In re Lincoln
| Decision Date | 15 June 1983 |
| Docket Number | Bankruptcy No. 83 B 00190 G,Adv. No. 83 G 0109. |
| Citation | 30 BR 905 |
| Parties | In re Eve Lynn T. (I.O.) LINCOLN, Debtor. Eve Lynn T. (I.O.) LINCOLN, Plaintiff, v. CHERRY CREEK HOMEOWNERS ASSOCIATION, Central Bank for Cooperatives, American Credit Company, Defendants. |
| Court | U.S. Bankruptcy Court — District of Colorado |
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Edward I. Cohen, Denver, Colo., for plaintiff.
Atler, Zall & Haligman by David J. Rubin, Denver, Colo., for defendants.
THIS MATTER comes before the Court on an objection to dischargeability, objections to confirmation and a Complaint to Avoid Liens in a Chapter 13 proceeding. The objection to dischargeability was filed by Central Bank for Cooperatives. Two objections to confirmation have been filed, one by Cherry Creek Homeowners Association and a second objection by Central Bank for Cooperatives. The Complaint to Avoid Liens filed by the debtor seeks to void liens of the Cherry Creek Homeowners Association (hereinafter referred to as "Cherry Creek"), the Central Bank for Cooperatives (hereinafter referred to as "Central"), and the American Credit Company (hereinafter referred to as "American Credit").
The debtor filed a voluntary petition under Chapter 13 of the Bankruptcy Code on January 17, 1983. On that same date, the debtor also filed the Complaint to Avoid Liens. Subsequent to filing of the Plan, the aforementioned objections to confirmation and objection to dischargeability were filed.
The Plan proposes to pay holders of mortgage liens on the debtor's residence in full outside the plan. Unsecured creditors, who would receive zero in a Chapter 7 liquidation, are to receive $1.00 per claim. The Complaint to Avoid Liens is filed pursuant to Sec. 522(f)(1) of the Code. Consequently, the plan treats the three creditors as unsecured. The basis for the lien voidance action is that those creditors allegedly hold judicial liens which impair an exemption to which the debtor is entitled.
The objection to confirmation filed by Cherry Creek and Central rest on different grounds. Cherry Creek asserts it holds a contractual lien in the debtor's real property, and as a secured creditor, § 1325(a)(5) mandates payment in full for past-due annual and special assessments. Central asserts that this plan is not filed in good faith as is required by § 1325(a)(3) because the debtor seeks to discharge a debt under Chapter 13 that would not be dischargeable in a Chapter 7 case. The debt in question is a judgment allegedly based on a claim of embezzlement. Central also filed an objection to the discharge of Lincoln with respect to this debt.
1. May the debtor avoid the liens of Cherry Creek, Central and American Credit pursuant to § 522(f)(1)?
2. Has the plan been filed in good faith as required by § 1325(a)(3)?
3. May the debtor be discharged from the debt owed to Central?
1. Lien Voidance. § 522(f) of the Bankruptcy Code states as follows:
"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 sub-section (b) of this section, if such lien is— (1) a judicial lien; . . . "
The question here is whether the judicial liens of Cherry Creek, Central and American Credit are judicial liens which impair an exemption of the debtor. § 522(b)(1) provides that a debtor may exempt from property of the estate certain property specified in the Code unless applicable state law specifies to the contrary. The State of Colorado has substituted its own exemptions pursuant to this section in place of the federal exemptions. The Colorado exemption provisions are contained in C.R.S.1973 XX-XX-XXX. Thus, the liens are voidable if they impair an exemption to which the debtor would have been entitled under Colorado law.
Colorado provides that the judicial lien attaches to nonexempt real property of the debtor when a transcript of the judgment docket is filed with the County Recorder where the real property lies. C.R.S. 1973, § 13-52-102 (1982 Cum.Supp.). The Colorado exemption statute applicable to real property is contained in C.R.S.1973, § 38-41-201, which reads as follows:
By operation of this statute, the homeowner may exempt from levy, execution and attachment up to $20,000.00 in actual cash value in excess of liens in existence on the homesteaded property at the time of any such levy and execution. In determining which liens will be used to calculate the exemption we use only those liens or encumbrances which existed prior to the placement of the homestead right on the property. Patterson v. Serafini, 187 Colo. 209, 532 P.2d 965 (1974); Sterling National Bank v. Francis, 78 Colo. 204, 240 P. 945 (1925); Weare v. Johnson, 20 Colo. 363, 38 P. 374 (1894), and liens with respect to which the debtor has expressly waived the homestead exemption. Landmeier v. Hanna, 157 Colo. 82, 401 P.2d 86 (1945). The homestead exemption is established automatically in Colorado from the date of the debtor's occupancy except with respect to liens which arose prior to July 1, 1975. C.R.S.1973 § 38-41-202. Since there are no debts here which arose prior to July 1, 1975, the homestead exemption was created automatically when Lincoln took possession of the real property.
