William E Hanson and Sharon D Hanson

OCR transcription for search; preserved printed pages are authoritative

emer eta ee

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Chse 8:05-bk-16710-TA Doc 71 Filed 08/09/06 Entered 08/LOPE SS 2SaF Sse
. . Main Document Page 1 of IQ caf

AUG - 9 2006

CLERK, U.S, BANKRUPTCY COUAT
CENTRAL DISTRICT OF CALIFORNIA
BY Léy Baputy Clerk

ENTERED
AUG | 0 2006

CLERK US. GANKRUPTCY COURT
CENTRAL THSERICT OF CALIFORNIA
By Te

—

UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
In re Case No. SA 05-16710 TA

Chapter 13
WILLIAM E. HANSON and
SHARON D. HANSON,
MEMORANDUM OF DECISION ON
MOTION FOR ORDER DIRECTING
TRUSTEE TO PAY OVER TO DAVID
DOBBS THE MONEY DUE HIM

Debtors.

Date: July 26, 2006
Time: 40:00 a.m.
Courtroom: 5B

This is the motion of judgment creditor David Dobbs directing the Chapter 13
Trustee to pay over to him the amount of his judicially determined lien from remaining
proceeds after close of escrow in the sale of the property commonly known as 66 Coral
Lake, Irvine (“the property’). This sale was approved upon motion of the Debtors under
11 U.S.C. § 363(f) with liens attaching to proceeds.

Earlier, the Court on June 20, 2006 had heard Debtors’ motion under 11 U.S.C.

Section 522(f) to avoid the Dobbs lien as impairing the Debtors’ homestead. The Court

a

C

16

11

12

13

14

15

16

1?

18

19

20

21

22

23

24

25

26

27

28

ase 8:05-bk-16710-TA Doc 71 Filed 08/09/06 Entered 08/10/06 13:23:25 Desc

‘ Main Document Page 2 of WQ”

determined that the Dobbs lien would be avoided to the extent that it exceeded
$252,008.56, as reflected in the court’s order entered July 7, 2006. This determination
was made as follows: 1. The senior morigage was found to have had a balance of
$397,718 as of the petition date; 2. The first judgment lien was found to have had a
balance of $12,566.07 as of the petition date; 3. The property was found to have had a
fair market value of $815,000 as of the petition date; and 4. The Debtors claimed a
$150,000 exemption, which was not contested. As guided by the statute and established
law, the Court added the amounts of the senior, unavoidable liens (including a $2,707.37
tax lien) plus the $150,000 homestead, and the sum of these numbers ($562,991.44)
was then subtracted from the determined fair market value as of the petition date,
$815,000, The resulting number was $252,008. 56, which is the amount of the Dobbs
lien not avoided because it did not impair the homestead under this formula (“remaining
Dobbs lien’).

There are not enough proceeds left after senior liens and various and sundry costs
of escrow to pay both the full exemption and the full amount of the remaining Dobbs lien.
This should not surprise anyone. Upon review of the closing statement, Exhibit “2” to the
Debtors’ opposition papers, it develops that the amount of the first mortgage payoff to
Countrywide was actually $429,307.71, an increase of $31,589 from the amount
determined as of date of petition. Why this lien is so much higher is not clarified, but if it
is, as the Court believes, because the mortgage has not been regularly paid then
certainly Debtors cannot expect someone else to have paid for this. Similarly, there is a
$48,000 broker's commission, and over $6,400 in other sundry costs deducted from

proceeds, which were never calculated when the amount of the remaining Dobbs lien

2

a

fe

190

11

12

13

14

15

16

17

18

i9

20

21

22

23

24

25

26

a2?

28

HSe 8:05-bk-16710-TA Doc 71 Filed 08/09/06 Entered 08/10/06 13:23:25 Desc

~ MainDocument Page 3 of Ww

was determined in the section 522(f) motion. The motion at bar highlights a basic issue.
Who pays for costs of sale and post petition changes in the amounts of senior liens, the
homestead or the unavoidable portion of the judgment lien after a section 522(f) order?
Since the determination of senior amounts and the unavoidable portion of a target lien
are all determined under section 522(f) as of the petition date, See, 11 U.S.C. §
522(a)(2); In re Goswami, 304 B.R. 386, 391-92 (9" Cir. BAP 2003), it is inevitable that
the actual amounts paid in a later sale will differ, but the question is, who bears the risk of
these changes?

