In re Lafoon

• Decision Date: 22 February 2002
• Docket Number: No. 01-23563.,01-23563.
• Parties: In re Mark Douglas LAFOON d/b/a Lafoon Construction, Debtor.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee

278 B.R. 767

In re Mark Douglas LAFOON d/b/a Lafoon Construction, Debtor.

No. 01-23563.

United States Bankruptcy Court, E.D. Tennessee.

February 22, 2002.

Margaret B. Fugate, Anderson, Fugate & Givens, Johnson City, TN, for Mark Lafoon.

Edward T. Brading, Herndon, Coleman, Brading & McKee, Johnson City, TN, for Terry Hartley.

MEMORANDUM

MARCIA PHILLIPS PARSONS, Bankruptcy Judge.

This chapter 7 case is before the court on the objection to the debtor's exemption filed by Terry Hartley d/b/a Appalachian Electric ("Hartley") and the debtor's response and request to avoid transfer pursuant to 11 U.S.C. § 522(h). The primary issue presented is whether this court should follow Norton v. Brokerage Oil Co. (In re Norton), 30 B.R. 712 (Bankr.E.D.Tenn.1983), wherein Bankruptcy Judge Clive Bare held that a debtor's prepetition failure to comply with state procedural mechanisms for claiming an exemption precluded judicial lien avoidance under 11 U.S.C. § 522(f)(1). As discussed below, the court concludes that due primarily to the United States Supreme Court's construction of § 522(f)(1) in Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991), the Norton decision is no longer good law. Accordingly, the objection to the debtor's exemption will be overruled and the transfer avoided. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(B), (F) and (K).

I.

The debtor Mark Douglas Lafoon commenced this bankruptcy case on October 18, 2001. In his amended Schedule C filed on November 8, 2001, the debtor asserted a $4,000 exemption in the "Bill Hardin Job" with a current market value of $4,894.55, pursuant to Tenn. Code Ann. § 26-2-103, which allows an individual to exempt $4,000 in personal property. On December 19, 2001, less than thirty days after the meeting of creditors held in the case, Hartley timely filed an objection to the exemption, asserting that the debtor had "lost his exemption because he failed to exercise it as required by Tenn. Code Ann. § 26-2-114(b)," citing In re Norton. In response, the debtor filed on January 2, 2002, a request to avoid pursuant to 11 U.S.C. § 522(h) "the transfer of $4,000 of the amount transferred to Terry Hartley d/b/a Appalachian Electric pursuant to an execution levied within ninety days of the commencement of this case," on the basis that the transfer was preferential under 11 U.S.C. § 547. The debtor asserts in the request that under 11 U.S.C. § 522(e) and In re Smith, 119 B.R. 757 (Bankr.E.D.Cal.1990), the debtor's "right to avoid a transfer pursuant to 11 U.S.C. § 522(h) survives regardless of any waiver of exemption provided by Tennessee law."

These matters came before the court for hearing on February 5, 2002, whereupon counsel for the parties announced that the material facts had been stipulated and that a ruling by the court on the legal issues was all that was required. In this regard, counsel referred to their "JOINT STIPULATIONS OF FACTS" filed prior to the hearing on January 14, 2002. These stipulations establish that on December 16, 1998, Hartley obtained a judgment against the debtor in the amount of $5,000 plus costs in the General Sessions Court for Washington County, Tennessee. Thereafter, on September 26, 2001, the General Sessions Court clerk issued a garnishment summons in the amount of $4,894.85,¹ which was served on Billy Joe Hardin on October 11, 2001. That same day, Mr. Hardin delivered to the officer serving the garnishment a check in the full amount of the garnishment payable to the General Sessions Court clerk. When the debtor filed for bankruptcy relief under chapter 7 on October 18, 2001, these funds were still in the possession of the court clerk.

Counsel for the parties further recite in their stipulations that "[t]he debtor is a bona fide citizen permanently residing in Tennessee" and then conclude by stating:

At no times, either before [Hartley's] judgment ... became final or at any time thereafter, up to and including the present time, has the debtor filed with the General Sessions Court for Washington County, Tennessee, any list of any items owned, constructive or actual, that the debtor chooses to declare as exempt. In other words, the debtor has never filed the list described in Tenn. Code Ann. § 26-2-114 and required by Tenn. Code Ann. § 26-2-114 to be filed in order for the debtor to exercise his exemption provided in Tenn. Code Ann. § 26-2-103.

The only other pertinent stipulated fact is that on November 30, 2001, this court entered an agreed order, approved for entry by the chapter 7 trustee and counsel for Hartley, which provided that the trustee was abandoning any interest in the sum of $4,894.85 being held by the clerk for the Washington County General Sessions Court pursuant to the garnishment. The order recites that Hartley requested the abandonment and states as grounds for the abandonment that "this case is a `no asset' case and that the property is burdensome to the estate or is of inconsequential value and benefit to the estate."

