Sulphur Mountain Land & Livestock v. Redmond
Filed 1/2/14 Sulphur Mountain Land & Livestock v. Redmond CA2/8
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prohibits courts and parties from citing or relying on opinions not certified
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
SULPHUR MOUNTAIN LAND & LIVESTOCK CO. LLC,
Plaintiff and Respondent,
v.
JOHN A. REDMOND et al.,
Defendants and Appellants.
B238767
(
Super. Ct. No. BS134625)
APPEAL from an order of the
Law Offices of Raymond H. Aver and
Raymond H. Aver for Defendants and Appellants.
Westlake Law Group and David Blake Chatfield for
Plaintiff and Respondent.
__________________
Plaintiff Sulphur Mountain Land
& Livestock Co. LLC sued defendants John and Maureen Redmond in
Court, and obtained a sizable judgment against them. When plaintiff attempted to enforce its
judgment, defendants sought bankruptcy protection. During the bankruptcy, defendants claimed the
California homestead exemption to protect a portion of the
equity in their Los Angeles home from
the bankruptcy estate, and therefore, to make fewer funds available to pay plaintiff’s
judgment. Defendants’ debts were not
discharged by the bankruptcy court, and ultimately, plaintiff sought to execute
its judgment on defendants’ home by filing this action for the sale of their
home, contending defendants could not again avail themselves of the homestead
exemption. The
homeowners exemption because it was used by the judgment debtor†in
bankruptcy. The trial court also
concluded that plaintiff’s lien attached in 2002, giving it priority over all
but the mortgage lien.
Defendants
appeal the order approving the sale of their home, contending the sale order
deprived them of their homestead exemption.
We agree, finding no merit to plaintiff’s contention that the homestead
exemption evaporates after it has been claimed in bankruptcy. Plaintiff’s novel theory that the homestead
exemption may be claimed only once has no support in the homestead law. The California
homestead exemption protects defendants’ equity up to the amount of the
exemption even if the home is sold. The
homestead exemption is not like a retail discount coupon that can only be used
once. We also find that plaintiff’s lien was effective as of October
2002. We reverse the sale order and
remand the case for further proceedings consistent with this opinion.
BACKGROUND
On
October 4, 2002, plaintiff sued defendants and their daughter in Ventura
County Superior Court for breach of a
commercial lease. The court issued a
writ of attachment against defendants’ property on October 11, 2002, which was recorded against their Los Angeles County home on October 15, 2002. A notice
of lien was recorded with the California Secretary of State on October
25, 2002. In 2003, defendants obtained an order
quashing the writ of attachment, but plaintiff posted an undertaking to keep
the attachment in place pending appeal or entry of judgment. Plaintiff’s appeal of the attachment order was
dismissed by this court in 2012 (case No. B168314).
Meanwhile,
the Ventura action proceeded, and in June 2005, defendants
accepted plaintiff’s Code of Civil Procedure section 998 offer to
compromise. The parties settled and
judgment was entered for $25,000, leaving open the issue of costs and
fees. Plaintiff then moved for recovery
of attorney fees, and an amended judgment for $456,853.14 was entered in
February 2006 (the Ventura judgment). In March
2006, the Ventura court issued an abstract of judgment and writ
of attachment. Notice of the judgment
lien was filed with the Secretary of State. Defendants appealed the Ventura judgment, but their appeal was dismissed in
2011 for failure to file an opening brief (case No. B189989).
In
May 2006, plaintiff executed on defendants’ bank account. Defendants filed a bankruptcy petition later
that month. In March 2008, on the
bankruptcy trustee’s motion, the bankruptcy court ordered a sale of the bankruptcy
estate’s interest in defendants’ home (the equity), excluding their claimed
$150,000 homeowners exemption.
Defendants obtained a loan from Lori Haynes to buy $210,600 of the
equity in their home. The Haynes loan was
secured by a deed of trust
recorded on the property on August 6, 2008. The
loan proceeds were used to pay defendants’ creditors, including plaintiff. Plaintiff received $181,478.15 from the loan
proceeds in October 2009.
