Opinion
CASE NO. 01-01849-AJM-7
February 16, 2001
Robert Lynch, Attorney for the Debtors.
Dina Cox, Attorney for Aetna Casualty Surety Co.
ORDER GRANTING DEBTORS' MOTION TO AVOID JUDICIAL LIEN OF AETNA CASUALTY SURETY CO.
The Debtors filed a voluntary petition for relief under chapter 7 of the bankruptcy code on February 16, 2001. Among the property listed on Schedule A (Real Property) was the "marital residence" being purchased on land contract with a fair market value of $30,000 and an encumbrance against it of $28,000 held by Ray Wilson, the vendor under the land contract, according to Schedule D (Creditors Holding Secured Claims). The Debtors claimed as exempt the $2000 in equity in the marital residence.
Aetna Casualty Surety Company ("Aetna") obtained a pre petition judgment against the Debtors in the principal amount of $7570.25, not including court costs, attorneys fees and post judgment interest ("Aetna's Judgment"). Once a judgment has been entered, a judgment lien attaches to all real property owned by the judgment debtor in the county in which the judgment was recorded, and Aetna obtained a pre petition judgment lien in the Debtors' marital residence (Aetna's Judicial Lien").
See, Indiana Code 34-55-9-2 and In re Zupan, 172 B.R. 250, 252 (Bankr.S.D.Ind. 1993).
The Debtors on May 10, 2001 moved to avoid Aetna's Judicial Lien (the "Debtors' Motion") under § 522(f) on the basis that it impairs an exemption to which the Debtors would be entitled. Aetna objected to the Debtors' Motion.
Hearing on the Debtors' Motion and Aetna's objection was held on July 17, 2001 wherein the Debtors appeared by counsel, Robert Lynch; Aetna appeared by counsel, Dina Cox. The Court heard the arguments of counsel and took ruling on the matter under advisement.
There appears to be no dispute as to the fair market value of the marital residence, the amount of equity in it, or the Debtors' eligibility to claim the marital residence as a homestead exemption. Rather, the only dispute appears to be whether Aetna's Judicial Lien in fact impairs an exemption to which the Debtors are entitled.
Aetna has cited the Zupan case for the proposition that a judicial lien does not attach to the debtors' homestead interest in real property and therefore, a judicial lien does not impair a debtors' ability to recover their homestead exemption.
In re Zupan, 172 B.R. 250 (Bankr.S.D.Ind. 1993).
Zupan went on to explain:
To the extent that a judicial lien attaches to real property upon which a debtor has a homestead exemption, the judicial lien does not attach to the debtor's homestead interest in that real property, and in no way impedes a debtor's ability to recover their homestead exemption. In re Chabot, 992 F.2d 891 (9th Cir. 1993); In re Cerniglia, 137 B.R. 722 (Bankr.S.D.Ill. 1992).
172 B.R. at 252 (emphasis added).
The Cerniglia case which was cited by the court in Zupan found (under Illinois law) that no judicial lien attached to the exempt amount of the debtor's homestead and concluded that there was no need for the debtors to avoid the creditor's lien under § 522(f) since the debtors' exemption would be preserved to them in any event and they would gain nothing by the use of § 522(f) beyond the exemption rights afforded them under state law. Cerniglia, 137 B.R. at 725-726.
The Chabot and Cerniglia cases upon which the Zupan decision was based, however, were superseded by statute when § 522(f) was amended in 1994 to add a provision defining "impairment" as well as a mathematical formula for determining "the extent to which" a lien impairs an exemption. § 522(f)(2)(A) provides:
"For the purposes of this subsection, a lien shall be considered to impair an exemption to the extent that the sum of —
(i) the lien,
(ii) all other liens on the property; and
(iii) the amount of the exemption that the debtor could claim if there were no liens on the property exceeds the value that the debtor's interest in the property would have in the absence of any liens.
§ 522(f)(2)(B) provides:
In the case of a property subject to more than 1 lien, a lien that has been avoided shall not be considered in making the calculation under subparagraph (A) with respect to other liens.
