Opinion
Case No. 92-15211-A
July 30, 1997
John P. McGeehan, Esq., John P. McGeehan Associates, P.C., Fairfax, VA, of Counsel for the debtor
MEMORANDUM OPINION AND ORDER
This matter is before the court on the debtor's motion to reopen his chapter 7 case in order to avoid a judgment lien against real estate under §§ 105 and 522(f)(1), Bankruptcy Code. A hearing was held on July 29, 1997, at which only counsel for the debtor appeared. At the conclusion of the hearing, the court ruled from the bench that the motion to reopen would be denied because the debtor would be unable to avoid the lien since he did not own the property in question when he filed his bankruptcy petition. This memorandum opinion supplements the court's bench ruling.
The motion was served only on the chapter 7 trustee and the United States Trustee. It was not served on the judgement creditor whose lien the debtor seeks to avoid.
Facts
Until the present motion, this chapter 7 case had an uneventful history. The debtor, Byron Smith, filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code in this court on November 5, 1992. The meeting of creditors was held on December 10, 1992 and the chapter 7 trustee filed a report of no distribution on February 11, 1993. On his schedules, the debtor did not list any interest — legal, beneficial or equitable — in real property, and correspondingly, did not exempt any interest in real property. The debtor did list a claim held by Fleet Funding that was secured by a first deed of trust against property located at 3017 Cardinal Drive, Front Royal, Virginia 22630. The debtor also listed two unsecured claims: one held by Dominion Bank, N.A. for $15,961 that resulted from credit card charges, and one held by United Savings Bank in the amount of $8,500 that arose from a "signature loan." By order dated February 24, 1993, the debtor received a discharge of his dischargeable debts and the case was closed on February 26, 1993.
The debtor listed a separate claim held by Dominon Bank, N.A., in the amount of $14,000 secured by a 1992 Mazda pick-up truck. This lien, and the underlying property, apparently are not the subject of the present motion.
On July 8, 1997 — more than four years later — the debtor filed the motion currently before the court. The motion recites that Dominion Bank, N.A. was a creditor of the debtor based on a "business debt" and obtained a default judgment against the debtor on May 31, 1991, for $13,997.50, plus interest. As noted above, Dominion was listed in the schedules both as an unsecured creditor (arising from credit card charges) and as a secured creditor (possessing a lien against the debtor's car). No claim by Dominion Bank is listed as arising from a "business debt." The motion further recites that on July 17, 1991, Dominion docketed its judgment in Warren County, Virginia, thus creating a lien against real property the debtor owned in the county. The bank has taken no action since that date to enforce its lien against the property in question. When the debtor and his wife attempted to apply for a loan in June 1997, the judgment lien was discovered during a title search. The motion asserts that as of the petition date, $89,000 was owed on the first deed of trust against the property, and that the property had a fair market value at that time of $92,000, leaving $3,000 of equity in the property.
In Virginia the docketing of a judgment creates a lien against real property which the judgment debtor owns in the city or county in which the judgment is docketed. Va. Code Ann § 8.01-458.
Central to the issue presently before the court, the motion recites that in September 1991 — more than a year prior to the bankruptcy filing — the debtor transferred his interest in the property to his wife, Marilyn Smith, as part of an [e]state plan." Thus, the debtor owned the property at the time the judgment was docketed on July 17, 1991, but not as of the date he filed his petition. The motion asserts that "[t]he docketing of the judgment in 1991 impaired [the debtor's] interest in the property as of that date, to the extent there was equity, or the lien did not attach to the property because there was no equity in the property."
Conclusions of Law and Discussion
Under § 350(b), Bankruptcy Code, a closed bankruptcy case "may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause." The decision whether to reopen a closed case is discretionary with the court. Hawkins v. Landmark Finance Co. (In re Hawkins), 727 F.2d 324 (4th Cir. 1984). A case should not be reopened when doing so would be futile and a waste of judicial resources. In re Carberry, 186 B.R. 401 (Bankr. E.D. Va. 1995) (Tice, J.) (denying motion to reopen case to schedule omitted creditor). The threshold issue, therefore, is whether, if the case were to be reopened, the court could grant meaningful relief.
