In Re Ronald Gary Watts in Re Yee Kome Kathy Watts, Debtors, Phillip J. Wolfson v. Ronald Gary Watts Yee Kome Kathy Watts

298 F.3d 1077, 2002 Cal. Daily Op. Serv. 7076, 2002 Daily Journal DAR 8862, 49 Collier Bankr. Cas. 2d 190, 2002 U.S. App. LEXIS 15657, 2002 WL 1792488

• Court: Court of Appeals for the Ninth Circuit
• Decided: August 6, 2002
• Docket: 00-55207
• Status: Published

Opinions

OPINION

PAEZ, Circuit Judge.

Phillip J. Wolfson, a judgment creditor, appeals the Bankruptcy Appellate Panel’s (“BAP”) decision affirming the cancellation of his judgment lien on debtors Ronald Gary Watts’s and Yee Kome Kathy Watts’s (collectively, “Debtors”) declared homestead. At the time Wolfson recorded his abstract of judgment, the value of the preexisting lien on Debtors’ homestead, together with the homestead exemption, exceeded the fair market value of Debtors’ real property. The bankruptcy court canceled Wolfson’s judgment lien in an avoids anee proceeding pursuant to 11 U.S.C. § 522(f) under the rationale of Jones v. Heskett (In re Jones), 106 F.3d 923 (9th Cir.1997).

In Jones, we held that, under California Code of CM Procedure (“CCP”) § 704.950(c), a judgment creditor’s lien does not attach to a declared homestead unless surplus equity exists in the homestead at the time the creditor records an abstract of judgment. After Jones, two California appellate courts rejected our interpretation of section 704.950(c) and con-eluded that a judgment creditor is entitled to surplus equity that accrues after the abstract of judgment is recorded. In light of the intervening California authority, which the California Supreme Court would likely follow, we overrule Jones. Accordingly, we reverse and remand.

I.Factual and Procedural History

In 1994, Debtors recorded a declaration of homestead, which protected $75,000 of equity in their principal residence from execution by creditors. CCP §§ 704.710(c) (defining homestead), 704.730(a). In 1995, Wolfson recorded an abstract of judgment against Debtors’ real property for $38,752.47. At the time Wolfson recorded the abstract of judgment, the sum of the debt on the first deed of trust and the homestead exemption exceeded the fair market value of Debtors’ home. Thus, there was no surplus equity at that time to satisfy the judgment.

When Debtors filed a Chapter 7 bankruptcy petition in 1998, however, there was surplus equity. At that time, the fair market value of the house was $295,000 and the debt on the first deed of trust was $188,000. Thus, there was $32,000 in surplus equity unencumbered by the first deed of trust and the homestead exemption ($295,000 — $188,000—$75,000 = $32,000).

In 1999, Debtors moved to avoid Wolf-son’s judgment lien in the bankruptcy court pursuant to 11 U.S.C. § 522(f).¹ Following Jones’s interpretation of section 704.950(c), the bankruptcy court found that Wolfson’s judgment lien had not attached and could never attach to Debtors’ residence because there was no surplus equity in the residence when Wolfson recorded the abstract of judgment. Accordingly, the bankruptcy court canceled Wolfson’s lien under § 522®. The bankruptcy court, however, expressed its disapproval of the result, explaining that it agreed with two subsequent California appellate court opinions, Smith v. Merrill, 64 Cal.App.4th 94, 75 Cal.Rptr.2d 108 (Ct.App.1998), and Teaman v. Wilkinson, 59 Cal.App.4th 1259, 69 Cal.Rptr.2d 705 (Ct.App.1997), both of which disagreed with Jones’s interpretation of section 704.950(c).

On appeal, the BAP agreed with the bankruptcy court that it could not “cast off the bonds imposed by Jones.” The BAP reasoned that. the California Supreme Court, which had not had the opportunity to interpret section 704.950(c), could conceivably disagree with the California appellate court rulings in, Smith and Tea-man. Accordingly, the BAP affirmed the bankruptcy court’s ruling.

This appeal followed.