Because of this abandonment, Hartley argues in his memorandum of law that this court lacks subject matter jurisdiction over the garnished funds. And, although neither the chapter 7 trustee nor the debtor has requested revocation of this abandonment, Hartley asserts that in the event such a request is made a chapter 7 trustee's abandonment may not be revoked. Lastly, Hartley contends that "[r]egardless of this court's jurisdiction or the trustee's abandonment, these matters are governed by Norton v. Brokerage Oil Co."

II.

Before addressing both of these issues, the court initially notes that the debtor's avoidance request is predicated on § 522(h) of the Bankruptcy Code while In re Norton and In re Smith, the cases cited by the parties, are premised on § 522(f)(1). The latter section permits a debtor to avoid a judicial lien to the extent it impairs an exemption to which the debtor would have been entitled. See 11 U.S.C. § 522(f)(1).² Section 522(h) authorizes a debtor to avoid a transfer of property pursuant to the trustee's avoidance powers if the trustee does not exercise these powers and the debtor could have exempted the property under § 522(g)³ which requires the transfer to have been involuntary and not concealed by the debtor. See 11 U.S.C. § 522(h).⁴ An avoidance under § 522(f) may be brought by motion; § 522(h) requires the commencement of an adversary proceeding. See In re Colston, 213 B.R. 704, 706-09 (Bankr.S.D.Ohio 1997).

In this case, the debtor cites § 522(h) as the basis for his avoidance request and states in his motion that he is seeking to avoid the transfer of $4,000 to Hartley.⁵ From the wording of this request, it appears that the debtor originally assumed that the garnished funds had actually been paid over to Hartley. However, according to the parties' stipulations and statements of counsel at the subsequent hearing, the funds have not been paid to Hartley but were still in the possession of the Washington County General Sessions Court clerk when the debtor's bankruptcy case commenced.

"In Tennessee the debtor's interest in garnished funds is not terminated until the court pays the funds over to the creditor." Credit Bureau of Hopkinsville, Inc. v. Richardson (In re Richardson), 52 B.R. 237, 240 (Bankr.M.D.Tenn.1985) (citing Perry v. GMAC (In re Perry), 48 B.R. 591 (Bankr.M.D.Tenn.1985); Eggleston v. Third Nat'l Bank (In re Eggleston), 19 B.R. 280, 285 (Bankr.M.D.Tenn.1982)). Furthermore, "[i]t is well established that a writ of garnishment constitutes a judicial lien for purposes of the lien avoidance provisions of § 522(f)". In re Bensen, 262 B.R. 371 (Bankr.N.D.Tex.2001). See also In re Perry, 48 B.R. at 594 ("A garnishment lien does not allow an immediate right of possession but affords security for the payment of the judgment underlying the garnishment."); In re Eggleston, 19 B.R. at 284 (quoting Beaumont v. Eason, 59 Tenn. (12 Heisk.) 417, 418-421 (1873)) (In Tennessee, "service of the garnishment fixes a lien on the debt or effects in the hands of the garnishee."). As the courts have recognized, a wage garnishment may be both a preferential transfer and a judicial lien. See Buzzell v. Montgomery Ward & Co. (In re Buzzell), 56 B.R. 197, 198 (Bankr.D.Md.1986) ("Before garnished wages are paid over to the judgment creditor, ... the creditor has a judicial lien on those wages, and a transfer of those funds has occurred for purposes of § 547. If the voluntary Chapter 7 petition is then filed, a debtor may either recover those funds (if otherwise exempt) by avoiding the lien under § 522(f)(1), or by setting aside the preferential transfer under §§ 547 and 522(h) (assuming the other requirements of a preference are met)."). In any event, regardless of whether the debtor is proceeding under subsection (f) or (h) of § 522, both subsections require the debtor to establish whether he could have exempted the property but for the lien (if § 522(f) is utilized) or but for the transfer (under § 522(h)). See 11 U.S.C. § 522(f) and (h). It is with respect to this requirement that the parties in the instant case disagree.

III.

Prior to addressing the exemption question, the court will first consider Hartley's contention that this court is without subject matter jurisdiction to decide the fate of the garnished funds because the chapter 7 trustee has abandoned any interest of the estate in the property. This argument has little merit. Pursuant to 28 U.S.C. § 1334(e), "[t]he district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction of all of the property, wherever located, of the debtor, as of the commencement of such case, and of the property of the estate." As authorized by 28 U.S.C. § 157(a), this grant of exclusive jurisdiction over both property of the estate and property of the debtor has been referred to the bankruptcy judges in this district. See Kirk v. Hendon (In re Heinsohn), 231 B.R. 48, 56 (Bankr.E.D.Tenn.1...