In re: Gurpreet Kaur

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: July 9, 2014
• Docket: WW-13-1391-JuKuPa
• Status: Unpublished

Opinion

FILED JUL 09 2014 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. WW-13-1391-JuKuPa ) 6 GURPREET KAUR, ) Bk. No. 12-16490-MLB ) 7 Debtor. ) Adv. No. 12-01872-MLB ______________________________) 8 ) GURPREET KAUR, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M* 11 ) PARDEEP RATHINAM; SHARMILA ) 12 RATHINAM; SATWANT SINGH; ) DHALIWAL REAL ESTATE LLC, ) 13 ) Appellees. ) 14 ______________________________) 15 Submitted Without Oral Argument on June 26, 2014** 16 Filed - July 9, 2014 17 Appeal from the United States Bankruptcy Court 18 for the Western District of Washington 19 Honorable Marc L. Barreca, Bankruptcy Judge, Presiding _________________________ 20 Appearances: Masafumi Iwama, Esq., on brief for appellant 21 Gurpreet Kaur; John H. O’Rourke, Esq. on brief for appellees Pardeep and Sharmila 22 Rathinam, Satwant Singh and Dhaliwal Real Estate LLC. 23 24 * This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 25 have (see Fed. R. App. P. 32.1), it has no precedential value. 26 See 9th Cir. BAP Rule 8013-1. ** 27 On May 15, 2014, this Panel entered an order determining that this appeal was suitable for submission without oral 28 argument.

-1- 1 Before: JURY, KURTZ, and PAPPAS, Bankruptcy Judges. 2 Chapter 111 debtor Gurpreet Kaur owned real property in 3 Kent, Washington comprised of two tax parcels (Property). 4 Debtor’s home was on one acre designated as Parcel A and the 5 contiguous four acres were designated as Parcel B. Debtor 6 claimed a homestead exemption on Parcels A and B and filed an 7 adversary proceeding2 seeking to avoid the judgment lien of 8 Pardeep and Sharmila Rathinam (Rathinams), Satwant Singh 9 (Satwant) and Dhaliwal Real Estate, LLC (Dhaliwal) 10 (collectively, Appellees) pursuant to § 522(f). Debtor then 11 moved for summary judgment. In response, Appellees argued, 12 among other things, that Parcel B was not reasonably necessary 13 for the use and occupancy of debtor’s homestead under John 14 Hancock Mut. Life Ins. Co. v. Wagner, 174 Wash. 185, 24 P.2d 420 15 (Wash. 1933). 16 Debtor later discovered that Appellees had not recorded 17 their judgment. Therefore, under Washington law, no lien 18 attached to her Property. Further, her personal liability on 19 the debt had been discharged in a previous chapter 7 case. 20 Debtor moved to dismiss the adversary proceeding, which the 21 bankruptcy court denied for reasons not apparent from the 22 1 23 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532 and 24 Rule references are to the Federal Rules of Bankruptcy Procedure. 25 2 Rule 4003(d) provides that a proceeding by the debtor to 26 avoid a lien under § 522(f) shall be by motion in accordance with Rule 9014. Appellees did not object to debtor proceeding by 27 adversary complaint rather than by motion. Regardless, no due process issues are triggered, since the adversary accords more 28 due process than a motion.

