All Points Capital Corp. v. Meyer (In Re Meyer)All Points Capital Corp. v. Meyer (In Re Meyer)
Lead Opinion
OPINION
The bankruptcy court avoided two judgment liens under
We agree there is nonexempt equity to which judgment liens may remain attached. Construing
Appellant’s theory for exploiting default to squeeze out the senior hen offends the rule that multiple liens impairing exemptions be avoided in order of reverse priority and offends the rule that default judgments should not be entered when they are not warranted on the merits.
As the record is confused by procedural issues and lack of findings, we VACATE and REMAND.
FACTS
The chapter 7 debtor claimed a $50,000 homestead exemption in a co-owned residence he valued at $515,000, encumbered by consensual debt of $232,005, in which he scheduled his 50-percent joint tenancy interest as worth $257,500.
The debtor’s interest was subject to two judgment liens (as one of four co-debtors). In first position was $275,000 owed to American Capital Resources, Inc. (“American Capital”) on a $217,972 judgment; next was $900,000 owed to appellant All Points Capital Corporation (“All Points”) on an $805,631 judgment.
The debtor filed one motion to avoid both judicial liens under
The obstacle to this result is the language of
The debtor argued that
All Points contended that the senior $275,000 American Capital lien should be first avoided by default and excluded from the analysis. Under its theory, excluding the senior lien and not adjusting еquity to reflect the value of the debtor’s one-half interest until after the $232,005 consensual lien is netted out, there would be equity of $282,995 (= $515,000. - 232,005) for all owners, the debtor’s half of which would be $141,497.50. Deducting a $50,000 homestead exemption would yield $91,497.50 that could survive
The court granted the lien avoidance motion in its entirety, without making findings of fact and conclusions of law articulating its reasoning about the statutory formula.
The court’s conclusion would follow if it read the statute mechanically by focusing on the phrase “value that the debtor’s interest would have in the absence of any liens” in
The avoidance of the senior American Capital lien has an added mystery. No default was entered. Nor did the court indicate that it would enter judgment by default. As there were no findings, we рresume that the court was concluding that there was no nonexempt equity for any judicial lien.
All Points appealed.
Federal subject-matter jurisdiction over this core proceeding under
ISSUES
1. Whether a partially-avoidable senior judicial lien may be avoided when the lien-holder does not appear in contest of a lien avoidance motion under
2. Whether
STANDARD OF REVIEW
Application of basic rules of procedure and construction of the Bankruptcy Code present questions of law that we review de novo. Ruvacalba v. Munoz (In re Munoz),
DISCUSSION
Before explaining why the debtor has nonexempt equity in his co-owned residence, we focus on why the senior judicial lien could not be avoided in full on a theory of default.
I
Two procedural flaws infect appellant’s theory that the senior judicial lien should remain avoided under the 1994 amendments to
A
Otherwise valid judicial hens that are being avoided under
This reverse priority rule is a corollary to the requirement in the
This reverse priority approach is important because it introduces an element of order to the provision of
It is literally impossible for both elements of the operating rule for implementing the
By avoiding both liens, the bankruptcy court implicitly concluded that there was no equity to support any judicial lien. For the reasons we shall explain later, that was error.
B
All Points’ contention that American Capital must be eliminated on a default theory is flawed.
The record does not reflect that default was entered against American Capital, notwithstanding that it did not respond to the motion. Without an entry of default, it is not permissible to proceed to the second step and enter default judgment.
All Points nevertheless would have us assume that a default that does not appear in the record was entered and then equate the phantom default with a default judgment in order to squeeze out American Capital. Although the absence of an entered default ought to end the analysis, we will also (in light of оur decision to vacate and remand) explain why the rest of All Points’ theory runs afoul of bedrock propositions of default judgment law.
First, it is black-letter law that entry of default does not entitle a plaintiff to judgment as a matter of right or as a matter of law.