II.Standard of Review

We review de. novo the BAP’s legal conclusions. Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th Cir.1997) (en banc). We also review de novo decisions regarding stare decisis. Baker v. Delta Air Lines, Inc., 6 F.3d 632, 637 (9th Cir.1993).

III.Discussion

A. The California Homestead Exemption in Federal Bankruptcy Law

Federal bankruptcy laws provide debtors with various exemptions, which exclude certain property from the bankruptcy estate. Kendall v. Pladsort (In re Pladson), 35 F.3d 462, 464 (9th Cir.1994); 11 U.S.C. § 522(d). Pursuant to 11 U.S.C. § 522(b)(1), California opted out of the federal exemptions and enacted its own exemptions. CCP § 703.130; Little v. Reaves (In re Reaves), 285 F.3d 1152, 1155 (9th Cir.2002).

A California debtor in bankruptcy must elect between two sets of exemptions under California law, one which applies to debtors generally and the other which applies to debtors in bankruptcy. CCP § 703.140(a)~ Farrar v. McKown (In re McKown), 203 F.3d 1188, 1189 (9th Cir. 2000). The homestead exemption available to judgment debtors, CCP § 704.730, is more generous than the exemption that applies to debtors in bankruptcy, id. § 703.140(b)(1). Here, prior to filing for bankruptcy, Debtors recorded a declaration of homestead available to judgment debtors, thereby entitling Debtors to a $75,000 homestead exemption, id. § 704.730(a), which remained effective after they filed their bankruptcy petition.²

After filing for bankruptcy, Debtors sought to avoid Wolfson's judgment lien pursuant to 11 U.S.C. § 522(f) on the ground that it impaired their homestead exemption. To determine whether or to what extent Wolfson's judgment lien could be avoided under § 522(f) because it impaired Debtors' state-law homestead exemption, the bankruptcy court had to (1) apply California law to determine whether Wolfson's lien attached to Debtors' residence, and (2) if the lien attached, determine under federal bankruptcy law whether or to what extent the lien impaired Debtors' homestead exemption. See Wiget v. Nielsen (In re Nielsen), 197 B.R. 665,

667-68 (B.A.P. 9th Cir.1996); see also Bank of Am. Nat'l Trust & Say. Ass'n v. Hanger (In re Hanger), 217 B.R. 592, 594-95 (B.A.P. 9th Cir.1997) (holding that the bankruptcy court must determine the extent to which a lien impairs. the exemption and that only that amount must be avoided). We address only the first inquiry here.

B. Attachment of a Judicial Lien on a Declared Homestead Under California Law

Prior to 1982, if a homeowner recorded a declaration of homestead in California, the California homestead exemption protected the entire value of the residence. Jones, 106 F.3d at 926. Thus, no judgment lien could attach, and a creditor's only option to enforce his judgment was to seek a judicial sale of the property. Id. In 1982, however, the California Legislature enacted the Enforcement of Judgments Law, CCP §~ 680.010-724.260, which amended the declared homestead provisions. Pursuant to section 704.950, judgment liens could now attach to declared homesteads if there was surplus equity in excess of the total amount of liens and encumbrances and the homestead exemption. Section 704.950 provides in pertinent part: (a) Except as provided in subdivision[] (c), a judgment lien on real property

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 debtor as a declared homestead owner.

(c) A 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 hen.

(2) The homestead exemption set forth in Section 704.730.³

In Jones, without the benefit of any California cases to guide our interpretation of section 704.950(c), we addressed whether a judgment lien could attach to a declared homestead if there was no surplus equity at the time the abstract of judgment was recorded. We held that a judgment creditor’s lien attaches only if (1) surplus equity exists at the time the creditor records the abstract of judgment, or (2) the creditor executes on the judgment, thereby creating a lien that has a two-year life. 106 F.3d at 927. Thus, under Jones, even if surplus equity accrues after a creditor records an abstract of judgment, the judgment creditor, confronted with a bankruptcy petition, is not entitled to any surplus equity.

