Opinion
Case No. 5-01-01852
May 23, 2002
DECISION AND ORDER
At Harrisonburg in said District this 23rd day of May, 2002:
On July 9, 2001, in the Shenandoah County District Court, Alan I. Herman (hereinafter Plaintiff) obtained a default judgment against Carl L. Cruise (hereinafter Debtor) in the amount of $5,452.00 plus interest. On July 20, 2001, the Plaintiff caused a garnishment summons to be issued to the Debtor's employer, Howell Metal Company of New Market, Virginia. The Suggestion for Summons in Garnishment indicated a return date of November 19, 2001. By October 17, 2001, a total of five checks were collected under the garnishment proceedings totaling $488.45. The Debtor filed a voluntary bankruptcy petition under Chapter 7 of Title 11 of the United States Code on October 12, 2001. The court entered an order staying the garnishment on the same date. Following the § 341 meeting of creditors, the Debtor executed and timely filed a homestead deed claiming an exemption of $1,333.12 in garnished wages.
"The judgment was awarded based on a suit for trespass and conversion. The Plaintiff alleged that the Debtor caused a logger to fell trees on the Plaintiff's land without his knowledge or permission.
On January 2, 2002, Debtor's counsel filed a motion to avoid the lien on the garnished funds that was acquired within 90 days of the Debtor's bankruptcy filing. The Debtor also argued that the lien impairs exemption to which the Debtor is entitled. The Plaintiff then filed this adversary proceeding to determine the dischargeability of the $5,452.00 judgment and to create a constructive trust in his behalf, the res of which would be $488.45 in garnished wages.
The issue before the court is whether the Plaintiff is entitled to the creation of a constructive trust to protect the garnished wages. The propriety of imposing a constructive trust has been recognized in circumstances where "property has been acquired by fraud or other improper means" or "where it has been fairly and properly acquired, but it is contrary to the principles of equity that it should be retained, at least for the acquirer's own benefit." Prime Construction Corp. v. Riverside Development Joint Venture A-1 (In re Prime Construction Corp.), 156 B.R. 176, 179 (Bankr. E.D. Va. 1993) (citation omitted). Before a constructive trust may be imposed, the court must be satisfied that the funds at issue are traceable. See Old Republic Nat'l Title Ins. Co. v. Tyler (In re Dameron), 206 B.R. 394, 402 (Bankr. E.D. Va. 1997).
The imposition of constructive trusts in bankruptcy proceedings has been questioned. However, without ruling whether a constructive trust in this case could be created, the Plaintiff's position regarding the imposition of a constructive trust on the garnished funds has little merit. It does not appear that there is any colorable argument by which to characterize the Debtor's wages as property that was acquired by fraud or by other inappropriate means. Furthermore, as mentioned in footnote 2, the creation of a constructive trust here may actually offend principles of equity rather than serve them. Lastly, the requirement of traceability appears impossible to establish. There is no alleged or apparent relationship between the wages received from the Debtor's employer and the money given to the Debtor by the logger. See supra note 1. For these reasons a constructive trust is not warranted here.
Compare XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443 (6th Cir. 1994) (rejecting constructive trust in bankruptcy because it may disrupt the policies of equitable distribution of the estate to creditors); In re Nova Tool Engineering, Inc., 228 B.R. 678, 680-81 (Bankr. N.D. Ind. 1998) ("To permit a creditor, no matter how badly he was 'had' by the debtor, to lop off a piece of the estate under a constructive trust theory is to permit that creditor to circumvent completely the Code's equitable system of distribution."); In re Jeter, 171 B.R. 1015, 1021-24 (Bankr. W.D. Mo. 1994), aff'd, 73 F.3d 205 (8th Cir. 1996) (same); Matter of Paul J. Paradise Associates, Inc., 217 B.R. 452, 455-56 (Bankr. Del. 1997); Matter of United Imports, 203 B.R. 162, 169-70 (Bankr. Neb. 1996) (following Omegas) with In re Dameron, 206 B.R. 394 (Bankr. E.D. Va. 1997) (addressing constructive trusts in bankruptcy but finding instead an express trust), aff'd, 155 F.3d 718 (4th Cir. 1998); In re Reider, 177 B.R. 412 (Bankr. D. Me. 1994) (rejecting Omegas); Curtis Mfr. Co. v. Plasti-Clip Corp., 933 F. Supp. 94 (D.N.H. 1995) (same).
