Daily Development for Thursday, October 13, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu
BANKRUPTCY; LIENS; JUDGMENT LIENS; AVOIDANCE: Plain meaning of 11 USC §522(f)(2) - Trustee’s avoidance power - requires avoidance of creditor's judicial lien, even though that lien is senior to consensual lien.
Moldo v Charnock (In re Charnock)318 BR 720 (BAP 9th Cir Dec. 15, 2004)
Moldo was appointed state court receiver in the dissolution proceedings of debtor Paula Charnock. In 1996, Moldo recorded an abstract of judgment, covering $56,072 in fees and costs incurred in the administration of the receivership estate. Charnock owned a residence that she refinanced in 2002, paying Moldo $28,000 from the proceeds of the loan. A deed of trust was recorded at that time evidencing the lender's lien. A year later, Charnock filed for Chapter 7 bankruptcy protection and moved to avoid Moldo's judicial lien under 11 USC §522(f)(2). The sum of the balance of the refinancing loan plus the amount of Charnock's homestead exemption exceeded the stipulated value of the property. The bankruptcy court granted Charnock's motion to avoid the lien.
The appellate panel affirmed. As the court noted, Congress chose among conflicting policies and ultimately favored consensual lienholders over judicial lienholders. The clear legislative intent of the changes to the bankruptcy statute was to override case law holding that a judicial lien could not be avoided if it was senior to a nonavoidable mortgage lien, and the total of all mortgages against the property exceeded the value of the property. Congress deliberately determined that judgment lien creditors would be treated differently from consensual lien creditors. The Bankruptcy Code provision is intended to preempt state law lien priorities that would apply outside bankruptcy; the policy favoring preservation of the homestead exemption does not create a windfall for, or confer a benefit not intended by Congress on, the debtor in a consumer bankruptcy proceeding.
Reporter’s Comment: This case involved a judgment lien of about $70,000, a deed of trust of $370,000, and a debtor's homestead protection of $75,000, against a property valued at only $435,000. The lien, the deed of trust, and the homestead totaled $515,000, or $90,000 more than the worth of the property; at least one of those interests had to suffer.
There is no easy resolution of this issue. The judgment lien is superior to the deed of trust but inferior to the homestead, while the deed of trust is inferior to the judgment lien but superior to the homestead, and the homestead is superior to the judgment lien but inferior to the deed of trust. Everybody is superior to one party and subordinate to another party. It is classic lien circuity!
While this is a hard issue for state courts to resolve (see Bratcher v Buckner 90 CA4th 1177, 109 CR2d 534 (2001), cited in Charnock), it is apparently a slam dunk for bankruptcy courts, since the plain meaning of §522 of the Bankruptcy Code is that the judicial lien may be avoided as impairing the homestead exemption even though the impairment happens only because of the deed of trust, which came after the judicial lien. Put another way: If the debtor had filed bankruptcy before putting a deed of trust on her property, the judicial lien would have been allowed, since at that stage it did not impair her statutory homestead exemption. But if the debtor later encumbers her liened property with a deed of trust, leaving her with less than $75,000 of equity in the property, then to the extent her homestead has been impaired, the prior judicial lien can be avoided.
Reporter’s Comment 2: So, the judicial lien creditor in this situation is the real loser. But who is the winner? The BAP was a little less willing to call that result (it was not before the panel on this appeal), but the judges made their sentiments clear: The winner should be the bankrupt debtor rather than the beneficiary of the deed of trust. The deed of trust is to stay as far below the judgment lien as it always was; the amount avoided enhances the homestead protection instead.
Thus, assuming the property was encumbered by a judgment lien of $70,000 and worth $435,000 when the deed of trust was put on, there was only $365,000 of remaining value to secure the $370,000 deed of trust; it was undersecured by $5000. Avoiding the $70,000 judgment lien could add the missing $5000 to the beneficiary's security, or it could, as suggested here, add $70,000 to the debtor's homestead exemption and nothing to the deed of trust. That latter result is not surprising, because that's what bankruptcy is supposed to be about: protecting debtors even at the expense of their creditors.
It is too bad that the deed of trust beneficiary did not also appeal. Its loan was apparently a refinance, meaning that there was a good chance it could have claimed subrogation rights for the old loan it paid off, which loan probably was superior to the judgment lien. That would have generated a whole different set of calculations.
The Reporter for this item was Professor Roger Bernhardt, of Golden Gate Law School in San Francisco, writing in the CEB California Real Property Law Reporter.
Items reported here and in the ABA publications
are for general information purposes only and
should not be relied upon in the course of
representation or in the forming of decisions in
legal matters. The same is true of all
commentary provided by contributors to the DIRT
list. Accuracy of data and opinions expressed
are the sole responsibility of the DIRT editor
and are in no sense the publication of the ABA.
Parties posting messages to DIRT are posting to a
source that is readily accessible by members of
the general public, and should take that fact
into account in evaluating confidentiality
issues.
ABOUT DIRT:
DIRT is an internet discussion group for serious
real estate professionals. Message volume varies,
but commonly runs 5 15 messages per work day.
Daily Developments are posted every work day. To
subscribe, send the message
subscribe Dirt [your name]
to
listserv@listserv.umkc.edu
To cancel your subscription, send the message
signoff DIRT to the address:
listserv@listserv.umkc.edu
for information on other commands, send the message
Help to the listserv address.
DIRT has an alternate, more extensive coverage that includes not only
commercial and general real estate matters but also focuses specifically upon
residential real estate matters. Because real estate brokers generally find
this service more valuable, it is named “BrokerDIRT.” But residential
specialist attorneys, title insurers, lenders and others interested in the
residential market will want to subscribe to this alternative list. If you
subscribe to BrokerDIRT, it is not necessary also to subscribe to DIRT, as
BrokerDIRT carries all DIRT traffic in addition to the residential discussions.
To subscribe to BrokerDIRT, send the message
subscribe BrokerDIRT [your name]
to
listserv@listserv.umkc.edu
To cancel your subscription to BrokerDIRT, send the message
signoff BrokerDIRT to the address:
listserv@listserv.umkc.edu
DIRT is a service of the American Bar Association
Section on Real Property, Probate & Trust Law and
the University of Missouri, Kansas City, School
of Law. Daily Developments are copyrighted by
Patrick A. Randolph, Jr., Professor of Law, UMKC
School of Law, but Professor Randolph grants
permission for copying or distribution of Daily
Developments for educational purposes, including
professional continuing education, provided that
no charge is imposed for such distribution and
that appropriate credit is given to Professor
Randolph, DIRT, and its sponsors.
DIRT has a WebPage at:
http://cctr.umkc.edu/dept/dirt/
*************************************
Your e-mail address will only be used within the ABA and its entities. We do not sell or rent e-mail addresses to anyone outside the ABA.
To change your e-mail address or remove your name from any future general distribution e-mails you can call us at 1-800-285-2221, or write to: American Bar Association, Service Center, 321 N Clark Street, Floor 16, Chicago, IL 60610
If you are an ABA member, log in to the ABA Web site at http://www.abanet.org/abanet/common/MyABA/home.cfm to edit your member profile. Otherwise, complete the form located at https://www.abanet.org/members/join/coa2.html
To review our privacy statement, go to http://www.abanet.org/privacy_statement.html.
If you have any problems, please contact the list owner at
dirt-dd-request@mail.abanet.org.