-2- 1 record. 2 Thereafter, the court held a trial to determine whether 3 debtor was entitled to claim Parcel B as part of her homestead 4 exemption. Without addressing the lien perfection issue, the 5 bankruptcy court issued its findings of fact and conclusions of 6 law, finding that debtor was entitled to claim Parcel A as 7 exempt, but that Parcel B was not reasonably necessary for the 8 use and enjoyment of her home as a dwelling under the holding in 9 Hancock. The court entered judgment in favor of debtor with 10 respect to Parcel A and in favor of Appellees with respect to 11 Parcel B. This appeal followed. For the reasons discussed 12 below, we VACATE the judgment of the bankruptcy court and REMAND 13 this matter with instructions that the bankruptcy court dismiss 14 this adversary proceeding. 15 I. FACTS3 16 A. The Purchase And Sale Agreement 17 In November 2006, Dhaliwal, through its managing member, 18 Satwant, offered to purchase the Property from the then-owner, 19 Harbhajan Singh (Harbhajan). Harbhajan agreed to sell the 20 Property for $1,615,000 and, as part of the agreement, Dhaliwal 21 was required to pay a $200,000 earnest money deposit which would 22 be applied to the purchase price. An addendum to the agreement 23 stated that the earnest money deposit would become nonrefundable 24 after a certain date. According to the agreement, the closing 25 26 3 We take judicial notice of various pleadings and documents 27 in this case and the adversary proceeding because the record on appeal is incomplete. See Atwood v. Chase Manhattan Mortg. Co. 28 (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

-3- 1 would occur in August 2007 and was conditioned on two 2 contingencies: (1) the land had to be subdivisible and (2) the 3 subdivision had to yield at least seventeen lots. 4 Because Harbhajan could not speak English, Satwant helped 5 prepare the subdivision plan and preliminary approval was 6 granted by the City of Kent. During the development process, 7 the Rathinams became parties to the purchase and sale agreement 8 through an assignment by Dhaliwal. In connection with the 9 purchase and sale, Appellees made a downpayment of $500,000, 10 $200,000 of which was the earnest money deposit. It is unclear 11 from the record whether the Rathinams paid the entire amount. 12 Ultimately, the transaction did not close and none of the money 13 was refunded. 14 B. The State Court Lawsuits And Transfer Of The Property 15 Appellees commenced a lawsuit against Harbhajan in the King 16 County Superior Court seeking the return of their $500,000 17 downpayment. They obtained a judgment against him by default in 18 the amount of $501,735. 19 In late October 2008, debtor purchased the Property from 20 Harbhajan. In connection with the purchase, debtor obtained a 21 loan from Provident Funding Associates, LP (Provident) in the 22 amount of $417,000 which is evidenced by a promissory note 23 secured by a first deed of trust against the Property (both 24 Parcels A and B). Debtor has been living on the Property since 25 August 2004 with her extended family members, including 26 Harbhajan, who is debtor’s father. 27 After learning about the transfer of the Property, 28 Appellees commenced an action against Harbhajan, his wife, and

-4- 1 debtor in the King County Superior Court, seeking to avoid the 2 alleged fraudulent transfer of the Property from Harbhajan to 3 debtor and alleging that debtor had received $200,000 of the 4 $500,000 downpayment (Case No. 09-2-15396-5KNT). In April 2010, 5 Appellees obtained a judgment by default against debtor in the 6 amount of $200,000 and the superior court avoided the transfer 7 of the Property (the April 2010 Judgment). 8 C. Debtor’s Chapter 7 And Chapter 13 Cases 9 Shortly after, on September 21, 2010, debtor filed a 10 chapter 7 petition (Case No. 10-21208-MLB). In Schedule A, 11 debtor valued the Property at $350,000 and identified it as her 12 residence. Debtor listed the Rathinams as secured creditors 13 against the Property. In Schedule C, she claimed the federal 14 homestead exemption. Debtor obtained her discharge on 15 January 19, 2011. 16 Prior to her discharge, on January 9, 2011, debtor filed a 17 chapter 13 case, this time claiming state exemptions in 18 Schedule C. That case was dismissed for failure to make plan 19 payments. 20 In January 2012, upon Appellees’ motion, the bankruptcy 21 court reopened debtor’s chapter 7 case so that they could file 22 an adversary proceeding seeking to revoke debtor’s discharge 23 under § 727(d)(1) and (2). Upon debtor’s motion, the bankruptcy 24 court granted partial relief in her favor, dismissing the 25 § 727(d)(2) claim entirely and dismissing Satwant and Dhaliwal 26 as parties to the § 727(d)(1) claim. After a trial on the 27 § 727(d)(1) claim, the bankruptcy court denied revocation and 28 upheld debtor’s discharge order in its findings of fact and

