In re Duvall

• Decision Date: 13 March 1998
• Docket Number: No. 97-51823-RBK.,97-51823-RBK.
• Citation: 218 BR 1008
• Parties: In re Everett Ray DUVALL and Karen Sprawls Duvall, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Texas

218 B.R. 1008 (1998)

In re Everett Ray DUVALL and Karen Sprawls Duvall, Debtors.

No. 97-51823-RBK.

United States Bankruptcy Court, W.D. Texas, San Antonio Division.

March 13, 1998.

Jeffrey Harbin Conner, Lubbock, TX, for debtors.

Craig A. Gargotta, Assistant United States Attorney, San Antonio, TX, for United States of America, Farm Service Agency.

OPINION

RONALD B. KING, Bankruptcy Judge.

Everett Ray Duvall and Karen Sprawls Duvall ("the Debtors") filed a "Motion to Avoid Non-Possessory, Non-Purchase Money Security Interest" of the United States of America, Farm Service Agency ("FSA"), in the Debtors' tools of the trade pursuant to § 522(f) of the Bankruptcy Code. For the reasons stated below, the Court concludes that while § 522(f)(1) and (f)(2) tentatively allow the Debtors to avoid the FSA's security interest in full, § 522(f)(3) limits that avoidance by a defined amount: the difference between the aggregate value of the Debtors' tools of the trade and $5,000.

I. FACTS

The Debtors filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on April 7, 1997. Thereafter, the Debtors elected the exemptions available under Texas law and claimed as exempt property certain tools of the trade valued in their schedules at $55,287. The FSA timely filed a proof of claim in the amount of $167,289.84. The FSA has a valid nonpossessory, nonpurchase-money security interest in the Debtors' tools of the trade pursuant to a written security agreement signed by the parties. On August 4, 1997, the Debtors filed this motion to avoid the FSA's security interest pursuant to § 522(f) of the Bankruptcy Code. In their motion and at the hearing, the Debtors argued that they should be allowed to avoid the security interest in full pursuant to § 522(f) of the Bankruptcy Code.¹ The FSA, in contrast, argued that § 522(f)(3) prohibits avoidance of liens on tools of the trade if the value of the property exceeds $5,000, or $10,000 for joint debtors.

II. DISCUSSION

A. History of § 522(f)

When a debtor files a bankruptcy petition, all of the debtor's legal and equitable interests in property, with some exceptions, become property of the estate. 11 U.S.C. § 541(a) (1994). Thereafter, an individual debtor may exempt from property of the estate certain types and amounts of property provided for under either a list of federal exemptions or a list of state exemptions, unless the state law of the debtor restricts the debtor to the state list. 11 U.S.C. § 522(b) (1994). A valid lien or security interest on exempt property securing a pre-petition debt is enforceable during or after the case unless the lien is void or is avoided pursuant to one of a number of avoidance provisions in the Bankruptcy Code. 11 U.S.C. § 522(c) (1994). One such provision is § 522(f), which, prior to 1994, provided in pertinent part that "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" the applicable state or federal list of exemptions. 11 U.S.C. § 522(f) (1988), amended by 11 U.S.C. § 522(f) (1994). Section 522(f) limited the types of avoidable liens to certain judicial liens and nonpossessory, nonpurchase-money security interests in household goods, implements, professional goods, tools of trade, and professionally prescribed health aids. Id.

Notwithstanding this Bankruptcy Code provision allowing debtors to avoid qualifying liens on certain personal property, the Court of Appeals for the Fifth Circuit concluded that Texas law, which excluded from the definition of exempt property that property encumbered by a valid security interest or lien, was not preempted by § 522(f). Bessent v. United States (In re Bessent), 831 F.2d 82, 82 (5th Cir.1987) (holding that "Texas debtors may not use 11 U.S.C. § 522(f) to avoid a non-possessory, non-purchase-money, non-judicial lien" on farm implements), overruled by Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991); Allen v. Hale County State Bank (In re Allen), 725 F.2d 290, 291-93 (5th Cir.1984) (holding that TEX.REV.CIV.STAT.ANN. art. 3836 current version at TEX.PROP.CODE ANN. §§ 42.001.002 (Vernon Supp.1998) was not preempted by § 522(f)), overruled by Owen. Because the Texas exemption statute specifically excluded validly encumbered property from the definition of exempt property, "the property would not be 522(b) exempt property and would not be exempt under the section (f) savings clause." Id. at 293. In short, Debtors who selected the Texas exemption scheme could not employ § 522(f) if the property were encumbered.

