Lawrence J. Warfield v. United States

All of a debtor’s interests in property become property of the bankruptcy estate when the bankruptcy petition is filed, including the debtor’s residence. The debtor may claim an interest in that residence up to a statutory maximum as a homestead exemption by listing it on a schedule. The exemption of the debtor’s equity interest in the homestead is allowed if no timely objection is filed or an objection is resolved by court order. The Bankruptcy Code expressly authorizes bankruptcy trustees to avoid liens against estate property securing penalties, including for debtor tax delinquencies, with no requirement that the property be non-exempt. Congress’ stated purpose was that debtors alone, not their creditors, should bear the consequences of debtor misconduct. Tax liens are not limited by homestead exemptions, and the Bankruptcy Code and Rules impose no deadline to file such avoidance actions. The Ninth Circuit ruled, over a strong dissent, that once the debtor’s homestead exemption has been allowed, a trustee cannot avoid a penalty lien on the residence underlying the homestead and preserve it for the benefit of creditors. Contrary to other circuits and this Court, the Ninth Circuit held that once the homestead exemption is allowed, it ceases to be property of the estate, and that prevents the trustee from accessing and avoiding the penalty lien that encumbers the residence subject to the homestead. The question presented is: When a bankruptcy court allows a state homestead exemption, is the