In re Pearson

• Decision Date: 16 April 2010
• Docket Number: No. 08-24291-SBB,08-24291-SBB
• Citation: 428 B.R. 533
• Parties: In re Stanley R. PEARSON, Donna M. Pearson, Debtors. Stanley R. Pearson, Donna M. Pearson Movants, v. Security Properties, LLC, Respondent.
• Court: U.S. Bankruptcy Court — District of Colorado

428 B.R. 533

In re Stanley R. PEARSON, Donna M. Pearson, Debtors.Stanley R. Pearson, Donna M. Pearson Movants,

v.Security Properties, LLC, Respondent.

No. 08-24291-SBB.

United States Bankruptcy Court, D. Colorado.

April 16, 2010.

Barton Balis, John H. Barrett, Balis & Barrett, P.C., Boulder, CO, for Stanley R. Pearson and Donna M. Pearson.

Richard A. Marsh, Samson, Pipis & Marsh, LLC, Longmont, CO, for Security Properties, LLC.

MEMORANDUM OPINION AND ORDER

SIDNEY B. BROOKS, Bankruptcy Judge.

THIS MATTER is before the Court on the Verified Motion to Avoid Fixing of Judicial Lien of Security Properties, LLC ("Creditor") ¹ pursuant to 11 U.S.C. § 522(f)(1)(A) filed by the debtors, Stanley R. Pearson and Donna M. Pearson ("Debtors"); a Response filed thereto by Creditor; ² evidence and argument presented at a hearing before the Court on September 22, 2009; ³ and the Creditor's and Debtors' proposed Findings of Fact and Conclusions of Law.⁴

I. Background

Donna and Stanley Pearson ("Debtors" or "Movants"), filed for bankruptcy on September 17, 2008.⁵ Pursuant to Colo.Rev.Stat. 38-41-201(1)(b), ⁶ the Debtors are entitled to a homestead exemption of $90,000.00 because Mr. Pearson is over 60 years of age. Mr. Pearson presently is the only Debtor residing in the home, although Ms. Pearson has not abandoned her homestead interest in their marital residence (hereafter "the Residence"). ⁷ The parties have stipulated to the value of the Residence being $273,500.00.

At the time of the Debtors' filing, the Residence was encumbered by a first mortgage in favor of Countrywide in the amount of $127,781.00 and a second mortgage in favor of Charter One Bank for $48,433.00. In addition, at the time of filing there existed a judgment lien against the Residence in favor of Creditor in the amount of $86,852.75. This results in the total amount of liens with the homesteadexemption reaching a figure of $353,066.75, thus exceeding the value of the property.

At issue in this matter is whether the Creditor's judicial lien should be avoided in its entirety or only partially. As discerned above from the figures, the sum of the first and second mortgages and the exemptions leaves a net equity with the Residence of $7,286.00. The Debtors assert in their Motion that under 11 U.S.C. § 522(f) ⁸ the entirety of Creditor's judicial lien is avoidable. Creditor responds that its judicial lien is only avoidable up to the amount their lien exceeds the Debtors' net equity after deducting unavoidable liens and the Debtors' homestead exemption. That is, Creditor's argument goes, $7,2860.00 is not avoidable.

II. Issue

The question before the Court is whether a debtor can avoid a judicial lien, in its entirety or only "to the extent that such lien impairs an exemption," when only part, or a portion, of the lien actually impairs the debtor's exemption. For the reasons set forth herein, the Court concludes that a debtor can only avoid a judicial lien to the extent the lien exceeds a debtor's equity in the property subject to such lien.

III. Discussion

A. Overview of 11 U.S.C. 522(f)

In accordance with the policy objective of providing a "fresh start," bankruptcy law allows a debtor to invoke certain exemptions to avoid debts that otherwise survive bankruptcy.⁹ The homestead exemption set forth at 11 U.S.C. § 522 protects the debtor and the debtor's dependents by helping them to preserve an interest in their home.¹⁰ Specifically § 522(f) controls the "availability of lien avoidance." ¹¹

Under 11 U.S.C. § 522(f)(1), "the Debtors may avoid the fixing of a lien on an interest of the Debtors in property to the extent that such lien impairs an exemption to which the Debtors would have been entitled...." ¹² Divergent interpretations of what the language "to the extent that such lien impairs an exemption" was intended to convey gave rise to disputes among courts in applying the statute.¹³ Asa result of this confusion, in 1994 Congress amended the statute through passage of the Bankruptcy Reform Act of 1994 ("Reform Act") and defined "impairment" of an exemption.¹⁴

The statute now includes under 11 U.S.C. § 522(f)(2)(A) language stating:

a lien shall be considered to impair an exemption to the extent that the sum of—

(i) the lien;

(ii) all other liens on the property; and

(iii) the amount of the exemption that the debtor could claim if there were no liens on the property;

exceeds the value that the debtor's interest in the property would have in the absence of any liens.¹⁵

Leading up to this amendment, the Supreme Court addressed the appropriate calculation to ascertain whether a lien impairs an exemption.¹⁶ In so doing, the Supreme Court favorably cited the case of In re Brantz, "[f]or a more precise formulation." ¹⁷

The Brantz case utilized the following formula:

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.¹⁸

In reviewing the House Report to the Reform Act (the "House Report") discussing the amendment of 522(f), it states that "[t]his amendment would provide a simple arithmetic test to determine whether a lien impairs an exemption, based upon [the] decision ... In re Brantz ...." ¹⁹ As shown above, the Brantz opinion limited a debtor's avoidability of a judicial lien to the amount it exceeded the debtor's equity with the property after deducting the debtor's exemption and unavoidable liens.

Applying the Brantz calculation to the facts here results in the following computation:

1. Value of Property:	$273,500.00
2. Less All Liens Not to Be Avoided	$176,214.00
(First and Second Consensual Liens)
3. Less Homestead Exemption	$ 90,000.00
4. Total (Amount which cannot be avoided)	$ 7,286.00

Since the total is a positive figure, the Court should, using this equation, allow the avoidance of $79,566.75 of the $86,852.75 sought to be avoided because that is the extent to which the exemption is impaired. Thus, $7,286.00 of the lien would remain as secured debt with the Residence.

Previously, this Court concluded that this result "would seem to conflict with the legislative history and the express language of 11 U.S.C. § 522(f)(2)(A)." ²⁰ Inconcluding such liens should be avoided in their entirety:

[t]his conclusion makes sense because if the Debtor were to later sell his homestead, a portion of the judicial lien would remain after discharge. The judicial lien would have to be satisfied at the time of the sale in order to transfer clear title. "Thus, the mere existence of a judicial lien impairs the homestead exemption because it constitutes a cloud on the title." ²¹

Nonetheless, the majority of the courts addressing § 522(f) partial avoidance hold contrary to the In re Saal opinion.²² For this reason the Court believes a fresh review of the conclusions reached in In re Saal, including the language of § 522(f), its progeny of case law, and its legislative history, are warranted to determine this matter.

B. The Statutory Language

To interpret and apply 522(f), the Court must look to the plain meaning of the statutory language.²³ A court's primary task in interpreting statutes is "to determine congressional intent, using 'traditional tools of statutory construction.' " ²⁴ The Tenth Circuit described the process of statutory construction as follows:

As in all cases requiring statutory construction, "we begin with the plain language of the law." United States v. Morgan, 922 F.2d 1495, 1496 (10th Cir.1991). In so doing, we will assume that Congress's intent is expressed correctly in the ordinary meaning of the words it employs. Park 'N Fly, Inc. v. Dollar Park and Fly, Inc., 469 U.S. 189, 194, 105 S.Ct. 658, 83 L.Ed.2d 582 (1985). Therefore, "[i]t is a well established law of statutory construction that, absent ambiguity or irrational result, the literal language of a statute controls." Edwards v. Valdez, 789 F.2d 1477, 1481 (10th Cir.1986). Where the language of the statute is plain, it is improper for this Court to consult legislative history in determining congressional intent. United States v. Richards, 583 F.2d 491, 495 (10th Cir.1978). Furthermore, legislative history may not be used to create ambiguity in the statutory language. Id. Our role in construing statutes was summarized by Justice Holmes: " 'We do not inquire what the legislature meant; we ask only what the statute means.' " Edwards, 789 F.2d at 1481 n. 7 (quoting OLIVER WENDELL HOLMES, COLLECTED LEGAL PAPERS 207 (1920)).²⁵

Section 522(f)(2)(A) clearly states "a lien shall be considered to impair an exemption to the extent that the sum ... exceeds the value that the debtor's interest in the property would have in the absence of any liens." ²⁶ The Debtors possess full ownership of the Residence, thus their interest is the full value of the Residence. As the statute plainly states, the judicial lien of Secured Properties, is avoidable "to the extent" the sum of liens exceed the value ($273,000.00) of the debtors' interest in the Residence in the absence of any liens. If there were no liens, the Debtors' interest would be the full value of the Residence, which is $273,000.00. The Court thus reads the plain meaning of the statute to pronounce liens are avoidable "to the extent" such liens exceed the $273,000.00; thus, resulting portions of a judicial lien that falls below the value are unavoidable.

The Court's interpretation of the phrase "to the extent" is essential to this conclusion. The Court is not resigned to rely upon its own understanding of this phrase, but rather need only follow guidance provided by the Tenth Circuit's interpretation of the phrase. In the opinion, In re Sanders, the Tenth Circuit interpreted the implication the phrase "to the extent" placed upon impairment within ...