See § 522(f)(2)(A) and (B). The mathematical formula set forth in the amendment, according to the legislative history, is based upon the analysis set forth in In re Brantz, 106 B.R. 62 (Bankr.E.D.Pa. 1989) which was cited favorably by the United States Supreme Court in Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833 (1991). This formula, used to determine the extent to which a lien impairs an exemption, is as follows:
See the House Report to the Bankruptcy Reform Act of 1994, HR Rep 103-834, 103rd Cong, 2nd Sess 35-37 and 41-42 (Oct. 4, 1994) 140 Cong. Rec. H 10769 and H 10770 (Oct. 4, 1994) which, gives examples of how the new mathematical formula is to be applied and which specifically notes that the new formula "would not permit" the result reached in the Chabot case, thus strongly suggesting that Chabot was legislatively overruled by this new amendment to § 522(f). See also, In re VanZant, 210 B.R. 1011 (Bankr.S.D.Ill. 1997) where Judge Meyers (the same judge who decided the Cerniglia case), acknowledged that "[b]ecause § 522(f)(2) now explicitly defines "impairment" for purposes of lien avoidance under § 522(f)(1)(A), this Court's ruling in Cerniglia is no longer viable". 210 B.R. at 1015.
In Owen, the creditor, the ex spouse of the debtor, obtained in Sarasota County a pre petition judgment against the debtor. At the time the judgment was taken, the debtor did not own real estate in that county. Under Florida law, a judgment lien attaches to after-acquired property, and eight years later, the debtor purchased a condominium in Sarasota County, so the ex-spouse's judgment lien attached to that property. But, under Florida law at the time, condominiums did not qualify as homesteads. A year after the condominium purchase, Florida amended its homestead law to allow condominiums to qualify as homesteads. However, under Florida law, the new homestead exemption did not apply to and creditors could execute on pre-existing liens in condominiums. After the debtor filed his chapter 7, he claimed the condominium as exempt under the homestead exemption and tried to avoid the ex spouse's judgment lien. The Bankruptcy Court, the District Court and the Court of Appeals for the Eleventh District all held that the lien could not be avoided since, at the time the lien attached, the condominium did not qualify as a homestead for exemption purposes. The Supreme Court reversed, holding that the judgment lien could be avoided under the bankruptcy statute, as impairing the debtor's state law exemptions even though the state had defined exempt property to exclude certain types of property encumbered by liens. For purposes of this case, the point of Owen is that it tacitly approved the arithmetic test set forth in Brantz.
1. Determine the value of the property on which a judicial lien is sought to be avoided
2. Deduct the amount of all liens not to be avoided from (1).
3. Deduct the debtor's allowable exemptions from (2).
4. Avoidance of all judicial liens results unless (3) is a positive figure.
5. If (3) does result in a positive figure, do not allow avoidance of liens, in order of priority, to that extent only. Brantz, 106 B.R. at 69. Ironically, this was precisely the same formula used by Judge Lorch in granting a debtor's lien avoidance motion prior to the 1994 amendments to § 522(f). In re Bradshaw, 156 B.R. 239, 242 (Bankr.S.D.Ind. 1993). Applying that formula here, we have the following:
1. Determine the value of the property on which a judicial lien is sought to be avoided: $30,000
2. Deduct the amount of all liens not to be avoided from (1). Debtors cannot avoid the consensual first mortgage of $28,000, so this would be $2000. ($30,000 — $28,000)
3. Deduct the debtor's allowable exemptions from (2). (the Debtors are entitled under Indiana law to a homestead exemption of $7500, so this would be ($5500) ($2000-$7500), a negative figure.
4. Avoidance of all judicial liens results unless (3) is a positive figure. (3) is a negative figure, so all the judicial liens, including Aetna's, may be avoided.
5. If (3) does result in a positive figure, do not allow avoidance of liens, in order of priority, to that extent only. Not applicable, since, (3) is a negative figure. Therefore, Aetna's Judicial Lien impairs an exemption to which the Debtors are entitled, and therefore, can be avoided in its entirety. This result is consistent with the following observation:
In adopting this expansive definition of "impairment", Congress established that when a debtor acts to avoid a judicial lien under § 522(f)(1)(A), the lien will survive only if, at the time of the bankruptcy filing, the debtor's property has sufficient value to satisfy all liens on the property, including the judicial lien [sought to be avoided], and at the same time, give effect to the debtor's exemption in the property. In all other instances, such as when a debtor has no equity in the property above a mortgage senior to the judicial lien, or when the amount of such equity is less than the amount of the lien and/or the exemption, the judicial lien will be avoided in its entirety.
In re VanZant, 210 B.R. 1011, 1014 (Bankr.S.D.Ill. 1997) (Meyers, J.). (emphasis added).
Here, the equity in the marital residence was less than the amount Aetna's Judicial Lien and also was less than the amount of the homestead exemption to which the Debtors were entitled. Accordingly, Aetna's objection is overruled and the Debtors' Motion to Avoid the Judicial Lien of Aetna Casualty Surety Co. is GRANTED.