Exemption Amount in Lien Avoidance Action

Posted by NCBRC - November 30, 2022

For purposes of lien avoidance under section 522(f), the debtor was able to claim a homestead exemption in the amount of the California exemption in effect at the time of his bankruptcy petition, despite California law that fixed the exemption amount at the time of lien creation. Barclay v. Boskoski (In re Boskoski), No. 22-55098 (9th Cir. Nov. 14, 2022).

When the debtor filed his bankruptcy petition, he claimed a homestead exemption of $600,000, based on California’s current exemption amount. He then moved, under section 522(f), to avoid a judgment lien on the property in its entirety as impairing his exemption. The lien creditor opposed the motion to avoid, arguing that the proper exemption was $100,000 based on California’s exemption amount at the time the lien was created. Calculating the impairment using the smaller figure would allow the debtor to exempt only $43,897.20 of the judgment creditor’s $477,926.82 lien.

The bankruptcy court held that under the Code, a debtor is entitled to the exemption amount as it stands at the time of the bankruptcy petition. Acknowledging a “close call on an important question,” though, the court certified the appeal to the Ninth Circuit which granted leave to appeal.

The court began its analysis with 522(f) which provides that a debtor may avoid a judgment lien to the extent that the lien “impairs an exemption to which the debtor would have been entitled.” A lien impairs an exemption when “the sum of (i) the lien; (ii) all other liens on the property; and (iii) the amount of the exemption that the debtor could claim if there were no liens on the property is greater than the value that the debtor’s interest in the property would have in the absence of any liens.”

The creditor argued that the homestead exemption the debtor was entitled to was governed by state exemption law which provides: “the amount of an exemption shall be made by application of the exemption statutes in effect . . . at the time the judgment creditor’s lien on the property was created.” Because the lien was created in 2014, the creditor maintained that the exemption amount was $100,000.

The court turned to Owen v. Owen, 500 U.S. 305, 308 (1991), which addressed the meaning of “would have been entitled.” The Owen Court found that the phrase referred to a hypothetical situation where a court is to apply the exemption to which the debtor would have been entitled in the absence of the lien.

Applying the reasoning in Owen, the court here found that, in the absence of the creditor’s lien, the debtor would have been entitled to take the state exemption in the amount of $600,000.

The court rejected the trustee’s argument that, under Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193 (9th Cir. 2012), a bankruptcy court must apply the state exemption law with all its restrictions. That case held that “it is the entire state law applicable on the filing date that is determinative of whether an exemption applies.”

The court disagreed with the trustee’s interpretation of that case. It noted that Jacobson did not involve lien avoidance, and Owen established that “the Bankruptcy Code’s policy of permitting state-defined exemptions is not ‘absolute.’” Owen specifically contemplated the situation where the Code allows a state to define an exemption while at the same time disfavoring infringement of certain liens.

Under Owen, therefore, the court concluded that the bankruptcy court correctly calculated the impairment and affirmed the order avoiding the creditor’s lien in its entirety.

Boskoski 9th Cir Nov 2022

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