Tuesday, March 8, 2016

FYI: 8th Cir BAP Holds Lien Against Only One Tenant by Entirety Avoidable in Bankruptcy

The U.S. Bankruptcy Appellate Panel for the Eighth Circuit recently affirmed an order of the bankruptcy court granting a debtor's motion to avoid a judgment creditor's lien on the debtor's residence held in tenancy by the entirety with his non-debtor spouse, holding because the lien "fixed" under the Bankruptcy Code and thus impaired the debtor's claimed exemption, it was avoidable.


A copy of the opinion is available at:  Link to Opinion


The debtor and his wife purchased their home in Missouri in 1995, taking title by the entireties. A creditor of the husband obtained a judgment against him (and not also his wife) in the amount of approximately $765,000 in Missouri state court and registered the judgment in January of 2015.


The husband filed a voluntary petition under Chapter 7 of the Bankruptcy Code. He listed the home in his schedules, valuing it at $105,000, with $52,500 as his apportioned interest in the home, and also claimed a $15,000 exemption pursuant to Missouri law and 11 U.S.C. § 522(b)(3)(B). The creditor did not object to the debtor's claims exemptions.


The debtor then filed a motion to avoid the judgment lien against the home.  The creditor objected, arguing that because the judgment lien did not attach to the home, "its lien did not fix upon the residence nor impair the debtor's exemption for lien avoidance purposes."


The bankruptcy court construed the Missouri statute governing judgment liens and the Supreme Court of the United States's ruling in Farrey v. Sanderfoot to determine the meaning of "fixing" under § 522(f)(1) and concluded as a matter of law that the judgment lien "affixed" to the home. It then determined under § 522(f)(2) that the lien impaired the debtor's exemptions, overruled the creditor's objection, and granted the debtor's motion to void the judgment lien as against the home. The creditor appealed.


On appeal, the creditor conceded that its judgment lien "attached" to the home, but argued that "its judgment lien did not fix upon the debtor's tenant by the entirety property interest in the residence, because the debtor did not have an interest to which its judgment lien could fix."


The Eighth Circuit Bankruptcy Appellate Panel began its discussion by explaining that under § 522(l) of the Bankruptcy Code, "[i]n the absence of an objection, property claimed as exempt is exempt … [and, under § 522(c)(2),] [e]xempt property is not liable during or after the case for any debts, except debts secured by liens not avoided." This means that judgment liens that are valid and pre-date the filing of the bankruptcy petition "ordinarily survive the bankruptcy case and can be enforced on exempt property, unless such liens are avoided."


The Bankruptcy Appellate Panel then explained that § 522(f)(1)(A) allows a debtor to avoid a judgment lien on exempt property "to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section…."


Pointing out that the Supreme Court in Farrey v. Sanderfoot held that "under § 522(f)(1), a debtor cannot avoid a lien, unless the debtor acquired the property interest before the lien fixed", the Bankruptcy Appellate Panel reasoned that the issue before it was "whether the debtor had an interest in the residence, to which [the creditor's] judgment lien attached."


The Eighth Circuit Bankruptcy Appellate Panel reasoned that the nature of a debtor's property interest is a question of state law, and because there was no dispute the debtor took title by the entireties in 1995, the Panel found that his interest in the property pre-dated the judgment lien.


The Panel then turned to address whether the judgment lien "fixed" to the debtor's home. Construing Missouri's statute governing judgments, the court found that the judgment lien "fixed" in January of 2015 when it was entered and registered, clearly after the debtor had acquired his interest in the property.


The Eighth Circuit Bankruptcy Appellate Panel rejected the creditor's final argument that Farrey v. Sanderfoot "requires a lien to have attached under relevant law in a technical, enforceable sense in order for a debtor to enforce a lien … [because] tenants by entirety property is not liable for the judgment debt of one spouse."  Because the judgment was only against the husband debtor and not also against the debtor's wife, the judgment did not attach as an enforceable lien on the home.


The Court reasoned that § 522(f)(1) was less restrictive than Missouri law on the issue of "what constitutes a valid, enforceable judgment lien" and "the meaning of 'fix' for lien avoidance purposes. Congress explained that the purpose of lien avoidance in § 522 was to allow the debtor to 'void any judicial lien on exempt property … If only choate liens or perfected liens were avoidable, then Congress would have used a technical term such as 'attach.' Instead, Congress used 'fixing,' which promotes the avoidance of judicial liens, even inchoate, unenforceable, or unperfected judicial liens. Even if we concede that the residence was not subject to [the creditor's] lien and that that the lien was therefore unenforceable, we would still find that an unenforceable judgment lien arose, so that it is possible for the debtor to avoid it under § 522(f)."


Finding that the judgment lien "fixed" and thus impaired or diminished the value of the debtor's claimed exemption, the Eighth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court's order granting the debtor's motion to avoid the judgment creditor's lien.




Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
Direct:  (312) 551-9320
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Email: rwutscher@MauriceWutscher.com


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