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Debtor's Mercedes Within Calif.'s 'Wildcard' Exemption; Avoid Lien as 'Tool of Trade'

Monday, March 18, 2013
By Diane Davis

The U.S. Court of Appeals for the Ninth Circuit March 5 held that a debtor's Mercedes sedan may fall within California's “wildcard” or “grubstake” exemption and, if an exempt motor vehicle is a tool of the debtor's trade, and is secured by a nonpossessory, nonpurchase-money lien, then the debtor can avoid the lien under Bankruptcy Code Section 522(f)(1)(B) (Orange County's Credit Union v. Garcia (In re Garcia), 9th Cir., No. 11-56076, 3/5/13).

Affirming the judgment of the district court, Judge Barry G. Silverman remanded the case to the bankruptcy court to determine whether the Mercedes was in fact a tool of the debtor's trade as a real estate agent, or “just a sweet ride.”

According to the court, California Civil Procedure Code § 703.140(b)(5) permits a debtor to exempt her aggregate interest, not to exceed $925, and § 703.140(b)(1) permits a debtor to exempt up to $17,425 in certain types of real or personal property. Combining these two paragraphs allows a debtor to exempt up to $18,350 in “any property,” the court said. Fancy cars are not excluded, the court noted. 

Chapter 7 Filing

In November 2006, debtor Angie M. Garcia, a real estate agent, borrowed $22,160 from the credit union and used her 2001 Mercedes 320E sedan as collateral. The credit union perfected a nonpossessory, nonpurchase-money lien on the vehicle.

Subsequently, the debtor filed for Chapter 7 protection and listed the outstanding balance of the loan as $12,715. She claimed that the car, valued at $5,350, was exempt from her bankruptcy estate under California Civil Procedure Code §703.140(b)(5), which allows a debtor to exempt up to $18,350 in “any property.”

The debtor also moved to avoid the lien on the car under Section 522(f)(1)(B). 

No Exemption Allowed

The bankruptcy court held that the California wildcard exemption could not be used for vehicles like the debtor's because other sections of the California exemption statutes deal with them explicitly. The court also ruled that the debtor could not use the lien avoidance provisions of Section 522(f)(1)(B) because motor vehicles were explicitly mentioned in other portions of the statute, such as Section 522(d)(2), and because the legislative history behind Section 522(f) did not support avoiding liens on luxury items. 

'Any Property' Allowed for Exemption

The district court reversed, concluding the California wildcard exemption for “any property” means just that--any property up to the statutory amount. “Lien avoidance on motor vehicles as tools of the debtor's trade … is generally allowed in situations where the vehicle is necessary to the debtor's trade, and the state has opted out of the federal laundry list,” the district court ruled, quoting In re Taylor, 861 F.2d 550 (9th Cir. 1988).

The court remanded the case to the bankruptcy court for further factual findings to determine whether the debtor's Mercedes is a tool of the trade.

On appeal by the lien-holder credit union, the Ninth Circuit considered whether California Civil Procedure Code § 703.140(b)(5) permits the exemption of a motor vehicle, and whether Section 522(f)(1)(B) permits lien avoidance on the same motor vehicle.

When a debtor files for Chapter 7 protection, all of the debtor's property become the property of the bankruptcy estate, the appeals court explained, citing Section 541. The exemption scheme under Section 522(d) can be supplanted by states that choose to provide their own menu of exemptions, the court said. California, the court explained, provides its own exemption scheme in California Civil Procedure Code §§ 703.130 and 703.140. 

'Any' Means Any Property

The appeals court agreed with the district court that as a purely legal matter, the debtor is not prevented from exempting a motor vehicle up to the maximum allowable amount under California Civil Procedure Code § 703.140(b)(5). That section, the court said, permits a debtor to exempt her “aggregate interest, not to exceed in value nine hundred twenty-five dollars ($925) plus any unused amount of the exemption provided under paragraph (1), in any property.” Further, paragraph (1) states that a debtor can exempt up to $17,425 in certain types of real or personal property, the court noted. Combining these two paragraphs together, the court said, allows a debtor to exempt up to $18,350 in “any property.” “Any” means any, the court explained.

The appeals court also concluded that a lien on a motor vehicle can be avoided under Section 522(f)(1)(B) as a tool of the debtor's trade. The court affirmed the district court's remand to the bankruptcy for that factual determination.

Judge Alex Kozinski and Senior District Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York joined the opinion.

Robert M. Dato and Joseph M. Welch of Buchalter, Nemer, Irvine, Calif., represented the appellant Orange County Credit Union; Anerio V. Altman of Lake Forest, Calif., represented the debtor/appellee. 

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