In re Magosin
| Decision Date | 25 June 1987 |
| Docket Number | Bankruptcy No. 86-01200S. |
| Citation | 75 BR 545 |
| Parties | In re A. Joseph MAGOSIN, Sr., Individually and t/a Chirosply and CPS, and Muriel E. Shotwell, Husband and Wife, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
James N. Gross, Philadelphia, Pa., for debtors.
Barbara R. Watkins, Norristown, Pa., for Meridian Bank.
Stephen Raslavich, Philadelphia, Pa., trustee.
Before us is a dispute between the Debtors and MERIDIAN BANK (hereinafter referred to as "the Bank"), one of fourteen Respondents named in a Motion by the Debtors to avoid judicial liens against their residential real estate, pursuant to 11 U.S.C. § 522(f)(1). The Bank presses two responses set forth in its Answer: (1) The Debtors should lose their homestead exemptions because of the alleged fraud of the Husband-Debtor in failing to list, as either property owned or property exempted on the Debtors' Schedules, certain equipment, which is or was allegedly collateral of the Bank; (2) The Debtors' exemptions "are less than the proceeds resulting from the sale of their residence," and hence that they may not avoid the Bank's liens because the liens allegedly do not impair the Debtors' exemptions in the premises.
We hold that a contention that a debtor is guilty of fraud in claiming exemptions which is not proven to have any direct relationship to the avoidance of the liens in question is totally irrelevant to the determination that the liens may be avoided pursuant to 11 U.S.C. § 522(f)(1). Also, we hold that the steps to be followed in applying § 522(f)(1) are as follows:
1. Determine the value of the property 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.
Application of these principles causes us to reject both arguments of the Bank and hold that the Debtor may avoid the Bank's liens, pursuant to § 522(f)(1).
On April 1, 1987, contemplating a sale of their residential realty at 1511 Norristown Road, Upper Dublin Township, Montgomery County, Pennsylvania (hereinafter referred to as "the premises"), the Debtors filed both the Motion in issue and Amendments to Schedules A-2, A-3, and B-4 of their Chapter 7 bankruptcy schedules. On April 22, 1987, the Bank filed its Answer, and the matter came before us for a hearing on April 29, 1987, whereupon we ordered the parties to simultaneously file opening Briefs on May 11, 1987, and Reply Briefs on May 18, 1987, in support of their respective positions.
In its Brief, the Bank recites the following figures arising from a court-approved sale of the premises, which we will accept arguendo, as presumably the most advantageous to its position which the facts would support, in deciding this Motion:
Sale Price $167,500.00
Net Proceeds after costs, payment
of first mortgage and escrow for
taxes 49,252.97
First lien — Judgment of the Bank 24,147.31
Second lien — Mortgage (Theresa
Myers) 41,540.00
Third lien — Judgment (Boxwood
Partnership) 3,283.07
Fourth lien — Judgment of the Bank 1,490.90
The operative statutory provision, 11 U.S.C. § 522(f)(1), provides as follows:
The Bank claims that we should not permit the Debtors to avoid its judicial liens on the premises because of the alleged fraud of the Husband-Debtor in failing to list or claim exemptions in certain equipment in which it allegedly has a security interest, and thus it concludes that the Husband-Debtor is concealing same. We fail to discern intuitively, and the Bank has not undertaken to argue, much less prove on the record, what possible connection this alleged fraud has with the issue of the liens in question, other than the fact that both relate, in some general fashion, to the issue of "exemptions."
Not surprisingly, all of the cases known to us arising under the Code reject arguments similar to that of the Bank. See In re Somerville, Bankr. No. 83-04881K (Bankr.E.D.Pa., Opinion filed Jan. 10, 1986) (unreported, per KING, J.) (Debtor allegedly failed to list all of his assets on schedules; lien of creditor nevertheless avoided);1 In re Nesset, 33 B.R. 326, 327 (Bankr. D.N.M.1983) (); In re Haupt, 16 B.R. 118 (Bankr.E.D.Pa.1981) (per TWARDOWSKI, J.) (); and In re Krajci, 7 B.R. 242, 244 (Bankr.E.D.Pa. 1980) (per GOLDHABER, CH. J.), aff'd on other grounds, 16 B.R. 464 (E.D.Pa.1981) (). Furthermore, assuming arguendo that fraud of the Debtors is or could be a defense to a § 522(f)(1) motion, the Bank has made only allegations of omissions on the Debtors' Schedules, which is a far cry from producing the requisite "clear and convincing" evidence by which fraud must be proven. See, e.g., In re Woods, 66 B.R. 984, 988 (Bankr.E.D.Pa. 1986); and In re Woerner, 66 B.R. 964, 972 (Bankr.E.D.Pa.1986), aff'd, C.A. No. 86-7324 (E.D.Pa., Order dated April 28, 1987).
