David G. Waltrip, LLC v. Sawyers (In re Sawyers)

• Citation: 2 F.4th 1133
• Decision Date: 02 July 2021
• Docket Number: No. 20-1130,20-1130
• Parties: IN RE: Ruby Jeane SAWYERS, Debtor David G. Waltrip, LLC, Appellant v. Ruby Jeane Sawyers, Appellee
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

2 F.4th 1133

IN RE: Ruby Jeane SAWYERS, Debtor

David G. Waltrip, LLC, Appellant

v.Ruby Jeane Sawyers, Appellee

No. 20-1130

United States Court of Appeals, Eighth Circuit.

Submitted: January 14, 2021

Filed: July 2, 2021

Angela Redden-Jansen, REDDEN-JANSEN LAW FIRM, Maplewood, MO, for Appellant.

Robert E. Eggmann, CARMODY & MACDONALD, Saint Louis, MO, for Appellee.

Before LOKEN, GRASZ, and KOBES, Circuit Judges.

GRASZ, Circuit Judge.

David G. Waltrip, LLC ("Waltrip") appeals after the Bankruptcy Appellate Panel affirmed the bankruptcy court's¹ order that fully avoided his judicial lien on Ruby Sawyers's homestead. We affirm.

I. Background

Waltrip sued Sawyers in October 2016 for breach of contract in Missouri state court. During that litigation, a fire damaged Sawyers's home. The fire damage was covered under a homeowner's insurance policy, and Sawyers received $132,392.99 from her insurance provider for the sole purpose of restoring and repairing her home. After the fire occurred, Waltrip obtained a consent judgment that gave Waltrip a judicial lien against Sawyers's homestead property² in the principal amount of $234,123.31 and a total amount (including interest and costs) as of January 12, 2017, of $256,739.31.

On February 15, 2017 (the "petition date"), Sawyers filed a petition for Chapter 7 bankruptcy protection. As of the petition date, Sawyers had not repaired her home, and its value was approximately $3,000 to $6,000. Waltrip filed a proof of claim for the judicial lien and was an active participant in Sawyers's bankruptcy case.

As of the petition date, Sawyers's home was also subject to another consensual mortgage lien to First Community in the amount of $29,376.96.³ Without objection, Sawyers claimed a homestead exemption under Missouri law for $15,000. But, she failed to take the steps to avoid Waltrip's lien under 11 U.S.C. § 522 of the bankruptcy code. Sawyers's bankruptcy case closed in July 2017.

After Sawyers's bankruptcy case closed, Waltrip tried to enforce his lien by arranging a sheriff's execution sale of Sawyers's home. In April 2018, Sawyers filed to reopen her bankruptcy case to avoid Waltrip's lien. The bankruptcy court approved Sawyers's request to reopen her bankruptcy case and granted Sawyers's motion to avoid Waltrip's lien.

Waltrip appealed the bankruptcy court's decision and sought an award of costs and fees resulting from the reopened bankruptcy case. The bankruptcy appeals panel affirmed the bankruptcy court's ruling, and Waltrip filed this appeal.

II. Discussion

As the second court of review, we apply the same standards of review as a district court. In re O'Sullivan , 914 F.3d 1162, 1166 (8th Cir. 2019). "[W]e review "the bankruptcy court's findings of fact for clear error and its conclusions of law de novo ." In re Bowles Sub Parcel A, LLC , 792 F.3d 897, 901 (8th Cir. 2015) (alteration in original) (quoting Tri-State Financial, LLC v. First Dakota Nat'l Bank , 538 F.3d 920, 922 (8th Cir. 2008) ). A bankruptcy court's decision to reopen a case and a bankruptcy court's order denying a party's request to recover costs and fees are reviewed for abuse of discretion. In re Apex Oil Co. , 406 F.3d 538, 541 (8th Cir. 2005) ; Stalnaker v. DLC, Ltd. , 376 F.3d 819, 823 (8th Cir. 2004) ("We review the award of fees for abuse of discretion.").

A. Avoiding Judicial Liens

Section 522 of the bankruptcy code allows a debtor to exempt certain property from the bankruptcy estate and avoid a lien that impairs any of its exempted property. See O'Sullivan , 914 F.3d at 1166 ("[S]ection 522(f)(1) provides, in relevant part, that ‘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 [ § 522(b) ], if such lien is ... a judicial lien.’ ") (alterations in original) (quoting 11 U.S.C. § 522(f)(1) ). "We liberally construe exemption statutes in favor of debtors." In re Hardy , 787 F.3d 1189, 1192 (8th Cir. 2015).

Section 522(f)(1)(a) applies to judicial liens, and it is the debtor's burden to demonstrate that the debtor is entitled to the avoidance of a lien. See Meseraull v. Rick Miller Constr., Inc. , 82 F.3d 421, at *2 (8th Cir. 1996) (unpublished) (stating debtor had the burden of establishing that she was entitled to avoid a creditor's lien). To avoid the fixing of a judicial lien on exempted property, a debtor must (1) establish the creation of an avoidable lien under § 522(f)(1) ; (2) that affixed to exempted property under § 522 (b) ; and (3) that impaired a debtor's claimed exemption in the property. See O'Sullivan , 914 F.3d at 1166.

