Does the Debtor Deduct Hypothetical Costs of Sale When Computing 522(f) – No, says Judge Ted Albert in a Tentative Ruling

United States Bankruptcy Court
Central District of California
Judge Theodor Albert, Presiding
Courtroom 5B Calendar
Santa Ana

Thursday, November 06, 2014 Hearing Room 5B
11:00 AM
8:14-13351 Donald R. Dahlgren Chapter 7
#18.00 Motion for Reconsideration of Debtors’ Motion to Avoid Lien Under 11 U.S.C. §
522(f) (Real Property)

Docket 48
This is the debtor’s motion for reconsideration of the court’s order entered Sept. 11, 2014 denying debtor’s §522(f) motion to avoid a judgment lien in favor of Newport Capital Recovery Group in the original amount of $30,085 as impairing his homestead. In the order denying the motion, the court indicated by its arithmetic there existed value of $31,192.97 above the sum of all senior liens and homestead of $175,000. In consequence, there was equity to which the senior lien could attach in full, and after deduction of the senior judgment lien, the most junior lien had a value of the remaining $1107 as well, and was likewise not avoidable for that amount. There may be interest issues as well that by now eclipse the junior lien, but the court is given no means to calculate these. In this motion debtor complains that actual costs of sale are now a known quantity, $68,339.93, and this amount of sale costs should have been recognized as ahead of the liens, leaving both judgment liens effectively unsecured. The court notes that debtor in his original motion in page 3 of Mr. Dahlgren’s declaration asked for deduction of sale costs, but the court implicitly did not grant this when calculating the result and denying the original motion.

This motion is couched in terms of “surprise” and “mistake” so as to come within the meaning of FRCP 60(b) on the grounds that the creditors did not file opposition; rather, the court raised it sua sponte. But mistake or surprise is not the issue. The issue is a legal one, i.e. in determining lien avoidance under §522(f), should the court recognize either anticipated or actual sale costs? The debtor cites no persuasive authority for this conclusion.

In re Nielsen, 197 B.R. 665, 671 (9th Cir BAP 1996), upon which debtor heavily relies, does not support debtor’s argument. At one point in the opinion the Nielsen court discussed the analogous question of whether partition of a jointly held property should be ordered under CCP §873.820. In that context the court mentioned that costs of sale are specifically called out in that statute. Id. at 671. But the main issue in the Nielsen opinion was whether in determining avoidance of liens under § 522(f) senior liens should be counted against the whole of the property, or onlyagainst the debtor’s percentage portion. The Nielsen court determined that since the trustee could sell the whole of the property as jointly owned, it was only logical to apply senior liens and the homestead against the whole value in determining whether there existed “surplus equity,” which if this was a positive number, liens could attach thereto, no impairment of the exemption pertained and liens would not be avoided to the extent of that “equity.” But in doing the arithmetic to decide whether this was the case for §522(f) purposes, the Nielsen court conspicuously did not count costs of sale. Id. at 672.

Similarly unavailing is In re Chiu, 266 B.R. 743, 745-46 (9th Cir. BAP 2001) aff’d 304 F. 3d 905 (9th Cir 2002). Chiu is a case about whether the debtor has standing to attempt avoidance of liens under §522(f) in a sale made after the bankruptcy case was closed against proceeds still in escrow. There is no real discussion in the Chiu opinion on the question of whether costs of sale should have been considered in determining impairment of the homestead since, as a practical matter, the remaining proceeds must have been after the sale costs. Further, the creditor did not contest the issue of impairment but only of standing. In contrast, all authority on point that the court could find is against the debtor. In re Mangold, 244 B.R. 901, 905 (Bankr. S.D. Ohio 2000); In re Anderson, 68 B.R. 313 (Bankr. W.D. Pa. 1986); In re Webb, 2002 WL 33939737 (Bankr. Idaho 2002). This is also the more logical result. Valuations upon which most §522(f) motions are considered do not take into account costs of sale when rendering an opinion, and it is that number against which deductions are figured. Here, we happen to have a sale at hand but this is really no reason to change the question of value of the property. Whether a debtor chooses to sell the property or retain it is his choice after the case is closed. As the above cases make clear, the exemption rights and amounts are figured on the fair market value of the property, not on realizable proceeds. Once impairing liens are erased on this calculation the debtor’s exemption rights are concluded, and he might either sell or hold at his option. The court sees no particular reason to favor those electing to sell. Debtor seems to be making an argument under §506 based on the purpose of the valuation, and from this argues that since a sale was contemplated here, there should be the $60,000+ deduction when making the calculation. But no authority is cited for this and the court does not accept the logic for reasons already given. This motion comes down in the end to the question of whether the homestead or the lienholders should pay for the costs of sale. The debtor was not compelled by any bankruptcy law or rule to sell. Debtor gives no persuasive reason for his position and to accept it would, in the court’s estimation, be very bad precedent.


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