In an unusual path, the Ninth Circuit affirmed the bankruptcy court’s dismissal of the debtor’s lien avoidance action where it found the underlying lien, based on an abstract of judgment which did not “substantially comply” with state requirements, to be invalid. Sanger v. Ahn (In re Ahn), No. 18-16794 (9th Cir. Feb. 28, 2020) (unpublished).
Ms. Ahn filed an adversary complaint in her bankruptcy seeking declaratory judgment that the Sangers’ lien was invalid because it was based on an abstract of judgment which did not comply with state law notice requirements. In the alternative, Ms. Ahn sought to avoid the judicial lien as impairing her homestead exemption. The bankruptcy court granted summary judgment to Ms. Ahn on the declaratory judgment count and dismissed the lien avoidance claim as moot.
On appeal, the district court found that the bankruptcy court lacked subject matter jurisdiction to reach the declaratory judgment claim and reversed that holding. Rather than remanding to the bankruptcy court to address the issue of lien avoidance, however, the district court instead went on to determine that the underlying judicial lien was invalid and, therefore, the debtor’s homestead exemption was not impaired under section 522(f). The district court, therefore, affirmed the bankruptcy court’s dismissal of the lien-avoidance claim.
Notwithstanding this facially favorable outcome, the Sangers appealed the finding that their lien was not valid, arguing that the district court erred in treating the 522(f) lien avoidance claim as the proper context for addressing the validity of a lien.
On appeal to the Ninth Circuit, the two judges constituting the majority reviewed the bankruptcy court decisions de novo. It broke the case down into four questions: 1) whether the Sangers waived their argument that Ms. Ahn lacked “statutory standing” to challenge the validity of a lien through section 522(f), 2) whether the bankruptcy court had jurisdiction to determine the validity of the lien, 3) whether Ms. Ahn’s filing of an adversary procedure instead of proceeding by motion to assert section 522(f)’s lien avoidance mechanism was fatal to her claim, and 4) whether the Sangers’ lien was valid.
The court rejected the Sangers’ argument that the debtor lacked standing to challenge the validity of their lien through the section 522(f)(1)(A) vehicle. The court found that while the Sangers had challenged the bankruptcy court’s subject matter jurisdiction in the courts below, it never raised any issue regarding statutory standing. Because the lower courts were not given an opportunity to address the issue below, the court declined to address it on appeal.
The dissent disagreed with the way the majority framed the issue. Rather, the dissent argued that the Sangers did not raise the issue of whether section 522(f)(1)(A) could be used to challenge the validity of the underlying lien in the lower courts because the issue did not become relevant until the district court rested its affirmance of the dismissal of the 522(f) claim on its finding that the lien was not valid. Until that point, Ms. Ahn had presented her 522(f) claim as an alternative to the declaratory judgment claim. Because she did not attempt to challenge the validity of the lien through her 522(f), the Sangers had no reason to address that issue at any time prior to the appeal of the district court opinion.
The majority next addressed whether the bankruptcy court had subject matter jurisdiction over the 522(f) claim finding that the claim arose under the Bankruptcy Code and was therefore within the bankruptcy court’s jurisdiction to decide.
As the dissent pointed out, however, the issue of subject matter jurisdiction arose in the context of the declaratory judgment claim and Ms. Ahn did not challenge the holdings below relating to that claim. There appeared to be no issue as to whether the lien avoidance claim was subject to “arising under” jurisdiction.
Next, the majority, without disagreement by the dissent, found that the fact that Ms. Ahn raised her 522(f) claim in an adversary proceeding rather than by motion was harmless error.
The final question identified by the majority—whether the lien was valid—had two parts: 1) whether validity of the underlying lien was properly treated as an element of a section 522(f) lien avoidance action, and, 2) whether the lien in this case was valid.
With respect to the first question, the majority cited Wiget v. Nielsen (In re Nielsen), 197 B.R. 665, 667–68 (B.A.P. 9th Cir. 1996) and Wolfson v. Watts (In re Watts), 298 F.3d 1077, 1080–83 (9th Cir. 2002), for the general rule that that the first step in the § 522(f) avoidance inquiry “is to utilize state law in deciding whether a valid judicial lien attached to the debtor’s property.” The majority interpreted this as setting forth a two-part analysis under which the bankruptcy court must first determine that the lien is valid, then decide whether it impairs the homestead exemption. It found, therefore, that the district court did not overstep in deciding whether the judgment lien was valid under state law. In answer to the second part of the question, the majority went on to find that, because the abstract of judgment lacked identifying features such as the creditor’s name and address, it did not create a valid lien under California law, Cal. Civ. Proc. Code § 674(a)(4).
The dissent disagreed with both parts of the majority decision on this question. It noted at the outset that section 522(f) would be an inappropriate vehicle for a debtor to attack the validity of a lien, and in fact, Ms. Ahn did not do so. The dissent pointed out the tangled circumstance of a debtor filing a 522(f) lien avoidance action only to argue that her own action should be dismissed due to underlying invalidity of the lien. Rather, the dissent interpreted the rule set forth in Wiget and Wolfson as creating only one inquiry: whether a valid lien attaches to the debtor’s property such that it impairs her homestead exemption. In the dissent’s view, for purposes of the 522(f) inquiry, the validity of the lien is a given and only its effect on the exemption is relevant. The dissent argued, therefore, that the district court erred in addressing the validity of the lien in the context of the 522(f) motion after it found that the bankruptcy court lacked jurisdiction to make that finding through declaratory judgment. The dissent argued that the district court should have remanded to the bankruptcy court for further action on the lien avoidance claim.
Finally, with respect to the validity of the lien, the dissent argued that the abstract of judgment was sufficient under state law to create a valid lien. The dissenting judge noted that while the creditor’s name and address was not listed in the line designated for that information in the abstract, it was readily available in other places in the document. Therefore, the abstract substantially complied with the notice requirements of the state law and should have been found to create a valid judgment lien.
Tags: Jurisdiction, declaratory judgment, lien avoidance
