In re Costello
| Decision Date | 22 April 1987 |
| Docket Number | Bankruptcy No. 182-10466. |
| Citation | 72 BR 841 |
| Parties | In re Thomas R. & Ann M. COSTELLO, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Marilyn Simon, New York City, for debtors.
Scott Fairgrieve, Mineola, N.Y., for Cessna Finance Corp.
DECISION AND ORDER
Thomas Costello and the estate of his deceased wife, Ann M. Costello, have moved this court to reopen the Chapter 7 case in which he and his wife had been joint debtors, stay the foreclosure sale of the home in which Thomas Costello and his family live and where Ann Costello had lived, and avoid the liens of certain judgment creditors to the extent that they impair exemptions which they claimed during the pendency of their case. The court grants the motion.
On February 26, 1982, Ann and Thomas Costello filed a joint petition under Chapter 7 of the Bankruptcy Code. One of the debtors' assets consisted of their marital home located in Pearl River, New York ("the marital home"). The debtors listed the estimated market value of the marital home in their schedules as $125,000 subject to an outstanding mortgage held by Franklin Society Federal Savings & Loan ("Franklin") in the amount of $34,056 and various judgment liens.
The petition for relief set out alternative exemptions from property of the estate. Ann Costello elected exemptions permitted under New York Civil Practice Law and Rule ("CPLR") § 5206(a) pursuant to § 522(b)(2) of the pre-1984 Bankruptcy Code. These exemptions included a $10,000 exemption in the marital home. Thomas Costello chose instead to elect the federal exemptions enumerated in § 522(d) of the pre-1984 Code. His exemptions included a $7,500 exemption in the marital home. Thus, the aggregate homestead exemption amounted to $17,500.
Following commencement of the Chapter 7 case, foreclosure proceedings previously instituted by the mortgagee against the marital home were abandoned. On April 26, 1982, the first meeting of creditors was held and an interim trustee was appointed. Shortly thereafter the trustee filed his report of no distribution and approving the debtors' list of exempt property. None of the creditors objected to the report pursuant to then Bankruptcy Rule 403(c) and the report became final. During the pendency of their case, the debtors never moved under § 522(f) to avoid the fixing of judicial liens on their interest in the marital home to the extent those liens impaired their exemptions under § 522(b). Discharges were granted to both debtors on July 20, 1982 and on August 5, 1982 the case was closed.
Ann Costello died on December 8, 1984 but Thomas R. Costello continues to live in the marital home with the rest of his family. After Mrs. Costello's death First Federal Savings and Loan Association of Rochester ("the Bank"), successor by merger to Franklin, commenced state court proceedings to foreclose its mortgage which presently amounts to approximately $70,000 by reason of substantial defaults in payments. Schedules annexed to the foreclosure complaint indicate that judgment liens against the property aggregate approximately $368,000 of which about $20,000 were perfected subsequent to the filing of the petition in bankruptcy. The complaint was served upon all the judgment lien creditors. Each had been scheduled in the debtors' petition either as a lien creditor whose lien had been perfected pre-petition or as an unsecured creditor. The present estimated market value of the marital home is $150,000.
On January 12, 1987, Thomas Costello and the estate of Ann Costello moved by order to show cause to reopen the Chapter 7 case pursuant to 11 U.S.C. § 350(b) in order to avoid the liens of judgment creditors under § 522(f)(1) to the extent they may impair the $17,500 aggregate homestead exemptions claimed in the original Chapter 7 joint petition.
The motion also sought to restrain the foreclosure sale of the marital home pending this court's consideration of the application to reopen the Chapter 7 case. Although all the judgment lien creditors received notice of the motion, only one, Cessna Finance Corporation ("Cessna"), appeared and objected to the motion.
Cessna is a former aircraft supplier of Aer Aisling, Ltd., a corporation in which the debtors served as President and Vice President and for which they guaranteed certain debts. During 1979 Aer Aisling purchased an aircraft financed by Cessna, secured by a note and chattel mortgage personally guaranteed by the debtors. Aer Aisling subsequently sold the aircraft to a third party purchaser without notifying Cessna, thereby breaching the note and chattel mortgage. Cessna then sought and secured a judgment against the debtors and Aer Aisling in the amount of $22,995.42. The judgment was perfected on June 9, 1981, prior to the perfection of the liens of the remaining judgment lien creditors with the exception of one whose claim amounts to a few hundred dollars. Thereafter, Aer Aisling filed a Chapter 7 petition on the same date as the debtors. Cessna's judgment remains unpaid.