The Bank attempts to avoid the force of these cases by citing three cases decided under the Bankruptcy Act. Not surprisingly, none of these cases involved a lien avoidance, as no such right was provided to Debtors under the Act. Each of these cases were simply challenges to the Debtors' claims of exemptions, in which the courts held that the respective debtors' fraud curtailed their respective rights to claim exemptions. In re Rosenberg, 7 F.2d 768 (W.D.Pa.1925); In re Rice, 164 F. 539 (E.D.Pa.1908); and In re Alex, 141 F. 483 (E.D.Pa.1905). There is no question that a creditor can raise the issue of fraud in objecting to exemptions, as these cases hold. See 3 COLLIER ON BANKRUPTCY, ¶ 522.08, at 522-31 to 522-42 (2d ed. 1987). However, that is not the relevant issue here.
The Bank also cites a decision of former Chief Judge Goldhaber, In re Laird, 6 B.R. 273, 277 (Bankr.E.D.Pa.1980), where, in dictum in a case wherein he ultimately granted the debtor's claimed exemptions in dispute, Judge Goldhaber states that "certain fraudulent conduct" could prevent a debtor from claiming exemptions. As we would be obliged to find due to the absence of anything but unproven accusations levelled against the Debtors here, Judge Goldhaber found insufficient evidence of fraud in Laird to deny relief to the debtor there. More significantly, however, Judge Goldhaber was merely addressing the right of creditors to challenge claims of exemptions, as do the Act cases and the passage in Collier cited in the foregoing paragraph. He was not holding that objections to claims of exemptions could be raised in defending a motion to avoid a lien. Moreover, when Judge Goldhaber's later decision in Krajci directly addressed that issue, he held that the exclusive means by which a creditor could challenge exemptions claimed is by an objection to the claim of exemption or a complaint challenging discharge or dischargeability. Accord, Somerville, supra.
Further, we believe that Judge Goldhaber's statement that "certain fraudulent conduct" could taint an exemption related to fraud which has a direct connection with the exemption challenged. For instance, if the Debtors here fraudulently deflated the value of their home or inflated the amounts of unavoidable liens, the Bank certainly could raise these issues, whether proving fraud or not, as defenses to the instant lien avoidance Motion.
However, when, like here, the effect of a debtor's alleged fraud in claiming exemptions is alleged to have at best an indirect impact upon the lien avoidance in issue, we believe that the objecting party must file a timely and specific objection to the claim of exemption, and then prove, at the hearing, by presenting evidence of same, that the improperly claimed exemption indeed does have an impact on the lien-avoidance issue.
Thus, at the hearing here, we indicated, consistent with the reasoning in Krajci, that the Bank, if it wished to contest the Debtor's failure to exempt its alleged collateral, initially should have challenged the Debtors' exemptions with a timely objection, pursuant to 11 U.S.C. § 522(l), which provides that "unless a party in interest objects, the property claimed on the list is exempt (emphasis added)." See Woerner, supra, 66 B.R. at 974. Bankruptcy Rule 4003(b) requires that such an objection be filed "within 30 days after the conclusion of the meeting of creditors held pursuant to Rule 2003(a) or the filing of any amendment to the list. . . ."
The Bank contended, at the hearing, that a purported lack of notice of the meeting of creditors excused its compliance with the time structures of Rule 4003(b). However, a similar argument was rejected by the court in In re Hahn, 60 B.R. 69 (Bankr. D.Minn.1985). Appropriate here is the Hahn court's observation that the debtor there filed an amendment to Schedule B-4 after the objecting creditor was well aware of the bankruptcy filing and, despite this triggering of a new 30-day period, the objecting creditor nevertheless still failed to file the requisite...
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