In re Kelly
| Decision Date | 20 September 2006 |
| Docket Number | No. 04 B. 46862.,04 B. 46862. |
| Parties | In re James J. KELLY, III, Debtor. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Chad H. Gettleman, Adelman, Gettleman and Merens, Chicago, IL, for debtor.
These matters come before the Court on the motion of James J. Kelly, III (the "Debtor") pursuant to 11 U.S.C. § 522(1) to avoid the judgment lien of Insty Prints of Joliet/David Kaminskas (the "Creditor") and on the Creditor's motion to dismiss the Debtor's motion. For the reasons set forth herein, the Court denies the Creditor's motion to dismiss and denies the Debtor's motion to avoid the Creditor's lien.
Initially, the Court must address the Creditor's challenge to this Court's subject matter jurisdiction. The Debtor's motion invokes the lien avoidance powers of 11 U.S.C. § 522(f). 28 U.S.C. § 1334(a) vests original and exclusive jurisdiction of this bankruptcy case with the United States District Court for the Northern District of Illinois. By its Internal Operating Procedure 15(a) and 28 U.S.C. § 157(a), the District Court has referred this (and all other bankruptcy cases) case to the bankruptcy judges of this District, who collectively constitute a unit of the District Court under 28 U.S.C. § 151. The Debtor's interest in property at the time of the petition became property of the bankruptcy estate under 11 U.S.C. § 541(a)(1) and, under 28 U.S.C. § 1334(c), the District Court has exclusive jurisdiction of all the property, wherever located, of the Debtor as of the commencement of the case and of the property of the estate. The District Court and, thus, this Court by the reference have original, but not exclusive, jurisdiction of all civil proceedings arising under title 11.
The Debtor's motion to avoid part of the Creditor's judgment lien is premised on § 522(f) of the Bankruptcy Code. The motion seeks a determination of the validity and extent of the Creditor's judgment lien against property of the estate. Further, the motion seeks to adjust the debtor-creditor relationship as between the parties in terms of the contested partial lien avoidance sought to protect the homestead exemption claim. Thus, the motion to avoid the lien and the motion to dismiss that motion are core proceedings under 28 U.S.C. § 157(b)(2)(A), (K), and (0). Therefore, the Court may enter appropriate orders and judgments under 28 U.S.C. § 157(b)(1). The focus of this matter is the Debtor's claimed homestead exemption in certain real property and whether the Creditor's lien asserted against that property impairs the Debtor's exemption. The Court is not asked to deal with the property itself over which it no longer has jurisdiction. See In re Ronics, Inc., 813 F.2d 127, 131 (7th Cir.1987). Rather, the Court's jurisdiction is being invoked to partially avoid the Creditor's judgment lien in order to protect the Debtor's claimed homestead exemption. Accordingly, the Court concludes that it has subject matter jurisdiction. The Court rejects the Creditor's challenge thereto and denies the motion to dismiss.
On February 7, 2003, the Creditor obtained a judgment in the Circuit Court of Will County, Illinois, against the Debtor in the amount of $115,885.23. The Creditor recorded a memorandum of that judgment with the DuPage County Recorder of Deeds on March 5, 2003. That recording of the Creditor's judgment lien encumbered all real property interests of the Debtor in DuPage County. See 735 ILL. COMP. STAT. 5/12-101 (2034).
Subsequently, on December 21, 2004, the Debtor filed a voluntary Chapter 7 bankruptcy petition. His spouse, Lorinda Kelly ("Lorinda"), did not file a petition and is not a debtor seeking relief under the Bankruptcy Code. The Debtor filed his original Schedules and Statement of Financial Affairs on January 14, 2035. Schedule A disclosed his interest in a residence commonly described as 3829 Vardon Court, Woodridge, Illinois (the "Property"). The Property was referenced as being held in joint tenancy with Lorinda and subject to undisputed mortgage liens in favor of Washington Mutual Bank ("Washington") in the amended sum of $163,551.00 and Archer Bank ("Archer") in the amended amount of $210,907.00. The Debtor valued the Property at $400,000.00 subject to secured claims of $462,400.00 (amended to 6362,400.00 and later amended to $489,458.00). The Creditor's claim was initially listed on Schedule F as unsecured and undisputed in the sum of $113,817.03 and arising from a judgment (later amended to secured claim status in the amount of V-15,085.23). Lorinda was listed as a co-debtor on the debts to Washington and Archer on Schedule The Debtor claimed a homestead exemption in the Property on Schedule C pursuant to 735 ILL. Comp. STAT. 5/12-931 (2004). No objections to his exemption claim were made within the applicable time period prescribed by Federal Pule of Bankruptcy Procedure 4003(b)(1).