Plaintiff
filed an adversary complaint objecting to defendants’ discharge in the
bankruptcy proceeding, for failure to comply with their discovery obligations
during the bankruptcy. In April 2010, the
bankruptcy court found the Ventura judgment against defendants was a secured
debt and entered judgment for plaintiff on the adversary complaint, denying
discharge of the judgment debt under Bankruptcy Code, title 11
727(a)(3), and 727(a)(4)(A). Defendants
appealed, but the judgment was affirmed by the district court and the Ninth
Circuit Court of Appeals.
In
September 2011, the Ventura judgment was amended to $543,804.35, to add postjudgment
costs and interest, and to account for credits received during the
bankruptcy. A new abstract of judgment
was recorded on October 3, 2011.
Therefore, as of October 2011, there
were several liens on defendants’ home.
These included Citi Mortgage’s December 2001 purchase money first deed
of trust, plaintiff’s judgment lien (perfected by abstracts of judgment
recorded in October 2002 and October 2011), Lori Haynes’s August 2008 deed of
trust, and a March 2010 deed of trust recorded by defendants’ attorney to
secure payment of $50,000 in attorney fees.
On October 31, 2011, plaintiff sought an order to sell defendants’
home under Code of Civil Procedure sections 704.750 and 704.760. The application and accompanying memorandum
of points and authorities posited that defendants used their homestead
exemption in the bankruptcy proceeding, and “are not entitled to utilize the
exemption twice.†Plaintiff also
contended its judgment lien was junior only to Citi Mortgage’s lien, and was
senior to the remaining liens on the property.
Therefore, based on a recent appraisal, plaintiff estimated there was
$397,735.93 in equity available to satisfy its Ventura judgment.
Defendants opposed the application,
contending plaintiff’s 2002 lien was extinguished by the bankruptcy court order
that the sale of equity from the bankruptcy estate to defendants “shall be free
and clear of any and all liens and other interests of [plaintiff], and such
liens and interests, if any, shall attach to the sale proceeds with the same
validity and priority as they may have had against the Property.†Defendants argued that plaintiff’s lien did
not attach until 2011, after their bankruptcy discharge was denied and a new
abstract of judgment was recorded, and was therefore junior in priority to all
other liens on the property. Defendants
also contended they were entitled to a homestead exemption.
The trial court concluded that
“there is no homeowners exemption because it was used by the judgment debtor
and their decision was to use their homeowners exemption in the bankruptcy
proceedings for the entire amount they were allowed at the time. So there is no exemption to be employed
here.†The trial court also concluded
that plaintiff’s lien was effective as of October 15, 2002, and accordingly, was only junior to Citi
Mortgage’s lien. On January 18,
2012, the trial court
issued an order for the sale of defendants’ home.
Defendants filed a timely notice of
appeal.
DISCUSSION
bankruptcy proceedings did not extinguish defendants’ homestead exemption nor
eliminate plaintiff’s 2002 lien.
Homestead Exemption
Resolution of
this appeal turns on the interpretation of the homestead exemption statute,
Code of Civil Procedure section 704.710 et seq.
Statutory interpretation is a question of law, subject to de novo review
on appeal. (People ex rel. Lockyer v.
Shamrock Foods Co. (2000) 24 Cal.4th 415, 432.) Similarly, when the facts are not disputed,
the effect or legal significance of those facts is a question of law. (Ghirardo v. Antonioli (1994) 8
Cal.4th 791, 799.)
“Our fundamental task in construing a statute is to ascertain
the intent of the lawmakers so as to effectuate the purpose of the
statute. [Citation.] We begin by examining the statutory language,
giving the words their usual and ordinary meaning. [Citation.]
If there is no ambiguity, then we presume the lawmakers meant what they
said, and the plain meaning of the language governs.†(Day v.
City of Fontana (2001) 25 Cal.4th 268, 272.) We must construe the language of a statute “ ‘in
the context of the statute as a whole and the overall statutory scheme, and we
give “significance to every word, phrase, sentence, and part of an act in
pursuance of the legislative purpose.†’ [Citation.]†(Smith
v. Superior Court (2006) 39 Cal.4th 77, 83.)
