In re Henderson
| Decision Date | 01 April 1993 |
| Docket Number | Civ. No. SA-93-CA-0095. |
| Citation | 168 BR 151 |
| Parties | In re E.C. HENDERSON and Phyllis Henderson, Debtors. E.C. HENDERSON and Phyllis Henderson, Appellants, v. Lee BELKNAP, Appellee. |
| Court | U.S. District Court — Western District of Texas |
James Samuel Wilkins, San Antonio, TX, for Lee Belknap.
Jess Vince Hightower, San Antonio, TX, for E.C. Henderson and Phyllis Henderson.
Pending before the Court is the Appeal of Order Denying Motion to Avoid Judicial Lien Pursuant to 11 U.S.C. § 522(f)(1) filed by E.C. and Phyllis Henderson on February 23, 1993 and the Response filed by Lee Belknap, Appellee herein, on March 10, 1993. Having reviewed the respective briefs of the parties and the record on appeal, the Court enters the following findings and order.
On October 26, 1990, Lee Belknap obtained a Texas state court judgment against E.C. and Phyllis Henderson in the amount of $197,667.21. Belknap filed an abstract of judgment in Caldwell County, Texas on November 29, 1990, thereby creating a judicial lien against all the non-exempt real property of the Hendersons.
On June 19, 1991, the Hendersons filed for relief under Chapter Seven of the Bankruptcy Code. At the time of the filing, the Hendersons owned 131 acres of real property in Caldwell County, Texas, which is exempt under Texas law as a rural homestead. On June 17, 1992, the Bankruptcy Court denied the Hendersons' discharge pursuant to § 727 of the Bankruptcy Code. On May 21, 1992, the Hendersons filed a motion to avoid the judgment lien under Bankruptcy Code section 522(f)(1) on the ground that it impairs their homestead exemption. Belknap opposed the motion, arguing that the Hendersons' discharge had been denied and the judicial lien does not "impair" the homestead exemption because it does not attach to the homestead under Texas law and therefore cannot be avoided pursuant to § 522(f)(1). Following a hearing on the motion, the Bankruptcy Court entered an order on December 21, 1992 denying the Hendersons' motion. 155 B.R. 157. The Hendersons then filed the instant appeal.
The sole issue presented for resolution is: Does a judicial lien "impair" a Texas homestead under 11 U.S.C. § 522(f)(1), even though a judicial lien does not "attach" to a homestead under Texas law?
The issue before the Court is a purely legal issue and therefore is subject to de novo review. In re Robinson, 114 B.R. 716, 718 (D.Colo.1990).
The natural starting point to resolving the issue is 11 U.S.C. § 522(f)(1). Section 522(f)(1) provides as follows:
Id. There once was uncertainty whether a debtor could use § 522(f) if his exemptions were created by state law and not federal law. However, it has been conclusively resolved that state law controls what property is exempt but federal law determines the availability of the lien avoidance provision. In re Robinson, 114 B.R. at 718. Therefore, a debtor with state-created exemptions is entitled to the protection of § 522(f). Id. at 719.
A debtor seeking to avoid a lien on exempt property under § 522(f)(1) must satisfy a three-pronged test.
In re Inman, 131 B.R. 789, 791 (Bankr. N.D.Tex.1991); In re Underwood, 103 B.R. 849, 850-51 (Bankr.E.D.Mich.1989); In re Shands, 57 B.R. 49, 50 (Bankr.D.S.C.1985).
No dispute exists as to the first and third requirements. The parties agree that Belknap has a judicial lien. They also agree that the Hendersons are entitled to the homestead exemption under Texas law.1 Thus, the only question to be answered is whether the judicial lien held by Belknap impairs the Hendersons' interest in their homestead exemption in the subject real property. The Bankruptcy Court held that it does not.
It is no mild understatement to say that there is a disagreement among the courts that have ruminated on this issue as to what is the answer. Situated on one side of this division are courts which hold that, where a judgment lien cannot attach to a debtor's homestead under the forum state's law, the judgment lien cannot be held to "impair" the debtor's homestead exemption for purposes of avoidance under § 522(f)(1). In re Cerniglia, 137 B.R. 722 (Bankr.S.D.Ill.1992); In re Chabot, 131 B.R. 720 (C.D.Calif.1991); In re Finch, 130 B.R. 753 (S.D.Tex.1991); In re Spearman, 124 B.R. 620 (E.D.N.Y.1991); In re Del Vecchio, 101 B.R. 803 (Bankr.S.D.Fla. 1989);2In re Zachary, 99 B.R. 916 (S.D.Ind. 1989); In re Fry, 83 B.R. 778 (Bankr.Col. 1988);3In re Goodwin, 82 B.R. 616 (Bankr. S.D.Fla.1988). This is the analysis applied by the Bankruptcy Court in the instant case in reaching its decision to deny the Hendersons' motion to avoid.