We reasoned in Jones that the California homestead exemption laws were designed to prevent individuals from losing their homes, and thus the homestead laws should be liberally construed in favor of homesteaders. Id. at 925, 927. We reviewed the history of the 1982 legislative amendments to the homestead statutes as reflected in the Comment of the California Law Revision Commission, 16 Cal. L. Revision Comm’n Reports 1438 (1982) (“Comment”). The Comment explained that judgment liens do not attach to property that is subject to a prior homestead declaration, but that, similar to the law prior to the 1982 amendments, a judgment creditor could reach any equity value in excess of the homestead exemption by levy of execution on the property. Jones, 106 F.3d at 926. We specifically noted that the Comment “was not revised to reflect the addition of subdivision (c) to;Section 704.950[.]” Id. Thus, we concluded that subsection (c) was an “afterthought”-and that it “carve[d] out a narrow exception to the general and long-standing California rule that judgment liens do not attach to a declared homestead.” Id. Judge Ferguson dissented for several of the reasons later adopted by the California appellate courts, discussed below.

Under Jones, Wolfson’s judgment lien, created by recording the abstract of judgment, did not and could never attach to Debtors’ residence because there was no surplus equity when he recorded the abstract of judgment. The only way that Wolfson could reach any surplus equity would be to rerecord the abstract of judgment when surplus equity accrued.

After Jones, the California Court of Appeal in Smith, 75 Cal.Rptr.2d at 111-13, and Teaman, 69 Cal.Rptr.2d at 707-09, disagreed with our interpretation of section 704.950(c), holding that a judgment creditor is entitled to surplus equity that accrues in a declared homestead after an abstract of judgment is recorded.⁴ We find Smith and Teaman persuasive. ■

Both California courts rejected Jones `s interpretation of section 704.950(c), noting that it leads to an anomalous result. It requires judgment creditors to "continually rerecord" their abstracts of judgment to ensure that their lien attaches if surplus equity has accrued, and it "cripple[s ] the doctrine of priority of liens." Teaman, 69 Cal.Rptr.2d at 708 (citing Jones, 106 F.3d at 928 (Ferguson, J. dissenting)). This continual rerecording of an abstract of judgment conflicts with CCP § 2897, which grants priority to liens based on the date that they are recorded. The interpretation of section 704.950(c) by the Smith and Teaman courts correctly avoids "giving much greater significance to the act of recordation than what it was designed for-to provide notice." Jones v. Heskett (In re Jones), 180 B.R. 575, 580 (B.A.P. 9th Cir.1995), overrated by Jones, 106 F.3d 923.

The California courts' interpretation of section 704.950(c) also follows from the statutory text. The clause "at the time the abstract of judgment is recorded" modifies only "[aIll liens and encumbrances," but not "the amount of any surplus." Thus, the surplus equity may be calculated at a later date, such as at the time the judgment debtor files a bankruptcy petition. Jones, 106 F.3d at 928 (Ferguson, J. dissenting).

Two other statutory provisions, CCP §~ 697.340 and 704.800(a), support the Smith and Teaman interpretation of section 704.950(c). See Teaman, 69 Cal. Rptr.2d at 708-09. Section 697.340 provides that, "[eI]xcept as provided in Section 704.950," a judgment lien attaches to both present and future interests in real property. Thus, a creditor can reach property that the debtor did not ov~n when the abstract of judgment was recorded, such as future increases in the equity value of real property. Id. (citing Kinney v. Vat-lentyne, 15 Cal.3d 475, 124 Cal.Rptr. 897, 541 P.2d 537, 539 (Cal.1975)). Accordingly, despite the "exception for section 704.950, none of the provisions of section 704.950 can be reasonably read to prevent section 697.340 from applying to an increase in equity in homestead property." Id.

Team an also relied on section 704.800(a), which provides that homesteaded property may not be sold if there is no surplus equity. If a creditor attempts to execute on his judgment lien and the homestead is not sold because of lack of surplus equity, the judgment creditor must wait one year before attempting to subject the property to another judicial sale. CCP § 704.800(a). Section 704.800(a) demonstrates the legislature's "intent that [if] a judgment creditor['sl ... lien d[oes] not initially attach because there [us no surplus equity when [his] abstract of judgment [i]s recorded," the creditor has later opportunities to execute on the lien if equity develops. T~aman, 69 Cal.Rptr.2d at 709.