The homestead right is recognized by the California Constitution,
which provides that “[t]he Legislature shall protect, by law, from forced sale
a certain portion of the homestead and other property of all
heads of families.†(Cal.
Const., art. XX, § 1.5.) “The object of all homestead legislation
is to provide a place for the family and its surviving members, where they may
reside and enjoy the comforts of a home, freed from any anxiety that it may be
taken from them against their will, either by reason of their own necessity or
improvidence, or from the importunity of their creditors.†(In re
Estate of Fath (1901) 132 Cal. 609, 613.)
“[T]he homestead law is not designed to
protect creditors, but protects the home against creditors . . . thereby preserving
the home for the family.†(
v. Khazindar (2003) 112
Cal.App.4th 582, 588.) Because homestead statutes are remedial,
they are “given a liberal construction in favor of the exemptions
created.†(Thorsby v. Babcock (1950) 36 Cal.2d 202, 204.)
The limitations and requirements for the homestead exemption are
set forth by statute. (Cal.
Const., art. XX, § 1.5; see also Noble v.
Hook (1864) 24 Cal. 638,
639-640.) A homestead is “the principal dwelling . . . in which the judgment
debtor or the judgment debtor’s spouse resided on the date the judgment
creditor’s lien attached to the dwelling, and . . . in which the judgment
debtor or the judgment debtor’s spouse resided continuously thereafter until
the date of the court determination that the dwelling is a homestead.†(Code Civ. Proc., § 704.710, subd. (c).) “A
homestead exemption does not preclude sale of the home but entitles the
homesteader to receive the value of the exemption if the property is sold to
satisfy a judgment lien.†(
Fargo Financial Leasing, Inc. v. D & M Cabinets (2009) 177 Cal.App.4th 59, 68; see also
Code Civ. Proc., § 704.730.)
A homeowner or
spouse of an owner may declare and record a homestead exemption. (Code Civ. Proc., § 704.920 [“A
dwelling in which an owner or spouse of an owner resides may be selected as a
declared homestead . . . by recording a homestead declaration in the office of
the county recorder of the county where the dwelling is located. From and after the time of recording, the
dwelling is a declared homestead for the purposes of this article.â€].) California law also provides an
automatic homestead exemption. The Legislature created an automatic homestead exemption to protect debtors
who do not file homestead declarations.
(§ 704.720.) The automatic
exemption does not have to be memorialized in a recorded declaration. Rather, “[t]he automatic homestead exemption
is available when a party has continuously resided in a dwelling from the time
that a creditors’ lien attaches until a court’s determination in the forced
sale process that the exemption does not apply.†(In re
Mulch (Bankr. N.D.Cal. 1995) 182 B.R. 569, 572, citing Webb v. Trippet (1991)
235 Cal.App.3d 647, 651; see also § 704.720.)
A declared
homestead provides a debtor with greater protection than the automatic
homestead exemption. For example, a
declared homestead is protected from a voluntary
sale, whereas the automatic homestead only entitles the debtor to protection
from a forced sale. (Code
Civ. Proc., §§ 704.960 [“If a declared homestead is voluntarily sold, the
proceeds of sale are exemptâ€]; 704.720; see also Legis. Com. com., 17 West’s Ann. Code Civ.
Proc. (2009 ed.) foll. § 704.720, p. 141 [“As under
former law, proceeds of a voluntary sale of [an automatic] homestead are not
exempt under the proceeds exemptionâ€].) The proceeds from a voluntary sale of a
declared homestead may be reinvested within six months, thus allowing the
debtor to invest in another residence, which will also be afforded homestead
protection to the same extent as the initial homestead. (§ 704.960.) The proceeds of a forced sale of an automatic
homestead are afforded the same protection, and may be reinvested in a new
homestead. (§ 704.710, subd. (c).)
A judgment lien
does not attach to a declared homestead; rather, the lien only attaches to the
equity in the property that exceeds the declared homestead exemption and any
preexisting liens on the property. (Code
Civ. Proc., § 704.950, subds. (a), (c); Smith v. James A. Merrill, Inc.
