Daily Development for
Thursday, September 10, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

The Reporter (and comentator) for today's DD is Jim Stillman of Murphy, Weir & Butler, Los Angeles and San Francisco.

BANKRUPTCY; LIENS; AVOIDANCE; IMPAIRMENT OF EXEMPTION: Under Bankruptcy Code § 522(f), a judgment creditor's lien will be avoided, only in part, and not in toto, where necessary to protect the debtor's exemption.

In re Silveira, ___ F.3d ___ (1st Cir. 1998), 1998 U.S. App. LEXIS 7754.

Section 522(f) permits a debtor to avoid the fixing of the lien on the interest of the debtor in property to the extent that such lien impairs an exemption. If Congress had meant that the lien would be avoided in toto, it would have used the word "if" instead of the words "to the extent that," the First Circuit held. In this case, to protect the debtor's exemption of $15,000, the bank's $209,500 judicial lien was reduced to $24,320, which was the amount of excess equity beyond the exemption amount and the senior mortgage. The First Circuit found that it was difficult to draw any reliable inferences from the House Report's negative references to In re Gonzalez and In re Chabot (at page 13), because the First Circuit felt that its conclusion in this case was similar to the ones reached in those cases, supposedly criticized by Congress.

Reporter's Comment: This case represents the clearlyemerging majority and common sense view, certainly after the 1994 Amendments, that section 522(f) does not require avoidance of the judicial lien in toto. The harder questions are, is the lien really stripped down to the amount that section 522(f) allows? Does all future appreciation in the property therefore go to the debtor? Should the Court permit the judicial lienor to sell the property at a sheriff's sale and remit the exemption amount in cash to the debtor? These questions and others are the subject of an array of Bankruptcy Court decisions, in recent years, reaching various results.

BANKRUPTCY; EXEMPTIONS; HOMESTEAD; PREEMPTION: A debtor was entitled to its homestead exemption under Bankruptcy Code § 522, even though under state law the fact that the subject debt arose prior to the acquisition of the said homestead would have given rise to an exception to the homestead claim.

In re Weinstein, 217 B.R. 5 (D.Mass. 1998).

Section 522 of the Bankruptcy Code preempts state law. Nor did the Bankruptcy Court err in deciding sua sponte to (1) reopen the case pursuant to section 350(a)(B), and (2) withdraw and reverse its previous decision denying the homestead exemptionand to do so without notice to the objecting creditor.

Reporter's Comment: The Bankruptcy Judge labored under a crisis of conscience in this case, with opinions in hand from each of his four judicial brethren from the Bankruptcy bench of Massachusetts, on the question whether Bankruptcy Code homestead exemption preempts state law. The opinions were divided. After ruling to the contrary, this Bankruptcy Court changed its mind sua sponte. A good thing, according the District Court. The Bankruptcy Court got it right on reconsideration, the District Court held, siding with Bankruptcy Judge Queenan's ruling in In re Boucher, 203 B.R. 10 (D. Mass. 1996).

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