Tools of the Trade
Last month, an important court issued an opinion, applicable locally, that helps protect owners of vehicles who use their vehicle as a "tool of trade." This opinion provides a good lesson for understanding how possessions that are important to you can be protected-in two distinct ways here-when filing bankruptcy.
The Ninth Circuit Court of Appeals
The opinion was handed down by the federal Court of Appeals for the Ninth Circuit in a case called In re Angie M. Garci a , arising from a Chapter 7 bankruptcy case that Garcia had filed in the Los Angeles area.
Bankruptcy courts are part of the United States federal court system. When someone disagrees with a ruling by a bankruptcy judge, that person can appeal the ruling to the local federal District Court, as Garcia did here. Then after the District Court judge makes a ruling, in this case in Garcia's favor, the losing party can appeal to a higher court, the federal Court of Appeals, as the creditor, Orange County's Credit Union, did here.
The United States Court of Appeals is divided into "Circuits," so locally the appeal went to the Court of Appeals for the Ninth Circuit. The Circuit Courts are the highest federal courts short of the United States Supreme Court. This means that a ruling by the Ninth Circuit, like this one, is binding on bankruptcy courts throughout this Circuit, which includes California and eight other western states.
The Basic Facts and the Two Legal Issues
Angie Garcia, a real estate agent, had taken out a loan and used her 2001 Mercedes as collateral. When she filed her Chapter 7 case, the vehicle was worth about $5,000, and the debt to the credit union was more than $12,000.
The first legal issue was whether she could keep the vehicle, and keep it out of the clutches of the Chapter 7 trustee. The trustee's job is to take from a debtor whatever assets are not protected by "exemptions," sell those assets, and pay the debtor's general creditors out of those proceeds.
Each state determines what assets its residence can protect when filing bankruptcy, and does this through a list of "exemptions." So the first issue on appeal was whether the vehicle fit within the applicable California "exemptions."
California provides both a specific vehicle exemption AND a much larger "wildcard" exemption for "any property." (See California Civil Procedure Code § 703.140(b)(5) .) Garcia used the "wildcard" exemption here (apparently because the vehicle exemption at the time was not large enough to cover hers). The specific issue was whether the "wildcard" exemption could be used to protect her vehicle in spite the existence of a specific vehicle exemption.
The second legal issue was whether Garcia would have to continue paying the credit union because of its lien on the vehicle, or instead could keep the vehicle free and clear of that lien. Generally, bankruptcy law respects the rights of lienholders, but it does provide for some exceptions.
One such exception is that a debtor can "avoid," or get rid of, a lien on an exempt "tool of trade" IF the lien was placed on the collateral for other than the purpose of purchasing it. (See Section 522(f)(1)(B) of the Bankruptcy Code .) Recall that Garcia already owned this vehicle when she provided it as collateral for her loan from the credit union.
The Two Lower Courts' Rulings
The bankruptcy judge in Garcia's Chapter 7 case ruled against her on both issues. The vehicle was considered not to be exempt because the "wildcard" exemption was not to be used for assets already covered by specific exemptions, such as the vehicle exemption. And the credit union's lien could not be "avoided" because the judge reasoned that this procedure was not intended to be used for "luxury" items.
But on appeal, the District Court judge reversed and ruled in Garcia's favor on both issues. The vehicle was exempt under the "wildcard" exemption because there was no justification to limit this broader exemption from assets also referred to by more specific exemptions. And a debtor's right to lien avoidance on tools of trade has no non-luxury condition, as long as the vehicle truly was used as a tool of trade in the eyes of the law. The judge "remanded" the case back to the bankruptcy court to determine whether the facts about Garcia's use of the vehicle meet the legal definition of a tool of trade.
The Ninth Circuit's Rulings
Then on the next (and presumably last) appeal, the Court of Appeals for the Ninth Circuit wholeheartedly agreed with the District Court judge instead of the bankruptcy judge on both issues.
On the question of Garcia's right to use the "wildcard" exemption, the Ninth Circuit said that the California statute "allow[s] a debtor to exempt up to $18,350 in 'any property.' 'Any' means any, and fancy cars are not excluded."
On the question of Garcia's ability to avoid the credit union's lien on the vehicle as a tool of trade, the Ninth Circuit noted that the District Court had cited a 25-year old opinion of the Ninth Circuit saying that "[l ]ien 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 . . . ." So on this question of the avoidability of the lien, the Ninth Circuit was short and sweet: "As the district court correctly ruled, the answer is 'yes.' "
Speaking of "sweet," the Ninth Circuit also agreed with the District Court judge and "remanded the case to the bankruptcy court to determine whether the vehicle in question, a 2001 Mercedes 320E sedan, was in fact a tool of the debtor's trade as a real estate agent, or just a sweet ride"!
What This Means for You
First, if you file a bankruptcy-and arguably even outside bankruptcy court-you can use the California "wildcard" exemption for your vehicle(s), even though there is a specified vehicle exemption. You may also be able to use the "wildcard" exemption for any other types of assets (beyond vehicles) that also have specified exemptions in the California exemption statutes.
Second, liens on tools of trade, created other than to purchase that tool of trade, can be avoided-meaning the formerly secured creditor need not be paid-even if that tool of trade could be considered a luxury, as long as it really IS a tool of trade!
For more information you can visit us at: Murrieta Bankruptcy Lawyer