IN RE: VIRGINIA H. JONES,
Debtor,
No. 95-15920
VIRGINIA H. JONES,
BAP No.
Appellant,
NC-93-2184-MePeG
v.
OPINION
LEON HESKETT and KELLEHER
LUMBER COMPANY, INC.,
Appellees.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Meyers, Perris, and Greenwald,*
Bankruptcy Judges, Presiding
Argued and Submitted
October 8, 1996--San Francisco, California
Filed February 11, 1997
Before: Betty B. Fletcher and Warren J. Ferguson,
Circuit Judges, and Samuel P. King,** District Judge.
Opinion by Judge Fletcher; Dissent by Judge Ferguson
_________________________________________________________________
* Hon. Arthur M. Greenwald, from the Central District of California,
and Hon. Elizabeth L. Perris, from the District of Oregon, both sitting by
designation.
**The Honorable Samuel P. King, Senior United States District Judge
for the District of Hawaii, sitting by designation.
1343
SUMMARY
The summary, which does not constitute a part of the opinion of the court,
is copyrighted C 1994 by Barclays Law Publishers.
_________________________________________________________________
Bankruptcy/Real Estate
The court of appeals reversed a judgment of the Bank-
ruptcy Appellate Panel (BAP). The court held that under Cali-
fornia law, surplus equity must exist in homesteaded property
at the time an abstract of the judgment is recorded for a judg-
ment lien to attach to the property.
In November 1986, appellant Virginia Jones and her hus-
band Brian filed a homestead declaration for their residence.
This entitled them to a $45,000 exemption. In June 1987,
appellee Kelleher Lumber Company recorded an abstract of
judgment against Brian for $29,882. At that time, the Joneses'
home was valued at $250,000 and the amount owed on deeds
of trust recorded before the homestead was $313,800.
In 1989, Brian quitclaimed his community property interest
in the home to Virginia. In November 1990, Virginia filed for
bankruptcy protection. At that time the home was valued at
$325,000 and the amount of the prior liens was $248,000.
Virginia filed a complaint in bankruptcy court to determine
the validity and extent of Kelleher's judgment lien. The court
declared that Kelleher had a valid lien against the home. The
BAP affirmed.
On appeal, Virginia contended that Kelleher's lien did not
attach because at the time the abstract of judgment was
recorded in June of 1987, there was no surplus equity in the
property.
California Code of Civil Procedure (CCCP) S 704.950(c)
provides that a judgment lien can attach to homesteaded prop-
erty in the amount of any surplus over the total of (1) all liens
and encumbrances on the homestead at the time the abstract
of judgment is recorded, and (2) the homestead exemption.
1344
[1] CCCP S 704.950(c) requires that surplus equity exist on
the date the abstract of judgment is recorded for the judgment
to attach to homesteaded property. [2] In June 1987, when
Kelleher recorded its $29,882 judgment, encumbrances on the
property totaled $313,000, the amount of the declared home-
stead was $45,000, and the home was valued at only
$250,000. At that time, the total of the encumbrances, liens,
and the homestead exemption was $358,000, exceeding the
value of the home by $108,000. No surplus equity existed to
which the Kelleher judgment lien could attach.
[3] California homestead laws were enacted to protect
homesteaders from the loss of their homes. California courts
have consistently construed these statutes liberally to effect
this purpose. [4] Subsection (c) of CCCP S 704.950 carves out
a narrow exception to the general and longstanding California
rule that judgment liens do not attach to a declared home-
stead.
[5] Rather than unduly burdening creditors by requiring
constant rerecording of judgment liens when no excess equity
existed at the time of the prior recordation, subsection (c) pro-
vides lienholders an opportunity where none existed before. A
judgment creditor's lien attaches (1) if surplus equity exists at
the time the creditor records the abstract of judgment, or (2)
if the creditor executes on the judgment, creating a lien that
has a two-year life. The creditor can pursue either or both
routes.
[6] The equity in a homesteaded property is measured at the
time a judgment lien is recorded. If at that time no equity
exists, no judgment lien attaches. In this case there was no
surplus equity on the date the abstract of judgment was
recorded. The judgment lien did not attach to the home.
Judge Ferguson dissented, expressing the view that under
S 704.950(c), a judgment lien attaches to homesteaded prop-
1345
erty whenever there is equity surplus during the ten-year life
of the lien.