-5- 1 conclusions of law entered on August 7, 2012. With her § 727 2 discharge intact, debtor’s personal liability on the debt owed 3 to Appellees was discharged. 4 D. Debtor’s Chapter 11 Case 5 Meanwhile, Provident commenced foreclosure proceedings 6 against the Property. Debtor filed a chapter 11 case on 7 June 21, 2012, to stop the proceedings. In Schedule A, debtor 8 valued the Property at $408,000. She characterized Parcel B as 9 wetlands having no value and she indicated the Property was 10 encumbered by approximately $501,000 of secured claims. She 11 again listed the Rathinams as secured creditors against the 12 Property. In Schedule C, she claimed the federal homestead 13 exemption. 14 On October 4, 2012, debtor filed an adversary proceeding 15 seeking to avoid Appellees’ judgment lien arising out of the 16 April 2010 Judgment. Debtor maintained that the lien impaired 17 her homestead exemption within the meaning of § 522(f). 18 Debtor then filed a motion for summary judgment (MSJ) on 19 the lien avoidance issue, which the bankruptcy court denied on 20 February 4, 2013. In opposition to the MSJ, Appellees argued 21 that Parcel B, which was vacant land, was not necessary for the 22 use and occupancy of debtor’s homestead under Hancock. 23 On January 15, 2013, debtor filed amended Schedules A and 24 C. In Schedule A, she valued the Property at $600,000. She 25 again characterized Parcel B as wetlands having no value and she 26 again indicated the Property was encumbered by approximately 27 $501,000 in secured claims. In Amended Schedule C, she claimed 28 the state law homestead exemption.

-6- 1 Debtor later discovered that Appellees had never recorded 2 the judgment at the King County Recorder’s Office. On 3 February 11, 2013, debtor moved to dismiss the adversary 4 proceeding on the grounds that the judgment did not attach to 5 her homestead under Wash. Rev. Code (RCW) 6.13.0904 and thus 6 there was no controversy for the court to decide. The 7 bankruptcy court denied her motion by order entered on March 28, 8 2013, for reasons not apparent from the record.5 9 On May 6, 2013, the bankruptcy court held a trial to 10 determine the exact portion of debtor’s property covered by the 11 homestead exemption. At the commencement of trial, the court 12 observed that it was the lien claimant’s burden to show that 13 they actually had a lien. The court later stated: 14 I can’t read [RCW] 6.13.090 as anything other than saying, if you don’t record the judgment, you don’t 15 have a lien against real property, even if it’s in the county where the judgment was taken. That’s just how 16 [RCW] 6.13.090 works. That’s always been my understanding of it. I didn’t see any case law cited 17 to me that may be in the exception for that. I think the thing that is missing in the defendants’ analysis 18 on that is the discharge injunction stays from you now recording it. So if it wasn’t recorded and I do 19 determine that both parcels are homestead, then as I 20 4 RCW 6.13.090 states in relevant part: 21 22 A judgment against the owner of a homestead shall become a lien on the value of the homestead property in 23 excess of the homestead exemption from the time the judgment creditor records the judgment with the 24 recording officer of the county where the property is located. . . .” 25 5 26 There is no transcript of the hearing on the motion to dismiss in the record or on the docket and the order denying 27 debtor’s motion does not contain findings of fact or conclusions of law. Therefore, we are unable to discern the precise basis 28 for the bankruptcy court’s decision to deny debtor’s motion.