The Court concludes that it is the exemption that must absorb these costs. First,
the definition of what is meant by a lien “impairing” an exemption found at 11 U.S.C.
522(f)(2)(A) addresses other liens and the amount of the debtor’s exemption, but notably
absent is any reference to costs of sale or post determination changes in the amount of
senior liens. In other words, at a fixed point in time liens are avoided to the extent they
impair exemptions, not to the extent they impair exemptions and possible future costs of
sale. Second, there is ample case law which forbids the Court from considering costs of
sale when determining “fair market value” in the context of a section 522(f) motion. See,
in re Nellis, 12 B.R. 770, 773 (Bankr. Conn. 1981); in re Clendennen, 67 B.R. 909
(Bankr. W.D. Pa. 1986); /n re Anderson, 68 B.R. 313,314 (Bankr. W.D. Pa. 1986); In re
Richardson, 280 B.R. 717 (Bankr. $.D. Ala. 2001.) It must logically follow, then, that the
resulting number for the unavoidable portion of an involuntary lien must be somewhat
larger than would be yielded upon immediate sale if costs of sale are also deducted from
the lien. To nevertheless deduct costs of sale then from the lien is illogical. Stated

differently, leaving the exemption untouched despite the incurrence of costs of sale or

3

ee

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

fe

hse 8:05-bk-16710-TA Doc 71 Filed 08/09/06 Entered 08/10/06 13:23:25 Desc

‘ MainDocument Page 4 of Mv

other deductions would only make sense /f these items could be considered in the initial
analysis. Third, logic dictates that since it is the exemption (or to the Debtors beyond
their exemption) that would enjoy any post determination appreciation of the property,
See, Anderson, 68 B.R. at 314, itis also the exemption which should suffer any post
determination depreciation or changes in the amounts of senior liens. It also follows that
costs of sale should be absorbed by the exemption since it is the debtor who decides
when, or if, any sale of the property is to occur, and at what price, and/or whether a
broker is to be retained and on what terms. To attempt a determination under section
522(f) that would fix the exemption but leave all these other potential deductions and
variables such as hypothetical costs of sale or changes in the amount of senior liens in
flux, would be illogical and unwieldy. Lastly, to the extent the diminishment of the
proceeds remaining is attributable to the Debtors' failure to service their mortgage, they
have no one to blame but themselves for this result. Certainly they cannot reasonably
expect that their secured creditor should, effectively, pay their costs of occupancy by
paying the full amount of an exemption from the diminished proceeds left after the
enlarged senior is paid in full.

Debtors’ citation to Bernstein v. Pavich (In re Pavich), 191 B.R. 838 (Bankr. E.D.
Ca. 1996), is not persuasive. Pavich did not involve a judicially determined amount of
lien after section 522(f) motion. Rather, Pavich involved a priority dispute between
claimants over proceeds remaining after the court had ordered a sale free of liens with
liens attaching to remaining proceeds. The Pavich court never fully explains the general
proposition stated in its opinion that exemptions are paid before involuntary liens and

therefore judicial liens cannot “impair” a homestead. /d. at 846. Of course, involuntary

4

CHse 8:05-bk-16710-TA Doc 71 Filed 08/09/06 Entered 08/10/06 13:23:25 Desc
. ‘we Main Document Page 5 of Nu

11 liens would impair homestead exemptions in certain circumstances as is discussed in

*\|_ many cases. See, In re Patterson, 139 BR. 229, 231 (9" Cir. BAP 1992); In re Kruger,
77 B.R. 785, 788 (Bankr. C.D. Cal. 1987). To suggest otherwise would be to render
section 522(f) unnecessary in most cases involving residential real estate. The reliance
of the Pavich court on in re Chabot, 992 F. 2d 891 (9" Cir. 1993) exposes the dubious

7\|__ reliability of Pavich as precedent. The holding of Chabot, i.e., that judgment liens do not
81 sven attach to the extent there is no equity above declared homestead exemptions is

factually distinguishable. Here we have an “automatic” homestead, not a declared

10

homestead, and clearly here some of the Dobbs !ien must have attached since the senior
1t

12 liens plus the full homestead did not fully eclipse the property value. Moreover, the