(1998) 64 Cal.App.4th 94, 99.) When no
declaration of homestead has been recorded, the lien attaches to the property,
irrespective of the amount of equity in the home. However, the judgment creditor is required to
obtain a court order for sale of the homestead under section 704.800, and the
court must determine the amount of the homestead exemption and the fair market
value of the property. The homestead may
not be sold unless a bid is received that exceeds the amount of the homestead
exemption plus “any additional amount necessary to satisfy all liens and
encumbrances on the property.†(§ 704.800,
subd. (a); see also Rourke v. Troy (1993) 17 Cal.App.4th 880,
885-886 [all liens senior to the executing creditor’s lien, and the homestead
exemption, must be satisfied or the home may not be sold].)
Here, the trial
court concluded that defendants had no homestead exemption because defendants
had claimed the homestead exemption in their earlier bankruptcy proceeding. Nothing in the homestead law provides that
the exemption expires after it was once claimed in bankruptcy. Instead, the Legislature clearly intended the
exemption to apply so long as a dwelling qualifies as a homestead. For example, as mentioned above, homestead
protection generally survives the sale of a homestead. In both declared and automatic homesteads,
the proceeds of the sale of the homestead are also exempt, in the amount of the
homestead exemption, and may be reinvested within six months in a new property,
which will be afforded homestead protection to the same extent as the original
property. (Code Civ. Proc., §§ 704.960, 704.710, subd. (c)
[“Where exempt proceeds from the sale . . . of a homestead are used
toward the acquisition of a dwelling . . . ‘homestead’ also
means the dwelling so acquired if it is the principal dwelling in which the
judgment debtor . . . resided continuously from the date of acquisition until
the date of the court determination that the dwelling is a homestead, whether
or not an abstract or certified copy of a judgment was recorded to create a
judgment lien before the dwelling was acquiredâ€]; see also SBAM Partners, LLC v. Wang (2008) 164 Cal.App.4th 903, 907-908.)
It is undisputed that
defendants have resided in their home since 1997, and that defendants recorded a
homestead declaration in July 2003. Thus,
before the trial court may order the sale of defendants’ homestead, the court
must follow the dictates of Code of Civil Procedure sections 704.780 and
704.800 and all other statutes which control the forced sale of a homestead. For example, the court may not order a sale
of the homestead if no bid is received that exceeds the amount of the homestead
exemption plus the amount required to satisfy all liens and encumbrances. There are limitations on the court’s ability
to order a sale if no bid is received that is 90 percent or more of the fair
market value of the dwelling. Since the
trial court did not protect defendants’ homestead exemption and otherwise did
not comply with the restrictions on the forced sale of a homestead, the order
for sale is reversed.
Priority of Plaintiff’s Lien
The trial court
also determined that plaintiff’s lien was effective as of October 2002, and that
the lien was not eliminated by the bankruptcy court. Defendants contend the property was sold to
them “free and clear†of plaintiff’s 2002 lien, and therefore, the 2002 lien
was eliminated. (Defendants do not deny
that a lien was created after defendants were denied discharge in bankruptcy,
when an amended abstract of judgment was recorded by plaintiff in October 2011.)
The question of the effect of the
bankruptcy court’s order, and the priority of plaintiff’s lien, is reviewed de
novo. (See
Tobacco Co. (2004) 116 Cal.App.4th 1253, 1267;
Irr. Dist. (1930) 106 Cal.App.
313, 319.)
The
trustee’s “Motion to Sell Estate’s Equity Interest in Real Property†was made
pursuant to title 11 United States Code section 363(b)(1) and Federal Rules of
Bankruptcy Procedure, rule 6004. The
bankruptcy order approving the sale recited that: “The Trustee is authorized to sell the
Estate’s interest in the Property to the Debtors for $210,600.00, cash; [¶] . . . [¶] . . . A lender is authorized to record a deed
of trust against the Property for the purpose of securing a loan to the Debtors
for the Debtors’ purchase of the Estate’s equity interest; and [¶] . .