The Supreme Court rejected the Fifth Circuit's rationale in Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991). The creditor in Owen had a judgment lien on the debtor's homestead that would have qualified for Florida's homestead exemption but for the lien. Id. at 306-08, 111 S.Ct. at 1834-35. The Court, noting that the phrase "would have been entitled" in § 522(f) "denotes a state of affairs that is conceived or hypothetical, rather than actual, and requires the reader to disregard some element of reality," concluded that to determine the application of § 522(f), "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." Id. at 310-11, 111 S.Ct. at 1836-37.

After Owen, Texas courts were bound to the proposition that "although a state may elect to control what property is exempt under state law, federal law determines the availability of lien avoidance under § 522(f) of the Code." In re Kelly, 133 B.R. 811, 813 (Bankr.N.D.Tex.1991) (permitting the debtors to avoid a nonpossessory, nonpurchase-money lien on household goods pursuant to § 522(f)). Therefore, "if unencumbered property of a type may be exempted under the state exemption statute, then any nonpossessory, non-purchase money lien on that property can be avoided under § 522(f)." Id.

Unfortunately, neither the Bankruptcy Code nor Owen specified what type of "interest" in property a debtor must have to employ § 522(f), and neither Congress nor the Supreme Court defined "impairment," leaving the lower courts to grapple with these issues. See, e.g., Simonson v. First Bank of Greater Pittston (In re Simonson), 758 F.2d 103, 105-06 (3d Cir.1985) (requiring a debtor to have equity — which the court defined as the amount, if any, left after subtracting from the sale proceeds the sum of all nonavoidable liens — in exempt property in order to avoid the fixing of a lien "on an interest of the debtor in property" pursuant to § 522(f)); DeLiguori v. Granite Bank (In re DeLiguori), 146 B.R. 52, 60 (Bankr.D.N.H.1992) (holding, in a post-Owen case, that "a debtor must have economic equity in his home as of the petition date in order to avoid a judicial lien pursuant to 11 U.S.C. § 522(f)(1)."); contra Brown v. Dellinger (In re Brown), 734 F.2d 119, 125 (2d Cir.1984) ("Nearly all of the courts that have construed this section have concluded that . . . the debtor is permitted, even if he lacks an equity interest in the property, to avoid the fixing of a judicial lien on the property if that avoidance would allow him to enjoy an exemption provided by § 522(b)."); Chesanow v. W.H. Squire Co. (In re Chesanow), 25 B.R. 228, 230 (Bankr. D.Conn.1982) (concluding that a debtor need not have an equity interest in property to employ § 522(f) and that other legal and equitable interests — such as the right of possession and the right to redeem — are sufficient); cf. Tower Loan of Miss. v. Maddox (In re Maddox), 15 F.3d 1347, 1351-52 (5th Cir.1994) (rejecting a creditor's argument that a lien did not fix "on an interest of the debtor" because the applicable lien attached before the property became eligible for exemption under Mississippi law: The creditor was interpreting § 522(f) "to mean `an exemptible interest of the debtor,' but the statute merely states `an interest of the debtor in property.' . . . At a minimum, the Debtor's ownership interest in the property at issue here suffices.") (alteration in original) (footnote and citation omitted). See also West v. West (In re West), 68 B.R. 647, 648-49 (Bankr.C.D.Cal.1986) (concluding that "avoidance of a judicial lien is limited by the amount of the exemption because the amount of the exemption establishes the outside boundary of impairment."); contra In re Brantz, 106 B.R. 62, 68 (Bankr.E.D.Pa.1989) (avoiding a judicial lien in an amount greater than the amount of the exemption pursuant to the following formula: "`1. Determine the value of the property on which a judicial lien is sought to be avoided. 2. Deduct the amount of all liens not to be avoided from (1). 3. Deduct the Debtors' allowable exemptions from (2). 4. Avoidance of all judicial liens results unless (3) is a positive figure. 5. If (3) does result in a positive figure, do not allow avoidance of liens, in order of priority, to that extent only.'") (alteration in original) (quoting In re Magosin, 75 B.R. 545, 547 (Bankr.E.D.Pa.1987)). Congress would have to set things straight.

B. Current § 522(f)

Section 522(f) was amended by the Bankruptcy Reform Act of 1994. Pub.L. No. 103-394, 108 Stat. 4106 (1994). The statute, which contains new subsections (f)(2) and (f)(3), now reads in pertinent part as follows:

(f)(1) Notwithstanding any waiver of exemptions but subject to paragraph (3), 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 —

. . . .

(B) a nonpossessory, nonpurchase-money security interest in any . . . implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor. . .

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