In re Lynch

• Decision Date: 22 August 1995
• Docket Number: Bankruptcy No. 93-50442.
• Citation: 187 BR 536
• Parties: In re Rick E. LYNCH, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Kentucky

187 B.R. 536 (1995)

In re Rick E. LYNCH, Debtor.

Bankruptcy No. 93-50442.

United States Bankruptcy Court, E.D. Kentucky.

August 22, 1995.

COPYRIGHT MATERIAL OMITTED

Barbara McDonald Griffin, Lexington, KY, for debtor.

Scott Rickman, Morgan & Pottinger, Lexington, KY, for creditors.

MEMORANDUM OPINION

JOE LEE, Chief Judge.

On motion of the debtor, by counsel, this case was reopened to permit the debtor to file and the court to consider a motion pursuant to 11 U.S.C. § 522(f)(1) to avoid judicial liens as liens that impair the debtor's homestead exemption in real property described as 3800 Windingbrook Court, Lexington, Fayette County, Kentucky.There is no dispute about the fact the property is the debtor's residence or that the debtor claimed and was allowed an exemption in the property to the extent of $5,000 under KRS 427.060 during the course of his chapter 7 bankruptcy proceeding.

FINDINGS OF FACT:

The debtor filed a petition for relief under chapter 7 of the Bankruptcy Code on March 17, 1993.On April 30, 1993, the trustee filed a notice of no distribution and a notice of abandonment of interest in property of the estate, including the real estate in question.The debtor was granted a discharge on September 15, 1993, and the case was closed on October 6, 1993.

There is no dispute about the right of the debtor to reopen the case pursuant to 11 U.S.C. § 350(b)andRule 5010,Federal Rules of Bankruptcy Procedure, to accord relief to the debtor.

The motion of the debtor seeks an order avoiding the following judicial liens.

1.Judgment lien of National City Bank, as successor in interest to Commerce National Bank, based on a judgment obtained September 18, 1990 in the amount of $1,758.73 plus costs and attorney fees against Rick E. Lynch and Connie Lynch in Fayette District Court in action no. 90-C-2555.Notice dated July 13, 1992 of the judgment which operates as a lien appears of record in Encumbrance Book 138, page 699 in the Fayette County Clerk\'s Office.¹

2.Judgment lien of Oakland Furniture Manufacturers, Inc. against Lester T. Clarkson d/b/a Value Rentals, a partnership, based on a judgment obtained on April 26, 1991 in the amount of $2,168.00 in the Fayette District Court in action no. 92-C-1043.Notice dated December 2, 1992 of the judgment which operates as a lien appears of record in Encumbrance Book 142, page 516 in the Fayette County Clerk\'s Office.It is not entirely clear that this lien actually encumbers the debtor\'s interest in real estate, although it appears the debtor was a partner with Clarkson in a business known as Value Rentals.

3.Judgment lien of Philip M. Bell Co. based on a judgment obtained November 11, 1992 against Value Rentals, et al., including the debtor, in the amount of $1,894.60 in action no. 92-C-2580 in the Fayette District Court.Notice dated February 9, 1993 of the judgment which operates as a lien appears of record in Encumbrance Book 144, page 393 in the Fayette County Clerk\'s Office.

Only one of the judgment lien creditors, National City Bank, as successor in interest to Commerce National Bank, has objected to the relief requested by the debtor.The objection states the debtor's homestead exemption in his residence is not presently impaired by the bank's lien because the debtor's residence is not now subject to foreclosure or involuntary execution proceedings.The objecting creditor is relying on the decision of the Court of Appeals for this circuit in In re Moreland,21 F.3d 102(6th Cir.1994).

The parties have stipulated certain facts.On the date of bankruptcy the value of the debtor's residence was $62,000.The property was subject to two consensual liens, a first mortgage in the amount of $59,900 in favor of Standard Federal,² and a second mortgage in the amount of $24,192.00 in favor of Money One Credit Corporation.Money One has filed a proof of claim indicating that the payoff balance on its mortgage on the date of bankruptcy was $14,338.29.The indebtedness to Money One is further secured by a security interest in a 1990 Toyota Camry purchased by the debtor and his wife on March 13, 1992.The mortgage of Money One was recorded on March 30, 1992, in Mortgage Book 1736, page 194 in the Fayette County Clerk's office.

The second mortgage indebtedness of Money One on the debtor's residence appears to be inferior to state tax liens, notices of which were filed on or about February 26, 1992 in Encumbrance Book 135, at pages 127, 128 and 129 against the debtor Ricky E. Lynch as a partner in Value Rentals, Lester P. Clarkson as a partner in Value Rentals, and Value Rentals.The debtor and Clarkson were partners in a business known as Value Rentalsat 2350 Woodhill Drive, Suite 8B, Lexington, Kentucky.The amount of the tax lien does not appear in the notices.According to the schedules to the debtor's petition the amount of the tax lien was $3,500.It appears from the record that these liens were released on May 12, 1995, but were liens on the debtor's residence on the date of bankruptcy.

