In re Brinley

• Decision Date: 22 March 2005
• Docket Number: No. 03-5653.,No. 03-5607.,03-5607.,03-5653.
• Citation: 403 F.3d 415
• Parties: In re: Stuart C. BRINLEY, Debtor. Stuart C. Brinley, Appellee/Cross-Appellant, v. LPP Mortgage, Ltd., Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

403 F.3d 415

In re: Stuart C. BRINLEY, Debtor Stuart C. Brinley, Appellee/Cross-Appellant, v. LPP Mortgage, Ltd., Appellant/Cross-Appellee.

No. 03-5607.

No. 03-5653.

United States Court of Appeals, Sixth Circuit.

Argued: August 6, 2004.

Decided and Filed: March 22, 2005.

COPYRIGHT MATERIAL OMITTED

ARGUED:

Rick D. DeBlasis, Lerner, Sampson & Rothfuss, Cincinnati, Ohio, for Appellant.

Richard A. Schwartz, Kruger, Schwartz & Morreau, Louisville, Kentucky, for Appellee.

ON BRIEF:

Rick D. DeBlasis, Lerner, Sampson & Rothfuss, Cincinnati, Ohio, for Appellant.

Richard A. Schwartz, Kruger, Schwartz & Morreau, Louisville, Kentucky, for Appellee.

Before: BATCHELDER and DAUGHTREY, Circuit Judges; DOWD, District Judge.^*

OPINION

DAUGHTREY, Circuit Judge.

In this appeal, we are asked to determine the extent to which a judgment lien impairs a debtor's statutory exemption. Both the debtor, Stuart C. Brinley, and the creditor, LPP Mortgage, Ltd., dispute portions of the district court's ruling that reversed the bankruptcy court's ruling on the debtor's motion to avoid the judgment lien of the creditor. Specifically, LPP contends that the district court erred in concluding that Brinley's statutorily-based exemption from bankruptcy estate property was impaired by LPP's entire judgment lien on Brinley's real estate.

Brinley, in turn, insists that the bankruptcy and district courts did not properly calculate the value of his interest in the real property in question in this litigation. Although we conclude that the district court and the bankruptcy court correctly valued the debtor's interest in property he held as a tenant by the entirety, we further conclude that the district court incorrectly determined the extent to which LPP's lien impaired Brinley's statutory exemption. We therefore affirm the district court judgment in part, reverse in part, and remand the case for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

The parties to this appeal have stipulated to all relevant facts underlying the litigation. Pursuant to the stipulation, they agree that Stuart Brinley and his non-debtor spouse own $280,000 worth of property jointly with rights of survivorship (that is, as tenants by the entirety). The property is secured by a first mortgage held by PHH U.S. Mortgage Corporation in the amount of $180,000. The parties further agree that approximately three months after the Brinleys executed that initial mortgage, a judgment lien ultimately assigned to LPP in the amount of $112,418.35, plus interest, was also placed against the property. Years later, the debtor and his wife executed a second mortgage on the same property with Bank One, Kentucky, N.A. The amount presently due and owing on that junior lien is $80,345.09.

Unfortunately, Stuart Brinley was ultimately forced to seek protection under Chapter 7 of the United States Bankruptcy Code. Then, without complaint from LPP, Brinley claimed entitlement to a statutory exemption in the amount of $6,000. Because the mortgages and judgment lien on Brinley's primary asset far exceeded the value of that land, however, the debtor's right to his claimed exemption was seriously impaired.

To preserve the $6,000 exemption, the bankruptcy court and the district court took different analytical paths when this case was before them. The bankruptcy court examined relevant statutory provisions and concluded that the most junior lien on the Brinleys' property, the second residential mortgage in the amount of $80,345.09, should first be avoided in its entirety before LPP's judgment lien was partially avoided to reduce Brinley's indebtedness sufficiently to give effect to the exemption. On appeal from that determination, the district court, interpreting the same statutory provisions, ruled that LPP's judgment lien, even though senior in priority to Bank One's second mortgage on the real property, should first be avoided in its entirety in order to allow the debtor to take advantage of the claimed exemption.

LPP now appeals from that district court judgment. Although the creditor does not contest the debtor's right to avoid some of the judgment lien attached to the Brinleys' property, LPP advocates adoption of the bankruptcy court's analysis that would minimize the amount of the judgment lien that would be avoided.