The fair market value of the real property was established to be approximately $118,000 to $119,000 as a result of uncontroverted testimony of a real estate expert who had several years experience in the area. The net fair market value, after deduction for commission and other costs was in excess of $110,000. The debt structure on the real property consists of a first mortgage lien in favor of Peoples Mortgage Company in the amount of $60,277.00, a second mortgage held by City Consumer Mortgage Company in the amount of $31,280.00, and a third mortgage held by Charlene Smith in the approximate amount of $8,000.00. Although the liens of City Consumer Mortgage and Smith came into existence subsequent to the automatic establishment of Lincoln's homestead right, they are not supplanted because Lincoln executed express waivers in both deeds of trust. Therefore, Lincoln's equity in the property to which the homestead exemption attaches is approximately $10,000.00.
The judicial liens of Cherry Creek, American Credit and Central which attached in 1981 or 1982 impair the debtor's equity because they were created subsequent to the establishment of the homestead right and no waiver was obtained from Lincoln. Consequently, pursuant to 11 U.S.C. § 522(f)(1), § 522(b)(1), C.R.S. 1973, § 13-54-107, § 38-41-201, and § 38-41-202, these liens are null and void as judicial liens.
However, Cherry Creek asserts it holds a contractual lien created by a declaration it recorded on October 7, 1976, in Book 2504, at page 393 and amended by instrument recorded on May 19, 1977, in Book 2590, at page 21 in the Office of the Clerk and Recorder of Arapahoe County, Colorado. The argument is that a prior recorded lien was in existence when Lincoln accepted the deed to the property, which she received on November 30, 1977. Therefore, under the homestead statute this lien would be used to calculate the debtor's equity. At the time Lincoln accepted the deed, she had actual and/or constructive notice of its contents. This prior lien had already been created and related back to the date of filing the declaration. See Boyle v. Lake Forest Property Owners Association, 538 F.Supp. 769 (D.C.Ala.1982); Bessemer v. Gersten, 381 So.2d 1344 (Fla. 1980). Therefore, Cherry Creek argues it has a secured claim and that, pursuant to 11 U.S.C. § 1325(a)(5), this claim must be paid in full at a capitalized rate.
I find no authority in Colorado or elsewhere contrary to Boyle v. Lake Forest Property Owners Association, supra, and Bessemer v. Gersten, supra. Thus, I accept the proposition of those decisions. It is clear that the encumbrance requiring payment of annual and special assessments is an affirmative covenant which touches and concerns the land. Boyle, supra, and Gersten, supra. (For requirements of covenants at law in Colorado, see Taylor v. Melton, 130 Colo. 280, 274 P.2d 977 (1954)). It appears equitable to hold that a property owner is bound to a lien which is stated specifically in the deed. The existence of the lien here was established by a prior recording of which Lincoln had constructive notice. She also had actual notice from the contents of the deed, itself. Thus, Cherry Creek holds a secured claim and the debtor is ordered to amend the plan to provide for appropriate treatment of the sum of $732.70 owed in unpaid assessments.
2. Good Faith. Central urges this Court to deny confirmation of Lincoln's plan on the basis that it has been proposed in bad faith. The objection of Cherry Creek is moot based on the foregoing discussion. Central argues that the debtor could not discharge the debt owed to Central in a Chapter 7 liquidation. Thus, argues Central, the proposal of a plan which provides for a $1.00 payment to Central in Chapter 13 is not in good faith. The debt owed to Central is dischargeable in Chapter 13. 11 U.S.C. § 1328(a). The fact that a debt may be dischargeable in Chapter 13 but not in Chapter 7 is not, in itself, an indication of bad faith when a debtor chooses to avail himself of Chapter 13 protections. It may simply be good sense.
The burden of proof to obtain confirmation is on the proponent of the plan. In re Wolff, 22 B.R. 510 (Bk...
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