However, the more well-reasoned analysis, and the one which this Court elects to follow, is advanced in the opinions of the courts arrayed against them on the other side of the division. These courts adhere to the view that the mere existence of a judgment lien, although not attaching to the exempt homestead, impairs the debtor's constitutional homestead exemption and, consequently, is avoidable under § 522(f)(1). See In re Bland, 760 F.2d 1252 (11th Cir.1985); In re Bradlow, 119 B.R. 330 (Bankr.S.D.Fla.1990); In re Watson, 116 B.R. 837 (Bankr.M.D.Fla. 1990); In re Robinson, 114 B.R. 716 (D.Colo. 1990); In re Calandriello, 107 B.R. 374 (Bankr.M.D.Fla.1989); In re Bird, No. 88-8184-Civ-Aronovitz, slip op. at 9 (S.D.Fla. 1989), reversing, 84 B.R. 858 (Bankr.S.D.Fla. 1988); In re Underwood, 103 B.R. 849 (Bankr.E.D.Mich.1989); In re Hutchinson, 92 B.R. 950 (Bankr.M.D.Fla.1988); In re Sanderfoot, 92 B.R. 802 (E.D.Wisc.1988); In re Dixon, 85 B.R. 745 (E.D.Ohio 1988). However, this specific issue has been addressed by only two bankruptcy courts in Texas.
In In re Inman, 131 B.R. 789 (Bankr. N.D.Tex.1991), Inman, the debtor, entered into a settlement agreement and agreement to pay judgment with his creditor, Dallas Flower Market, Inc. ("DFM"). Therein Inman agreed to have judgment entered against him, and granted and assigned to DFM "an interest in and a right to proceeds from the sale of" his homestead located in Dallas, Texas. He then executed an assignment in favor of DFM which DFM filed in the Deed Record of Dallas County. An agreed final judgment was entered in the state court lawsuit. However, DFM, pursuant to the terms of the settlement, did not abstract the judgment.
Inman subsequently filed his petition under Chapter 7 of the Bankruptcy Code. He claimed exemptions under Texas law pursuant to 11 U.S.C. § 522(b)(2), and listed the Dallas property as his exempt homestead. Inman then filed a motion to avoid the assignment lien, an interest in his exempt homestead, and also the judgment lien pursuant to 11 U.S.C. § 522(f)(1).
The question initially confronting the bankruptcy court and the one to which it dedicated the bulk of its opinion was whether the assignment lien was a "judicial lien", as that term is defined in the Bankruptcy Code.4 The bankruptcy court ultimately determined that the assignment lien did not constitute a "judicial lien" and could not be avoided. In re Inman, 131 B.R. at 793.5
The other question, the question of significance to this Court, was disposed of in a succinct one line finding.6 The Inman court did not explain the analytical underpinning of its decision.
In In re Swift, 124 B.R. 475 (Bankr. W.D.Tex.1991), Swift, the debtor, obtained a divorce in 1989. Pursuant to the divorce decree, Swift was awarded the homestead, in return for which he granted his ex-wife a lien on his homestead, agreeing that, should the sale of another house given to her not yield at least $98,000 upon sale netting at least $82,500 to her, she could then recover any deficiency out of Swift's homestead whenever it was sold.
In 1990 Swift filed for Chapter 7 relief. Creditors GNA Life Insurance Companies ("GNA") and Bank of San Antonio ("Bank-SA") joined in the trustee's objections to the exemptions claimed by Swift. In particular, the creditors claimed that the ex-wife's interest in his homestead was not protected by Swift's claimed homestead exemption and was therefore subject to attachment. They further argued that Swift was attempting to exploit his own bankruptcy to shelter his ex-wife's interest in the property. Swift, in turn, filed a motion to avoid the creditors' judicial lines on his homestead pursuant to § 522(f)(1). Therein he asserted that his ex-wife simply acquired a lien on his homestead and nothing more. Consequently, his interest extended to the entire property and the judicial liens of GNA and Bank-SA could be avoided under § 522(f)(1).
The bankruptcy court rejected the creditors' construction of the divorce decree and held that the judicial liens could be avoided, stating:
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