The U.S. Court of Appeals for the Ninth Circuit has held that: (1) a motor vehicle, including a luxury vehicle, may fall within California’s wildcard or grubstake exemption; and (2) if an exempt vehicle is a tool of the debtor’s trade, the debtor can avoid a non-possessory, non-purchase money lien against it under 11 U.S.C. 522(f)(1)(B). Orange County’s Credit Union v. Angie M. Garcia (In re Garcia) ___ F. 3d ___ (9th Cir. 2013). To read the full opinion, click here (Garcia)
http://cdn.ca9.uscourts.gov/datastore/opinions/2013/03/05/11-56076.pdf
Factual Background
In November 2006, real estate agent Angie Garcia ("Debtor") borrowed $22,160 from Orange County’s Credit Union ("OCCU"), using her Mercedes Benz automobile as collateral. OCCU properly perfected its non-possessory, non-purchase money lien on the Mercedes.
When the Debtor later filed for Chapter 7 relief, she listed the car’s value at $5,350, with an outstanding balance of $12,715.50 owed to OCCU. The Debtor claimed that the car was exempt from her bankruptcy estate under California Code of Civil Procedure section 703.140(b)(5), known as California’s "wildcard" exemption. The bankruptcy court ruled that the Debtor could not exempt her Mercedes under the wildcard exemption, because there are other sections in the California exemption statutes that explicitly deal with vehicles, e.g. Section 703.140(b)(2), which has a significantly lower statutory cap intended specifically for vehicles.
The Debtor also sought to avoid OCCU’s lien on the car pursuant to 11 U.S.C. section 522(f)(1)(B), claiming that as a realtor her Mercedes is a "tool of the trade". The bankruptcy court ruled that the Debtor could not use Section 522(f)’s lien avoidance provisions because motor vehicles are explicitly mentioned in other portions of the statute (e.g., Section 522(d)(2)), and because the legislative history did not support avoiding liens on luxury items.
The district court reversed and remanded the case to the bankruptcy court, and OCCU appealed.
The Appellate Court’s Holding and Reasoning
Noting that the issues presented are purely legal, the appellate court affirmed the district court’s ruling. It first held that, as a matter of law, the Debtor is permitted to claim a wildcard exemption in a motor vehicle, under California Code of Civil Procedure section 703.140(b)(5). After it examined that section’s language, which permits a debtor to exempt the allowable amount in "any property," the appellate court reasoned that, "'[a]ny means any, and fancy cars are not excluded." (Emphasis in original).
The appellate court also affirmed the district court’s ruling that a debtor may use 11 U.S.C. section 522(f)(1)(B) to avoid a lien on an exempt motor vehicle as a tool of the debtor’s trade. Without discussing the legislative history of the section or the implications of applying it to a luxury vehicle, the court of appeals relied on In re Taylor, 861 F.2d. 550, 553 (9th Cir. 1988), which held that in opt-out states, like California, lien avoidance on cars as "tools of the trade" is generally allowable if the vehicle in question is "necessary to the debtor’s trade". The Garcia Court remanded the action to the bankruptcy court to decide whether the Debtor’s Mercedes does in fact qualify as a tool of her trade as a realtor.
Author’s Commentary
The Ninth Circuit’s decision takes a literal approach in interpreting the California wildcard exemption statute: "’any property’ means just that – any property… ." Under this interpretation, a debtor in 2013 has free reign to claim a wildcard exemption up to an additional $25,340 in her car (or any property she owns), and is not limited to the exemption section specifically intended for cars.
The Ninth Circuit remains silent, however, on the nebulous issue that remains – to what extent does a luxury item, like a Mercedes automobile, qualify as a "tool of the trade"? Notably, the Debtor’s profession in Garcia was a real estate agent, not a chauffeur, for which she claims her Mercedes was a tool of her trade. It is to be expected that, especially in California, debtors in various professions will subjectively assert that their luxury cars are necessary to their trades. If a bankruptcy court agrees with such an assertion, it will presumably also allow the debtors to avoid certain liens under Section 522(f)(1)(B), up to the wildcard exemption amount claimed. This leaves substantial room for California bankruptcy courts to be creative in their interpretation of what assets are objectively necessary for various professions for purposes of lien avoidance.