13 | Chabot holding that post-petition appreciation would inure to the benefit of avoided liens,

14|| has been challenged as having been overruled by changes in the Code. See, /n re

15! Nielson, 197 B.R. 665, n. 3 (9" Cir BAP 1996). The other cases cited in Pavich, such as

16
in re Galvan, 110 B.R. 446 (9th Cir. BAP 1990), overruled by In re Chabot, 992 F.2d 891

17

12 (9th Cir. 1993), overruled by 1994 Bankruptcy Reform Act 303 and /n re Patterson, 139

i9|| B.R. at 231 do not cast light on our issue because they do not discuss the pivotal issues

20|| of costs of sale or accruing charges on senior liens. However, the methodologies

21]/ described in those cases for a section 522(f) determination are in all ways consistent with

22
this Court's approach herein. Moreover, the reference by the Pavich court to judicial liens

23

; is largely dicta since the Pavich court went on to hold that certain tax liens would be paid
4

>5 || in any event eclipsing the exemption. Pavich, 191 B.R. at 847. In sum, there is nothing

2611 about Pavich which can overcome the clear weight of authority and common sense as

2711 described hereinabove.
28

C

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
a7

28

ise 8:05-bk-16710-TA Doc 71 Filed 08/09/06 Entered 08/10/06 13:23:25 Desc

‘eer MainDocument Page 6 of Nu

At the hearing there was argument to the effect that under CAL. Civ, PROC. §
701.850, full homestead exemptions plus all existing encumbrances are paid by the
levying officer. Therefore, Debtors argue, the Court should order payment in full of their
homestead exemption before the remaining Dobbs lien because, for purposes of
homestead exemptions, bankruptcies are treated as involuntary sales. See, in re Pike,
243 B.R. 66, 70 (9" Cir. BAP 1999).

First, CAL. Civ. PRoc. § 701.850 cannot be read as Debtors have suggested. At
most, it could be argued that under California law, homestead properties cannot be sold
by the levying officer at a// unless at a price sufficient to clear aif liens and encumbrances
plus the homestead. See, CAL. Civ. PRoc. §§ 704.760, 704.780 and 704.800.

Debtors are mixing figurative “apples and oranges.” While the petition is indeed
treated as the equivalent of a forced sale for limited purposes of determining that
California's automatic homestead exemption applies, it does not follow that California's
protection against involuntary sale should also apply insofar as homestead exemptions
thereunder must emerge unscathed. No case law suggests that the operation of the
bankruptcy must exactly mimic the operation of a hypothetical sheriff's sale under
California law. This pushes the analogy to an involuntary sale too far. Nor is the analogy
a logical one, as there is no assurance that the costs of sale through an escrow, such as
in the case at bar, would be anywhere near the same as the reimbursement of the costs
of a levying officer as referenced at CAL. Civ. PRoc. § 704.850(a)(3). Further, the
analogy to a sheriffs sale becomes even more remote since the California Code of Civil
Procedure scheme suggests that accruing amounts under the senior lien must not be

allowed to become a major factor since sales can only be ordered in the first place where

6

C

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

2?

28

ise 8:05-bk-16710-TA Doc 71 Filed 08/09/06 Entered 08/10/06 13:23:25 Desc

‘w MainDocument Page 7 of 1

all liens and encumbrances plus the full exemption do not exceed the expected price.
See, CAL. Civ. Proc. §§ 704.750 - 704.800.

Moreover, section 522(f) is designed to deal with realities of the petition having
actually been filed. It therefore no longer makes any sense to further analogize the
petition to a sheriff's sale under a state statute that would not have allowed the sale at all
under the facts of this case where liens and encumbrances, plus the full exemption,
exceeded the value of the property. Instead, section 522(f) is designed to do what no
state statute can do, that is, to bifurcate liens that impair homesteads and retain only that
part that does not impair the exemption. Nor does it follow that a sale conducted in
bankruptcy, or after the bankruptcy has been pending many months, should be treated
as a second forced sale, particularly where, as here, the Debtors have already had one
determination of their exemption. \nstead, it is more logical under section 522(f), and
consistent with case law, that the petition is the “forced sale” since all values and lien
amounts are examined as of that date. That is as far as the analogy can go. The
amount of an involuntary lien impairing the homestead is adjusted as of that date and
only the portion of the target lien after the senior liens plus the homestead remains as of
the petition date. It is then totally illogical to again readjust the lien just because Debtors
decide to sell their residence months or even years later, particularly where, as here, all
of the senior amounts have changed, the price has changed, and the additional factor of
costs must be dealt with.