Settled precedent establishes that default judgment is a matter of discretion in which the court is entitled to consider, among other things, the merits of the substantive claim, the sufficiency of the complaint, the possibility of a dispute regarding material facts, whether the default was due to excusable neglect, and the “strong policy” favoring decisions on the merits. E.g., Eitel v. McCool,
Default judgments are disfavored because cases should be decided on thеir merits whenever reasonably possible. Id.; Pena v. Seguros La Comercial, S.A.,
Our own precedents recognize that default judgments are the result of a two-step process — entry of default and then judgment by default — designed to assure
II
Addressing the problem of how to calculate
(2)(A) For the purposes of this subsection, a lien shall be considered to impair an exemption to the extent that the sum of—
(i) the lien;
(11) all other liens on the property; and
(in) the amount of the exemption that the debtor could claim if there were no liens on the property; exceeds the value that the debtor’s interest in the property would have in the absence of any liens.
(B) In the case of a property subject to more than 1 hen, a hen that has been avoided shall not be considered in making the calculation under subparagraph (A) with respect to other hens.
(C) This paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure.
The difficulty centers around the operation of the phrase “value that the debtor’s interest in the property would have in the absence of any hens” in
But in the case of fractionally-owned property, the outcome depends upon whether one subtracts all hens against the entire fee before addressing the value in the absence of any hens. If all consensual hens against the entire fee are netted out first, then the answer is the same as in the single-owner case. If, however, one does not first net out the consensual hens against the entire fee and applies the literal terms of the statutory formula, then the result could be that judicial hens are avoided that do not impair an exemption.
Under facts of this appeal, it is the difference between avoiding judicial hens only to the extent that they leave the $50,000 exemption to the debtor and avoiding an extra $91,497.50 worth of judicial hens.
Thus, the strict or mechanical approach to applying the statutory formula, which has the advantage of conforming to the letter of
Such a result appears to be at odds with what Congress intended, which was to overrule judicial decisions that all had the consequence of frustrating a debtor’s ability to receive the full exemption authorized by law. H.R.Rep. No. 103-835, 52-54, reprinted in 1994 U.S.C.C.A.N. 3340, 3361-63. In the context of co-owned property, which is not discussed in the House Report, Congress overshot its mark.
The alternative common-sense application realigns the application of the statutory formula to conform with unambiguous Congressional intent. Under this approach, one nets out consensuаl liens against the entire fee in co-owned property before determining the value of a debtor’s fractional interest and excludes those liens from the calculation of “all other liens on the property” under
Although the latter approach has intuitive appeal because it achieves a result consistent with the notion that the debtor is entitled to no more than the exemption, it must be conceded that it requires a generous interpretation of
Courts are divided between the strict and the common-sense approaches to the
Nationally, the majority position, which includes the First, Third, and Eleventh Circuits, rejects mechanical application of the statutory formula in cases where a debtor co-owns property. All three courts of appeal that have addressed the question have concluded that mechanical application of
Our own precedent under the pre-1994 version of
A minority of courts apply the statutory formula literally and mechanically by allowing a debtor to deduct the full amount of liens from the proportional interest in the value of the property. E.g., Zeigler Eng’g Sales, Inc. v. Cozad (In re Cozad),
In concrete terms, the choice between the common-sense and the mechanical applications of the statute in situations where property is co-owned is the difference between protecting only the debtor’s $50,000 California exemption from judicial liens or protecting $141,497.50.
We agree with the three courts of appeals to have considered the question that mechanical application of the statutory formula would lead to an absurd result not intended by Congress. Miller, 299 F.3d at
Accordingly, we adhere to our view stated in Nielsen, a case interpreting the pre-1994 version of
CONCLUSION
Since there are no findings of fact and conclusions of law regarding the underlying substantive questions, we VACATE the order avoiding the liens of American Capital and All Points and REMAND for further proceedings consistent with this decision.
Notes
.
. ($515,000 value — $232,005 mortgage) = $282,995 h- 2 = $141,497.50. Deduct $50,000 homestead = $91,497.50.
. The statutory exemption-impairment formula is:
(A) For the purposes of this subsection, a lien shall be considered to impair an exemption to the extent that 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; exceeds the value that the debtor's interest in the property would have in the absence of any liens.
. The provision is:
(B) In the case of a property subject to more than 1 lien, a lien that has been avoided shall not be considered in making the calculation under subparagraph (A) with respect to other liens.
