In re Jones

• Decision Date: 22 April 1994
• Docket Number: Bankruptcy No. 93 B 04953.
• Citation: 166 BR 657
• Parties: In re Jay JONES a/k/a Francis Randall Jones and Betty Jones a/k/a Betty Strassman, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

166 B.R. 657 (1994)

In re Jay JONES a/k/a Francis Randall Jones and Betty Jones a/k/a Betty Strassman, Debtors.

Bankruptcy No. 93 B 04953.

United States Bankruptcy Court, N.D. Illinois, E.D.

April 22, 1994.

COPYRIGHT MATERIAL OMITTED

Max Chill, Steven R. Radtke, Chill, Chill & Radtke, P.C., Chicago, IL, for debtors.

Joseph Stein, Chicago, IL, Trustee.

Martin W. Salzman, Richard T. Reibman, Schwartz, Cooper, Kolb & Gaynor, Chtd., Chicago, IL, for creditor (Pinnacle Bank).

MEMORANDUM OPINION

SUSAN PIERSON SONDERBY, Bankruptcy Judge.

This matter comes before the Court on Jay and Betty Jones' ("Debtors") Motion to Avoid Judicial Lien of Pinnacle Bank/Harvey.¹ The Court denies the Debtors' request for relief.

JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. Section 1334 and General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. This matter constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(A), (K) and (O).

BACKGROUND

On March 5, 1993, Jay and Betty Jones filed a petition for relief under Chapter 11 of the Bankruptcy Code. On May 19, 1993, the case was converted to Chapter 7. Debtors own and reside at 20020 Western Avenue, Olympia Fields, Illinois, ("real estate") and allege that the fair market value of the real estate is $725,000.² The Debtors claimed a $15,000 homestead exemption in the real estate on their schedules. See 735 ILCS 5/12-901.

The real estate is encumbered with five liens which total $2,383,099.33 and have the following priorities: (1) Arthur Rosenblum holds a judgment lien in the amount of $21,617.16; (2) First Illinois Bank holds the first mortgage in the amount of $573,584.53; (3) Pinnacle Bank/Harvey ("Pinnacle Bank") holds the second mortgage and a judgment lien pursuant to foreclosure in the amount of $45,366.61; (4) Pinnacle Bank holds a judgment lien in the amount of $1,683,996.00;³ (5) KJB Construction Management, Inc. holds four mechanic's lien claims in the amount of $58,535.03. Pursuant to their motion, Debtors seek to avoid Pinnacle Bank's judgment lien in the amount of $1,673,099.33⁴ alleging that it impairs the Debtors' homestead exemption pursuant to 11 U.S.C. § 522(f)(1). Pinnacle Bank argues that Debtors are attempting to improperly strip down its lien in violation of § 506(d) citing Dewsnup v. Timm, ___ U.S. ___, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992).

DISCUSSION

The issue before the Court is whether Pinnacle Bank's judicial lien impairs an exemption which the Debtors would be entitled to under Illinois state law. See Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991). Section 522(b) of the Bankruptcy Code allows a debtor to determine what property to exempt. Pursuant to that section, a debtor may choose between the federal exemptions that are allowed and the exemptions provided by the state. A debtor is not entitled to that option however, if the state prohibits the debtor from electing the federal exemptions. Illinois is one such state. See 735 ILCS 5/12-1201.

The Bankruptcy Code protects a debtor's exemptions by providing a mechanism for a debtor to avoid the fixing of a judicial lien on an entitled homestead exemption in certain circumstances. Section 522(f)(1) states in pertinent part:

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 subsection (b) of this section, is such lien is —

(1) a judicial lien;

A debtor may avoid a "judicial lien on any property to the extent that the property could have been exempted in the absence of the lien." H.R.Rep. No. 595, 95th Cong., 1st Sess. 362 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 76 (1978), U.S.Code Cong. & Admin.News 11978, pp. 5787, 5862, 6318. The "extent" of this protection is the focus of this opinion.

The Supreme Court has stated that in determining how § 522(f)(1) will be applied, the pertinent question to ask is whether the lien impairs an exemption which the debtor would have been entitled but for the lien itself. Owen v. Owen, 500 U.S. at 309-10, 111 S.Ct. at 1836. To ascertain the extent of Pinnacle Bank's lien impairment on the Debtors' exemption, the Court will begin with an analysis of a debtor's right to a homestead exemption according to Illinois law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979) (State law should be analyzed to determine a Debtor's interest in property and the perfection of liens therein).

