Opinion
No. 01-81600.
May 21, 2004
OPINION
This case was reopened to permit the Debtors, Larry L. Meincke, individually referred to as "LARRY," and Nancy E. Meincke (together, the "DEBTORS") to move, pursuant to 11 U.S.C. § 522(f), to avoid a judgment lien as impairing their homestead exemption. The judgment lien is held by Buffalo Prairie State Bank ("BUFFALO"). Following an evidentiary hearing, the Court took the lien avoidance motion under advisement, as well as the DEBTORS' Motion to Amend Schedules A, C D.
The DEBTORS filed their Chapter 7 bankruptcy case on April 9, 2001. Prior thereto, BUFFALO had obtained a judgment against LARRY, only, and had recorded a memorandum of the judgment in the Office of the Recorder of Deeds for Mercer County, Illinois, the county in which the DEBTORS' homestead real estate in New Boston, Illinois, is situated. As of the petition date, the balance due on BUFFALO'S judgment was $7,770.84.
The homestead property is encumbered by two prior mortgages. The first mortgage, held by 1st National Bank of Muscatine, had a petition date balance of $67,278.03. The second mortgage, held by Farmers State Bank of Western Illinois, had a petition date balance of $14,965.72. There was also a lien on the property for unpaid real estate taxes of $813.00.
Notwithstanding that the value of the homestead property is disputed, neither party presented the testimony of an appraiser at trial. The DEBTORS had retained an appraiser but he failed to appear at the hearing. Hearsay evidence of the appraiser's opinion of value was denied admission. BUFFALO chose not to retain its own appraiser, apparently content with cross-examining the DEBTORS' appraiser. In the absence of an appraiser, the only evidence of value proffered at trial was the lay opinion of LARRY.
BUFFALO'S attorney questioned the validity (and, hence, the admissibility) of a real estate appraisal stating an opinion of value as of a date three years past. However, it is a relatively common occurrence, in bankruptcy cases, for property to be valued as of a prior date. As long as the comparables used by the appraiser are of sales around the date in question, the fact that the opinion of value is as of an earlier date does not generally affect the validity of the appraisal.
In their bankruptcy schedules, signed on April 5, 2001, the DEBTORS listed the current market value of their residence at $82,000.00. At trial, LARRY testified that his opinion has changed and he now believes his house was worth $85,000.00 when the bankruptcy commenced in April, 2001. The sole basis for his revised opinion, however, was his knowledge of the new appraisal, ruled inadmissible, prepared by the appraiser who did not appear to testify at trial. By their Motion to Amend Schedules, the DEBTORS seek to amend Schedules A and D to reflect a value of $85,000.00 rather than $82,000.00 for their homestead property and to amend Schedule C to claim a $15,000.00 homestead exemption not previously asserted.
The requested amendment to Schedule C will be granted. BUFFALO does not dispute that the DEBTORS are entitled to a $15,000.00 homestead exemption under Illinois law, applicable in this proceeding. In general, a tardily filed amendment to Schedule C does not result in forfeiture of an exemption to which the debtor is entitled as a matter of substantive law; instead, the detriment to the debtor is loss of the benefit of the bar date for interested parties to object to claimed exemptions. In re Montanaro, 307 B.R. 194 (Bankr.E.D.Cal. 2004). Schedules are generally permitted to be amended liberally and the delay in claiming the exemption has not prejudiced BUFFALO'S ability to assert its position in this litigation.
As to the value of the property, the Court rejects LARRY'S revised lay opinion of $85,000.00, since it was admittedly based on nothing other than inadmissible hearsay evidence. Given what little there is in the record to work with, the Court finds that the best evidence of the value of the homestead property is the $82,000.00 amount originally scheduled by the DEBTORS in April, 2001. That figure represents the DEBTORS' opinion of value that they held at the time of the filing, before they became aware that the value of this property was a disputed issue. For the purpose of this proceeding, the value of the homestead property as of the petition date is determined to be $82,000.00.
Section 522(f)(1)(A) of the Bankruptcy Code permits a debtor to avoid the fixing of a judicial lien on an interest in the debtor's property, but only to the extent that such lien impairs the debtor's entitlement to an exemption. The purpose of this provision is to enhance a debtor's fresh start. In re Hart, 282 B.R. 70, 77 (1st Cir.BAP 2002). By stripping off judicial liens that impair the homestead exemption, a debtor is able to realize the benefit of any post-filing appreciation in the value of the property as well as the benefit of creating equity by paying down the prior mortgage.
Subsection 2(A) of Section 522(f) provides the formula for determining impairment, as follows:
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.
As a general rule, where a debtor has no equity in the property because the amount of senior, unavoidable liens exceed its value, a junior judgment lien is nonetheless considered to impair the exemption, and thus be wholly avoidable, even though the exemption attaches to no present equity. 4 COLLIER ON BANKRUPTCY ¶ 522.11[3] (15th ed. rev.). The Court adopts that rule and rejects the contrary rationale that there can be no impairment absent present equity to support the exemption claim. See, e.g., In re Freeman, 259 B.R. 104, 109 (Bankr.D.S.C. 2001) ("the view that lack of equity in the property precluded avoidance of a judicial lien has been clearly overturned by the Bankruptcy Reform Act of 1994, in which Congress clearly stated that it intended to overrule that prerequisite"); In re Whitehead, 226 B.R. 539, 541 (Bankr.W.D.N.Y. 1998) ("The Legislative History to the Bankruptcy Reform Act of 1994 has made it clear that it was always the intention of Congress in enacting Section 522(f)(1), that a debtor would be entitled to avoid the fixing of judicial liens, and take advantage of the applicable federal or state homestead exemption, even if a debtor did not have equity in their residence over otherwise unavoidable liens."). This construction most fully effectuates the purpose of Section 522(f)(1) to enhance a debtor's fresh start.
Likewise, where the value of the property exceeds the balance due on unavoidable mortgages but the amount of the debtor's equity in the property is less than the allowed amount of the exemption, the judgment lien is wholly avoidable. Under the statutory definition of impairment, a judicial lien will survive only if, at the time of the bankruptcy filing, the debtor's property has sufficient value to satisfy all unavoidable liens and the full amount of the exemption, with some equity left over for the judicial lienor. See, In re Ware, 274 B.R. 206, 209 (Bankr.D.S.C. 2001) (debtor's equity is the starting point when analyzing a judicial lien avoidance issue). The judicial lien is unavoidable only to the extent of the leftover equity. See, In re Kolich, 273 B.R. 199 (8th Cir.BAP 2002).
The statutory formula is applied in this case, as follows:
(i) "the lien" BUFFALO'S judgment lien $ 7,770.84
(ii) "all other liens on the property" Muscatine Bank's first mortgage 67,278.03 Farmers Bank's second mortgage 14,965.72 Real estate tax lien 813.00
(iii) "the amount of any exemption that the debtor could claim if there were no liens on the property" Homestead exemption 15,000.00 ___________ $105,827.59
Less the property's value — 82,000.00 ___________ Extent of impairment $ 23,827.59
Since the extent of the impairment, $23,827.59, is greater than the amount of BUFFALO'S judicial lien, $7,770.84, the lien is entirely avoidable. In order for any portion of BUFFALO'S lien to be unavoidable, the value of the property would have had to exceed $98,056.75, the sum of the two mortgages, the real estate tax lien and the DEBTORS' homestead exemption.
The court in Kolich noted with approval an alternative formula, perhaps easier to apply than the statutory one, to reach the same result, used by the court in In re Brantz, 106 B.R. 62 (Bankr.E.D.Pa. 1989). The Brantz Court determined the value of the property, deducted the amount of all liens which were not avoidable, and then deducted the debtor's allowable exemption. Under that formula, if the result is a negative number, the lien is avoidable in its entirety; if positive, the lien is not avoidable to that extent only. Kolich, 273 B.R. at 204. In the case at bar, the Brantz formula yields a negative number, so that BUFFALO'S lien is avoidable in its entirety.
Based on the Court's finding that the value of the property, as of the petition date, is less than the sum of the mortgage balances, it is unnecessary and pointless for the DEBTORS to amend Schedules A and D and the Motion to Amend Schedules A, C D will be denied to that extent.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED as follows:
1. The fair market value of the Debtors' residential real estate as of April 9, 2001, the date this case was filed, is determined to be $82,000.00.
2. The Debtors' Motion to Amend Schedules A, C D is allowed to permit the amendment of Schedule C and is denied as to the proposed amendments to Schedules A and D.
3. The Debtors' Motion to Avoid the Judgment Lien of Buffalo Prairie State Bank is granted and the judgment lien is avoided in its entirety.