spouse if such person is the exemption claimant.” [Emphasis added.]

. The operation of the exemption can be demonstrated by analogy. The California dwelling-house exemption is much like a glass bottle with liquid in it. The bottle represents the expendable nature of the exemption and the liquid, the debtor’s equity therein. On the date of bankruptcy a portion of the liquid equal to the trustee’s lien is frozen. Thereafter, any post-bankruptcy accruals in equity or future earnings of the debtor fill the bottle with additional liquid. This tends to push the frozen part of the liquid out of the top of the bottle. If down the road the frozen liquid is pushed out of the bottle, or the bottle breaks, the trustee and hence the unsecured creditors are entitled to receive the frozen part of the liquid. The debtor keeps the rest.