Owen v. Owen

• Decision Date: 23 May 1991
• Docket Number: No. 89-1008,89-1008
• Parties: Dwight H. OWEN, Petitioner v. Helen OWEN
• Court: U.S. Supreme Court

500 U.S. 305

111 S.Ct. 1833

114 L.Ed.2d 350

Dwight H. OWEN, Petitioner

v Helen OWEN.

No. 89-1008.

Argued Nov. 5, 1990.

Decided May 23, 1991.

Syllabus

The Bankruptcy Code allows States to define what property is exempt from the estate that will be distributed among the debtor's creditors. The Florida Constitution provides a homestead exemption, which the state courts have held inapplicable to liens that attach before the property in question acquires its homestead status. Petitioner purchased his Florida condominium in 1984 subject to respondent's pre-existing judgment lien, and the property first qualified as a homestead under a 1985 amendment to the State's homestead law. After petitioner filed a chapter 7 petition for bankruptcy in 1986, the Bankruptcy Court, inter alia, sustained his claimed homestead exemption in the condominium, but subsequently denied his postdischarge motion to avoid respondent's lien pursuant to Code § 522(f). The District Court and the Court of Appeals affirmed, finding that since the lien had attached before the condominium qualified for the homestead exemption, the property was not exempt under state law.

Held:

1. Judicial liens can be eliminated under § 522(f) even though the State has defined the exempt property in such a way as specifically to exclude property encumbered by such liens. The section provides, inter alia, that "the debtor may avoid the fixing of a [judicial] lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under," in effect, § 522(d), which lists federal exemptions, or under state law. At first blush, respondent's argument seems entirely reasonable that her lien does not "impair" petitioner's Florida homestead exemption within the meaning of § 522(f) because the exemption is not assertable against pre-existing judicial liens, and that permitting avoidance of the lien would not preserve the exemption but expand it. However, this result has been widely and uniformly rejected by federal bankruptcy courts with respect to federal exemptions under § 522(d). To determine the application of § 522(f), those courts ask not whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he would have been entitled but for the lien itself. This approach, which gives meaning to the phrase "would have been entitled" in the applicable text, is correct. A different approach cannot be adopted for state exemptions, in light of the equivalency of treatment accorded to federal and state exemptions by § 522(f). Pp. 308-314.

2. This Court expresses no opinion on, and leaves for the Court of Appeals to resolve in the first instance, the questions whether respondent's lien can be said to have "impair[ed] an exemption to which [petitioner] would have been entitled" at the time the lien was fixed, in light of the fact that petitioner did not yet have a homestead interest; whether the lien in fact fixed "on an interest of the debtor" if, under state law, it attached simultaneously with petitioner's acquisition of his property interest; and whether the Florida statute extending the homestead exemption was retroactive. P. 314.

877 F.2d 44, (CA 11 1989), reversed and remanded.

SCALIA, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and WHITE, MARSHALL, BLACKMUN, O'CONNOR, KENNEDY, and SOUTER, JJ., joined. STEVENS, J., filed a dissenting opinion.

Roger L. Fishell, Sarasota, Fla., for petitioner.

Timothy B. Dyk, Washington, D.C., for respondent.

Justice SCALIA delivered the opinion of the Court.

The Bankruptcy Code allows the States to define what property a debtor may exempt from the bankruptcy estate that will be distributed among his creditors. 11 U.S.C. § 522(b). The Code also provides that judicial liens encumbering exempt property can be eliminated. 11 U.S.C. § 522(f). The question in this case is whether that elimination can operate when the State has defined the exempt property in such a way as specifically to exclude property encumbered by judicial liens.

I

In 1975, Helen Owen, the respondent, obtained a judgment against petitioner Dwight Owen, her former husband, for approximately $160,000. The judgment was recorded in Sarasota County, Florida, in July 1976. Petitioner did not at that time own any property in Sarasota County, but under Florida law, the judgment would attach to any after-acquired property recorded in the county. B.A. Lott, Inc. v. Padgett, 153 Fla. 304, 14 So.2d 667 (1943). In 1984, petitioner purchased a condominium in Sarasota County; upon acquisition of title, the property became subject to respondent's judgment lien. Porter-Mallard Co. v. Dugger, 117 Fla. 137, 157 So. 429 (1934).

