CCP 704.965 – Automatic Homestead Exemption Defeats Outdated Limits on Declared Homestead Exemption in Bankruptcy

Debtors Can Still Claim California’s Increased, Automatic Homestead, Despite California Code of Civil Procedure § 704.965

Effective January 1, 2021, the California homestead exemption increased to $300,000 to $600,000 depending upon the median sales price in the county of residence, up from a meager $75,000 to $175,000 the year before. In turn, creditors have looked for ways around this increased homestead exemption by arguing that the debtors should not be permitted to claim the increased homestead exemption in California if the judgment was recorded before 2021.

Specifically, creditors in bankruptcy have cited California Code of Civil Procedure § 704.965, which provides that:

If a homestead declaration is recorded prior to the operative date of an amendment to Section 704.730 which increases the amount of the homestead exemption, the amount of the exemption for the purposes of subdivision (c) of Section 704.950 and Section 704.960 is the increased amount, except that, if the judgment creditor obtained a lien on the declared homestead prior to the operative date of the amendment to Section 704.730, the exemption for the purposes of subdivision (c) of Section 704.950 and Section 704.960 shall be determined as if that amendment to Section 704.730 had not been enacted.

As explained below, debtors in bankruptcy can defeat this argument by citing to the automatic homestead exemption as defeating any limits on the declared homestead exemption.

Ninth Circuit BAP Rules that Declared Homestead Exemption is Irrelevant if Automatic Homestead Exemption Allows for a Larger Exempt Amount

Numerous cases have rejected this theory advanced by creditors that a debtor is limited to a lower, pre-2021 homestead if the declared homestead was recorded before 2021. As the Ninth Circuit Bankruptcy Appellate Panel explained in In re Zall, No. BAP.EC-05-1476-MOSB, 2006 WL 6811022, at *4 (B.A.P. 9th Cir., Sept. 5, 2006):

Creditor relies primarily on two cases to make its argument. In In re Morgan, 157 B.R. 467 (Bankr.C.D.Cal.1993), the bankruptcy court relied on state court decisions and language in CCP § 704.965 to hold that the debtor was only eligible for the lesser, earlier declared homestead exemption amount. Id. at 469, 470. The second case, Bernhanu v. Metzger, 12 Cal.App. 4th 445 (Cal.Ct.App.1992), does not address the application of the section 522 exemption laws. In Bernhanu, the court limited the debtor to the lower exemption amount that was in effect at the date the judgment lien was fixed, relying also on CCP § 704.965. Id. at 448.

Unlike the present case, neither In re Morgan nor Bernhanu pertained to the automatic homestead exemption statute. Further, both cases were decided prior to the 1994 revisions of the Bankruptcy Code that altered section 522. Most importantly, since these cases were decided, this panel has issued In re Mayer and held that the date for the determination of the homestead exemption amount is the date on which debtors file a bankruptcy petition.

Creditor asserts that because California opted out of the federal bankruptcy scheme as permitted under section 522(b)(2)(A), California exemption rules alone should apply. Indeed, CCP § 703.050 states that the exemption amount is determined “by application of the exemption statutes in effect (1) at the time the judgment creditor’s lien on the property was created.” The policy, however, of allowing states to opt out of the federal exemption scheme is not absolute. Rather, courts must apply state exemption statutes “along with whatever other competing or limiting policies the statute contains.” Owen, 500 U.S. at 315. Essentially, the state law exemption statutes must not conflict with the general policies underlying the Bankruptcy Code, or section 522 specifically. In re Charnock, 318 B.R. at 727. “To the extent that the California exemption law attempts to establish a procedure that overrides the well-settled bankruptcy law regarding the date for determining an exemption, it is preempted.” In re Kim, 257 at 687.

Respondent would find support for the trial court’s requirement of continuous residence in the fact that the declared homestead provisions contain numerous references to the automatic exemption codified under section 704.710 et seq. (See §§ 704.910, subds. (c), (e), 704.950, 704.960, 704.965, 704.995.) The declared homestead provisions and the automatic exemption law each confer different rights on the homesteader, and there is no overlap between these rights. One may have rights under the declared homestead law, or rights under the automatic exemption law, or both, or neither. (See In re Anderson (9th Cir.1987) 824 F.2d 754, 756.) However, the fact that one set of statutes refers to the other in some manner does not blur the distinctions between the rights each confers on the homesteader.

Under § 522(f), however, the court must determine whether the debtor would have been entitled to the exemption in the absence of the lien. See Owen v. Owen, 500 U.S. 305, –––– – ––––, 111 S.Ct. 1833, 1836–1837, 114 L.Ed.2d 350 (1991); In re Opperman, 943 F.2d 441, 443–444 (4th Cir.1991); In re Galvan, 110 B.R. 446, 450 (9th Cir. BAP 1990). This determination is made as of the date the debtor files bankruptcy. In re Herman, 120 B.R. 127, 130 (9th Cir. BAP 1990). The state of affairs considered by the court is hypothetical, not actual. Owen, 500 U.S. at ––––, 111 S.Ct. at 1837. Thus, the court must essentially treat the judicial lien as non-existent until the date of the bankruptcy at which time there is a hypothetical attempt to levy on the property by the trustee. See Herman, 120 B.R. at 130.