Despite reaping the benefit of avoiding the LPP judgment lien in full, Brinley also appeals from the district court ruling, claiming that the court erred in considering the entire $280,000 value of his property when calculating the amount of the lien avoidance. He contends that, because he owned the property as a tenant by the entirety with his non-debtor wife, the court should have valued his share of the subject property at only $140,000.

DISCUSSION

We review a district court's conclusions of law in a bankruptcy appeal de novo. See Holland v. Star Bank, N.A. (In re Holland), 151 F.3d 547, 548 (6th Cir.1998). The bankruptcy court's initial factual findings, however, are reviewed by both the district court and by this court only for clear error. See id.

I. Statutory Framework for Avoidance of Judicial Liens

One of the purposes of federal bankruptcy law is to accord to the debtor a "fresh start" from past financial difficulties. See id. at 550 (citing In re Miller, 198 B.R. 500, 505 (Bankr.N.D.Ohio 1996)). To that end, 11 U.S.C. § 522(f)(1), in relevant part, provides:

[T]he 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... if such lien is —

(A) a judicial lien ... or (B) a nonpossessory, nonpurchase-money security interest in any

(i) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;

(ii) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor; or

(iii) professionally prescribed health aids for the debtor or a dependent of the debtor.

(Emphasis added.)

To aid in the determination of "the extent that such lien impairs an exemption," Congress amended the Bankruptcy Code in 1994 to add subsection (2)(A) to § 522(f) of title 11. That "new" subsection states:

For the purposes of this subsection, a lien shall be considered to impair an exemption to the extent that the sum of

(i) the lien;

(ii) all other liens on the property; and

(iii) 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.

No one disputes that these provisions of 11 U.S.C. § 522(f) accurately describe the calculations to be undertaken to determine what portion of a judicial lien may or must be avoided in order to give effect to a debtor's exemption. Although the courts and the parties concur in the actual decisional framework to be utilized, they would arrive at different results based upon the application of the framework to the facts of this case.

A. Bankruptcy Court Version

In applying the seemingly straight-forward provisions of 11 U.S.C. § 522(f) to this case, the bankruptcy court concluded that only $18,418.35 of LPP's judgment lien would be avoided by giving effect to the debtor's exemption, "leaving LPP with a judgment lien of $94,000 on the Property." To obtain those figures, the bankruptcy court did not aggregate the values of LPP's judicial lien ($112,418.35), the first mortgage on the property ($180,000.00), the second mortgage on the property ($80,345.09), and the debtor's claimed exemption ($6,000.00), as required by the statute. Instead, in arriving at the figure by which the liens and the exemption exceeded the value of the property without liens ($280,000.00), the bankruptcy court ignored the second mortgage on the property that was junior to LPP's judgment lien. By doing so, the court immediately reduced the impairment of the exemption by the $80,345.09 value of the second mortgage and left a difference between (a) the sum of the remaining liens and exemption amount ($298,418.35) and (b) the value of the property without liens ($280,000.00) of $18,418.35, the amount by which LPP's judgment lien must be avoided. Subtracting that amount from the total $112,418.35 value of the judgment lien, the bankruptcy court concluded that the creditor was still left with a $94,000 judgment lien on the property.

In reaching the result it did, the bankruptcy court openly admitted that it failed to follow the explicit language of the bankruptcy statute. The court felt compelled to interpret the law as it did, however, because adherence to the strict provisions of the code would produce an "unjust result ... without regard to state law priorities [of liens]." Not surprisingly, LPP endorses the bankruptcy court's analysis of the statute and its operation because initial application of the junior lien value to the amount by which the debtor's exemption is impaired reduces LPP's "loss" by an equal amount.

B. District Court Version

Unlike the bankruptcy court, the district court felt obligated to adhere to the formulaic calculations called for in the statute. By so adhering and including all liens and the debtor's exemption in the first totaling, the district court arrived at a figure of $378,763.44 ($180,000.00 + 112,418.35 + 80,345.09 + 6,000.00 = $378,763.44). Because that sum exceeded the $280,000.00 value of the debtor's property, the district judge also concluded that the value of Brinley's statutory exemption was impaired. Rather than specify that the exemption was impaired only to the extent that the sum exceeded the property value ($378.763.44 — 280,000.00 = $98,763.44), and offset the judicial lien only by that amount, however, the court simply concluded that "[t]he judicial lien of...