In re Farrar

• Decision Date: 02 April 1998
• Docket Number: Bankruptcy No. 97-11454.
• Citation: 219 BR 48
• Court: U.S. Bankruptcy Court — District of Vermont
• Parties: In re Roy H. FARRAR, Debtor.

219 B.R. 48 (1998)

In re Roy H. FARRAR, Debtor.

Bankruptcy No. 97-11454.

United States Bankruptcy Court, D. Vermont.

April 2, 1998.

C.C'O. Reis, Hull, Webber & Reis, Rutland, VT, for Debtor.

D.L. Leahy, Windsor, VT, for Dorothy E. Farrar, Creditor.

MEMORANDUM OF DECISION DENYING LIEN AVOIDANCE

FRANCIS G. CONRAD, Bankruptcy Judge.

Debtor moves to avoid¹ a judicial lien of $16,400 on his homestead awarded to Creditor, his former wife, by the Windham County Family Court in the parties' divorce. Farrar v. Farrar, F166-4-95 WmDmd, slip op. at 15 (Vt. Windham County Fam. Ct. Jan. 27, 1997) (Hereinafter "Fam. Ct."). We sustain Creditor's objection, holding that her lien is not avoidable.

FACTUAL BACKGROUND

Debtor acquired the property, in which he claims a homestead interest, before his 1989 marriage to Creditor. They separated in 1994. On April 5, 1995, Debtor conveyed the property to his son, who was then 19, for $1, reserving a life estate for himself. Creditor "was not consulted or advised of this transfer." Fam.Ct., 8 ¶ 26. Two weeks later, on April 21, 1995, Debtor sued Creditor for a divorce.

"It was patently obvious to the Family Court that the conveyance was made in an effort to deprive the defendant of any share in this marital asset," and the Court refused to "condone such a superficial ploy," finding the conveyance "unenforceable as a fraudulent transfer" under 9 V.S.A. § 2281. Fam. Ct., 12. The Court, determined, based on an extensive factual findings, that "the defendant has a one-quarter interest in the marital residence and property which amounts to $10,000." Id., at 13. The Court also made other monetary awards to Creditor, and held:

All of the monetary awards set forth above, totalling $16,400.00, shall operate as a judgment lien on the homestead premises. . . . The total monetary award shall be paid within ninety (90) days of this order. In the event plaintiff fails to pay the total monetary award within that period of time, defendant shall be entitled to foreclose on her judgment lien pursuant to V.R.C.P. 80.1 and all other applicable provisions and statutory authority.

Id., 16 ¶ 7.

Debtor filed a Chapter 7 bankruptcy on Oct. 7, 1997. His schedules listed his interest in the homestead as a life estate, valued at $50,000.² He claimed a homestead exemption in the life estate.

DISCUSSION

Debtor moves to avoid Creditor's lien under § 522(f)(1)³, which provides, in pertinent 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 subsection (b) of this section, if such lien is . . . a judicial lien. . . . ⁴

Emphasis added. The parties agree that the controlling precedent is the Supreme Court's decision in Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991). They disagree, however, on the nature of the state-law property rights to which we must apply Farrey.

Sanderfoot, the debtor in Farrey, was attempting to avoid the lien awarded to his ex-wife by a divorce court. In that case, the parties had jointly owned their home during the marriage and the divorce decree awarded the property to Sanderfoot, subject to Farrey's lien. The Supreme Court parsed the phrase in § 522(f)(1) that we italicized in the quotation above, and concluded that "unless the debtor had the property interest to which the lien attached at some point before the lien attached to that interest, he or she cannot avoid the fixing of the lien under the terms of § 522(f)(1)." Id, 500 U.S. at 296, 111 S.Ct. at 1829. The lien could not be avoided, the Supreme Court said, because Sanderfoot acquired his fee simple interest at the same time that Farrey acquired her lien. The Court's rationale was that

the lien could not have fixed on Sanderfoot\'s pre-existing undivided half interest because the divorce decree extinguished it. Instead, the only interest that the lien encumbers is debtor\'s wholly new fee simple interest. The same decree that awarded Sanderfoot his fee simple interest simultaneously granted the lien to Farrey. . . . Sanderfoot took the interest and the lien together, as if he had purchased an already encumbered estate from a third party. Since Sanderfoot never possessed his new fee simple interest before the lien "fixed," § 522(f)(1) is not available to void the lien.

Id., 500 U.S. at 299-300, 111 S.Ct. at 1830-1831.

The only issue we have to decide is whether Debtor here "had the property interest to which the lien attached at some point before the lien attached." If he did, Creditor's lien is avoidable; if he didn't, it's not.