Generally, "a debtor is permitted to choose between the scheme of federal exemptions prescribed in section 522(d) of the [bankruptcy code ] or the exemptions available under other federal law and the law of the state in which the debtor is domiciled." In re Benn , 491 F.3d 811, 813 (8th Cir. 2007). One of the many exemptions available to a debtor is the homestead exemption, which allows a debtor to exempt a pre-petition lien levied against its homestead. 11 U.S.C. § 522(b) and (o)(4). By utilizing the homestead exemption, the debtor is able to shield its homestead from a secured creditor's post-petition collection efforts. "Missouri has chosen to opt out of § 522(d) ’s exemptions, ‘thereby restricting Missouri residents to the exemptions available under Missouri law and under federal statutes other than 11 U.S.C. § 522(d).’ " Benn, 491 F.3d at 813 (quoting Wallerstedt v. Sosne (In re Wallerstedt) , 930 F.2d 630, 631 n. 1 (8th Cir. 1991) ); accord Hardy , 787 F.3d at 1192 (citing Mo. Rev. Stat. § 513.427). Under the homestead exemption, Missouri law allows a debtor to exempt $15,000 of home equity from attachment and execution. Mo. Rev. Stat. § 513.475 ; accord In re Nguyen , 332 B.R. 393, 395 (Bankr. W.D. Mo. 2005).

The parties do not dispute that Waltrip had a valid, avoidable lien that was affixed to Sawyers's property before she filed her bankruptcy petition. Thus, the issues on appeal involve the extent to which Waltrip's lien impairs Sawyers's claimed homestead exemption.

B. Calculating the Value of a Homestead

The primary issue on appeal is the valuation of Sawyers's homestead. Sawyers's home was lost in a fire prior to Waltrip's judicial lien and before the bankruptcy petition. Waltrip's judicial lien affixed to Sawyers's home approximately two months after the house fire, before Sawyers made any attempts to repair the damaged home. Sawyers filed her bankruptcy petition approximately one month after Waltrip's judicial lien affixed to her property.

On the petition date, an appraisal of Sawyers's property valued her fire-damaged home between $3,000 and $6,000. However, before the petition date, Sawyers received approximately $132,392.99 from her homeowner's insurance provider for home repairs. Waltrip argues that the insurance proceeds Sawyers received to rebuild her home should be included in the bankruptcy court's valuation of the home.

It is well settled that the value of a debtor's homestead is determined based on the property's fair market value as of the petition date. See BFP v. Resolution Tr. Corp. , 511 U.S. 531, 537, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) (noting that under bankruptcy code § 522, " ‘value’ means fair market value as of the date of the filing of the petition") (quoting 11 U.S.C. § 522(a)(2) ); In re Kolich , 328 F.3d 406, 408 (8th Cir. 2003) (using a homestead's fair market value in calculating lien avoidance). To determine fair market value, courts should consider factors "including location of the real estate, condition of the real estate and unique fixtures and attributes of the real estate" when calculating a property's fair market value. In re Lewis , 419 B.R. 804, 806 (Bankr. E.D. Mo. 2009). Missouri state courts also rely on the appraisal process to determine the value of a homestead. See Meeks Leasing Co. v. Young , 881 S.W.2d 232, 236 (Mo. Ct. App. 1994).

Waltrip fails to cite to any controlling or persuasive authority in support of his argument to depart from this general-fair-market-value rule and, instead, include the insurance payout in the bankruptcy court's valuation of Sawyers's fire-damaged home. All of the cases Waltrip cites are distinguishable. For example, Waltrip relies on In re Burns , 482 B.R. 164 (Bankr. E.D. La. 2012), for the proposition that insurance proceeds can be valued just like home equity during a judicial lien avoidance analysis. Id . at 166–68. Burns is distinguishable for three reasons: (1) it applied Louisiana, as opposed to Missouri, homestead law; (2) the exemption at issue in the case focused on the debtor's disposable income, not the debtor's homestead; and (3) the "restitution" paid for the debtor's loss of property (in the form of income) came from the settlement of a lawsuit, not the payout of an insurance claim. Id. Further, the approach in Burns is inconsistent with cases applying Missouri law. For example, a Missouri bankruptcy court has stated that any post-petition increase in a debtor's property value should benefit the debtor. In re Hall , 327 B.R. 424, 428 (Bankr. W.D. Mo. 2005).

Separately, Waltrip cites a Fifth Circuit case for the proposition that insurance proceeds can be substituted for the value of damaged exempt property. Matter of Swift , 129 F.3d 792, 801 (5th Cir. 1997) ("[T]he proceeds, insurance, cause of action, etc., are a substitute for the exempt property that is lost. To be effective, the substitute must be treated as if it were the lost item."). Again, this case is distinguishable because it applied Texas state exemption law, and the exempted property at issue was a debtor's retirement savings account, not a debtor's homestead. Id . Similarly, Waltrip's reliance on In re McDonald, No. BR 15-00739, 2016 WL 1238832, at *2 (Bankr. N.D. Iowa Mar. 29, 2016) (unpublished), is distinguishable because it applied Iowa law and focused on the value of...