Concurrence Opinion
concurring:
I join the majority decision and write separately to note the existence of significant issues that may not be essential to the majority decision but that should not be overlooked. First, whether All Points has appellate standing is uncertain. Second, it would be inappropriate for there to be inconsistent decisions as between All Points and American Capital. Finally, there is a due process notice issue regarding the notice to American Capital that needs to be addressed if, on remand, the bankruptcy court contemplates entry of default.
I
In order to have appellate standing, All Points must be “adversely and pecuniarily affected” by the outcome of the appeal. Gilliam v. Speier (In re KRSM Props., LLC),
So long as the American Capital lien is valid for at least $91,497.50, nothing is left for All Points even if we were to agree with its substantive position. In the present procedural posture of the appeal, we must presume that the American Capital lien is valid to the extent of $275,000 and can be avoided only to the extent it impairs the debtor’s homestead exemption. This suggests that All Points may not have appellate standing.
To the extent that All Points may presently lack standing, it could obtain standing to contend that the
II
Appellant argues two inconsistent positions. First, it contends there is nonexempt equity. Then, it contends that the senior lien should nevertheless have been avoided even though the sole theory for avoiding that senior lien was the absence of nonexempt equity. This theory works only if the contradiction is accepted.
In multiple defendant situations, the long-settled rule is that default judgments must be consistent with judgments on the merits against other parties. 10 Moore’s
Thus, it is an abuse of discretion to enter default judgments that are inconsistent with decisions as to other defendants. Neilson v. Chang (In re First T.D. & Inv., Inc.),
In the words of the Ninth Circuit’s recent invocation of the Frow principle in a bankruptcy appeal, it is “incongruous and unfair” for a bankruptcy court to enter a default judgment inconsistent with the merits decision regarding another defendаnt. First T.D. & Inv., Inc.,
In this appeal, the analysis is straightforward. Both American Capital and All Points were in the posture of defendants to the motion to avoid lien. Each of the judicial liens exceeds the amount of the $91,497.50 equity that is argued to be available to support a judicial lien. As the lienor in senior position, the lien of American Capital could not be avoided to the extent it exceeds $91,497.50 unless it is determined to be no longer valid on the merits. This result would pertain even if American Capital’s default is entered.
A default judgment that avoids the American Capital hen merely because of a default, thereby permitting All Points to step into the shoes of American Capital so as to reap the benefit of the $91,497.50, plainly would violate the Frow principle, be incongruous and unfair, and amount to a windfаll.
Ill
There is also a due process notice issue embedded in the facts. This necessitates clarification of one of our precedents in light of the recent Supreme Court decision in Jones v. Flowers,
The lack of response from American Capital to the motion that would extinguish its judgment lien property right may be attributable to confusion resulting from an asymmetry in the interface between the Federal Rules of Bankruptcy Procedure and California law.
We have held that notice of a motion to avoid a judicial lien must be served in the same manner as service of a summons and complaint and when served by mail on a corporation pursuant to
The quirk of California law that produces the asymmetry is a provision of the California judgment enforcement statute that notices regarding the judgment are not to be sent to the judgment creditor and, instead, must go to the attorney of record who obtained the judgment or that attorney’s successor. California Code of Civil Procedure § 684.010 provides in relevant part: Cal.Code Civ. Pro. § 684.010 (emphasis supplied).
when a notice, order, or other paper is required to be served under this title [Title 9 Enforcement of Judgments] on the judgment creditor, it shall be served on the judgment creditor’s attorney of record rather than on the judgment creditor if the judgment creditor has an attorney of record.
Thus, service regarding California judgment enforcement matters must be directed to the counsel who obtained the judgment and not to the judgment creditor. It follows, that a California judgment creditor who receives a notice that must be sent to counsel may reasonably think that the notice can be ignored as either redundant of service on counsel or ineffective.
To be sure, the avoidance of a judgment lien pursuant to the Bankruptcy Code is not a state enforcement of judgment matter, even though it implicates the ultimate enforceability of the judgment. That is, however, a fine distinction that invites confusion and could operate as a trap for the unwary.
