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SAMPLE: Memo re lien sale of joint tenant's interest

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Client seeks to sell real property under a judgment against defendant. Defendant owns the dwelling in joint tenancy with his wife. If the court grants plaintiff's Application for Sale, Code of Civil Procedure section 704.820 indicates that plaintiff can get only the defendant's interest.

ISSUES

1. What does the language of section 704.820 mean?

2. Does the "all liens" language of Code of Civil Procedure section 704.800 mean prior liens or subsequent liens?

DISCUSSION

1. Code of Civil Procedure section 704.820

The law in California is well-settled that, where an Order of Sale is sought of a dwelling, and the judgment debtor owns the property in joint tenancy with a non-debtor, "only the judgment debtor's one-half interest" is "subject to execution." In re Jacobs (1985) 48 B.R. 570, 572, citing Schoenfeld v. Norberg (1970) 11 Cal.App.3d 755, 90 Cal.Rptr. 47.

Schoenfeld stated the general rule that where "the property is held in joint tenancy, the wife's interest, being her separate property, is not liable for the husband's debt; in that event, only the husband's interest may be sold." Id., 11 Cal.App.3d at 760. In such a situation, the purchaser of the husband's interest would become a tenant in common with the wife, and might seek the property's partition. Ibid.; see also Russell v. Lescalet (1967) 248 Cal.App.2d 310, 56 Cal.Rptr. 399, 400 ("upon the purchase of the interest of that joint tenant at execution sale the joint tenancy is severed . . . ."). Here, only the husband's interest in the homestead can be sold to satisfy the judgment. (But note that this would not be true if the couple held title as community property. See, e.g., In re Miles (Bkrtcy. 1983) 35 B.R. 52.)

Schoenfeld v. Norberg is the seminal case on the California law of homesteads. The judgment debtor appealed an order for the sale of his homestead. As here, the couple allegedly held the real property in joint tenancy (although the case was remanded with instructions to determine the true nature of the title). Id., 11 Cal.App.3d at 767. The Schoenfeld court also considered the issue, assuming a joint tenancy were found, of whether the homestead exemption and encumbrances should be against the "total value of the property," or alternatively simply against the "value of the interest to be sold?" Id., at 762. This distinction is crucial, determining whether a deduction is made from the appraised value of the whole property or merely from the debtor's one-half interest. Schoenfeld held that "the interest subject to sale must exceed in value the statutory homestead exemption . . . before the interest may be sold under execution." Id., at 764-765 (emphasis in original). The Schoenfeld court concluded that the "husband's interest" (i.e., the interest subject to sale) must also exceed the "amount of the joint encumbrance." Id., at 766.

Although a few cases since 1970 have distinguished Schoenfeld on the facts (see, e.g., In re Reed (9th Cir. 1991) 940 F.2d 1317, noting that in bankruptcy a trustee can sell the entire property, and distinguishing Schoenfeld on that basis), in general the cases interpreting Schoenfeld have adhered to its "mandate":

[W]hen calculating a debtor's equity in a joint-tenancy interest for creditor sale purposes, one must subtract the full value of the outstanding liens and encumbrances and the homestead exemption from the debtor's one half interest in the fair market value. If the resulting number is negative, there can be no forced sale by a creditor.
Reed, supra, 940 F.2d at 1322.

The one seemingly open question in this analysis is whether one first divides the fair market value in half and then subtracts the liens and encumbrances, or conversely whether one first subtracts the liens and encumbrances and then divides that. Compare Schneider, supra, 9 B.R. at 489-490 (deducting the "total encumbrances" from the value of the property first) with In re Miles (Bkrtcy. 1983) 35 B.R. 52, 54 (citing both Schoenfeld and Schneider, but dividing the property's value in half before deducting the various encumbrances). Given the relative amounts of the property's appraised value and the homestead exemption here, this distinction may not be crucial.

This analysis is not very promising for plaintiff here, but there is little room to maneuver. Many of the cases point out the general policy that "the [homestead] statutes are to be liberally construed to protect the claimant and his family." Schoenfeld, supra, 11 Cal.App.3d at 364. One possible argument is that, having failed to allege this defense in his memorandum in opposition, the defendant has waived the defense.

2. Code of Civil Procedure section 704.800

Plaintiff here can argue that Code of Civil Procedure section 704.800's language regarding "all liens and encumbrances" means all prior liens and encumbrances. Although no cases have directly addressed this language of section 704.800, a few have considered the issues of prior liens in the context of the homestead exemption. See, e.g., In re Martin (1980) 6 B.R. 827, 830-831 (in a bankruptcy setting a trustee "has a judicial lien" that is "subject to and junior to all valid prior recorded liens"); Van Bogaert v. Avery (1969) 271 Cal.App.2d 492, 76 Cal.Rptr. 608, 613 (noting that, under the predecessor sections to section 704.800 et seq., "only prior lienholders and the homestead claimant are protected by the minimum bid . . . ." (emphasis added)). This language from Van Bogaert seems directly on point, but it is mere dictum and no other cases have followed its assertion.

One other case may indicate a contrary outcome. In Kahn v. Berman (1988) 198 Cal.App.3d 1502, 244 Cal.Rptr. 575, the defendant homeowners had lost a substantial judgment to plaintiffs. Five days later they recorded a $500,000 first deed of trust to an entity of suspicious origins, the Berman Corporation, whose address was the same as the address of the property purportedly being encumbered. Id., at 1502. The court focussed on the improper exclusion of the defendants' homestead exemption, but in a final footnote the court addressed the "all . . . liens and encumbrances" language of section 704.800, viewing the later-created deed of trust this way:

[W]e do not intend to pass on the validity or legitimacy of the $500,000 deed of trust recorded by the "Berman Corporation." It is sufficient to say that the circumstances of the recording were suspicious. Finally, the Kahns have access to other statutory remedies for challenging that deed of trust. (Civ. Code sec. 3439 et seq. [the Uniform Fraudulent Transfer Act].)
Id., at 1509.

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