The answer to that question in turn depends upon the resolution to another: does the Bankruptcy Code permit a debtor to avoid a judgment lien against property if the debtor owned the property when the lien attached, but no longer owned the property at the time the bankruptcy petition was filed? Under § 522(f)(1)(A), Bankruptcy Code, "the debtor may avoid the fixing of a judicial lien on an interest of the debtor in property to the extent that such Hen impairs an exemption to which the debtor would have been entitled under subsection (b) of this section," subject to certain exceptions not relevant here. (Emphasis added). A judicial lien is considered to "impair" an exemption "to the extent that the sum of the lien, all other liens on the property[,] and 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)(A), Bankruptcy Code. Put more simply, most consensual liens — such as a deed of trust or a mortgage — take priority over a debtor's right to claim an exemption in property, but a debtor's right to claim an exemption in property comes ahead of a judgment lien. The judgment lien can be avoided, however, only to the extent it impairs an exemption to which the debtor would otherwise be entitled. 4 Collier on Bankruptcy ¶ 522.11[1], [3], at 522-74, 76 to 82 (Lawrence P. King, ed., 15th ed. rev. 1997). The critical question before the court is whether the debtor could claim an exemption in the property that is subject to the judicial lien.
A nonpurchase-money, nonpossessory security interest, even though consensual, may be avoided in certain types of personal property, but not in real property. § 522(f)(1)(B), Bankruptcy Code. Unless avoided under some provision of the Bankruptcy Code, the general rule is that liens and other security interests survive bankruptcy. Johnson v. Home State Bk., 501 U.S. 78, 82-84, 111 S.Ct. 2150, 2153-54, 115 L.Ed.2d 66 (1991); Farrey v. Sanderfoot, 500 U.S. 291, 297, 111 S.Ct. 1825, 114 L.Ed.2d 377 (1991). This is true even as to exempt property. § 522(c)(2), Bankruptcy Code. The court can only assume, based on the limited recitals in the motion, that the "business debt" that resulted in the judgment lien held by Dominion Bank is the same as the unsecured claim listed by the debtor in his schedules. Any personal liability that the debtor had on such claim was discharged during the pendency of the case. See § 524(a)(1), Bankruptcy Code; Johnson, 501 U.S. at 82-84 n. 5, 111 S.Ct. at 2153-54 n. 5.
The definition of impairment found at § 522(f)(2), Bankruptcy Code, was added as part of the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4106. When the value of the unavoidable liens and the exemption to which the debtor is entitled is at least equal to the value of the debtor's interest in the property, without the liens or exemptions in place, the entire judicial lien is considered to "impair" the exemption, and may be avoided in its entirety. This is contrary to, and likely overrules, a number of decisions in this and other circuits decided under prior law. See Butler v. Southern O Corp. (In re Butler), 196 B.R. 329, 331 (Bankr. W.D. Va. 1996) (stating that the amendments overruled cases such as In re Opperman, 943 F.2d 441 (4th Cir. 1991), which held that the lien is avoided only to the extent it actually impaired an exemption); see also 4 Collier on Bankruptcy ¶ 522.11[3], at 522-76 to 82. However, because the debtor, as discussed below, did not own the property at the time he filed his petition for relief, the court need not reach the question of the extent to which the lien may be avoided.