In Jones, the Supreme Court reiterated that due process requires “notice reasonably calculated under all the circumstances, to apprise interested parties of the pendency of the action and afford thеm an opportunity to present their objections.” Jones,
If there is reason to think that notice may not have been effective, then “additional reasonable steps” may be needed “if practicable to do so.” Jones,
In the face of the confusion that results from the seemingly contradictory requirements of Villar and of § 684.010, the solution is to require the “additional reasonable step” of giving notice of a motion to avoid a California judgment lien to the attorney of record who is responsible for enforcing the judgment. The reality is that, in view of the attorney of record’s continuing obligations under California statute with respect to recorded judgments, notice to the attorney may be more likely to elicit response than service on the judgment creditor.
This reality is confirmed by the fact that the actual contest of the lien avoidance mоtion came from All Points, which was not served in the manner required by Vil-lar. Rather, the debtor’s counsel served All Points’ attorney of record in the manner of § 684.010.
It is odd that the debtor’s bankruptcy counsel, having served the lien avoidance motion on All Points’ counsel in the manner of § 684.010, but not on All Points separately in the manner of Villar,
It is apparent that the better practice for bankruptcy judicial lien avoidance motions in any state is to serve both the judgment creditor and the attorney of record. In California, the apparent asymmetry created by § 684.010 warrants requiring that the attorney of record be served as an “additional reasonable step” that is “practicable” within the meaning of Jones in order to assure that the essential principle of notice reasonably calculated to come to the attention of the target is honored.
In short, on remand, the bankruptcy court should assure itself that notice consistent with due process in light of Jones was provided to American Capital before proceeding.
. This is a multiple defendant situation, the lienors being the defendants. The Frow principle, however, is powerful enough to encompass lien avoidances that are presented by the alternative procedure of separate motions because the matters are so interrelated that they should be treated as the equivalent of a multiple defendant lienor situation. The point of the Frow principle, as enforced by the Ninth Circuit in Neilson, is that inconsistent judgments in such matters are not acceptable.
. This provision is complemented by California Code of Civil Procedure §§ 283, 284, and 285 which eliminate ambiguity about counsel’s post-judgment authority:
An attorney and counselor shall have authority: ... 2. To receive money claimed by his client in an action or proceeding during the pendency thereof, or after judgment, unless a revocation of this authority is filed, and upon the payment thereof, and not otherwise, to discharge the claim or acknowledge satisfaction of the judgment.
Cal.Code Civ. Pro. § 283 (emphasis supplied).
The attorney in an action or special proceeding may be changed at any time before or after judgment or final determination, as follows: 1. Upon the consent of both client and attorney, filed with the clerk, or entered upon the minutes; 2. Upon the order of the court, upon the application of either client or attorney, after notice from one to the other.
Cal.Code Civ. Pro. § 284 (emphasis supplied).
When an attorney is changed, as provided in the last section, written notice of the change and of the substitution of a new attorney, or of the appearance of the party in person, must be given to the adverse party. Until then he must recognize the former attorney.
Cal.Code Civ. Pro. § 285.
. Villar did not address Cal.Code of Civ. Proc. § 684.010 and did not consider whether service in accordance with it would qualify as service under
. The service address, taken from the All Points Abstract of Judgment, was: "All Points Capital, c/o Scott Schutzman, Esq., 3700 S Susan Street # 120, Santa Ana, CA 92704.”
. The address on American Capital's Abstract of Judgment is: "American Capital Resources, Inc., а subsidiary of Unicapital Corporation, a Delaware corporation, c/o Ivan-jack & Lambirth, LLP, 500 S. Grand Ave., 21st FI., Los Angeles, CA 90071-0904.” And it shows the counsel who prepared document as: "Thomas B. Shuck — SBN 116228, Ivan-jack & Lambirth, LLP, 500 S. Grand Ave., 21st Floor, Los Angeles, CA 90071-0904,”
Concurrence Opinion
concurring and dissenting:
I concur with the opinion’s analysis in Part II regarding the proper way to apply § 522(f)(2),
Otherwise I dissent from the opinion and feel obliged to respond to Judge Klein’s observations in his concurrence about what he calls inconsistent outcomes and his views about California procedural law. The opinion takes judicial activism to a new level — judicial advocacy — by rewarding American Capital, an absentee litigant who has had not one, but several bites of the apple, and hands it an undeserved partial victory. In doing so it misstates controlling precedent on how courts should deal with multiple liens impairing exemption. Further, the concurrence invokes an inapplicable doctrine prohibiting inconsistent outcomes when no one else has. Then it suggests an improper mandatory state-federal service procedure that can only confuse bankruptcy practitioners and bankruptcy judges who are used to well-established and unequivocal federal procedures.