-7- 1 see it, there’s just no lien there, and I could enter a judgment declaring that there is no lien against 2 that property, and then your client’s precluded -- because I already determined the debt’s dischargeable, 3 you’d be precluded from then recording the judgment lien because of the discharge injunction. 4 5 Without further discussion or argument on the lien perfection 6 issue, the matter proceeded to trial on whether Parcel B was 7 included in debtor’s homestead. 8 During the trial, debtor testified that she and her family 9 utilized the entire property for their residence. Her driveway 10 begins at the west boundary of Parcel B and ends at the 11 northeast corner of Parcel A. The driveway is the only 12 practical means of access to her residence. There are two 13 appurtenant buildings located on Parcel B, one of which is 14 served by an electric power line attached to the residence. 15 This structure is used as a storage shed. The other structure 16 is a goat house where debtor keeps her two goats. She keeps a 17 garden and maintains fruit trees on the portion of her property 18 designated as Parcel B. Parcel B also includes a wetland where 19 debtor and her family pick berries and where her children often 20 play. She parks her commercial vehicles on Parcel B, which 21 affords her additional recreational area for her family. 22 The bankruptcy court issued its ruling on June 6, 2013, 23 where it found in debtor’s favor as to Parcel A. However, 24 relying on the Washington Supreme Court’s Hancock decision, the 25 court found that the homestead exemption did not cover Parcel B 26 because it was not reasonably necessary for debtor’s use and 27 enjoyment of her home as a dwelling. The court found that 28 although debtor used Parcel B for storage, for gardens, to house

-8- 1 her two goats and as a recreation area for children and pets, 2 those uses did not make Parcel B reasonably necessary for the 3 use of the dwelling as her home. The court further opined that 4 debtor could relocate those activities to Parcel A because 5 Parcel A was sufficient in size to accommodate those activities. 6 On July 31, 2013, the bankruptcy court entered the judgment 7 which states, among other things: “Defendants are also granted 8 judgment in their favor as to continued attachment of the stated 9 judgment lien as to Parcel B because Plaintiff has no exemption 10 in Parcel B . . . .” Debtor timely appealed from this portion 11 of the judgment. 12 II. JURISDICTION 13 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 14 §§ 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. 15 § 158. 16 III. ISSUE 17 Whether the bankruptcy court erred by holding a trial on 18 the scope of debtor’s homestead exemption when there was no case 19 or controversy before it. 20 IV. STANDARD OF REVIEW 21 Whether the case or controversy requirement has been met is 22 a question of law. We review questions of law de novo. Bias v. 23 Moynihan, 508 F.3d 1212, 1223 (9th Cir. 2007). 24 V. DISCUSSION 25 The bankruptcy court as a unit of the Article III district 26 court is a court of limited jurisdiction and is bound by the 27 requirement that, as a preliminary matter, it have before it an 28 actual case or controversy. City of L.A. v. Lyons, 461 U.S. 95,

-9- 1 101 (1983); see also Day v. Klingler (In re Klingler), 301 B.R. 2 519, 522–23 (Bankr. N.D. Ill. 2003) (“The limits Article III 3 imposes on federal jurisdiction apply equally to bankruptcy 4 courts.”). If the bankruptcy court does not have an actual case 5 or controversy before it, it has no power to hear the matter in 6 question. In re Klinger, 301 B.R. at 523. The 7 case-or-controversy requirement subsists through all stages of 8 federal judicial proceedings, which means that the parties must 9 continue to have a personal stake in the outcome of the lawsuit. 10 Steffel v. Thompson, 415 U.S. 452, 459 n.10 (1974). 11 The requirement that a claimant have “standing is an 12 essential and unchanging part of the case-or-controversy 13 requirement of Article III.” See Lujan v. Defenders of 14 Wildlife, 504 U.S. 555, 560 (1992). To qualify for standing, a 15 claimant must present an injury that is concrete, 16 particularized, and actual or imminent; fairly traceable to the 17 defendant’s challenged behavior; and likely to be redressed by a 18 favorable ruling. Id. at 560-61. “We are obliged to examine 19 standing sua sponte where standing has erroneously been assumed 20 below.” Adarand Constructors, Inc. v. Mineta, 534 U.S. 103, 110 21 (2001) (per curiam) (citing Steel Co. v. Citizens for a Better 22 Environment, 523 U.S. 83, 95 (1998)). In Steel Co., the United 23 States Supreme Court went on to say: “‘[When the lower federal 24 court] lack[s] jurisdiction, we have jurisdiction on appeal, not 25 of the merits but merely for the purpose of correcting the error 26 of the lower court in entertaining the suit.’” 523 U.S. at 95. 27 Here, the case or controversy requirement was not met when 28 debtor filed her adversary complaint. Instead, the parties and

