In re Hilt
| Decision Date | 16 December 1994 |
| Docket Number | Bankruptcy No. 89-10974-13. |
| Citation | 175 BR 747 |
| Parties | In re Margaret Rose Stewart HILT, Debtor. |
| Court | U.S. Bankruptcy Court — District of Kansas |
Jan M. Hamilton of Hamilton, Peterson, Tipton & Keeshan, Topeka, KS, for debtor.
Sueann V. Schultz, Asst. Vice President and Associate Counsel, for Bank IV Topeka, N.A.
Margaret Rose Hilt and Leonard D. Hilt owned a residence homestead as joint tenants with right of survivorship1 before Margaret filed a petition for divorce in 1985. The District Court of Shawnee County, Kansas, entered a divorce decree on September 16, 1985, granting Margaret Hilt the homestead and Leonard Hilt a judicial lien2 on the homestead to secure a money judgment in his favor of $61,771.00. Leonard Hilt assigned his lien to Bank IV Topeka, N.A., on June 30, 1987.3
Margaret Hilt4 filed for Chapter 7 bankruptcy relief on April 25, 1989, claiming the homestead exempt under Kansas law.5 On July 6, 1989, Margaret filed a motion under § 522(f)(1)6 to avoid the judicial lien that Leonard had assigned to Bank IV.7 Bank IV objected and filed a proof of claim as a secured creditor for $61,771.00, supported by a copy of the decree of divorce, the assignment of collateral described as a judicial lien, and copies of filed UCC-1s.8 The Chapter 7 case was converted to Chapter 13 on August 3, 1989.
The parties have stipulated to the following facts:
(Memorandum In Support Of Application To Avoid Lien filed July 6, 1989, at 1-3.) (Footnotes added.)
As the following passage from the decree reflects, the divorce court divided the Hilts' property under the authority of Kansas statutes:
IT IS FURTHER ORDERED BY THE COURT that all property, real or personal, is marital property as defined by K.S.A. 23-201b as amended, and that it was accumulated by the Petitioner and the Respondent during their marriage and by their joint industry. All such real and personal property is hereby divided as a division of marital property pursuant to K.S.A. 60-1610 and K.S.A. 23-201b and all amendments thereto, in accordance with the above findings of this Court.
(Decree of Divorce filed September 16, 1985, in Case No. 85-D-228 in the District Court of Shawnee County, Kansas, at 4, Exhibit A attached to Memorandum in Support of Application to Avoid Lien filed July 6, 1989.)
The bankruptcy schedules list the value of the home at $168,000.00 and the amount of a first mortgage thereon at $20,493.37, leaving an equity of $147,506.63, or for each spouse $73,753.31. The $61,771.00 judicial lien awarded to Leonard Hilt is $11,982.31 less than one-half the equity in the home. Presumably, the divorce court gave Leonard Hilt the judicial lien to equalize the division of property between the parties without requiring sale of the residence.
The United States Supreme Court examined § 522(f)(1) lien avoidance in Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991). To be avoidable under the statute, a judicial lien must "fix" to an interest of the debtor in property at some point in time after the debtor obtains the interest. Stated conversely, "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. at 296, 111 S.Ct. at 1829. If the lien fixes before the debtor holds the interest in property, or at the same time the debtor receives the interest, the lien is not avoidable.
The parties in Sanderfoot stipulated that prior to the divorce judgment they had held the property in joint tenancy, each possessing an undivided one-half interest.11 They further stipulated that the divorce decree dissolved any preexisting interest the nondebtor spouse had in the homestead. Because of this stipulation, the Supreme Court concluded that the lien could not have fixed on an interest of the debtor in property because the decree gave Sanderfoot his wholly new fee simple interest with Ms. Farrey's lien already attached. The Supreme Court stated:
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. at 299-300, 111 S.Ct. at 1830-31.
The Court also stated that the result would not be changed, "even if the divorce decree did not extinguish the couple's pre-existing interests but instead merely reordered them." Id. at 300, 111 S.Ct. at 1831. Expanding on this theme, the Court offered:
The parties\' current position notwithstanding, it may be that under Wisconsin law the divorce decree augmented Sanderfoot\'s previous interest by adding to it Farrey\'s prior interest. If the court in exchange sought to protect Farrey\'s previous interest with a lien, § 522(f)(1) could be used to undo the encumbrance to the extent the lien fastened to any portion of Sanderfoot\'s previous surviving interest. This follows because Sanderfoot would have possessed the interest to which that part of the lien fixed, before it fixed. But in this case, the divorce court did not purport to encumber any part of Sanderfoot\'s previous interest even on the assumption that state law would deem that interest to have survived. The decree instead transferred Farrey\'s previous interest to Sanderfoot and, again simultaneously, granted a lien equal to that interest minus the small amount of personal property she retained. Sanderfoot thus would still be unable to avoid the lien in this case since it fastened only to what had been Farrey\'s pre-existing interest, and this interest Sanderfoot would never have possessed without the lien already having fixed.
Id. at 300, 111 S.Ct. at 1831.
Justice Kennedy, joined by Justice Souter, wrote a concurring opinion emphasizing Sanderfoot's concession that the Wisconsin divorce decree wholly extinguished the parties' property rights and put in place new ones. This concession was at the heart of the case and made it unnecessary to determine Wisconsin law on the fixing issue.
Justice Kennedy's concurrence goes on to suggest that under the laws of other states, the lien might fix to a preexisting interest of the debtor/spouse and thus justify avoidance under the terms of § 522(f)(1). Consequently, he recommended a legislative fix for this possibility.
Because of the concession in Sanderfoot, it was unnecessary for the Court to examine Wisconsin law on the fixing question. But, absent such a concession, when a divorce court grants one party the homestead and the other a compensating lien by decree, state law determines whether the fixing of the lien has occurred. Farrey v. Sanderfoot, 500 U.S. 291, 299, 111 S.Ct. 1825, 1830, 114 L.Ed.2d 337 (1991).
Relevant Kansas divorce law is found in K.S.A. § 60-1610(b), K.S.A. § 23-201(b), and Cady v. Cady, 224 Kan. 339, 581 P.2d 358 (1978).
Kansas Statutes Annotated § 60-1610(b) grants the power to divide property between the parties in a divorce case. At the time of the divorce decree in this case it read, as it still does:
(b) Financial matters. (1) Division of property. The decree shall divide the real and personal property of the parties, whether owned by either spouse prior to marriage, acquired by either spouse in the spouse\'s own right after marriage or acquired by...
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