In re Gokay
| Decision Date | 14 August 2015 |
| Docket Number | Case No. 14–30703 |
| Citation | 535 B.R. 758 |
| Parties | In re: Michael Cem Gokay, Nilesen S. Gokay, Debtors |
| Court | U.S. Bankruptcy Court — Southern District of Ohio |
John Paul Rieser, Dayton, OH, for Debtors.
Decision Granting Debtors' Motion to Avoid Judgment Lien of the State of Ohio
This matter is before the court on the Motion to Avoid Judicial Lien on Real Estate (doc. 12) and the objection filed by the State of Ohio (doc. 16). The parties also filed additional memoranda concerning the issues presented by the motion (docs. 42, 64 and 65). The issues presented by the motion are whether Ohio Revised Code § 2329.661(A)(4) precludes the debtors' use of their Ohio homestead exemptions to avoid the State's judgment lien pursuant to Bankruptcy Code § 522(f) ; and if so, whether the debtors may avoid some or all of the State's judgment lien through their wildcard exemption.
No party has contested the jurisdiction of the court or its authority to enter a final judgment in this proceeding. The court finds that it has jurisdiction pursuant to 28 U.S.C. § 1334, this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (K) and (O), and that it has the constitutional authority to enter final judgment over this contested matter.
Michael and Nilesen Gokay (the “Gokays”) borrowed money from the Ohio Department of Developmental Services (the “State”) for their business. The Gokays and their business entity defaulted on the loan, the State obtained judgment against the Gokays, and on January 27, 2014, the State recorded a certificate of judgment in the amount of $696,263.04, which serves as a lien against the Gokays' residence located in Dayton, Ohio.1
The Gokays filed this Chapter 7 bankruptcy on March 7, 2014. The Gokays' original Schedule A stated that the value of the residence was $307,200, with a $291,666 secured claim against it on the date of the filing of their bankruptcy case (doc. 1). The Gokays did not assert an exemption in the residence on Schedule C in their original filings (doc. 1).2 Schedule D reflects a debt owed to the State of Ohio Developmental Services Agency (the “State”) in the amount of $696,263.04.
The Gokays filed a motion seeking to avoid the State's judgment lien as having impaired their homestead exemption provided by Ohio Revised Code § 2329.66(A)(1) (doc. 12). The State filed a memorandum in opposition (doc. 16).
Subsequently, the Gokays filed an amended Schedule A which states that the value of the residence is $288,000, again listing a secured claim of $291,666 against the property (doc. 39). This value also corresponds with an appraisal report which the Gokays filed on July 31, 2014 (doc. 38). Also, the Gokays filed an amended Schedule C which asserted a homestead exemption in the residence in the amount of $15,534 pursuant to § 2329.66(A)(1) and a wildcard exemption in the residence in the amount of $20 pursuant to Ohio Revised Code § 2329.66(A)(1 8) (doc. 39). The State disputes the Gokays' $288,000 value placed on the residence, arguing that the $307,200 value described by the Gokays' original Schedule A and the Montgomery County, Ohio, Auditor's 2011, 2012, and 2013 value of $312,720 are “more likely to be reflective of the true value of the real property[.]” (doc. 64).
The Gokays insist that they are entitled to the homestead exemption and that it applies to the State's judgment lien, with 11 U.S.C. § 522(f) permitting the avoidance of the State's judgment lien as impairing their homestead exemption. They argue that subsection (c) of § 522 is at the heart of debtors' fresh start and that, combined with subsection (f), Congress' intent in providing debtors a fresh start free from judgment liens is clearly evinced. The Gokays assert that Ohio Revised Code § 2329.661(A)(4) contravenes and is preempted by § 522(f)(1). They further argue that even if the homestead exemption does not apply due to § 2329.661(A)(4), that provision does not protect the State's judgment from being avoided as impairing their wildcard exemption.