A fundamental, albeit sometimes overlooked, requirement in order to claim an exemption in property in bankruptcy is that the debtor must own the property, or have an interest in the property at the time the bankruptcy is filed. The term "interest of the debtor in property" can only be understood as referring to an interest of the debtor in property existing on the date of the bankruptcy filing, not an interest the debtor may have had sometime in the near or distant past. Barzee v. Trammel (In re Trammel), 63 B.R. 878, 882 (Bankr. E.D. Va. 1986) (Bostetter, C.J.) (debtors could not avoid judgment lien against real estate under 522(f) when they had sold property prior to filing bankruptcy petition); see also In re Vitullo, 60 B.R. 822 (D.N.J. 1986) (judgment lien against real estate could not be avoided under 522(f) where, even though debtors owned real estate on the date they filed their chapter 7 petition, they sold it before filing their lien avoidance motion); In re Stephenson, 205 B.R. 52, 61 n. 16 (Bankr. E.D. Pa. 1997) (stating in dicta that the lien avoidance powers under § 522(f) are limited to the debtor's interests in property, not those of third persons); In re May, 33 B.R. 599 (Bankr. N.D. Ohio 1983) (handgun sold prior to bankruptcy not subject to lien avoidance); In re Gibbs, 39 B.R. 214 (Bankr. W.D. Ky. 1984) (funds paid over to garnishment creditor 8 months prior to bankruptcy not subject to lien avoidance); Clowney v. North Carolina Nat'l Bk. (In re Clowney), 19 B.R. 349, 351-52 (Bankr. M.D.N.C. 1982) (stating that property acquired after the debtor filed for bankruptcy cannot be exempted, and thus any judgment lien against such property could not be avoided under § 522(f)). It is well established that the time for determining what exemptions a debtor is entitled to is the date of filing the petition for relief. § 522(b)(2)(A), Bankruptcy Code; Owen v. Owen, 500 U.S. 305, 314 n. 6, 111 S.Ct. 1833, 1838 n. 6, 114 L.Ed.2d 350 (1991); In re Weinstein, 192 B.R. 133, 137 (Bankr. E.D. Va. 1995) (Mitchell, J.); In re Heater, 189 B.R. 629, 634 (Bankr. E.D. Va. 1995) (Shelley, J.); see also Palais v. Dejarnette, 145 F.2d 953, 955 (4th Cir. 1944) (decided under the Bankruptcy Act of 1898).
This fundamental requirement — that the debtor must actually own property in order to exempt it — is well-established in other contexts. See, e.g., In re Duty, 78 B.R. 111, 116-17 (Bankr. E.D. Va. 1987) (Shelley, J.) (holding that a debtor had no interest in proceeds from a personal injury claim to exempt when the debtor had already assigned them to another person); In re Smith, 45 B.R. 100, (Bankr. E.D. Va. 1984) (Shelley, J.) ("where the debtor does not own real or personal property, including money or debts due, then there is nothing for the debtor to exempt"); see also General Motors Acceptance Corp. v. Lefevre, 38 B.R. 980, 983 (D. Vt. 1983) (finding that a debtor had no interest in spouse's truck, thus preventing the debtor from claiming it exempt); In re Preston, 96 B.R. 61, 63 (Bankr. W.D. Va. 1989) (Pearson, J.) (holding that a spouse may not exempt a leasehold interest where she is not the actual owner of the leasehold); In re Love, 42 B.R. 317, (Bankr. E.D.N.C. 1984) (in order to claim the North Carolina residential exemption, the debtor must own the residence); In re Freund, 32 B.R. 622, 623 (Bankr. W.D. Wis. 1983) (holding that the bankruptcy estate of a spouse, who has no interest in an inheritance, has no interest to exempt in her spouse's inheritance that he received from his mother); In re Taylor, 22 B.R. 888, 890 (Bankr. S.D. Ohio 1982) (a nonincome producing spouse has no property interest to exempt in other spouse's federal income tax refund); In re Ferguson, 15 B.R. 439, 441 (Bankr. D. Colo. 1981) ("It is basic to any right to an exemption, however, that the debtor have an ownership interest in the property before an exemption may be claimed"); In re Cunningham, 5 B.R. 709, 711 (Bankr. D. Mass. 1980) (disallowing an exemption of one spouse in the residence when title to the residence was in the other spouse's name only).
Section 522(b)(2) states in relevant part:
(b) [A]n individual debtor may exempt from property of the estate
* * *
(2)(A) any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor's domicile has been located for the 180 days immediately preceding the date of filing of the petition, or for a longer portion of such 180-day period than in any other place[.]
(Emphasis added).
In Trammel, Chief Judge Bostetter squarely addressed the issue that is currently before the court. In Trammel, the debtors, husband and wife, conveyed their one-third interest in certain property, which was subject to nine judgments docketed by seven creditors of the debtors, to the plaintiffs on July 30, 1984. Id. at 879 n. 1. The Trammels then proceeded, over three months later on November 7, 1984, to file their petition for relief under chapter 7 of the Bankruptcy Code. Id. at 880. In response to the plaintiff's argument that because the judgment creditors' liens could have been avoided by the debtors under § 522(f)(1), leaving such creditors without an in rem claim against the land, and thus no inequity would result from avoiding the liens, Chief Judge Bostetter succinctly stated:
Clearly a debtor may avoid only those liens fixed on the debtor's own property. Further, said liens are only avoidable to the extent that they impair an exemption. Once the Trammels transferred title to the encumbered property, they lost their ability to avoid liens standing against it for two reasons. First, the liens were no longer fixed on property in which the debtors held an interest. Second, because the debtors could not and did not claim the property exempt, the lien did not impair the debtors' exemption.