Debtor argues that "the interest of the Debtor in the property was in existence prior to the marriage and remained so throughout the marriage. The Debtor and Creditor never held the property jointly." Debtor's Memorandum, 2 (Jan. 15, 1998) (97-11454, Document No. 17-1). Creditor's lien attached to his pre-existing interest, Debtor argues, and thus may be avoided.

Creditor responds with two arguments. First, she argues that Debtor went into divorce court with only a life estate in the property, which he reserved when he conveyed the fee simple interest to his son. The divorce decree simultaneously avoided the transfer, and awarded the fee simple interest to Debtor, subject to Creditor's lien. Thus, as in Farrey, Debtor's interest was acquired subject to Creditor's lien, which cannot be avoided.

Creditor also argues in the alternative that even if the fraudulent conveyance had never occurred and record title had been in Debtor's sole name before and during their marriage, Vermont law affords each spouse an interest in all property owned by the other.

Prior to the divorce, the property was "marital property" as defined in 15 V.S.A. § 751⁵ as well as subject to Creditor\'s homestead interest pursuant to 15 V.S.A. § 64.⁶ The Debtor did not have a sole and separate interest in the property prior to the divorce, or prior to the creation of Creditor\'s lien. As in Sanderfoot, the Debtor was awarded his fee simple interest in the property upon the entry of the divorce decree and simultaneously with the creation of Creditor\'s lien securing compensation for the interest she had in the property prior to the divorce.

Creditor's Objection to Debtor's Motion to Avoid Judicial Lien, 2 (Dec. 9, 1997) (97-11454, Document No. 13-1).

Debtor answers both Creditor's arguments by contending that "the divorce proceeding between the parties to this matter, in fact, did not convert the nature of ownership of the homestead property." Debtor's Memorandum, 4 (Jan. 15, 1998) (97-11454, Document No. 17-1). Debtor answers Creditor's first argument, about the effect of the conveyance to Debtor's son, indirectly, in a footnote, that merely points us to "a very curious component of the divorce decree." The Family Court's opinion on the fraudulent conveyance issue "is curious for two reasons," Debtor says.

First, the conveyance appears to have been ineffective and void by virtue of the lack of spousal signature, as required under 15 V.S .A. § 64. Additionally, the purported grantee, Roy Farrar, Jr., was not a party to the divorce proceeding and would have to be a party to any fraudulent conveyance judgment. See Becker v. Becker, 138 Vt. 372, 416 A.2d 156 (1980).

Debtor's Memorandum, 4 n. 1.

Debtor makes no argument about the import of these curiosities, so we are left to fend for ourselves. We infer that the point of the first is to counter Creditor's argument that the Family Court changed Debtor's title by avoiding the fraudulent conveyance to his son. If the conveyance was void and ineffective from the outset, then Debtor in fact enjoyed uninterrupted, fee simple title, to which Creditor's lien attached, making it avoidable. A problem Debtor faces with this argument, however, is the fact that the only real property interest he scheduled on his petition was a life estate.

The point of the second curiosity seems to be that the Family Court's avoidance of the fraudulent conveyance was ineffective, so the son still owns the property, and there's nothing for a lien to attach to.

We believe Debtor is simply wrong about the first curiosity; 15 V .S.A. § 64 applies only to "a homestead interest." Vermont law defines a homestead interest as property "owned and used or kept . . . as a homestead." 27 V.S.A. § 101. Here, the parties separated in 1994, when Creditor "moved out of the house." Fam.Ct., supra, 5 ¶ 18. Debtor's conveyance to his son was not until April 5, 1995. Thus, Debtor's house was not Creditor's homestead at the time of the conveyance, 15 V.S.A. § 64 does not apply, and the conveyance to Debtor's son was valid.

The second curiosity is more troublesome. The Family Court avoided the transfer under 9 V.S.A. § 2281,⁷ which provides:

Fraudulent and deceitful conveyances of houses, lands, tenements or hereditaments, or of goods and chattels, and all bonds, bills, notes, contracts and agreements, all actions, judgments and executions, made or had to avoid a right, debt or duty of another person, shall, as against the party only whose right, debt or duty is attempted to be avoided, his heirs, executors, administrators and assigns, be null and void.

Emphasis added. Debtor correctly contends that the son is a necessary party to a fraudulent conveyance action under 9 V.S.A. § 2281. Former Vermont Supreme Court Chief Justice Franklin Billings explained why in Becker.

A fraudulent conveyance is valid between the parties, and in fact as to the whole world, except those within the protection of the statute; thus the words "null" and "void" are construed to mean voidable only. Therefore such conveyances vest the legal title in the grantee, subject only to be divested by the creditors of the grantor, if they choose to impeach it.

Not only is the conveyance voidable only as to creditors under the statute, it can become binding upon a creditor who affirms

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