In effect, once the section 522(f) determination was made this case became no
different than if the amount of the lien were $252,008.56 and voluntary in nature (and

thus not further avoidable as impairing the homestead). Once the section 522(f)

7

Clise 8:05-bk-16710-TA Doc71_ Filed 08/09/06 Entered 08/10/06 13:23:25 Desc
‘ee Main Document Page 8 of 1Qy

1] determination is made, the target lien should not equitably be subjected to repeated
examination, particularly where, as here, it is the Debtors’ decision not to service the
senior mortgage yet remain in residence and where the sale is conducted only for the
benefit of the Debtors. In such a case of a voluntary lien there could be no reasonable
¢ || argument that the lienor should be made to absorb the costs of sale or any of the other
7 || charges involved here.

8 Grant motion instructing Trustee to remit full amount of Dobbs lien, $252,008.56.

ro} DATED: Aug - 927006 Baw C Z. }

“ HONORABLE THEODOR C. ALBERT
12 United States Bankruptcy Judge

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

10

11

12

13

14

15

16

17

18

i9

20

21

22

23

24

25

26

27

28

se 8:05-bk-16710-TA Doc 71 Filed 08/09/06 Entered 08/10/06 13:23:25 Desc

DUE HIM: was entered on

we Main Document Page 9 of ty

NOTICE OF ENTRY OF JUDGMENT OR ORDER

AND CERTIFICATE OF MAILING

TO ALL PARTIES IN INTEREST LISTED BELOW:
You are hereby notified that a judgment or order entitled MEMORANDUM RE MOTION

FOR ORDER DIRECTING TRUSTEE TO PAY OVER TO DAVID DOBBS THE MONEY

and entities listed below on

| hereby certify that | mailed a true copy of the:order or judgment to the persons

Clark D. Nicholas

Attorney at Law

1800 Gathe Drive

San Luis Obispo, CA 93405

Bruce David White, Esq
White & Roseman

{201 Dove Street, Suite 480
Newport Beach, CA 92660

Amrane Cohen

Chapter 13 Trustee

770 The City Drive South, Suite 3300
Orange, CA 92868

Office of the United States Trustee
411 W. Fourth Street, Suite 9041
Santa Ana, CA 927014

DATED

——

Arnold H. Wuhmman, Attorney
SERENITY FINANCIAL SERVICES
28871 Hedgerow

Mission Viejo, CA 92692

William E. Hanson
Sharon D. Hanson
66 Coral Lake

Irvine, CA 92614 —

By

Clerk

10

11

12

13

14

15

16

17

18

13

20

21

22

23

24

25

26

27

28

ise 8:05-bk-16710-TA Doc 71 Filed 08/09/06 Entered 08/10/06 13:23:25 Desc
‘we Main Document Page 10 of 40
NOTICE OF ENTRY OF JUDGMENT OR ORDER

AND CERTIFICATE OF MAILING ©

TO ALL PARTIES IN INTEREST LISTED BELOW:
You are hereby notified that a judgment or order entitled MEMORANDUM RE MOTION

FOR ORDER DIRECTING TRUSTEE TO PAY OVER TO DAVID DOBBS THE MONEY

DUE HIM: was entered on AUE—ty 2
| hereby certify that | mailed a true copy of the:order or judgment to the persons

and entities listed below on _AUG 4 02996 .

Clark D. Nicholas - ae
Attorney at Law Arnold H. Wuhrman, Attorney

4800 Gathe Drive SERENITY FINANCIAL SERVICES
San Luis Obispo, CA 93405 28871 Hedgerow

Mission Viejo, CA 92692
Bruce David White, Esq
White & Roseman
1201 Dove Street, Suite 480
Newport Beach, CA 92660

Amrane Cohen William E. Hanson
Chapter 13 Trustee Sharon D. Hanson
770 The City Drive South, Suite 3300 66 Coral Lake
Orange, CA 92868 Irvine, CA 92614

Office of the United States Trustee
411 W. Fourth Street, Suite 9041
Santa Ana, CA 92701

DATED AuG 1 0 2006 | A
4

Clerk