1. Standing
All Points held a judicial lien which the record suggests was valid but for the powerful weapon individual debtors have to avoid judicial liens to the extent that they impair exemptions under Section 522(f)(1).
Debtor moved (the “Motion”) to avoid All Points’ and American Capital’s judicial liens because they impaired his claimed exemption in his residence. For reasons known only to American Capital, it did not oppose Debtor’s Motion. Maybe the lien had been satisfied- by a third party. Maybe American Capital’s judgment also created a lien on other property with sufficient value. Maybe American Capital feared the outcome the bankruptcy court reached here and had no economic incentive to fight. Maybe American Capital had little hope for a third position lien on a fractional interest of a debtor in Chapter 7 bankruptcy. It really does not matter. Regаrdless of American Capital’s reasons, its non-opposition to the Motion left All Points “in the money” to the extent of $91,497.50 but for the bankruptcy court’s ruling. By that ruling All Points’ economic interest was adversely and pecuniarily affected. See Fondiller v. Robertson (In re Fondiller),
The law of the Ninth Circuit prescribes that when calculating exemption impairment, liens are to be “subtracted in order of reverse priority and that those which are avoided not be included in the calculation.”
Ordinarily, when a debtor seeks to avoid more than one judicial lien at the same time under
Here American Capital, properly served, did not oppose Debtor’s Motion and its lien was effectively avoided by default at the same time the court was considering whether to avoid All Points’ lien over its objection.
As that case points out the purpose of
3. The Default
Part I-B of the opinion suggests that the two-step process for entry of default judgments in adversary proceedings under
Here, LBR 9013-1 establishes the procedure for obtaining defaults in contested matters and those procedures do not involve a two-step process. Subsection (g)(1)(F) of LBR 9013-1 specifically provides that an order granting a motion to avoid a hen under
The bankruptcy court, through its local rules, directed a procedure for obtaining default relief on motions to avoid judicial hens pursuant to
I therefore believe the opinion is incorrect in intimating, if not outright holding, that unopposed contested matter motions must be disposed of by
4. No Inconsistency In Outcomes
The concurrence cites a very old Supreme Court case, Frow v. De La Vega,
It is important to note that the parties who invoked the Frow rule were themselves appellants, complaining about the default judgments against them because they were inconsistent with the court’s earlier summary judgment in favor of the defendants who invoked the statutory safe harbor.
Here, American Capital (not before us) is the beneficiary of the Frow rule. But as the Bankruptcy Court’s analysis and the opinion’s interpretation of the applicable substantive law both demonstrate, the relative positions of American Capital and All Points versus the Debtor here involved mixed questions of law and fact, turning on specific valuations and interests and unsettled principles of law dealing with lien avoidance on fractional interests in jointly owned property. More importantly, the bankruptcy court here was completely consistent in its disposition, avoiding both judicial liens for the same reason. Thus, not only does the Frow doctrine not аpply, but the invocation of it in favor of a nonparty to this appeal is unjustified. There is no intimation anywhere that an incorrect decision such as the Bankruptcy Court made in T & D Investment was void ab initio requiring an appellate court to examine the propriety of the outcome sua sponte. It is for American Capital, and no one else, to raise this issue; otherwise it has been waived and should not be raised now.
5. Inapplicable California Rules of Procedure
I also disagree with the concurrence’s inference that American Capital could obtain relief from its default based upon an expectation that its California attorney would be served in accordance with inapplicable state law procedures that have nothing to do with avoidance of liens that impair homestead exemptions. We have nothing but speculation as to whether or how American Capital was misled. Where is this expectation in the record?
