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In re Morgan

filed: January 12, 1993.

IN RE: THOMAS K. MORGAN, DEBTOR. THOMAS K. MORGAN, APPELLANT,
v.
FEDERAL DEPOSIT INSURANCE CORP., AS RECEIVER FOR HERITAGE BANK; BANK OF AMERICA, NT & SA; MERCHANTS RECOVERY SERVICES, INC.; AND HOUSEHOLD FINANCE CORP., APPELLEES.



Appeal from the United States Bankruptcy Court for the Central District of California. Honorable Lisa Hill Fenning, Bankruptcy Judge, Presiding

Before: Jones, Volinn and Perris, Bankruptcy Judges

Author: Jones

Opinion

JONES, Bankruptcy Judge.

FACTS

On or about June 9, 1986, the Federal Deposit Insurance Corporation, as receiver for Heritage Bank ("FDIC"), obtained a judgment against debtor Thomas Morgan ("Morgan") in the amount of $53,174.18. After recording an abstract of judgment, the FDIC initiated a proceeding in California state court to levy on real property owned by Morgan.

On February 21, 1990, the California court held a show cause hearing to determine whether an execution sale should be held. Morgan appeared at the show cause hearing and argued for a homestead declaration which would prohibit the sale, but presented no evidence to support that position. The state court granted Morgan additional time to submit evidence in support of his homestead declaration.

Morgan did submit evidence, but at a subsequent hearing the state court determined that the evidence was insufficient to support Morgan's homestead declaration and ordered the property sold. Morgan appealed that decision and the California Court of Appeals affirmed, finding that Morgan had failed to satisfy his burden of proving a homestead even though the state trial court had "bent over backward" to accommodate him.

The FDIC calendared a trustee's sale of the property, but that sale was stayed when Morgan filed a petition under Chapter 11 of the Bankruptcy Code*fn1 on July 19, 1991. In conjunction with the bankruptcy petition, Morgan filed a schedule A-2 (creditors holding security) on which he listed the subject real property. Morgan listed the property as having a value of $165,000 and the encumbrances on the property (including that of the FDIC) as totaling $285,000. Morgan also filed a schedule B-4 (property claimed as exempt) on which he listed the subject property and claimed a homestead exemption of $100,000.

On or about September 6, 1991, Morgan filed a motion to avoid judicial liens in which he sought to avoid, inter alia, the FDIC lien. On or about September 20, 1991, the FDIC filed an opposition to the motion in which it argued that the state court order concluding that Morgan was not entitled to a homestead exemption should be given full faith and credit.

At a hearing on October 1, 1991, the court denied the relief requested by the motion because (1) it was not supported by competent evidence, (2) it did not appear that Morgan was entitled to a homestead exemption, and (3) the state court determination that Morgan was not entitled to a homestead was entitled to full faith and credit.

Morgan subsequently filed a motion for reconsideration, which the court denied. Morgan then filed a timely notice of appeal.

ISSUE

A. Whether the failure of a party in interest to timely object to Morgan's claim of exemption results in the exemption being valid by default.

B. Whether the default validation of Morgan's exemption prevents the FDIC from challenging the validity of the exemption in defense of a motion to avoid its lien.

C. Whether the trial court correctly determined that Morgan was barred from relitigating the validity of his claimed exemption.

STANDARD OF REVIEW

Resolving the first two issues identified above requires us to interpret Bankruptcy Code § 522. We review questions of statutory construction de novo. See In re Rubottom, 134 Bankr. 641, 643 (9th Cir. BAP 1991). We also review de novo the trial court's ruling on the availability of res judicata as to both claim and issue preclusion. See Guild Wineries and Distilleries v. Whitehall Co., 853 F.2d 755, 758 (9th Cir. 1988).

Discussion

The case at bar involves an analysis of the interplay between subsections (f) and (1) of Bankruptcy Code § 522 and Bankruptcy Rule 4003(b). Section 522(f) provides:

(f) Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled ...


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