Virginia H. Jones appeals a decision of the Bankruptcy
Appellate Panel ("BAP") holding that a recorded abstract of
judgment became a lien on her property subordinate, how-
ever, to prior liens and to a recorded declaration of home-
stead. The BAP concluded that because surplus equity existed
in the property on the date Ms. Jones petitioned for bank-
ruptcy, the lien could attach under California Code of Civil
Procedure ("CCCP") S 704.950. The BAP erred in its con-
struction of the California law. We therefore reverse the deci-
sion of the BAP.
I.
Virginia Jones and her former husband, Brian Jones,
bought a home in Berkeley, California in 1976. It was encum-
bered by a purchase money first deed of trust, recorded in
December 1976. Four more deeds of trust were subsequently
recorded. In November 1986, Mr. and Mrs. Jones recorded a
declaration of homestead for the home pursuant to CCCP
S 704.730 which, at that time, provided the Joneses with a
$45,000 exemption.
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In January 1987, Kelleher Lumber Company, Inc.
("Kelleher") recorded a writ of attachment incident to a state
court action against Brian Jones. In May 1987, Kelleher
obtained a judgment in the amount of $29,882.50 against Mr.
Jones. Kelleher recorded an abstract of judgment in June,
1987. In January and June 1987, when the Kelleher writ of
attachment and abstract of judgment lien respectively were
recorded, the Jones' home was valued at $250,000. During the
same period, the amount owed on the deeds of trust was
$313,800.
The Joneses divorced in early 1989. At that time, Brian
Jones quitclaimed his community property interest in their
home to Virginia Jones. In November 1990, Virginia Jones
filed a Chapter 7 voluntary petition for bankruptcy. 1 As of that
time, the home was valued at $325,000 and the amount of the
prior liens was $248,000.
In April 1993, Virginia Jones filed a complaint with the
Bankruptcy Court to determine the validity and extent of the
judgment lien in favor of Kelleher. She alleged that the lien
did not attach to her home. The Bankruptcy Judge declared
the Kelleher judgment lien a valid lien against the home. The
BAP affirmed. Both the Bankruptcy Court and the BAP con-
cluded that the date Ms. Jones filed for bankruptcy was the
appropriate date for determining whether there was surplus
equity in the property to which a lien could attach.
II.
We are called upon to answer a state law question of first
impression -- how properly to apply California Code of Civil
Procedure Section 704.950(c) which describes the circum-
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1 The petition was later converted to a petition under Chapter 13 of the
Bankruptcy Code.
1347
stances under which a judgment lien can attach to home-
steaded property.2
The California statutory scheme that controls this case is as
follows. Article 2 of Chapter 2 on Enforcement of Money
Judgments, commencing with California Code of Civil Proce-
dure S 697.310, governs the creation of judgment liens on real
property. They are created by recording an abstract of money
judgment with the county recorder in the county where the
real property is located. CCCP S 697.340(a). They continue
for a period of ten years from the date of recordation. CCCP
S 697.310(a)-(b). A recorded lien automatically attaches to
any after-acquired interest of the debtor in real property.
CCCP S 697.340(b). However, this section specifically, by its
terms, does not apply to homesteaded property. CCCP
S 697.340 (The section begins with the phrase:"Except as
provided in Section 704.950"). Accordingly, no judgment lien
attaches to surplus equity in homesteaded property by virtue
of CCCP S 697.340.
The parties agree that Section 704.950 controls the out-
come of this case. It governs whether and when a judgment
lien attaches to a declared homestead. Section 704.950 pro-
vides that a judgment lien cannot attach to a residence with
a properly recorded homestead if the homestead was (1)
recorded prior to the time the abstract of judgment was
recorded, and (2) the declaration names the judgment debtor
or spouse as a declared homestead owner. CCCP
S 704.950(a). However, S 704.950 (c) carves out an exception
to this general rule of non-attachment:
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2 In reaching its ruling, the BAP relied heavily upon our holding in In
re Chabot, 992 F.2d 891 (9th Cir. 1993). However, Chabot concerned
when a judgment lien can be avoided under 11 U.S.C.S 522(f)(2). It is
inapposite to the issue in this case.
Congress expressed its disapproval of Chabot when it overruled its
holding with the Bankruptcy Reform Act of 1994. Pub. L. No. 103-393,
108 Stat. 4106, Sec. 702.
1348
A judgment lien attaches to a declared homestead in
the amount of any surplus over the total of the fol-
lowing:
(1) All liens and encumbrances on the
declared homestead at the time the abstract
of judgment or certified copy of the record-
ed judgment is recorded to create the judg-
ment lien.
