In re Coats
| Decision Date | 15 April 1999 |
| Docket Number | BAP No. EO-98-028,Bankruptcy No. 98-70529. |
| Citation | 232 BR 209 |
| Parties | In re Michael Kevin COATS, Debtor. Michael Kevin Coats, Appellant, v. Betty Ogg, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Tenth Circuit |
Jimmy L. Veith, Ardmore, Oklahoma, for Appellant.
Betty Ogg, Pro Se.
Before CLARK, PEARSON, and ROBINSON, Bankruptcy Judges.
The debtor, Michael Kevin Coats, appeals the order of the bankruptcy court denying his motion to avoid a judicial lien pursuant to 11 U.S.C. § 522(f).1 For the reasons set forth below, this Court reverses the bankruptcy court's order and the matter is remanded for a decision consistent with this Opinion.
In February 1997, Betty Ogg obtained a judgment in the amount of $2,542.00 against Michael Kevin Coats ("the Debtor"). Betty Ogg filed a "Statement of Judgment" with the County Clerk of Pontotoc County, Oklahoma, where the Debtor's residence is located. The Debtor filed for relief under Chapter 7 of the Bankruptcy Code on March 2, 1998. The Debtor claimed his residence as exempt property2 in his bankruptcy schedules and there is no dispute that it is his homestead.
The Debtor filed a Motion to Avoid Judicial Lien, contending that the lien of Betty Ogg impaired his homestead exemption and should be avoided pursuant to § 522(f). Betty Ogg filed a pro se objection. Without addressing the definition of impairment set forth in § 522(f), the bankruptcy court denied the Debtor's motion, holding that there was no evidence that the lien impaired his "right to enjoy and use the homestead." This appeal followed.
This Court, with the consent of the parties, has jurisdiction to hear timely-filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit. 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1). Under this standard, we have jurisdiction over this appeal. The parties have consented to this Court's jurisdiction in that they have not opted to have the appeal heard by the United States District Court for the Eastern District of Oklahoma. Id. at § 158(c); 10th Cir. BAP L.R. 8001-1(a) and (d). The appeal was filed timely by the Debtor, and the bankruptcy court's Order is "final" within the meaning of § 158(a)(1). See Fed.R.Bankr.P. 8001-8002.
The Debtor does not ascribe error to the bankruptcy court's brief findings of fact. In reviewing whether the court's order denying the motion to avoid lien was correct as a matter of law, we review the case de novo. Pierce v. Underwood, 487 U.S. 552, 558, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988). De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court's decision. Salve Regina College v. Russell, 499 U.S. 225, 238, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991).
This case presents the Court with the opportunity to address the split among bankruptcy courts in Oklahoma regarding the effect of the recent amendment to Oklahoma law that permits judgment liens to attach to homesteads. Prior to November 1, 1997, Oklahoma courts consistently held that a judgment lien created pursuant to Section 706 of the Oklahoma statutes did not attach to the homestead of the judgment debtor, and could not be enforced against the same. See Sooner Fed. Sav. & Loan Ass'n v. Mobley, 645 P.2d 1000 (Okla.1981); Kelough v. Neff, 382 P.2d 135 (Okla.1963).
The Oklahoma legislature amended Section 706, effective November 1, 1997, to provide as follows:
A lien created pursuant to this section shall affect and attach to all real property, including the homestead, of judgment debtors whose names appear in the Statement of Judgment; however, judgment liens on a homestead are exempt from forced sale pursuant to Section 1 of Title 31 of the Oklahoma Statutes and Section 2 of Article XII of the Oklahoma Constitution.
Okla. Stat. Ann. tit. 12, § 706(B)(2).