Cessna contends that reopening the case would lend support to a fraud and conversion practiced upon them by the debtors. It further contends that it would be prejudiced by the fact that the debtors have waited five years after their case closed before seeking to void the liens under § 522(f) on the eve of the foreclosure sale. Finally, Cessna contends that because Ann Costello died in 1984, the movants have lost any right to claim the homestead exemption under the CPLR.
At the time of the argument of the motion before this court, it became apparent that the movants' primary concern was to stay the foreclosure proceedings in order to prevent the extinguishment of the debtors' exemptions affecting the marital property. At the suggestion of the court, Cessna agreed with the movants that if the court were to direct that the case be reopened, the foreclosure sale would proceed conditioned upon the movants applying the amount of the exemptions against any surplus remaining after payment in full of the lien of the mortgagee and the prior lien of Cessna and the other small lien creditor, as well as the amounts of the valid liens of the remaining judgment lien creditors to the extent that they do not impair the exemptions.
Section 350(b) of the Bankruptcy Code provides that: "a case may be reopened ... to administer assets, to accord relief to the debtor, or for other cause." 11 U.S.C. § 350(b) (1986). The great weight of authority holds that absent prejudice to a creditor, a bankruptcy court may reopen a case for the purpose of commencing a proceeding to avoid the fixing of a lien under § 522(f). See, e.g., In re Carilli, 65 B.R. 280 (E.D.N.Y.1986), In re Dvoroznak, 38 B.R. 178 (Bkrtcy.E.D.N.Y.1984); In re Moser, 27 B.R. 144 (Bkrtcy.E.D.N.Y. 1983); Rheinbolt v. Credit Thrift of America, Inc., 24 B.R. 167 (Bkrtcy.S.D.Ohio 1982); In re Tarrant, 19 B.R. 360 (Bkrtcy. Alaska 1982); Matter of Holyst, 19 B.R. 14 (Bkrtcy.D.Conn.1982); In re Gortmaker, 14 B.R. 66 (Bkrtcy.D.S.D.1981); see also 2 Collier on Bankruptcy, Para. 350.03 at 350-6 (15th ed. 1986). The legislative history accompanying § 522(f) sets forth the policies at stake:
H.R.Rep. No. 595, 95th Cong. 1st Sess. 362 (1977); S.R.Rep. No. 95-989, 95th Cong. 2d Sess. 76 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6318.
Neither § 522, Bankruptcy Rule 4003 which implements § 522(f) nor the accompanying legislative history provide a time limit for avoiding liens under § 522(f). In view of the legislative silence in this area we are reluctant to imply one.
A number of jurisdictions have declined to reopen cases where creditors had incurred expenses in seeking to recover property through state court proceedings, holding that to do otherwise would unduly prejudice those creditors. E.g., In re Hawkins, 727 F.2d 324 (4th Cir.1984); In re Serafini, 30 B.R. 606 (Bkrtcy.W.D.Pa.1983); In re Towns, 16 B.R. 949 (Bkrtcy.N.D.Iowa 1982). In the case at bar, however, Cessna Finance has made no showing whatever of prejudice. The record is devoid of any evidence that it has begun state court proceedings or that it has incurred any expense in attempting to recover its judgment from the property in question. Indeed, the only creditor that arguably would be prejudiced is the mortgagee, First Federal Savings & Loan Association of Rochester, in view of its prior commencement of a foreclosure proceeding against the property. First Federal, however, does not object to the reopening of the case as long as it may proceed to foreclose its lien. Consequently, reopening of this case is justified. The next question presented to the court is whether or not the movants may apply their exemptions against the surplus funds remaining after the foreclosure sale in light of the death of one of the spouses.
Once a Chapter 7 case has been reopened, a surviving joint debtor — here Thomas Costello — may claim the exemption he elected and which vested at the time the petition in bankruptcy was filed to avoid the fixing of a lien under 11 U.S.C. § 522(f).
Section 541(a)(1) defines property of the estate as all legal or equitable interests of the debtor in property as of...
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