(2) The homestead exemption set forth in
Section 704.730.
CCCP S 704.950(c).
[1] "The starting point in statutory interpretation is the lan-
guage of the statute itself." United States v. James, 478 U.S.
597, 604 (1985) (citations omitted). The plain reading of
CCCP S 704.950(c) requires that surplus equity exist on the
date the abstract judgment is recorded for the judgment to
attach to homesteaded property. "The lien is created by
recording an abstract of judgment (Code Civ. Proc.,
S 697.060) and attaches to the value of the property in excess
of the statutory homestead exemption and all liens and
encumbrances in existence when the abstract of judgment is
recorded (Code Civ. Proc. S 704.950, subd. (c))." Stoffel v.
Dutton, 221 Cal. Rptr. 346, 348 (Cal. Ct. App. 1985).
[2] In June 1987, when Kelleher recorded its $29,882.50
judgment, the encumbrances on the property totalled
$313,800. The amount of the declared homestead exemption
was $45,000. The Jones' home was valued at only $250,000.
Thus, at the time the judgment was recorded, the total of the
encumbrances and liens and the homestead exemption was
$358,800, exceeding the value of the home by $108,000.
Clearly, no surplus equity existed at that time to which the
Kelleher judgment lien could attach.
1349
III.
In construing the language of the California statute, the
BAP concluded that the phrase "at the time the abstract of
judgment . . . is recorded" only modifies the phrase "[a]ll liens
and encumbrances" not the phrase "amount of any surplus."
Under this interpretation, a new type of floating judgment lien
would be created. Such a lien would attach to a homesteaded
property whenever surplus equity existed in the property dur-
ing the ten year life of the lien. The BAP erroneously con-
cluded that CCCP S 704.950(c) was simply intended to order
the priority of liens, rather than determine their validity. This
reading of the statute contorts its plain language and is con-
trary to the legislative history.
[3] California homestead laws were originally enacted in
1872 to protect homesteaders from loss of their homes. Since
that time, California courts have consistently liberally con-
strued these statutes to effect this purpose. "The policy under-
lying all homestead legislation, whether providing for the
selection of a homestead by a person during his lifetime or by
the court for his family after his death [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, and to this end a lib-
eral construction of the law and facts will be adopted by the
courts." Strangman v. Duke, 295 P.2d 12, 17 (Cal. 1956)
(internal citations and quotations omitted); See also, Parker v.
Riddell, 108 P.2d 88 (Cal. 1941) (homestead statutes are
benevolent and remedial in character, to protect property from existing debts, and may be liberally construed).
Originally, a judgment lien could not attach at all to real
property subject to a prior homestead declaration. Engleman
v. Gordon, 146 Cal. Rptr. 835, 837 ("It is well established in
California that a judgment lien does not attach to property
1350
subject to a prior homestead declaration."). This was true
even in cases where there was surplus equity over the statu-
tory exemption, regardless of the value of the property. Id.
The only recourse available to a judgment creditor was to exe-
cute upon the judgment and force a sale. Such a levy of exe-
cution would establish a lien on the property to the extent of
any excess over the homestead exemption. Id. at 838
("Accordingly, until the creditors fully comply with section
1245 of the Civil Code by the levy of an execution on home-
steaded property, a judgment is not secured by any kind of
lien thereon but amounts to only a personal liability. The
creditor is afforded no alternative procedure."). 3
[4] This was the situation until 1982 when the California
legislature recodified and amended the homestead statutes.
California Code of Civil Procedure Section 704.950 was
enacted at that time. Stats. 1982, c. 1364, p. 5171, operative
July 1, 1983. Initially, the section as proposed simply recodi-
fied the prior law; however, subsection (c) was added before
enactment allowing a judgment lien to attach provided surplus
equity existed at the time of recordation of the abstract of
judgment. This history is reflected in the Comment of the Cal-
ifornia Law Revision Commission regarding S 704.950. 16
Cal. L. Rev. Comm. Reports 1438 (1982) ("Comment"). The
Comment states that "[a] judgment lien does not attach to
property subject to a prior homestead declaration; likewise,
such a judgment is not a lien on a surplus value therein
over and above the amount of the homestead exemption. . . .