Prior to the amendment, it was not necessary for a debtor to file a motion to avoid a judgment lien on exempt homestead property pursuant to § 522(f) because, since judicial liens did not attach to a homestead, there was no lien to avoid. See David Dorsey Distrib., Inc. v. Sanders (In re Sanders), 39 F.3d 258, 262 (10th Cir.1994) (). Under the amendment, however, judgment liens attach to homestead property, giving Oklahoma debtors in bankruptcy an incentive to avoid a judgment lien against homestead property under § 522(f). As a result, the issue becomes whether, in light of the amendment to Section 706 providing for attachment, a judicial lien upon a homestead may be avoided pursuant to § 522(f). The Debtor does not dispute that the amendment to Section 706 applies in this case.3
Bankruptcy courts in Oklahoma are split on the issue. One court has held that because the amended Section 706 provides that a judgment lien cannot be foreclosed by a sale of homestead property, a debtor's homestead is not impaired by the judgment lien, and thus may not be avoided. In re McKinney-Jones, 219 B.R. 619 (Bankr.W.D.Okla.1998). In McKinney-Jones, the court focused upon the purpose the homestead exemption was designed to serve, i.e., to "shelter a debtor from the elements," and determined that such purpose is not undermined by the continued existence of a non-executable judgment lien. Id. at 621. The court reasoned that, because the debtor could not be forcibly dispossessed of her home by the judgment lien creditor, her exemption was not impaired. Id. In the instant case, the bankruptcy court adopted the reasoning set forth in McKinney-Jones in denying the Debtor's motion for lien avoidance.
The opposing view concluded that a judicial lien that attaches to a debtor's homestead pursuant to the amended Section 706 impairs the exemption within the meaning of § 522(f) and may be avoided. See In re Richardson, 224 B.R. 804 (Bankr. N.D.Okla.1998); In re McMasters, 220 B.R. 419 (Bankr.N.D.Okla.1998). In these cases, after exhaustive analysis of the issue, the bankruptcy courts held that § 522(f) preempts state exemption law in determining whether a judicial lien impairs the homestead exemption. We agree with the reasoning of these cases.
Section 522(f)(1)(A)4 permits a debtor to avoid a creditor's lien in exempt property if the debtor's interest in that property would be exempt but for the existence of the lien. The debtor's avoiding power under this section may be employed only to the extent that the lien impairs the debtor's exemption. Whether a judicial lien "impairs" a debtor's exemption under § 522(f) is a question of federal law. Heape v. Citadel Bank (In re Heape), 886 F.2d 280, 282 (10th Cir.1989).
The United States Supreme Court addressed the issue of determination of impairment in the case of Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991). In Owen, the Supreme Court held that a judicial lien on property claimed exempt under a state law may be avoided under § 522(f), even if state law limits the circumstances under which the property may be exempt. The debtor's ex-wife obtained a judgment lien against the debtor. The judgment was properly recorded, but the debtor did not own any real property at that time. Several years later, the debtor acquired property in the county, and under the applicable Florida law, the ex-wife's judgment lien attached to that property at the time of purchase. Florida's homestead exemption statute was subsequently amended such that the debtor was able to claim the property as an exempt homestead. Under Florida law, a judicial lien that attaches to property before it qualifies as exempt property continues in the property, notwithstanding the later claim of exemption. The debtor commenced bankruptcy proceedings, claimed the real estate as exempt, and sought to avoid the judicial lien under § 522(f)(1). The ex-wife lienholder argued that the Florida homestead exemption was not assertable against pre-existing judicial liens, and thus the lien did not impair the exemption. However, the Court held that the question to consider in determining whether avoidance is possible under § 522(f) is to 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." Owen, 500 U.S. at 310-311, 111 S.Ct. 1833.5 The Court concluded that "Florida's exclusion of certain liens from the scope of its homestead protection does not achieve a similar exclusion from the Bankruptcy Codes's lien avoidance provision." Id. at 313-314, 111 S.Ct. 1833.
Owen illustrates the supremacy of federal law over state law in the field of bankruptcy. Central to Owen's analysis is the proposition that, while federal law permits states to define what property is exempt, federal law governs the availability of lien avoidance, and preempts any state law that limits the scope of its exemptions in a way that would interfere with the "fresh start" policy served by the avoidance of certain types of liens under § 522(f). Richardson, 224 B.R. at 808. See also Tower Loan v. Maddox (In re Maddox), 15 F.3d 1347, 1351 (5th Cir. 1994); Aetna Fin. Co. v. Leonard (In re Leonard), 866 F.2d 335, 336 (10th Cir. 1989). Under the rationale of Owen, debtors may avoid liens upon property in order to avail themselves of the full benefit of the exemption, notwithstanding state law that purports to except those liens from the exemption. Id. See also McMasters, 220 B.R. at 423.
Despite the Supreme Court's decision in Owen, determination of impairment under § 522(f) remained difficult. Consequently, Congress amended § 522(f) in the Bankruptcy Reform Act of 1994 to set out a mathematical formula to determine whether a lien impairs the debtor's exemption.6 Under this formula, liens impair an...
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