The concurrence reluctantly acknowledges that Debtor’s counsel properly served the Motion on American Capital in accordance with
California Code of Civil Procedure § 684.010 requires service of papers under Title 9, Enforcement of Judgments, on the judgment creditors’ attorneys of record. Title 9 covers a multitude of subjects, including enforcement of money judgments, enforcement of non-money judgments, third party claims and related procedures, and satisfaction of judgments. There is nothing in Title 9 (or as far as I know anywhere in California law) permitting a judgment debtor to eliminate all or a portion of a judgment lien to the extent it impairs the judgment debtor’s exemption. Yet the concurrence urges that federal lien avoidance practice comply with state law service rules that do not encompass lien avoidance. In fact, enforcement of judgments necessarily occurs after an action has been commenced and has gone to judgment. The idea that counsel of record on a judgment must be served is quite sensible, given the state of any particular lаwsuit and post-judgment activity. The procedural rule imposed by the California legislature appears to be more a matter of convenience than of fundamental due process. Thus, while a great number of state court procedures embraced within Title 9 require service of papers on counsel, there is no hint that California law must be complied with when a party avails itself of a right found exclusively within the Bankruptcy Code.
As previously noted, avoidance of a lien that impairs an exemption is accomplished by the initiation of a contested matter and is governed by Rule 9014. See Rule 4003(d).
Apart from the debate of whether inapplicable state rules of procedure are necessary to graft onto well developed federal rules, here the concurrence on its own has decided to render an advisory opinion that somehow under Supreme Court precedent, due process requires compliance with inapplicable state rule of procedure. This is so notwithstanding the fact that no party has raised this matter on appeal, and only American Capital can possibly benefit by this outcome. By no means is this view the holding of this decision.
In conclusion, it is error to remand and relieve American Capital of its inattention and punish All Points for its diligence. Neither party asked us to do that, and doing so is gratuitous. We should avoid the anomaly of an aggrieved creditor versus a successful debtor on an appeal resulting in not the creditor winning and the debtor losing (as I would rule) but rather the debtor losing and American Capital winning by being invited back into the battle to have the benefit of All Points’ advocacy, perhaps to assure it the benefit of a lien being brought back from the dead. This result is not in response to a
We should REVERSE and REMAND in favor of All Points in acсordance with the foregoing.
. Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code,
. The opinion's concerns about dysfunction reigning and debtors colluding with junior lienors is nothing more than speculation. The bankruptcy court has many tools in its toolbox of remedies to deal with such nefari
. The opinion cites this same phrase from Hanger; regrettably, it does not address the critical words after “and”.
. This is the same result that would follow had Debtor filed two separate, but similar, motions. Had he done so, with the motion directed at American Capital set earlier, there is little doubt that the court would have defaulted American Capital and avoided its lien. See discussion of Local Bankruptcy Rule 9013-1 (“LBR 9013-1”) of the Central District of California, infra. When the motion directed at All Points came before the court, there would be no justification to consider American Capital's then avoided lien. To reject this same result when Debtor’s counsel filed the Motion directed at two respondents elevates form over substance and punishes effective and efficient lawyering.
. LBR 9013 — l(i) reiterates that a
.
. The record before us reflects that American Capital was properly served with Debtor’s Motion, All Points’ Response and Objections to Evidence, the Order on Appeal, All Points’ Notice of Appeal, and Debtor’s Motion for Leave to Appeal.
. In Hanna the Supreme Court upheld the adoption of
”... disembowel either the Constitution's grant of power over federal procedure or Congress' attempt to exercise that power in the Enabling Act.” Hanna,380 U.S. at 473-74 ,85 S.Ct. 1136 (footnote omitted).
While the concurrence does not purport to replace
. Rule 4003(d) provides as follows:
Avoidance by Debtor of Transfers of Exempt Property. A proceeding by the debtor to avoid a lien or other transfer of property exempt under§ 522(f) of the Code shall be by motion in accordance with Rule 9014.
. As we observed in another, similar bankruptcy appeal, "[fjederal courts are not run like a casino game in which players may enter and exit on pure whim.” Investors Thrift v. Lam (In re Lam), 192 F.3d 1309, 1311 (9th Cir.1999). The Bank has forfeited its right to challenge value of the collateral as determined by the bankruptcy court.
Enewally v. Washington Mutual Bank (In re Enewally),