-10- 1 the bankruptcy court proceeded under the false assumption that 2 Appellees had recorded their judgment and thus there was a 3 judicial lien against debtor’s Property subject to avoidance 4 under § 522(f). However, in the context of her motion to 5 dismiss, debtor showed that Appellees’ judgment lien never 6 attached to her Property because they failed to record it. See 7 RCW 6.13.090; Mehl v. Roberts (In re Deal), 933 P.2d 1084, 8 1086-87 (Wash. Ct. App. 1997) (judgment creditor who wishes his 9 or her judgment to attach to the value of a homestead in excess 10 of the homestead exemption need only record the judgment under 11 RCW 6.13.090). Because the judgment lien did not attach to 12 debtor’s Property, there was no lien to avoid. Consequently, 13 debtor had no injury in fact. It follows that the adversary 14 proceeding could give her no more than what she already had — a 15 homestead exemption that was not impaired by Appellees’ judicial 16 lien. See Cetacean Cmty. v. Bush, 386 F.3d 1169, 1174 (9th Cir. 17 2004) (“A suit brought by a plaintiff without Article III 18 standing is not a ‘case or controversy,’ and an Article III 19 federal court therefore lacks subject matter jurisdiction over 20 the suit”). 21 Appellees fare no better. Because Appellees had not 22 recorded their judgment in conformance with Washington law, 23 their lien never attached to debtor’s Property and thus they 24 were not secured creditors in debtor’s chapter 11 case. 25 Further, because debtor’s personal liability on the underlying 26 debt had already been discharged in her prior chapter 7 case, 27 they were not unsecured creditors in debtor’s chapter 11 case. 28 As a result, they did not have standing to challenge the

-11- 1 validity of debtor’s homestead exemption6 nor did they meet the 2 conditions under the broader constitutional standing test. See 3 Rule 4003(d) (stating that a “creditor” may object to a motion 4 filed under § 522(f) by challenging the validity of the 5 exemption asserted to be impaired by the lien); Lujan, 504 U.S. 6 at 560-61. 7 In sum, there was no dispute between the parties that could 8 support the case or controversy requirement. Since there was no 9 dispute, the bankruptcy court should have dismissed the 10 adversary proceeding, as it had no power to hear the matter. 11 The bankruptcy court compounded the error by granting judgment 12 in Appellees’ favor “as to the continued attachment of the 13 judgment lien,” even though Appellees never recorded their 14 judgment as required for attachment under Washington law. 15 VI. CONCLUSION 16 Accordingly, we VACATE the judgment of the bankruptcy court 17 and REMAND this matter with instructions that the bankruptcy 18 court dismiss this adversary proceeding. 19 20 21 6 Here, Appellees raised the objection to the claim of 22 exemption as an affirmative defense to the § 522(f) avoidance. 23 Their need for standing is no different than if they had affirmatively objected to the exemption under Rule 4004(b) which 24 states that a “party in interest” may file an objection to the list of property claimed exempt. See Brown v. Sobczak 25 (In re Sobczak), 369 B.R. 512, 517-18 (9th Cir. BAP 2007) (a 26 “party in interest” is a party that has a pecuniary interest in the matter or that has a practical stake in the resolution of the 27 matter). As they were neither secured nor unsecured creditors, Appellees had no pecuniary interest or practical stake in the 28 outcome of a dispute over the validity of debtor’s exemption.

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