_________________________________________________________________
3 Former California Civil CodeS 1245 authorizing a levy of execution was repealed in 1982 when the California legislature recodified the entire
code section dealing with homesteads. These code sections, formerly Civil
Code SS 1237, 1238, 1240-1269, 1300 & 1301-1304, were recodified as
California Code of Civil Procedure SS 704.710-704.850 (claimed home-
stead exemption) & 704.910-704.990 (declared homesteads). California
Code of Civil Procedure S 704.970 "makes clear that the homestead decla-
ration does not affect the right of a judgment creditor to levy on the
declared homestead pursuant to a writ of execution. " 16 Cal. L. Rev.
Comm. Reports 1440 (1982).
1351
However, as under former law, a judgment creditor may reach
the value of the equity in a declared homestead in excess of
the homestead exemption by levy of execution on the
property" Id. (emphasis added). The Comment goes on to add
that the "[Comment] was not revised to reflect the addition of
subdivision (c) to Section 704.950 prior to the enactment of
the section." Id. It is thus apparent that subsection (c) was an
afterthought, making it possible for judgment liens to attach
to homesteaded property under narrowly defined circum-
stances where they could not do so in the past. This subsec-
tion carves out a narrow exception to the general and long-
standing California rule that judgment liens do not attach to
a declared homestead. See, Stoffel, 221 Cal. Rptr. at 348
("Under the new law it finally became possible to create a
judgment lien on a homesteaded property.").
[5] Appellees argue that if subsection (c) is interpreted
according to its plain meaning judgment creditors would be
required constantly to rerecord judgment liens. They argue
that this procedure would be unduly burdensome and unfair
to creditors. However, given the history of the statute, the
opposite is true. Rather than unduly burdening creditors, by
requiring them to rerecord when no excess equity existed at
the time of the prior recordation, subsection (c) in fact pro-
vides lienholders an opportunity where none existed before.
Under the current scheme, a judgment creditor's lien attaches:
1) if surplus equity exists at the time of recording the abstract
of judgment or, 2) if the creditor executes on the judgment,
creating a lien that has a two-year life. The creditor can pur-
sue either or both routes.
IV.
[6] If we are to decide unanswered questions of California
homestead law, which we are forced to do in this case, we
must interpret the law as would the California courts -- liber-
ally in favor of the homesteader and consistent with the plain
language and the statutory scheme. We are compelled to hold
1352
that the equity in a homesteaded property is measured at the
time a judgment lien is recorded. If, at that time, no equity
exists then no judgment lien attaches. In this case there was
no surplus equity on the date the abstract of judgment was
recorded. As the judgment lien did not attach to Virginia
Jones' home, Kelleher has no judgment lien against it.
Virginia Jones and her former husband, Brian Jones,
bought a home in California in 1976. The home was encum-
bered by several deeds of trust. In November 1986, the
Joneses recorded a declaration of homestead for the residence.
This declaration entitled them to a $45,000 homestead exemp-
tion under CCCP S 704.730.
Before January 1987, Kelleher Lumber Company, Inc.
("Kelleher") filed an action in state court against Brian Jones
for a community obligation. Kelleher obtained a $29,882.50
judgement against Brian Jones and recorded a judgment lien
in that amount against the residence.
The Joneses divorced in 1989 and Brian Jones quitclaimed
his community property interest in the residence to Virginia
Jones. In January and June of 1987, the value of the residence
was $250,000. In April 1988, the residence had appreciated to
$275,000. In November 1990, its value was $325,000, senior
consensual liens and the homestead exemption totaled
$293,000 leaving an equity surplus of $32,000.
In November 1990, Ms. Jones filed a Chapter 7 voluntary
petition for bankruptcy. The petition was later converted to a
petition under Chapter 13 of the Bankruptcy Code. Ms. Jones
filed a complaint with the Bankruptcy Court to determine the
1353
validity and extent of judgment liens recorded against the res-
idence. The Bankruptcy Judge declared the Kelleher judg-
ment lien valid. The Bankruptcy Appellate Panel ("BAP")
affirmed. Both the bankruptcy court and BAP concluded the
date Ms. Jones filed for bankruptcy was an appropriate date
for determining whether there was equity surplus in the prop-
erty for a lien to attach.
I.