Had the bankruptcy court here followed the rationale of Smith and Teaman instead of Jones, it would have concluded that Wolfson's lien had attached by the time Debtors filed their Chapter 7 bankruptcy petition, and thus the lien could not have been avoided on this basis. We adopt that approach here.

We are bound to follow Smith and Team an absent convincing evidence that the California Supreme Court would reject the interpretation of section 704.950(c) by these two courts. See Owen ex rel. Owen v. United States, 713 F.2d 1461, 1464-65 (9th Cir.1983). In reexamining our interpretation of section 704.950(c) in light of Smith and Teaman, we conclude that, if confronted with the issue, the California Supreme Court would follow the rationale of Smith and Teaman and not the approach that we adopted in Jones. As we explained in Owen:

These recent decisions by the California courts of appeal that have appeared subsequent to our Commercial Union decision require us to reconsider the proper interpretation of § 877. Our interpretation in Commercial Union was only binding in the absence of any subsequent indication from the California courts that our interpretation was incorrect. The recent decisions from the courts of appeal cast a new light on the question. In the absence of a pronouncement by the highest court of a state, the federal courts must follow the decision of the intermediate appellate courts of the state unless there is convincing evidence that the highest court of the state would, decide differently.

Id. (internal quotation marks and citations omitted) (emphasis added) (holding that convincing evidence existed that the California Supreme Court would not follow the state appellate courts’ decisions); Stephan v. Dowdle, 733 F.2d 642, 642 .(9th Cir.1984) (concluding that an earlier panel decision was “no longer binding ... and must be overruled” because the Arizona Court of Appeals had subsequently interpreted the relevant Arizona statute to the contrary); see also TwoRivers v. Lewis, 174 F.3d 987, 996 (9th Cir.1999) (applying federal law to decide the issue in the case but explaining that, had the panel applied state law, it would be bound by a state appellate court opinion that conflicted with an earlier panel opinion absent convincing evidence that the state supreme court would disagree with the appellate court); FDIC v. McSweeney, 976 F.2d 532, 535-36 (9th Cir.1992) (explaining that, in the absence of an intervening California Supreme Court opinion concerning the relevant issue or an appellate court opinion “at odds with” the prior Ninth Circuit opinion, the three-judge panel was “bound by our prior decisions interpreting state as well as federal law”). Accordingly, as in Stephan, 733 F.2d at 642, we overrule Jones and hold, consistent with the intervening California case law, that a judgment creditor is entitled to surplus equity that accrues in a declared homestead after an abstract of judgment is recorded.⁵

REVERSED AND REMANDED.

1 . 11 U.S.C. § 522(f)(1) states in pertinent part:

A debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled ..., if such lien is—

(A) a judicial lien[.]

Section 522(f)(2)(A) provides a formula .for calculating to what extent, if any, a lien impairs a debtor's ability to exempt property from the bankruptcy estate.

2 . There is also a "separate and distinct" automatic, non-declared homestead exemption, which is not relevant here. Katz v. Pike (In ye Pike,), 243 B.R. 66, 69 70 (B.A.P. 9th Cir. 1999); CCP § 704.720; see also Wynns v. Wilson (In re Wilson), 90 F'.3d 347, 350 (9th Cir. 1996).

3 . The homestead exemption does not apply to a judgment lien for child, family, or spousal support. CCP § 704.950(b).

4 . Although the California appellate courts disagreed as to when a judgment lien attaches— whether it attaches at the time the abstract of judgment is recorded, Smith, 75 Cal.Rptr.2d at 112, or when surplus equity accrues, Tea-man, 69 Cal.Rptr.2d at 709 — this issue need not be resolved here because it is undisputed that surplus equity had accrued by the time Debtors filed their bankruptcy petition. Thus, under either approach, the judgment lien would have attached by that date.

5 . Because we conclude that Wolfson's lien attached, upon remand the bankruptcy court must determine to what extent, if any, the lien impairs the exemption and must be avoided under 11 U.S.C. § 522(f). See Hanger, 217 B.R. at 594-95.