On February 7, 2035, Washington filed a motion to modify the stay thereby seeking to foreclose its mortgage lien against the Property. That motion was granted on March 11, 2035. A mortgage foreclosure action was filed by Washington in the state court against, inter alia, the Debtor, Lorinda, Archer, and the Creditor. The Court has not been furnished a complete copy of the record of the foreclosure proceeding. Rather, the Court has received only a copy of the judgment of foreclosure and sale and other orders entered in that matter.
On April 1, 2305, the Creditor filed a motion for an extension of time to file an objection to the Debtor's discharge and a motion to modify the stay as to the Property in order to protect and assert its judgment lien in the foreclosure action. Those motions were granted on April 8, 2005. The Chapter 7 trustee also filed a motion for an extension of time to object to the Debtor's discharge that was granted on April 15, 2035. Pursuant to these motions as well as another motion, the Court extended the deadline for filing objections to the Debtor's discharge to August 9, 2005.
Based on the records that were furnished from the state court foreclosure proceeding, the Court is able to determine the following. On August 15, 2005, the state court entered an order of default against the Debtor, Lorinda, and Archer, among others. Only the Creditor took appropriate action to protect its judgment lien. The state court entered a judgment of foreclosure and sale on August 15, 2005, and found that Washington had a first priority lien in the total sum of $176,324.22. That judgment further found that the Creditor had a valid but subordinate lien by virtue of its recorded memo' randum of judgment, and that the balance of its lien totaled $133,354.73 "plus such amounts as shall accrue and be assessed thereafter plus attorney fees and costs." The judgment of foreclosure also stated that the rights and interests of all defendants were inferior to Washington's mortgage lien against the Property, and it provided for a subsequent foreclosure sale of the Property in the event Washington's loan was not timely reinstated or the Property redeemed in accordance with Illinois law.
Apparently, Archer was the successful bidder at the foreclosure sale. The sale generated the sum of $447,000.00, which was sufficient to pay the amount due Washington in full. The sale left a surplus of $257,103.59. It appears that at this point the Debtor began to participate in the remaining matters before the state court. The Debtor furnished a recent transcript of the state court proceedings in which that court deferred ruling on the division and award of the surplus proceeds pending resolution of the instant matters before the Court.
On August 9, 2005, the Creditor filed an adversary proceeding (05 A 01723) wherein it objected to the Debtor's discharge. That matter was set for trial, but it did not go forward because of a possible settlement. The settlement, however, did not materialize. On April 27, 2006, the Creditor moved to dismiss the adversary proceeding. The trustee objected, and the Court denied the motion. As a result of that development, the trustee moved to be substituted as the party plaintiff in lieu of the Creditor. The Court granted that request and reset the trial for October 23, 2006, with the trustee as the substituted plaintiff.
The Debtor alleges in his motion to avoid the Creditor's lien that the judgment lien only encumbers the Debtor's undivided one-half interest in the Property, not Lorinda's interest, but that both of their undivided interests were encumbered with mortgage liens in favor of Washington and Archer. In addition, the Debtor contends that on March 14, 2006, Archer requested leave to appear, answer, and prove up its claimed lien against the Property. The state court denied that request without prejudice "as to its right to any surplus that may exist after payment to creditors who have exercised their rights have been duly paid from the proceeds of ... sale." The Debtor further alleges that Archer filed an amended motion seeking a lien and judgment in the amount of $218,488.06 to be deemed a surviving lien to attach to any available surplus proceeds from the foreclosure sale. The Debtor contends that if Archer is successful in its position, then the combined liens of Washington, Archer, and the Creditor under the § 522(f) formula would total the sum of $362,886.09 as to the whole of the Property, which was valued in the Debtor's Schedules at $400,000.00. His undivided one-half interest at the time of the petition was estimated at $200,000.00. The Debtor thus computes that in order to protect his claimed homestead exemption of $7,500.00, the Creditor's judgment lien must be partially avoided pursuant to § 522(f) as follows: the Creditor's lien of $115,885.23 plus onehalf of...
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