. The sale shall be free and clear of
any and all liens and other interests of [plaintiff], and such liens and
interests, if any, shall attach to the sale proceeds with the same validity and
priority as they may have had against the Property, pending further order of
this Court.â€
We find the bankruptcy court ordered
only a sale of equity in the dwelling, and the equity was sold free of liens
and encumbrances so that the entire amount generated from the sale could be turned
over to the trustee to distribute among the creditors. The bankruptcy court’s later judgment denying
discharge permitted plaintiff to continue to pursue defendants’ nonexempt
assets in full satisfaction of plaintiff’s judgment.
Bankruptcy Code section 363(b)(1) allows a
trustee, “after notice and a hearing, [to] sell . . . property of the
estate.â€
(Ibid.) Moreover, section 363(f) permits the
estate’s property to be sold free and clear of any liens if one of five
conditions is satisfied. (
99 Cal.App.4th 505, 511; see also § 363(f).)
Property may be sold free and clear of an entity’s interests only if applicable
nonbankruptcy law permits sale of the property free and clear of such interests;
the entity consents; the property is to be sold for greater than the
aggregate value of all liens on the property; the interest is in bona fide
dispute; or the entity could be compelled to accept a money satisfaction of
such interest. (§ 363(f).) A trustee seeking to sell property free and
clear of any liens under section 363(f) must do so by noticed motion to the
lienholder. (Fed. Rules Bankr.Proc.,
rules 6004, 9014 (11 U.S.C.).)
The trustee’s
motion did not seek to sell the estate’s interest in the property “free and clear
of any liens†under Bankruptcy Code section 363 (f). Because section 363(f) and the bankruptcy
rules require notice and an opportunity to be heard on the issue of the
elimination of any liens, and section 363(f) requires satisfaction of a
condition precedent for the sale to be free and clear of liens (that one of the
five conditions of section 363(f) is satisfied), plainly the sale order was
never contemplated to eliminate plaintiff’s lien on the property.
The
order for the sale to be “free and
clear of any and all liens and other interests of [plaintiff]†was meant to
effectuate the sale of equity in the property, in other words, the value of the
property in excess of all liens, encumbrances and exemptions. As is evident from the trustee’s accounting,
numerous creditor’s claims were made in the bankruptcy, and these were to be
paid, in order of priority, from the proceeds of the sale of the estate’s
portion of the equity.
The
order of the bankruptcy court denying defendants discharge allowed plaintiff to
pursue collection of its debt, because denial of discharge preserves the
debtor’s liability to creditors, and does not stop the administration of the
case. (See 11 U.S.C. § 727.) Because defendants’ debts were not
discharged, and a judgment lien relates back to (and merges with) the filing of
a writ of attachment, plaintiff’s lien became effective in October 2002, when
its writ of attachment was recorded. (See
Code Civ. Proc., § 697.020; Diamond
Heights Village Assn., Inc. v. Financial Freedom Senior Funding Corp.
(2011) 196 Cal.App.4th 290, 302-303; see also Brun v. Evans (1925) 197 Cal. 439, 442-443.)
The order is reversed
and the matter is remanded for further proceedings consistent with this opinion. Appellants are to recover their costs on
appeal.
GRIMES,
J.
WE CONCUR:
BIGELOW, P. J.
RUBIN, J.
name="_ftn1" title="">[1] The dismissal is not
part of the record on appeal.
Nevertheless, we take judicial notice, on our own motion, of the order
of dismissal, and of the other appeals by these parties.
(Evid. Code, §§ 452, subd. (d), 459.) The first appeal was
filed on June
25, 2003, but was stayed by defendants’
bankruptcy on September
15, 2003.
The stay was lifted on August 24, 2012. On September 19, 2012, the appeal was dismissed as abandoned, having been mooted by entry
of judgment.
name="_ftn2" title="">[2] That appeal was
originally filed in March 2006, but was also stayed because of defendants’
bankruptcy. It was dismissed in April
2011, after the bankruptcy stay was lifted and defendants failed to file an
opening brief.