In Illinois, a judgment lien attaches to all real property in the county which the real property is located upon the filing of a transcript, certified copy or memorandum of the judgment. 735 ILCS 5/12-101. However, every individual is entitled to a homestead exemption in the amount of $7,500 and "such homestead, and all right and title therein, is exempt from attachment, judgment, levy or judgment sale for the payment of his or her debts . . ." 735 ILCS 5/12-901. 735 ILCS 5/12-912 states that upon the execution and sale of the premises, the proceeds of the sale will be used to pay the judgment debtor the sum of $7,500, and the balance will be applied on the judgment. In Illinois, a judgment creditor cannot force the sale of property unless more than $7,500 is bid on the homestead property. 735 ILCS 5/12-909; Dixon v. Moller, 42 Ill.App.3d 688, 1 Ill.Dec. 411, 356 N.E.2d 599 (5 Dist.1976) (Sale and deed void where amount bid was less than amount of individual homestead exemption); Moriarty v. Galt, 112 Ill. 373 (Ill.1884) (Where value of homestead property did not exceed the exemption amount, judgment lien did not attach to the property). Furthermore, the homestead estate is freely alienable. Dixon v. Moller, 42 Ill.App.3d 688, 1 Ill.Dec. at 414, 356 N.E.2d at 602. If upon the forced sale of the property the homestead is not setoff, the sale will be found void. Palmer v. Riddle, 197 Ill. 45, 64 N.E. 263 (1902); Wabash Production Credit Ass'n v. Stroup, 111 Ill. App.2d 289, 250 N.E.2d 184 (5 Dist.1969). Illinois courts have consistently interpreted these cited provisions as protecting a person's homestead from attachment to ensure payment of the entitled homestead amount.⁵ Cochran v. Cutler, 39 Ill.App.3d 602, 350 N.E.2d 59 (2 Dist.1976); Lehman v. Cottrell, 298 Ill.App. 434, 19 N.E.2d 111 (2 Dist.1939) (both cases stating judgment lien does not attach to judgment debtor's homestead exemption).

Consequently, pursuant to Illinois law Pinnacle Bank's judgment lien does not attach or otherwise "impair" the Debtors' homestead exemption. Rather, the judgment will attach to any equity left over in the real estate which is over and above the amount paid on the Debtors' homestead exemption. Other bankruptcy courts confronted with the same issue have reached similar conclusions. See In re Cerniglia, 137 B.R. 722 (Bankr. S.D.Ill.1992); In re Ward, 157 B.R. 643 (Bankr.C.D.Ill.1993); In re Harrison, 164 B.R. 611 (Bankr.N.D.Ill.1994).

Debtors urge this Court to construe the word "impair" to effect the avoidance of a substantial amount of Pinnacle Bank's lien. Specifically, Debtors request the Court to apply the formula that Judge Scholl utilized in In re Magosin, 75 B.R. 545 (Bankr. E.D.Pa.1987) and In re Brantz, 106 B.R. 62 (Bankr.E.D.Pa.1989) as follows:

1. Determine the value of the real estate 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.

Magosin, 75 B.R. at 547; Brantz, 106 B.R. at 68. In applying this formula, Debtors seek to have Pinnacle Bank's judicial lien avoided in the amount of $1,673,099.33.⁶ If allowed, Pinnacle Bank's judicial lien would be avoided except for that portion of the lien on the Debtor's pre-petition equity in the real estate. Courts which allow avoidance of liens rationalize the reading of § 522(f)(1) as follows:

Impairment should be construed in a manner consistent with the fresh start purposes served by the applicable Code provisions. In this regard, in determining whether a lien impairs an exemption under Section 522(f) we apply a practical approach to determining the impact that a judicial lien may have on the debtor\'s ability to use a given piece of exempt property to achieve his or her fresh start.

In re Herman, 120 B.R. 127, 131 (9th Cir. BAP 1990). The resulting avoidance would allow a debtor to keep any post-petition appreciation in the value of the real estate, and the post-petition equity built up which would be paid upon the sale of the property. Cerniglia, 137 B.R. at 723. Therefore, the Debtors rather than Pinnacle Bank would benefit from the increase in the value of the real estate and this assists the Debtors in their fresh start.

The line of cases cited by the Debtors ignore the plain language of the Bankruptcy Code. Section 522(f)(1) states "to the extent that . . ." a judicial lien impairs an exemption the debtor may avoid the fixing of that lien. A debtor's power in avoiding a lien is restricted to the extent of the impairment. This limiting language necessarily implies that to the extent a judicial lien does not impair a debtor's exemption, the lien may not be avoided. In re Sanders, 156 B.R. 667, 670 (D.Utah 1993); see In re Chabot, 992 F.2d 891 (9th Cir.1993). Furthermore, a debtor or a trustee may avoid the full amount of a lien pursuant to other sections of the Bankruptcy Code that do not contain such restrictive language. For example, Section 544(b) states that a "trustee . . . may avoid any transfer . . . that is voidable under applicable law . . .", and Sections 547(b) and 548(a) state that a "trustee may avoid any transfer of...