The State does not appear to dispute that the Gokays would be entitled to the homestead exemption as to the bankruptcy trustee and all other creditors holding judgment liens. However, the State argues that it legitimately carved out of the Ohio homestead exemption judgment liens obtained by the State. The State contends that, in allowing the states to opt out of the federal exemptions provided by the Bankruptcy Code, Congress has given Ohio the discretion to define the scope of its exemptions as it deems appropriate. Ohio has chosen to set the parameters of the Ohio homestead exemption so as to apply it to all judgment liens except judgment liens of the State, its agencies, and its political subdivisions. The State claims that, by definition, the Ohio homestead exemption does not apply to judgment liens held by the State and its political subdivisions and agencies and, therefore, its judgment lien cannot impair the Gokays' homestead exemption. In sum, the State explains that because Ohio has defined the homestead exemption in a manner to exclude its own judgment liens from coverage of that exemption, the lien avoidance mechanism is not applicable because the debtors “would [not] have been entitled under subsection (b) [of § 522 ]” to a homestead exemption as relates to the State judgment lien. 11 U.S.C. § 522(f)(1).
The determination of the applicability of §§ 2329.66(A)(1) and 2329.661(A)(4) and § 522(f)(1)(A) under the circumstances of this case present a difficult question concerning the extent to which Congress intended to permit the “opt out” states to define their exemptions versus the extent to which Congress intended to give debtors a fresh start through the ability to avoid judgment liens under § 522(f)(1). The issue as relates to these Ohio statutes appears to present a case of first impression. However, in the end, the court determines that the Supreme Court's decision in Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991) is dispositive and supports the Gokays' avoidance of the State's judgment lien in its entirety.
Any issue as to the application of the Gokays' wildcard exemption is rendered moot as a result of the court's determination as to the Gokays' homestead exemption. Accordingly, the court will not address application of the wildcard exemption.
Section 522 is the general section of the Bankruptcy Code which describes debtors' ability to exempt certain property interests from their bankruptcy estates, saving those interests from liquidation for the payment of their unsecured creditors. See Owen, 500 U.S. at 305, 111 S.Ct. 1833. Subsection (b) provides, in pertinent part, as follows:
11 U.S.C. § 522(b) (emphasis added). As permitted by § 522(b)(2), Ohio has expressly opted out of the federal bankruptcy exemptions provided in § 522(d), stating that: “Pursuant to the ‘Bankruptcy Reform Act of 1978,’ 92 Stat. 2549, 11 U.S.C. 522(b)(1), this state specifically does not authorize debtors who are domiciled in this state to exempt the property specified in the ‘Bankruptcy Reform Act of 1978,’ 92 Stat. 2549, 11 U.S.C. 522(d).” Ohio Revised Code § 2329.662. See In re Kyle, 510 B.R. 804, 808 (Bankr.S.D.Ohio 2014) (Walter, J.) ().
It has been stated that the “opt-out” states were given wide discretion and broad authority to define their exemptions. Thus, the Court of Appeals for the Sixth Circuit has adopted the following statement:
The unambiguous language of section 522(b) implicitly indicates a state may exempt the same property included in the federal laundry list [§ 522(d) ], more property than that included in the federal laundry list, or less property than that included in the federal laundry list. The states also may prescribe their own requirements for exemptions, which may either circumscribe or enlarge the list of exempt property.
Rhodes v. Stewart (In re Rhodes), 705 F.2d 159, 163 (6th Cir.1983) (quoting In re McManus, 681 F.2d 353, 355-56 (5th Cir.1982) (abrogated on other grounds by Owen ). See also Granger v. Watson (In re Granger), 754 F.2d 1490, 1492 (9th Cir.1985) ().3 In discussing § 522, the Supreme Court stated: “Nothing in subsection (b) () limits a State's power to restrict the scope of its exemptions; indeed, it could theoretically accord no exemptions at all.” Owen, 500 U.S. at 308, 111 S.Ct. 1833. However, later in Owen , the Supreme Court did qualify this statement—stating that the “opt-out policy” was not absolute, but rather, must be applied “with whatever other competing or limiting policies” the Bankruptcy Code provides. Id. at 313, 111 S.Ct. 1833. As Judge Walter recently held:
Owen's language and logic support the courts concluding that a “state's ability to define its exemptions is not absolute and must yield to conflicting policies in the Bankruptcy Code.” Weinstein, 164 F.3d at 683. Although § 522(b) allows states to opt out of § 522(d) and thereby define what property a “debtor may exempt...
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In re Delk
...Ohio's state law exemptions are generally applicable. In re Kyle, 510 B.R. 804, 808 (Bankr. S.D. Ohio 2014); In re Gokay, 535 B.R. 758, 762 (Bankr. S.D. Ohio 2015). Ohio Revised Code § 2329.66(A)(1)(b) provides an exemption applicable in bankruptcy cases for "the person's interest, not to e......