In a case of first impression in the Ninth Circuit, the U.S. Bankruptcy Appellate Panel has ruled that a debtor is not entitled to avoid a creditor’s judicial lien under 11 U.S.C. section 522(f)(for impairing the debtor’s homestead exemption) when the debtor didn’t maintain a continuous ownership interest in the property after the judicial lien had fixed. McCoy v. Kuiken, Jr. (In re Kuiken, Jr.), BAP No. SC-12-1218-JuMkPa (B.A.P. 9th Cir. Jan. 4, 2012)
Factual Background:
In 2003, Conrad Kuiken, Jr. purchased certain real property ("Property"). In 2009, one of Kuiken’s creditors, Daniel McCoy ("Creditor"), obtained a judgment against Kuiken in the amount of $16,838, and recorded an Abstract of Judgment. Thereafter, on July 5, 2011, Kuiken transferred title in the Property to Bayview Resources, LLC ("Bayview") "for valuable consideration." Kuiken held a membership interest in this entity at the time of the transfer. Bayview recorded the grant deed from Kuiken on July 15, but re-conveyed title to Kuiken as a gift on September 28, 2011. This grant deed was duly recorded on October 11, thirteen days before Kuiken ("Debtor") filed his chapter 7 petition.
Debtor filed a motion to avoid Creditor’s judicial lien, pursuant to 11 U.S.C. section 522(f). In his motion, Debtor declared that he resided at the Property when his petition was filed, and therefore he qualified for a homestead exemption. Creditor objected, arguing that the nature of his judicial lien changed when the Debtor transferred his ownership interest to Bayview, resulting in a consensual lien. In the alternative, Creditor claimed that under California law his lien received priority over Debtor’s homestead rights and ownership interest at the time Bayview transferred ownership interest back to Debtor.
The bankruptcy court ruled in Debtor’s favor, concluding that Creditor’s lien remained a judicial lien despite the back and forth ownership transfers. Moreover, the court reasoned that since Debtor qualified for a homestead exemption on the petition date, he also had the right to avoid Creditor’s lien under Section 522(f).
Creditor timely appealed the bankruptcy court’s ruling to the U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP"). Interestingly, Debtor did not participate in the appeal.
The BAP’s Holding and Reasoning:
Noting that section 522(f) allows a debtor to avoid a lien if he can establish that (1) the lien was fixed on the debtor’s interest in property, (2) the lien impairs an exemption to which the debtor is entitled, and (3) the lien is a judicial lien, see Culver, LLC v. Kai-Ming Chiu (In re Chiu), 304 F.3d 905, 908 (9th Cir. 2002), the BAP concluded that Debtor failed to establish the first requirement for setting aside a judicial lien.
It was undisputed in this case that Debtor qualified for a homestead exemption. The BAP further dispatched Creditor’s argument that his lien became consensual, and therefore not a judicial lien, when Debtor transferred the Property to Bayview. Thus, the only issue remaining was whether "there was a fixing of a lien" on Debtor’s interest in the Property. Observing that the Ninth Circuit cases relied upon by the lower court failed to address a situation where a debtor’s interest in property at the time a lien attached was extinguished, and subsequently replaced by a different ownership interest before the debtor’s ultimate bankruptcy filing, the BAP concluded that the more relevant legal analysis to these facts was found in Farrey v. Sanderfoot, 500 U.S. 291 (1991) and Stephens v. Walter E. Heller W., Ltd. (In re Stephens), 15 B.R. 485 (Bankr. W.D. N.C. 1981), cited with favor in the Farrey case.
In Farrey, the U.S. Supreme Court stated, "[I]t is settled that a debtor cannot use § 522(f) to avoid a lien on an interest acquired after the lien attached." Farrey, at 299. Thus, to avoid a lien under section 522(f), the debtor must have "possessed an interest to which a lien attached, before it attached." Farrey, at 301.
The BAP noted that the facts in the present case are very similar to those in the Stephens case. There, judgments attached to real property owned by the debtor who subsequently transferred the property to his brother. Four days before the debtor filed for bankruptcy, his brother re-conveyed the property to him. The Stephens court denied a motion to avoid the liens under Section 522(f), holding that the transfer to the brother divested the debtor of all interest in the property. When the property was re-conveyed, it was done subject to the judgment liens. Therefore, the first element of Section 522(f) was not established.
Distinguishing on the facts the cases relied upon by the trial court, the BAP concluded that Debtor herein could not avoid Creditor’s judicial lien, because:
the debtor’s interest in the property when he filed bankruptcy was a different and discontinuous interest from the one he held when [the creditor’s] lien affixed. When the interest once held is entirely extinguished by transfer, voluntary or as a matter of law, a judicial lien which attached when a debtor had that interest cannot be avoided when the debtor acquires a new interest. The interest held when the lien fixed is gone and the debtor reacquires a different interest subject to the judicial lien . . . . (emphasis supplied.)
The BAP acknowledged in a footnote that the Stephens case, and others relied upon in the present decision, based their reasoning at least in part on bad faith or fraudulent conduct by the debtor. The BAP noted that the record in this case did not support such discussion, and therefore its decision did not rely on this theory.
Author’s Comments:
The BAP’s decision seems correct and obvious, until one notes that it reverses the lower court’s opposite view. Contrary to the appellate court’s analysis, the Farrey ruling is not so clear, and Law Offices of Moore & Moore v. Stoneking (In re Stoneking), 225 B.R. 690, 696 (9th Cir. BAP 1998) is not so easily distinguishable. In fact, in Stoneking, the BAP held that Farrey’s holding is limited "to liens created simultaneously with the creation of the ‘new’ property interests." Id., at 695. As such, Stoneking suggests that once a lien fixes to a debtor’s preexisting ownership interest, subsequent changes to that interest do not necessarily affect the debtor’s rights under Section 522(f).
Also interesting is the BAP’s disavowal of any reliance on bad faith or fraudulent conduct by Debtor, unlike other cases relied upon by the BAP in its present decision. Though the record here is limited on this subject, circumstances of Debtor’s transfer of the Property to Bayview and its re-conveyance to Debtor shortly before his bankruptcy filing sound very similar to the circumstances in Stephens, wherein the court stated:
The fruits of the debtor’s frauds have come home to rest, and such rest should go undisturbed by a court of equity. He sought to cheat and got cheated, and must now know that as he set out to cheat and deceive, a tangled web he did weave, thereby canceling his authority to benefit from Section 522(f). Stephens, supra, 15 B.R. at 486.
One wonders whether such facts or lack thereof would influence future bankruptcy courts evaluating this issue.
This analysis published by the California STate Bar Business Law Committee Insolvency Section on 2/8/13