There was another tax lien against the residence when bankruptcy intervened.This lien was filed March 10, 1993 in Encumbrance Book 145, page 214 in the Fayette County Clerk's office, the amount of which, based on the stipulation of the parties, appears to have been approximately $600.This lien is inferior to the judgment liens which the debtor seeks to avoid.³

It seems clear that on the date of bankruptcy the debtor's interest in the real property which he and his wife occupied as a residence was less than the $5,000 homestead exemption which he claimed and was allowed therein during the administration of his bankruptcy case.The property, valued at $62,000, was subject to a first mortgage lien of $59,900, a tax lien of $3,500, and a second mortgage lien of $14,338.29.

It is also clear that the judicial liens which the debtor seeks to avoid operate as a cloud on the debtor's legal title to the property and impair the ability of the debtor to transfer his interest in the property free of the judicial liens.SeeMatter of Henderson,18 F.3d 1305, 1309(5th Cir.1994).

CONCLUSIONS OF LAW:

Kentucky, like Ohio, is among the 36 "opt out" states that have made the exemptions provided by 11 U.S.C. § 522(d) unavailable to resident individual debtors seeking relief under the Bankruptcy Code.KRS 427.170.

The applicable Kentucky homestead exemption statute provides:

427.060 Homestead and burial plot exemptions; exceptions

In addition to any exemption of personal property, an individual debtor\'s aggregate interest, not to exceed $5,000 in value, in real or personal property that such debtor or a dependent of such debtor uses as a permanent residence in this state, or in a burial plot for such debtor or a dependent of such debtor is exempt from sale under execution, attachment or judgment, except to foreclose a mortgage given by the owner of a homestead or for purchase money due thereon.This exemption shall not apply if the debt or liability existed prior to the purchase of the property or the erection of the improvements thereon.

KRS 427.060.

This Kentucky statute has not been interpreted, as the Ohio exemption statute has been misinterpreted (much more about this later), to postpone a debtor's right to a homestead exemption until the property in which the debtor is entitled to the exemption is threatened with sale pursuant to an execution, attachment, or foreclosure of a judgment lien.District JudgeShackelford Miller, who later served on the Sixth Circuit Court of Appeals,⁴ pointed out in In re Grisanti,58 F.Supp. 646(W.D.Ky.1945), that under Kentucky law the right of an individual debtor to a homestead exemption vests on the acquisition of property and may be claimed at any time thereafter by an individual debtor who qualifies for the exemption.First National Bank of Jackson v. Oliver,286 Ky. 286, 150 S.W.2d 894(Ky.1941).

The Kentucky statute here involved exempts homestead property from levy and sale under execution.Foreman v. Cook,277 Ky. 812, 127 S.W.2d 856, 858(1939).⁵This interpretation of the statute mandates that the exemption is available to a debtor upon the commencement of a bankruptcy case under the long established rule enunciated by the Supreme Court of the United States in White v. Stump,266 U.S. 310, 45 S.Ct. 103, 69 L.Ed. 301(1924).

On the basis of Judge Miller's decision in the Grisanti case, 58 F.Supp. 646, the decision of the Kentucky Court of Appeals in the Oliver case, 150 S.W.2d 894, and other relevant authorities, my colleague Judge Howard concluded that the courts of this state have clearly recognized the right of a debtor to assert a homestead exemption in the absence of a forced sale.In re Powell,173 B.R. 338(Bankr.E.D.Ky.1994).

I agree.To hold otherwise would be contrary to a long established rule in this circuit and to the decision of the Supreme Court of the United States in White v. Stump,266 U.S. 310, 45 S.Ct. 103, 69 L.Ed. 301.

Long ago the court of appeals for this circuit adopted the general rule that in a bankruptcy case the right of an individual debtor to an exemption provided by applicable state law is to be determined by the interpretation placed on the statute by the courts of the state.In re Baker,182 F. 392(6th Cir.1910).The court has on a number of occasions reiterated this rule.Arbogast v. Gottfried,58 F.2d 156(6th Cir.1932);Burns v. Kinzer,161 F.2d 806(6th Cir.1947).The same rule has been adopted by other circuits.See1A Collier on Bankruptcy § 6.03(14th ed. 1974).

Unfortunately, the court of appeals did not adhere to this salutary rule in its decisions in In re Dixon,885 F.2d 327(6th Cir.1989), andIn re Moreland,21 F.3d 102(6th Cir.1994).The court was mislead by a decision of the United States District Court for the Northern District of Ohio in In re Peck,55 B.R. 752(N.D.Ohio1985), in which the district judge, as had the district judge in the Baker case, engaged in...