An even more persuasive reason to deny the constructive trust theory is found in Virginia Code § 34-4 and -17 and 11 U.S.C. § 522(f). Virginia Code § 34-4 states that "[e]very householder shall be entitled.., to hold exempt from creditor process arising out of a debt, real and personal property, or either, to be selected by the householder, including money and debts due the householder not exceeding $5,000 in value."
By design the homestead deed protects from creditors a certain amount of the debtor's property needed for a fresh start. To receive the benefit, a debtor must follow Virginia Code § 34-17 which states that:
[t]he real or personal estate which a householder is entitled to hold as exempt may be set apart at any time before it is subjected by sale under creditor process, or, if such creditor process does not require sale of the property, before it is turned over to the creditor.
Applying § 34-17 to garnishment proceedings, the Virginia Supreme Court declares:
[w]e construe the language 'subjected by sale or otherwise under judgment, decree, order, execution or other legal process' to mean that a homestead deed may be filed at any time before a court order or decree directs a sale or, as in this case, otherwise orders the payment of money by the garnishees to the judgment creditor at a hearing of the garnishment proceeding. See Smith v. Holland, 124 Va. 663, 666, 98 S.E. 676, 677 (1919). Hence we do not agree that the language in Code § 34-17 means, as contended by Virginia National Bank, that property may not be set aside as exempt after it is subject to the lien of the judgment and after a garnishment proceeding has been instituted.
Wilson v. United Virginia Bank, 214 Va. 14, 15, 196 S.E.2d 920, 921 (1973) (emphasis in original).
The court finds the Wilson case controlling. The garnishment proceeding here was stayed before the return date indicated on the Suggestion of Garnishment. Moreover, a state court did not hold a hearing on the garnishment, nor were the garnished funds the object of a court order directing payment to the garnishor. Accordingly, the garnished funds are properly exempted under the homestead deed and cannot be the res of a constructive trust. 11 U.S.C. § 522(f) also provides means by which to extinguish the Plaintiff's claim to the garnished funds. Section 522(f) allows a debtor to avoid the fixing of a judicial lien on an interest in the debtor's property that impairs an exemption to which a debtor would be entitled. Because the Debtor was entitled to homestead the garnished wages, the Plaintiff's execution lien (or judicial lien) on the Debtor's wages is voidable under § 522(f). See Baum, 15 B.R. at 540.
The case styled Baum v. United Virginia Bank, 15 B.R. 538 (Bankr. E.D. Va. 1981) is on all fours with the matter here and is likewise persuasive. In Baum, the court held that Virginia's homestead deed trumped a creditor's interest in $742.16 of garnished funds that were not the subject of sale or court order before the homestead deed was recorded. Id. at 540. See In re Wilkinson, 196 B.R. 311, 316 (Bankr. E.D. Va. 1996) ("An execution lien in Virginia, however, differs from a consensual lien in one important respect: it can be trumped, even after it fixes, by the debtor's assertion of his or her exemption rights.").
For the reasons stated above, the Plaintiff's request that a constructive trust be created must be denied. The Debtor's properly filed homestead deed protects the garnished funds from the reach of the Plaintiff. The General Assembly of Virginia has not yet seen fit to except from the scope of Va. Code § 34-4 obligations arising from the claimant's bad acts; thus, the Debtor's exemption of garnished wages based on a tort judgment is viable. Additionally, Bankruptcy Code § 522(f) permits avoidance of judicial liens that impair exemptions to which a debtor is entitled. Because the Plaintiff's lien impairs the Debtor's exemption under Va. Code § 34-4, the lien may be avoided. Accordingly, it is
ORDERED:
That the Plaintiff's request for the creation of a constructive trust is DENIED and that the properly exempted garnished funds be turned over to the Debtor.