Jones v. Heskett (In Re Jones)

180 B.R. 575, 95 Cal. Daily Op. Serv. 3853, 95 Daily Journal DAR 6314, 1995 Bankr. LEXIS 607, 1995 WL 273969

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: April 21, 1995
• Docket: BAP No. NC-93-2184-MePeG. Bankruptcy No. 4-90-05815 NP-1. Adv. No. 93-4230 AT
• Status: Published

Opinions

AMENDED OPINION

MEYERS, Bankruptcy Judge:

I

The bankruptcy court held that in determining whether a judgment hen attached to a debtor’s property under California law, the equity in the property should be determined as of the date the debtor filed her bankruptcy petition. The debtor appealed, contending that the equity should have been determined ón the date the abstract of judgment was recorded.

We AFFIRM.

II

FACTS

The facts in this matter are undisputed. Virginia Jones (“Debtor”) and her husband Brian Jones (“Jones”) acquired a residence in Berkeley, California in 1976. The residence was encumbered by a purchase money first deed of trust in favor of California Federal Savings & Loan Association, recorded in December 1976. Deeds of trust subsequently were recorded in favor of Crocker National Bank, C. Markus Hardware, Inc. and Haley Bros., Inc. (“Haley”). In November 1986, the Debtor and Jones recorded a declaration of homestead for the residence.

Kelleher Lumber Company, Inc. (“Kelle-her”) filed an action in state court against Jones. After obtaining a $29,882.50 judgment against Jones, in June 1987 Kelleher recorded an abstract of judgment against the residence.

Haley filed an action on the debt secured by its deed of trust. After obtaining judgment against Jones, Haley recorded an abstract of judgment on April 11, 1988.

The Debtor filed a Chapter 7 bankruptcy petition on November 26, 1990. The case subsequently was converted to one under Chapter 13 of the Bankruptcy Code.

On April 19, 1993, the Debtor filed a complaint to determine the validity and extent of the judgment liens in favor of Kelleher and Haley. The complaint alleges that the liens did not attach to the Debtor’s residence. The matter was tried in the bankruptcy court on August 24, 1993.

The court filed a Memorandum of Decision, finding the Kelleher lien valid and the Haley lien invalid. Judgment was entered on October 12, 1993. The Debtor appeals from that portion of the judgment upholding the validity of the Kelleher lien.

hi

STANDARD OF REVIEW

Because the facts in this appeal are undisputed, this appeal involves only legal issues which are subject to de novo review. In re Conco Bldg. Supplies, Inc., 102 B.R. 190, 191 (9th Cir. BAP 1989).

IV

DISCUSSION

The Debtor argues that the Kelleher lien is invalid because it never attached to the Debtor’s residence. The bankruptcy court looked to the case of In re Chabot, 992 F.2d 891 (9th Cir.1993), in finding the Kelleher hen valid. The issue before the Chabot court was whether a hen should be avoided pursuant to 11 U.S.C. § 522(f) as impairing the debtors’ exemption. 992 F.2d at 893. The court reasoned that before deciding whether a hen should be avoided as impairing an exemption, it first must be determined that there is a vahd, attached hen. Id. Consequently, the court first determined whether, under California law, the hen attached to the debtors’ residence. Id.

The court stated that under subsection (c) of Cal.Civ.Proc.Code (“CCCP”) Sec. 704.950, a judicial hen may attach to any equity remaining in the property after subtracting ah prior hens and the declared homestead exemption. 992 F.2d at 894. The Chabot court apphed Section 704.950 to determine whether there was any equity at the time the Chapter 7 petition was filed. 992 F.2d at 893-94. The court found that at that time, after subtracting from the value of the residence (1) the money owed on the promissory notes secured by the deeds of trust and (2) the amount of the homestead exemption, there was enough “surplus equity” for the disputed hen to attach. 992 F.2d at 894.

Following Chabot, the bankruptcy court decided whether there was equity to which the Kelleher and Haley judgment hens could attach on the petition date. The court determined that on the date the bankruptcy petition was filed, the value of the residence was $325,000 and the senior consensual hens to-talled $248,000. After subtracting the total hens and the $45,000 homestead exemption from the value of the residence, the court stated that there was $32,000 in equity to which junior hens could attach ($325,000 - $248,000 - $45,000 = $32,000). Following Chabot, the court held that the Kelleher hen could not be avoided because it attached to equity in the residence above the senior hens and the homestead exemption on the date the bankruptcy petition was filed.² Because the Kelleher judgment hen exceeded $32,000, it exhausted the balance of the surplus equity. As a result, the Haley hen did not attach to any equity and could be avoided.

The Debtor argues that Chabot does not apply because the instant case was a proceeding to determine the extent and vahdity of hens under Fed.R.Bankr.P. 7001, while Chabot concerned a motion to avoid hens under 11 U.S.C. § 522. The Debtor has not explained why this difference is material. The court in Chabot specifically stated that before it decided whether a judgment hen was avoidable, it first would determine its vahdity. Similarly, in the instant case, the Debtor asked the court to determine the vahdity of judgment hens. Chabot is not distinguishable.

