No. 4-02-01943-EWH.United States Bankruptcy Court, D. Arizona.
January 24, 2007

EILEEN HOLLOWELL, Bankruptcy Judge

The real property in which the Debtors’ claimed a homestead right has been sold and the proceeds distributed under a final unappealed, unstayed order. As a result, and as explained in the balance of this decision, the Debtors right to assert a homestead exemption in the proceeds of the sale has been rendered moot.

Debtors commenced a Chapter 12 case on April 26, 2002. At that time, they operated a 320 acre farm located in Cochise County (“Property”). The Property was encumbered by a lien in favor of the United States Department of Agriculture, Farm Service Agency (“FSA”) securing a debt in excess of $800,000. It was also subject to the lien claim of Cochise County for past-due property taxes. Located on the Property was a mobile home (“Mobile Home”), where the Debtors lived, but did not own on the petition date.

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The Debtors claimed a homestead exemption of $100,000, although they did not specify in their schedules what property was being claimed as their homestead. The Chapter 12 Trustee did not object to the Debtors’ homestead exemption claim. In September of 2003, the Debtors sought to use $20,000 of estate funds along with $18,000 of gift money from family members to purchase the Mobile Home.[1] The Debtors’ motion was granted after they stipulated that they would not make a homestead claim on the Mobile Home.

On the motion of the Chapter 12 Trustee, the Debtors’ case was converted to a Chapter 7 on June 18, 2004 for “cause” including material misrepresentations made by the Debtors regarding the use of estate funds. Following the conversion, the Debtors amended their schedules, but did not amend their original claim of homestead exemption. On December 6, 2004, the Chapter 7 Trustee (who had also acted as the Chapter 12 Trustee) filed an objection to the Debtors’ homestead exemption on the grounds that the Debtors had waived their right to the exemption during the Chapter 12 when they purchased the Mobile Home. The Trustee’s objection was sustained by an order entered on February 9, 2005 (“Homestead Order”). The Debtors appealed that order, but did not obtain a stay pending appeal.

On March 16, 2005, the Chapter 7 Trustee filed a motion to sell the Property pursuant to U.S.C. § 363(f) free and clear of all liens, claims and interests (“Sale

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Motion”).[2] The Sale Motion noted that the proposed purchase price was insufficient to pay the full amount of FSA and Cochise County’s lien claims. The Debtors filed an objection to the Sale Motion, which was overruled. On April 21, 2005, an order was entered approving the sale of the Property to the highest bidder for $550,000 (“Sale Order”).

The Debtors appealed and sought a stay of the Sale Order until the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) could hear and decide the Debtors’ appeal of the Homestead Order. The BAP denied the Debtors’ request for a stay of the Sale Order. Thereafter, the Debtors permitted their appeal of the Sale Order to be dismissed, but pursued their appeal of the Homestead Order.

On June 8, 2006, the BAP entered an order reversing the Homestead Order on the grounds that the Debtors’ waiver of their homestead right in the Mobile Home was not a waiver of their homestead interest in the Property in what the BAP found was a “two part” exemption right provided by A.R.S. § 33-1101(A)(4). The BAP held, therefore, that the Debtors retained a homestead exemption right in the Property independent from their waived homestead interest in the Mobile Home. Noting that the Property had been sold, the case was remanded to this court to “determine whether it has an ongoing jurisdiction to resolve the competing claims of Debtors and FSA.”

Both FSA and the Debtors have, after several extensions of the deadline, submitted memoranda to the court on the question of the court’s jurisdiction to issue

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any further orders regarding the parties’ claims to the sale proceeds from the Property. The matter is now ready for decision.

This court has jurisdiction under 28 U.S.C. § 1334 and 11 U.S.C. § 157(b)(1).

At the time that the Sale Order was approved, the Homestead Order was final, appealed, but unstayed. The Debtors assert that because the BAP reversed the Homestead Order, that at the time the Sale Order was entered, the Debtors had an interest in the Property and, therefore, the Trustee could only have sold the Property pursuant to 11 U.S.C. § 363(f)(1) in his capacity as judgment creditor and not pursuant to 11 U.S.C. § 363(f)(2), which requires the consent of all parties with an interest in the property. The Debtors’ argument fails for two reasons. First, the Arizona statute requires that a forced sale of homestead property by a judgment creditor be in an amount in excess of all liens, applicable costs and the amount of the homestead exemption. The statute does not permit a “short” sale which is what would have occurred in this case because the sale was for $550,000, well below the amount of the liens and Debtors’ $100,000 homestead interest. A.R.S. § 33-1105 provides that if a judgment creditor seeks to force a sale of homestead property and the amount bid for

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the property is insufficient to cover all liens and the homestead, then there is no sale.[3] The Sale Order could not, therefore, have been entered under 11 U.S.C. § 363(f)(1).

Secondly, Debtors ignore the effect of the entry of the Homestead Order as a final, unstayed order at the time the sale.See In re Copper Antitrust Litigation, 436 F.3d 782, 793 (7th Cir. 2006) (“The general rule is that the judgment of a district court becomes effective and enforceable as soon as it is entered; there is no suspended effect pending appeal unless a stay is entered.”) Because the Homestead Order was a final order a the time of the sale of the Property, the Debtors did not have a protectable interest in the Property and their consent was not needed for a sale to proceed under 11 U.S.C. § 363(f)(2).

Even if the Debtors did have a right to consent to the sale based on what was then, at best, a contingent homestead interest in the Property, the finality of the Sale Order moots any reconsideration of the sale of the Property. The Sale Order provided for a complete distribution of sale proceeds. (Docket #422, ¶ 8). The Sale Order also included a determination that the purchase of the Property was a good faith purchaser under § 363(m) (Docket #422 at ¶ 12). The Sale Order, therefore, is subject to the well-recognized rule in the Ninth Circuit that a failure to obtain a stay moots any appeal or reconsideration of a Sale Order. In re Southwest Products, Inc., 144 B.R. 100, 102
(9th Cir. B.A.P. 1992). Because this court lacks jurisdiction to reconsider, the Sale Order’s

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terms, FSA cannot be required to pay the Debtors the amount of their homestead exemption.

An order will be entered this date consistent with the terms of this Memorandum Decision.

[1] This court later determined that the purchase price of the Mobile Home was paid exclusively from estate funds.
[2] An order was entered on November 1, 2004 approving a stipulation between FSA, Cochise County and the Chapter 7 Trustee authorizing the Trustee to market and sell the Property.
[3] The statute provides “A bid shall not be accepted. . . . which does not exceed the amount of the judgment debtor’s homestead, plus the amount of any consensual liens on the property having a priority of the judgment plus the costs of sale allowable under title 12. . . . If the sale does not occur. . . . because no sufficient bid is made, the judgment creditor may not charge any costs or attorney fees incurred in connection with the sale.” (emphasis added).