The primary purpose of the declared homestead exemption
is to grant debtors some relief from the forced sale of their
homes. In California, prior to 1982, a judgment lien could not
attach to any of the real property subject to a prior homestead
declaration. Engleman v. Gordon, 82 Cal. App. 3d 174, 179
(1978). However, in 1982, the California legislature recodi-
fied and amended the homestead statutes. Among these addi-
tions was S 704.950.
Under S 704.950, attachment by a judgment creditor to a
residence with a properly recorded homestead is subject to
certain limitations. A judgment cannot attach if a declared
homestead was (1) recorded prior to the time the abstract
judgment was recorded to create the judgment lien, and (2)
the declaration names the judgment debtor or spouse as a
declared homestead owner. CCCP S 704.950 (a). However,
S 704.950 (c) provides an exception:
(c) a judgment lien attaches to a declared home-
stead in the amount of any surplus over the total of
the following
(1) All liens and encumbrances on the
declared homestead at the time the abstract
of judgment or certified copy of the re-
corded judgment is recorded to create the
judgment lien. (Emphasis added).
1354
(2) The homestead exemption set forth in
section 704.730.
The homestead exemption in this case was $45,000. It is now
higher.
The interpretation of S 704.950 (c) must come from the lan-
guage of the statute. See United States v. James, 478 U.S.
597, 604 (1985) ("The starting point in statutory interpretation
is the language of the statute itself.") (citations omitted). The
phrase "at the time the abstract of judgment . . . is recorded"
modifies the phrase in the same section "[a]ll liens and
encumbrances." It does not modify the phrase "the amount of
any surplus" which is contained in a different section. There-
fore, a judicial lien attaches to a residence with a declaration
of homestead once there is equity surplus in that residence
during the existence of the lien, which in California is ten
years pursuant to CCCP S 683.020.
S 704.950 (c) preserves the debtor's homestead exemption,
thereby enabling her to sell her home by limiting the total
value of liens that a buyer would have to cover upon pur-
chase. In the case at hand, Ms. Jones's homestead exemption
of $45,000 is preserved even when the Kelleher judgment lien
attaches. While Ms. Jones's homestead exemption is pro-
tected under S 704.950 (c), the holder of the judgment lien is
entitled to recover from the equity surplus which existed at
the time she filed for bankruptcy.
Calculating equity surplus at the time the bankruptcy peti-
tion is filed also preserves the priority of senior encumbrances.1
The rule announced by the majority cripples the California
doctrine of priority of liens. Prior recorded liens have priority
_________________________________________________________________
1 California Civil Code S 2897 assures the priority of liens according to
the date the underlying judgments are recorded. It provides:
Other things being equal, different liens upon the same property
have priority according to the time of their creation . . . .
1355
over those subsequently filed. However, under the majority
decision in this case, if equity surplus was to be determined
at the time the lien was filed, and no surplus existed at that
time, then when a surplus did exist and a subsequent lien was
recorded after that time, the subsequent lien would benefit
from the surplus while the prior lien would not.
II.
The majority rule permits a property owner in California to
sell his residence for a profit, occasioned by rising real estate
values free and clear of a valid judgment lien against the
property, if at the time of the filing of the judgment no surplus
equity existed. The majority have erased the California statute
which grants full force and credit to a judgment lien for a full
ten years from the date it is recorded. In addition, the majority
have turned around the California statute which grants priority
to liens in the order of their recording.
Finally, the majority uses the term "homesteaded property"
at the present time as it was prior to the enactment of
S 704.950(c). The homestead exemption used to exclude the
entire interest in the property from judgment liens. Today the
California legislature has decreed in plain language that the
declaration of homestead only excludes a specific monetary
value (in this case $45,000) from attachment by the judgment
lien.
The majority claims that it decides this case based upon
public policy, but federal courts cannot create state public pol-
icy. The California legislature changed the law and the major-
ity simply refuse to recognize the change. In Lezine v.
Security Pacific Financial Services, 925 P.2d 1002 (Cal.
1996), the California Supreme Court recently set forth the
public policy, in an action involving a judgment lien against
property of a non-debtor spouse, that although the result
reached appeared inequitable, it "nevertheless is dictated by
existing legislation protecting the rights of creditors." Id. at
1356
1014. That is exactly what was done by the passage of
S 704.950(c). The majority should not brush it aside as a mere
"afterthought."
I therefore dissent, thankful that the majority opinion is not
binding upon the state courts of California. Matter of McLinn,
739 F.2d 1395, 1401 (9th Cir. 1984).