The Debtor contends that the court in Chabot misconstrued CCCP Sec. 704.950. This statute provides in relevant part:

(a) Except as provided in subdivisions (b) and (c), a judgment hen 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 hen.

(2) The homestead declaration names the judgment debtor or the spouse of the judgment debtor as a declared homestead owner.

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(c) A judgment hen attaches to a declared homestead in the amount of any surplus over the total of the following:

(1) Ah hens 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. CCCP § 704.950 (West 1987) (emphasis added).

In sum, Section 704.950 provides that a judgment hen will not attach if a declared homestead already has been recorded. An exception to this rule is that a judgment hen attaches to a declared homestead in the amount of any surplus over the total of the homestead .exemption and the hens and encumbrances existing when the judgment is recorded.

Applying the Debtor’s interpretation of CCCP § 704.950 to this case, the Kelleher hen ordinarily would not attach to the Debt- or’s homestead because it was created after the declared homestead was recorded. The hen would not attach under the exception in subsection (c) either, because there was no surplus equity to which it could attach. The value of the residence was $325,000 on the petition date, the homestead exemption was $45,000 and in June 1987, when the Kelleher judgment was recorded, the total amount owed on the trust deeds was $313,800. Thus, if the judgment’s recordation date is the only relevant date in determining the senior consensual hens on the homestead, thereby fixing the amount owed on the senior trust deeds at $313,800, the Kelleher hen would not have attached because there was no surplus equity in the property.

A surface reading of Section 704.950 seems to support the Debtor’s argument. However, the court in Chabot did not construe Section 704.950 in the manner urged by the Debtor. Even if we disagreed with the Ninth Circuit Court of Appeals’ analysis in Chabot we are bound by it. The Chabot court did not explain why it construed Section 704.950 as it did. We find guidance in the reasoning of several bankruptcy court, cases and a journal article, along with principles of statutory interpretation, and conclude that the Chabot decision is on firm ground. We hold that although a lack of surplus equity might prevent a judicial hen from attaching to property on the date the judgment is recorded, the hen will attach to the property in the event surplus equity is created.

Statutes should not be mechanically construed, but must be interpreted in hght of their purposes. San Francisco Foundation v. Superior Court, 37 Cal.3d 285, 297, 208 Cal.Rptr. 31, 690 P.2d 1 (1984); Westinghouse Electric Corp. v. Superior Court, 17 Cal.3d 259, 268, 131 Cal.Rptr. 231, 551 P.2d 847 (1976). The Panel beheves that the language in CCCP Sec. 704.950(c) refers to and assures the priority of senior encumbrances over a later-recorded judgment hen, and the priority of a recorded homestead over hens and encumbrances created after the creation of the homestead. The court in In re Dodge, 138 B.R. 602 (E.Cal.1992), seemed to interpret Section 704.950 in this way. It stated that “[u]nder § 704.950, the judgment hen does not attach until the equity in the property exceeds all hens, encumbrances and the homestead amount.” 138 B.R. at 606 n. 6 (second emphasis added).

A California statute should be construed with reference to the entire statutory system of which it forms a part, in such a way that harmony may be achieved among the parts. See In re Talmadge, 832 F.2d 1120, 1123-24 (9th Cir.1987); People v. Caudillo, 21 Cal.3d 562, 585, 146 Cal.Rptr. 859, 580 P.2d 274 (1978). Accordingly, CCCP Sec. 704.950 should be construed in hght of the California statutes concerning judgment hens.

Cal.Civ.Code See. 2897 assures the priority of liens according to the date the underlying judgments are recorded. It provides: “Other things being equal, different liens upon the same property have priority according to the time of their creation, except in cases of bottomry and respondentia.” Interpreting CCCP Section 704.950 in the manner urged by the Debtor would introduce a conflict with Section 2897, in that a lien could have priority over an earlier created lien upon the same property if an encumbrance senior to both hens is paid off by the time the most junior hen is created. In Comment, Exemptions under the Bankruptcy Code: Using California’s New Homestead Law as a Medium for Analysis, 72 Calif.L.Rev. 922 (1984), the author recognized this type of problem. The article states:

The declared homestead, however, does appear to create an unfortunate anomaly. Suppose that a debtor’s home has a market value of $145,000; the debtor files a homestead declaration and is entitled to a $45,-000 exemption. On March 1, a creditor files a $100,000 judgment hen. On March 2, a second creditor records a $10,000 hen. Since the second hen overencumbers the property, § 704.950 provides that the hen does not attach to the homestead. Suppose that two years later the market value of the home has risen to $155,000. A third creditor then files a $10,000 hen. Since there is an equity at the time the third creditor files the hen, the hen attaches to the property. This creates an absurd result; the second judgment creditor receives no satisfaction. This contradicts the fundamental principle that an earlier lienor has absolute priority over a later lien- or.... A lien, by definition, gives priority to those who are first in time.

