In re Mitchell
| Decision Date | 30 November 1987 |
| Docket Number | Bankruptcy No. 87-60229-C-13. |
| Parties | In re Albert Vaughan MITCHELL, Debtor. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas |
Randy Roberts, Black & Roberts, Dallas, Tex., for debtor.
Edwin R. DeYoung, William B. Mateja, Dallas, Tex., for Commerce Bank-Las Colinas.
Albert Vaughan Mitchell was in the real estate business. He executed a guaranty to Texas Commerce Bank-Las Colinas (TCB) on one of his real estate transactions. The reverses suffered by so many in the real estate business in Texas did not spare Mr. Mitchell, who lost his business, his wife, and even his home. He also lost a lawsuit brought by TCB on his guaranty. As a result, in November 1985, a judicial lien attached to some rural real estate in Hillsboro, Texas owned by Mr. Mitchell ("the Hillsboro property"). This land, consisting of two parcels totalling approximately 230 acres, has been in the Mitchell family since just after the turn of the century. Mitchell's parents still live on the land, though, in 1979, they sold fee simple title to their son on the eve of foreclosure by the first lienholder, evidently to save the farm.1 Mr. Mitchell still makes the payments on the farm and goes there frequently on weekends and sometimes during the week (in the summertime). After he lost his home in Dallas, he moved some of his clothing and furniture to the Hillsboro property (he had nowhere else to store them). Neither of Mitchell's parents actually farm the property, nor is Mitchell a farmer. Instead, the land is leased to another farmer, who pays rent in the form of a percentage of his harvest proceeds. Mitchell occasionally "helps out" with the farming, making fence repairs and the like.
In November 1986, Mr. Mitchell remarried. His new wife lived in Garland, Texas ("the Garland property"). Mr. Mitchell had met her in the spring of 1985 and, after he lost his home to foreclosure, he took up residence with her. He kept most of his work clothes at her home and commuted daily to Dallas, where he works as a workout consultant to a Dallas savings and loan company. He assumed the duties of father to her two children (by a previous marriage). During the summer, they would take the children down to Hillsboro for upwards of a week at a time. During the school year, Mitchell and his wife would get away to Hillsboro on weekends, especially when the children were with their father (Myra's first husband).
In March 1987, Mitchell filed this chapter 13 case, claiming the Hillsboro property as exempt on his informational schedule. TCB did not object to the exemption claim within 30 days of the § 341 meeting, as prescribed by Bankruptcy Rule 4003(b). The debtor proposed a plan which contemplated avoiding TCB's judicial lien on the Hillsboro property and, incident to the plan, filed a motion under Section 522(f) to avoid the lien. TCB objected to the lien avoidance as well as to the plan, on grounds that the Hillsboro property was not exempt as Mitchell's homestead. In a prophylactic manuever, TCB also filed a late objection to the homestead exemption claim itself. Mitchell strenuously objected to TCB's right to raise the validity of the exemption in the lien avoidance action, contending that TCB was estopped because it had failed to object to the exemption claims within thirty days after the first meeting of creditors, as prescribed by Bankruptcy Rule 4003. He also contended that the Hillsboro property was eligible for exemption anyway so the lien avoidance should be permitted and the plan confirmed.
The parties agree that this court's disposition of the lien avoidance issue effectively decides the confirmation issue as well, as the plan cannot otherwise succeed. The parties thus proceeded to put on confirmation evidence as well, so that, in the event this court's decision regarding the lien avoidance should be overturned on appeal, the parties would not need to retry the case. After consideration of the evidence, the court has, for the reasons set out in this opinion, concluded that (1) the creditor was not estopped from contesting the validity of the exemption as a defense to the lien avoidance action, (2) the Hillsboro property is not eligible for exemption under Section 522(b), and therefore TCB's lien cannot be avoided under Section 522(f), and that, as a result, (3) the plan cannot be confirmed.2
I. DOES THE CREDITOR'S FAILURE TO OBJECT TO DEBTOR'S EXEMPTIONS WITHIN THIRTY DAYS AFTER THE § 341 MEETING OPERATE AS AN ESTOPPEL TO PREVENT CREDITOR FROM RAISING THE EXEMPTION ISSUE IN THE DEBTOR'S LIEN AVOIDANCE ACTION UNDER § 522(f)?
The debtor contends that TCB's failure to object to the debtor's exemptions within thirty days after the § 341 meeting should prevent TCB from attacking the claimed exemption in this lien avoidance action. As a general proposition, the debtor's position has support. In re Hahn, 60 B.R. 69, 75-76 (Bankr.D.Minn.1985); but see In re Rollins, 63 B.R. 780, 783 (Bankr. E.D.Tenn.1986). A wooden application of the Hahn rule, however, yields results inconsistent with the equitable principles which underpin estoppel. Hahn also does not grapple with the express language of Section 522(f). A closer analysis of Section 522(f), the function of exemptions in chapter 13 cases, and the nature of estoppel itself lead this court to conclude that a failure by a judicial lien creditor to object to exemption claims within the time frame set out in Bankruptcy Rule 4003(b) will not prevent that creditor from asserting the invalidity of the lien under Section 522(b) as a defense to the debtor's lien avoidance action.
The natural place to begin this analysis is with the statute itself.
Section 522(f) provides in pertinent part as follows:
11 U.S.C.S. § 522(f)(1) (Norton pamphl.ed. 1987) (emphasis added). The avoidance power is an extraordinary device implemented by Congress in the 1978 Code to enhance the debtor's fresh start. It permits a debtor to select an exemption ex post facto, then to eliminate an otherwise valid judicial lien impairing that exemption. Commented the House Report:
. . . The . . . right to avoid judicial liens allows the debtor to undo the actions of creditors that bring legal action against the debtor shortly before bankruptcy. Bankruptcy exists to provide relief for an overburdened debtor. If a creditor beats the debtor into court, the debtor is nevertheless entitled to his exemptions.
H.Rep. No. 95-595 at p. 126, 95th Cong., 1st Sess. (1977), U.S.Code Cong. & Admin. News 1978, pp. 5787, 6087. The Report also acknowledged the balance to be struck between the debtor's fresh start and existing state law exemption schemes:
H.R. 8200 the precursor to the Bankruptcy Reform Act of 1978 adopts the position that there is a Federal interest in seeing that a debtor that goes through bankruptcy comes out with adequate possessions to begin his fresh start. Recognizing however that circumstances do vary in different parts of the country, the bill permits the States to set exemption levels appropriate to the locale, and allows the debtor to choose between the State exemptions and the Federal exemptions provided in the bill. Thus, the bill continues to recognize the States\' interest in regulating credit within the States, but enunciates a bankruptcy policy that favors a fresh start.
Id. The policy of the Code then is to afford the debtor the maximum benefit of those exemptions to the extent they are otherwise authorized under whichever exemption scheme the debtor elects. Consistent with this policy, Section 522(f) authorizes avoidance of liens to facilitate the debtor's fresh start, but limits the availability of the avoidance powers to those exemptions "to which the debtor would have been entitled under subsection (b) of this section Section 522." 11 U.S.C. § 522(f) (Norton pamphl.ed. 1987). Thus, one element of the debtor's cause of action under Section 522(f) is that the subject property is otherwise exempt under Section 522(b). In re Shands, 57 B.R. 49, 50 (Bankr.D.S.C.1985). If the debtor has elected the state exemption scheme (and he or she must make an election under Section 522(b)), then the debtor must establish that, under applicable state law, the subject property would be exempt. Matter of Allen, 725 F.2d 290, 292-93 (5th Cir.1984).3
The debtor's estoppel argument is premised on the concept that, even though a particular exemption might not be cognizable under Section 522(b), if the creditor has not timely objected under Bankruptcy Rule 4003(b) to the debtor's claiming the exemption, the property is deemed exempt under Section 522(l). The exemption, goes the argument, is therefore immune from further attack in a later lien avoidance action.
Section 522(l) provides that:
The debtor shall file a list of property that the debtor claims as exempt under subsection (b) of this section. . . . Unless a party in interest objects, the property claimed as exempt on such list is exempt.
11 U.S.C. § 522(l) (Norton pamphl. ed. 1987) (emphasis added). Bankruptcy Rule 4003(b) was written to implement Section 522(l). In re Starns, 52 B.R. 405, 410 (S.D.Tex.1985). It reads as follows:
The trustee or any creditor may file objections to the list of property claimed as exempt 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 unless, within such period, further time is granted by the court. . . .
Rule 4003(b), Bankruptcy Rules (Norton pamphl. ed. 1987) (emphasis added). Thus, an otherwise nonexempt item of property is deemed...
To continue reading
Request your trial