One year later, Florida amended its homestead law so that petitioner's condominium, which previously had not qualified as a homestead, thereafter did. Under the Florida Constitution, homestead property is "exempt from forced sale . . . and no judgment, decree or execution [can] be a lien thereon . . .," Fla. Const., Art. 10, § 4(a). The Florida courts have interpreted this provision, however, as being inapplicable to pre-existing liens, i.e., liens that attached before the property acquired its homestead status. Bessemer v. Gersten, 381 So.2d 1344, 1347, n. 1 (Fla.1980); Aetna Ins. Co. v. LaGasse, 223 So.2d 727, 728 (Fla.1969); Pasco v. Harley, 73 Fla. 819, 824-825, 75 So. 30, 32-33 (1917); Volpitta v. Fields, 369 So.2d 367, 369 (Fla.App.1979); Lyon v. Arnold, 46 F.2d 451, 452 (CA5 1931). Pre-existing liens, then, are in effect an exception to the Florida homestead exemption.

In January 1986, petitioner filed for bankruptcy under chapter 7 of the Code, and claimed a homestead exemption in his Sarasota condominium. The condominium, valued at approximately $135,000, was his primary asset; his liabilities included approximately $350,000 owed to the respondent. The bankruptcy court discharged petitioner's personal liability for these debts, and sustained, over respondent's objections, his claimed exemption.

The condominium, however, remained subject to respondent's pre-existing lien, and after discharge, petitioner moved to reopen his case to avoid the lien pursuant to § 522(f)(1). The Bankruptcy Court refused to decree the avoidance; the District Court affirmed, finding that the lien had attached before the property qualified for the exemption, and that Florida law therefore did not exempt the lien encumbered property. 86 B.R. 691 (MD Fla.1988). The Court of Appeals for the Eleventh Circuit affirmed on the same ground. 877 F.2d 44 (1989). We granted certiorari. 495 U.S. ----, 110 S.Ct. 2166, 109 L.Ed.2d 496 (1990).

II

An estate in bankruptcy consists of all the interests in property, legal and equitable, possessed by the debtor at the time of filing, as well as those interests recovered or recoverable through transfer and lien avoidance provisions. An exemption is an interest withdrawn from the estate (and hence from the creditors) for the benefit of the debtor. Section 522 determines what property a debtor may exempt. Under § 522(b), he must select between a list of federal exemptions (set forth in § 522(d)) and the exemptions provided by his State, "unless the State law that is applicable to the debtor . . . specifically does not so authorize," 11 U.S.C. § 522(b)(1)—that is, unless the State "opts out" of the federal list. If a State opts out, then its debtors are limited to the exemptions provided by state law. Nothing in subsection (b) (or elsewhere in the Code) limits a State's power to restrict the scope of its exemptions; indeed, it could theoretically accord no exemptions at all.

Property that is properly exempted under § 522 is (with some exceptions) immunized against liability for prebankruptcy debts. § 522(c). No property can be exempted (and thereby immunized), however, unless it first falls within the bankruptcy estate. Section 522(b) provides that the debtor may exempt certain property "from property of the estate"; obviously, then, an interest that is not possessed by the estate cannot be exempted. Thus, if a debtor holds only bare legal title to his house—if, for example, the house is subject to a purchase-money mortgage for its full value—then only that legal interest passes to the estate; the equitable interest remains with the mortgage holder, 11 U.S.C. § 541(d). And since the equitable interest does not pass to the estate, neither can it pass to the debtor as an exempt interest in property. Legal title will pass, and can be the subject of an exemption; but the property will remain subject to the lien interest of the mortgage holder. This was the rule of Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886), codified in § 522. Only where the Code empowers the court to avoid liens or transfers can an interest originally not within the estate be passed to the estate, and subsequently (through the claim of an exemption) to the debtor.

It is such an avoidance provision that is at issue here, to which we now turn. Section 522(f) reads as follows:

"(f) Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is—

"(1) a judicial lien; or

"(2) a nonpossessory, nonpurchase-money security interest. . . ."

The lien in the present case is a judicial lien, and we assume without deciding that it fixed "on an interest of the debtor in property." See Farrey v. Sanderfoot, --- U.S. ----, 111 S.Ct. 1825, --- L.Ed.2d ---- (1991). The question presented by this case is whether it "impairs an exemption to which [petitioner] would have been entitled under subsection (b)." Since Florida has chosen to opt out of the listed federal exemptions, see Fla.Stat. § 222.20 (1989), the only su...