72 Calif.L.Rev. at 940, n. 117.³

Accordingly, if the bankruptcy court in this case had determined that the Kelleher lien had not attached, then the Haley lien, which was created after Kelleher’s lien, could have been given priority over the Kelleher hen.⁴

The Dissent points out that a creditor whose hen did not attach at the time the judgment was recorded is not without recourse. The creditor may rerecord the judgment once there is equity in the property. Under CCCP § 697.020(b), when a creditor creates more than one hen on the same property under the same judgment, the creditor’s priority relates back to the date the first hen was created.⁵ This section allows, for example, relation back of an execution hen to the date a prior unsuccessful execution hen was created or to the date a judgment hen on the same debt was created. We do not beheve that in enacting Section 697.020(b), the California legislature envisioned creditors having to constantly rerecord their abstracts of judgment in speculation that there may be equity in the debtor’s property.

The purpose of recording is to give notice of existing claims to prospective purchasers and mortgagees. Taormina Theosophical Community, Inc. v. Silver, 140 Cal.App.3d 964, 971, 190 Cal.Rptr. 38 (1983); Lawyers Title Co. v. Bradbury, 127 Cal.App.3d 41, 46, 179 Cal.Rptr. 363 (1981). Under California law, recording, by itself, grants no interest in the property. 140 Cal.App.3d at 971. By construing the statutes as Kelleher urges, we would be giving much greater significance to the act of recordation than what it was designed for — to provide notice. Moreover, requiring repeated recordation of a judgment in order to ensure priority would unduly increase the cost of pursuing judgments and possibly create confusion in the process of reviewing title to property.

Another reason for using the date of bankruptcy to determine the amount of liens on the Debtor’s property is that the date of filing already is used to measure exemptions and to determine which property may be claimed as exempt. In re Dvoroznak, 38 B.R. 178, 182 (E.N.Y.1984). It would be impractical to demand evidence of all senior liens on the date the abstract of judgment is recorded as well as on the bankruptcy petition date.

Y

CONCLUSION

On first reading of CCCP See. 704.950(c), it appears that the amount of senior encumbrances on property protected by a declaration of homestead is measured as of the date an abstract of judgment is recorded, and for the purposes of determining when the judgment lien attaches, the amount stays constant even if some of the senior hens are paid off. However, in light of In re Chabot and the directive in Cal.Civ.Code See. 2897 to prioritize judgment hens by the dates the judgments are recorded, and in order to avoid the absurd result of having creditors repeatedly rerecord the same abstract of judgment, Section 704.950(c) should be interpreted as concerning only the priority of hens. A decrease in the amount of senior hens encumbering a property should affect the determination of whether junior hens attach to that property. In considering the validity and extent of judgment hens on the Debtor’s property, the bankruptcy court correctly considered the amount of hens on the property as of the bankruptcy filing date.

2 . The Bankruptcy Reform Act of 1994 amended 11 U.S.C. § 522(f)(2) to overrule the holding in Chabot that a judgment lien will be avoided only to the extent it is secured by the debtor's property on the bankruptcy petition date. Under Section 303 of the Bankruptcy Reform Act, the unsecured portion of the lien also will be avoided to the extent the value of the lien exceeds the amount of surplus equity. The revisions to Code Section 522 do not apply to the instant case, since generally the Bankruptcy Reform Act is applicable only in bankruptcy cases filed on or after October 22, 1994. Bankruptcy Reform Act of 1994, Pub.L. No. 103-393, 108 Stat. 4106, Sec. 702.

3 .The Comment assumes that under CCCP Sec. 704.950(c)(1), for the purpose of determining whether a lien attaches, the value of property is measured only at the time the judgment is recorded. We disagree. The phrase in Section 704.950(c)(1), "at the time the abstract of judgment ... is recorded,” modifies only the words “[a]ll liens and encumbrances.” The "amount of any surplus” is not modified by the phrase "at the time the abstract of judgment ... is recorded.” The statute nowhere indicates that the value of the property is calculated only at the time the abstract is recorded.

The Comment also provides that unless the legislature were to amend Section 704.950 to provide that any surplus equity at the time of sale would inure to those lienors who were first in time, "the bankruptcy courts are bound by this law.” Id. Because courts should interpret statutes so as to avoid absurd results, In re Rau, 113 B.R. 619, 622 (9th Cir. BAP 1990), we do not feel bound to read Section 704.950 to reach a result which the author finds “absurd.” Comment, supra, 72 Calif.L.Rev. at 940, n. 117.

4 . In fact, the bankruptcy court determined that because Kelleher's lien had attached and exhausted the surplus equity in the residence, the Haley lien could be avoided. The portion of the order avoiding Haley's lien has not been appealed. Consequently, were the Panel to rule that Kelleher's lien was invalid, the creditors who had properly recorded judgments on the Debtor’s property would not benefit from the $32,000 in surplus equity in the property.

5 . CCCP § 697.020(b) provides: "If a lien is created on property pursuant to this division and a later lien of the same or a different type is created pursuant to this division on the same property under the same judgment while the earlier lien is in effect, the priority of the later lien relates back to the date the earlier lien was created.”