In re Quackenbos
| Decision Date | 26 March 1987 |
| Docket Number | Bankruptcy No. 85-00064G. |
| Citation | 71 BR 693 |
| Parties | In re David Allen QUACKENBOS and Joan Ann Quakenbos, his wife, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
James T. Owens, West Chester, Pa., for debtors, David Allen Quackenbos and Joan Ann Quackenbos.
William C. Thum, Hankin, Hankin & Shield, Willow Grove, Pa., for Bank and Trust Co. of Old York Road.
On December 10, 1986, debtors David Allen Quackenbos and Joan Ann Quackenbos, husband and wife, filed a motion to reopen their closed chapter 7 bankruptcy case for the purpose of avoiding a judicial lien held by the Bank and Trust Company of Old York Road ("the bank") on property the debtors claimed as exempt in this case. The bank filed an answer to the motion and a hearing was held on January 7, 1987. For the reasons set forth below, I will grant the motion to reopen the case and schedule a hearing to consider whether the judicial lien may be avoided.
The debtors filed a voluntary petition in bankruptcy under chapter 7 on January 7, 1985. In their schedules, they disclosed their ownership, as tenants by the entireties, of the residential real property located at 29 Park Road, Ambler, PA and listed the property's fair market value as $70,000.00. In schedule A-2, the debtors listed four secured debts. Two creditors were listed as holding claims aggregating $61,777.86 and secured by a first and second mortgage on the property. A third creditor was listed as secured by an installment contract in the fixtures in a store located in Exton, PA. The bank was described as the holder of a secured claim in the amount of $18,414.60 secured by a security interest in the contents of a store leased by the debtors in the Willow Grove Mall.
On February 6, 1985, the clerk's office sent notice to all creditors informing them that the section 341 hearing would be held on March 1, 1985 and that the deadline for filing complaints objecting to discharge or for determining the dischargeability of a debt would be April 30, 1985.
On February 28, 1985, the bank filed a proof of claim in the amount of $18,564.84. The proof stated, inter alia, that a judgment had been entered in state court in Montgomery County, PA at C.P. No. 83-16855. The entry of a money judgment imposed a lien on the debtors' residential real property. See 42 Pa.C.S. § 4304. There is no evidence, however, that the bank served debtors or their counsel with a copy of the proof of claim.
On March 1, 1985, the section 341 hearing was held. The interim trustee submitted a report stating his conclusion that the estate contained no non-exempt assets and recommending that the court grant the debtors a discharge. On March 19, 1985, the discharge hearing was held and concluded. On that date, the court signed the discharge order and an order which, inter alia, approved the trustee's report and provided that "this case be, and the same hereby, is closed." The docket reflects that on March 21, 1985, the clerk's office served four copies of both the discharge and the order closing the case and forty copies of the discharge order only. The docket also reflects that the clerk's office did not actually administratively close the case until June 25, 1985.
Section 522(f) of the Bankruptcy Code grants a bankruptcy debtor the right to avoid certain liens which impair the debtor's exemptions. 11 U.S.C. § 522(f). Neither the Code nor the Bankruptcy Rules contain an express time deadline for the exercise of the debtor's rights under section 522(f). As a result, the question whether a debtor's motion is barred by the passage of time has spawned substantial litigation.
The overwhelming majority of courts which have considered the issue have held that a debtor may seek to avoid a lien after the entry of the discharge order and may even reopen a closed case pursuant to 11 U.S.C. § 350 and Bankr.Rule 5010 in order to do so. E.g., Noble v. Yingling, 29 B.R. 998 (D.Del.1983), after remand, 37 B.R. 647 (D.Del.1984); In re Yazzie, 24 B.R. 576 (Bankr.App. 9th Cir.1982); In re Skakalski, 67 B.R. 448 (Bankr.W.D.Pa.1986); In re Carilli, 65 B.R. 280 (Bankr.E.D.N.Y. 1986); In re Palmquist, 54 B.R. 24 (Bankr. D.Colo.1985); In re Moser, 27 B.R. 144 (Bankr.E.D.N.Y.1983); In re Hall, 22 B.R. 701 (Bankr.E.D.Pa.1982); Matter of Russell, 20 B.R. 537 (Bankr.W.D.Pa.1982); Matter of Hart, 16 B.R. 78 (Bankr.D.Neb. 1981); Matter of Swanson, 13 B.R. 851 (Bankr.D.Idaho 1981). The courts adopting this view have articulated various reasons for their conclusion, including: (1) the absence of any deadline in the Code or the Bankruptcy Rules for initiating a lien avoidance proceeding under section 522(f), especially when contrasted with 11 U.S.C. §§ 546(a), 549(d); (2) the text of 11 U.S.C. § 350 which states that a case may be reopened to accord relief to the debtor; (3) legislative history which refers to reopening cases for lien avoidance subject to the bar of laches;1 (4) the fresh start policy of the Code which encourages the full application of the Code's exemption provisions; and (5) the interpretation of the right to avoid liens under section 522(f) as a "personal" right of the debtor which exists independent of case administration.
At the same time, the courts have acknowledged that a debtor may lose the right to avoid a lien due to delay in initiating proceedings if the lien creditor has been prejudiced by the delay; in other words, a debtor's right to reopen a case to avoid a lien under section 522(f) is subject to the doctrine of laches. See Noble v. