Opinion
Civil Action No. 3:02CV-376-S
March 31, 2003
MEMORANDUM OPINION
This matter is on appeal from the bankruptcy court. At issue is the proper methodology for calculating the extent to which a judicial lien may be avoided because it impairs an exemption in the property to which the debtor is entitled under the Bankruptcy Code.
The facts are straightforward and undisputed. The debtor owns a house and lot in Louisville, Kentucky with a fair market value of $250,000.00. The debtor claims and wishes to have the benefit of a $6,000.00 exemption in this property.
The property is encumbered by several liens. They are, in order of priority, as follows:
$15,000.00 — ad valorem real estate taxes;
$180,000.00 — first mortgage;
$112,418.35 — judgment lien in favor of LPP Mortgage, Ltd., the appellee (hereinafter LPP);
$56,548.03 — state tax lien.
Title 11, United States Code, Section 522(f)(1) provides, in essence, that a debtor such as appellant may avoid a lien to the extent that the lien impairs the debtor's $6,000.00 exemption.
A lien impairs an exemption to the extent that the sum of the lien, all other liens on the property, and the amount of the exemption exceeds the value of the debtor's interest in the property in the absence of any liens. 11 U.S.C. § 522(f)(2).
The liens against the property total $363,967.18. Since the agreed value of the property is $250,000.00, it is obvious that the debtor/appellant's $6,000.00 exemption is impaired by LPP's lien.
In this action, the debtor/appellant wishes to avoid the third lien out of four, that being the lien of LPP in the amount of $112,418.35. He reasons that LPP's lien impairs his exemption because, as provided in 11 U.S.C. § 522(f)(2)(A), the sum of LPP's lien plus all other liens on the property and the amount of his exemption exceeds the value of his interest in the property in the absence of any liens. Of course, if LPP's lien were avoided in its entirety, there would still not be any equity in the property to satisfy the debtor/appellant's exemption, since the total of all other liens is $251,548.83, which is in excess of the property's $250,000.00 agreed value.
In its order below, the bankruptcy court calculated the extent to which LPP's lien impaired the $6,000.00 exemption. First, the bankruptcy court disregarded the $15,000.00 ad valorem tax lien on the basis that § 522(f)(2)(A) did not mention ad valorem tax assessments, and that the lien was statutory, not recorded.
The bankruptcy court then began subtracting the liens from the agreed value of the property, in order of priority, to determine the extent to which LPP's lien impaired the debtor/appellant's exemption. In essence, after subtracting the debtor's exemption of $6,000.00 and the first mortgage in the amount of $180,000.00, the bankruptcy court found that there was $64,000.00 in equity available to secure LPP's lien, and that the unsecured balance of $48,418.35 impaired the exemption and was therefore avoidable.
On appeal, the debtor/appellant takes issue with two aspects of the bankruptcy court's calculus:
Should the bankruptcy court have disregarded the $15,000.00 ad valorem tax lien?
Should the bankruptcy court have considered the liens in order of priority in order to determine the extent to which the lien in question impairs the debtor/appellant's exemption?
We will address these issues in turn.
A. THE $15,000.00 AD VALOREM TAX LIEN
On appeal, LPP contends that ad valorem tax assessments are not debts of a debtor, but debts of the land. It contends that since the land has liability for payment of ad valorem taxes, the lien imposed by Kentucky law does not comport with the definition of lien contained in 11 U.S.C. § 101(37).
The debtor/appellant contends that the Bankruptcy Code makes no distinction between statutory and recorded liens, which was the point of distinction in the bankruptcy court's opinion. Debtor/appellant's contention is clearly correct.
An examination of the Kentucky statutes reveals that the position taken by LPP is clearly incorrect. KRS 134.060 makes the owner of real property, here the debtor/appellant, liable for taxes thereon. The tax is the personal debt of the person liable for payment. KRS 134.050. The lien imposed by KRS 134.420 obviously secures the payment of taxes, as does KRS 91A.070.
We conclude that the ad valorem state tax lien, while not avoidable because it is not a judicial lien as defined in 11 U.S.C. § 101(36), is nevertheless a lien which must be taken into account in determining the extent to which an avoidable lien impairs the debtor's exemption.
The bankruptcy court will be reversed in this regard.
B. CONSIDERING LIENS IN ORDER OF PRIORITY
Aside from the bankruptcy court's failure to properly consider the $15,000.00 ad valorem tax lien, the crux question in this part of the appeal is whether the bankruptcy court properly disregarded the inferior state tax lien of $56,548.03 in determining that just a portion of the LPP mortgage could be avoided by the debtor. The bankruptcy court observed "We do not believe, however, that Congress intended to alter state law lien priorities when it added [ 11 U.S.C. § 522(f)(2)(A)]." While the bankruptcy court found support for its position in several cases cited in the opinion below, it is also clear that the bankruptcy court disregarded the precise language of the cited statute.
We have found no authority in the Sixth Circuit on this point.
The situation presented in In re Kolich, 273 B.R. 199 (8th Cir. BAP 2002), is remarkably similar to the facts presented here. We find the rationale in this case persuasive, especially since it encompasses the calculus provided by Congress in § 522(f)(2)(A). State lien priority law, while perhaps useful in state foreclosure proceedings, simply has no applicability when Congress has spoken on the subject, and clearly. Accordingly, the judgment of the bankruptcy court will be reversed in this regard as well.
C. CONCLUSION
In accordance with this opinion, the bankruptcy court's determination to disregard the $15,000.00 ad valorem state tax lien in its lien avoidance calculation will be reversed. The bankruptcy court's determination with respect to the partial avoidability of the LPP lien will be reversed. The judicial lien of LPP in the amount of $112,418.35 will be avoided in its entirety.
A separate order will be entered in conformity with this opinion.