Id. at 882 (citation omitted). The court also declined to find that equity demanded that the judgment liens be released from the property because "[a]fter the transfer of the property to the [plaintiffs], the judgment lien creditors had every right to conclude that, under the law, their liens followed the property into the purchasers' hands. . . . The fact that under a completely different set of circumstances the Trammels' judgment creditors could have lost their liens against this parcel of property does not provide adequate justification for the Court to extinguish the liens." Id. at 887.
Turning to the present case, the court agrees with the reasoning in Trammell and holds that a debtor cannot avoid a lien as impairing an exemption to which the debtor would otherwise be entitled when, as of the date the debtor filed his bankruptcy petition, the debtor did not own the property subject to the lien. It is absolutely fundamental that in order to claim an exemption in property, one must own the property in question. Here, the debtor candidly admits in his motion to reopen his case that he transferred the property subject to the judicial lien to his wife over one year prior to filing for bankruptcy. At the time the debtor filed for bankruptcy, there was simply no exemption which he could claim in the relevant property that would be impaired by the judicial lien. As no exemption was claimed in the property, the judicial lien in question does not "impair" an exemption to which the debtor would be entitled but for the lien. Accordingly, there is no basis upon which the lien may be avoided under § 522(f), Bankruptcy Code.
Because the transfer in question occurred more than one year prior to filing for bankruptcy, the debtor answered "NONE" in response to a question in the statement of financial affairs asking that the debtor "[l]ist all other property, other than property transferred in the ordinary course of the business or financial affairs of the debtor transferred either absolutely or as security within one year immediately preceding the commencement of this case."
The debtor asserts in his motion that he could have (had he not transferred the property) exempted the equity under his homestead exemption, Va. Code Ann. § 34-4. Under the homestead exemption, a "householder" — defined as any resident of Virginia — may hold up to $5,000 of real or personal property exempt by filing for record an instrument known as a homestead deed in the Circuit Court of the city or county where the real property is located or, if personal property is claimed, where the debtor resides. Va. Code Ann. §§ 34-4, 34-6, 34-13, 34-14. In the case of a debtor who has filed for bankruptcy, the homestead deed must be filed within 5 days of the first date set for the meeting of creditor in the bankruptcy case. Va. Code Ann. § 34-17. Failure to properly file the homestead deed in accordance with state law results in the loss of the exemption in bankruptcy. Zimmerman v. Morgan, 689 F.2d 471 (4th Cir. 1982). Although the debtor claimed other items as exempt under his homestead exemption, he did not claim the real property as exempt on his schedules; nor apparently did he list it on his homestead deed.
The motion to reopen recites that the debtor transferred the property in question to his wife as part of an estate plan. An interesting question would arise if the debtor retained some type of beneficial or equitable interest in the property through a trust or other estate planning device. It is sufficient to note that no such interest was listed on the debtor's schedules or claimed exempt, and that, in any event, the time within which such interest could be exempted under the Virginia homestead exemption has long expired. Va. Code Ann. § 34-17.
In the alternative, the debtor asks this court to avoid the lien under § 105, Bankruptcy Code. Section 105 is intended to allow a bankruptcy court to issue any order to further or carry out the provisions of the Bankruptcy Code, or prevent the use of the Code in an illicit or abusive manner. See Kestell v. Kestell (In re Kestell), 99 F.3d 146, 148-49 (4th Cir. 1996). Here, however, the debtor is requesting that the court use its § 105 powers contrary to the provisions of the Bankruptcy Code. The court declines the invitation to do so. As Chief Judge Bostetter noted in Trammel, circumstances such as this "does not provide adequate justification for the Court to extinguish the liens" by use of the court's equitable powers. Trammel, 63 B.R. at 887.
Since the judgment lien cannot be avoided, reopening the case to permit the debtor to file a lien avoidance motion would be a futile act and a waste of judicial resources. Since no purpose would be served by reopening the case, the court declines to do so.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The debtor's motion to reopen his case to avoid a judgment lien is DENIED.
2. The clerk shall mail a copy of this order to counsel for the debtor, the chapter 7 trustee, and the United States Trustee.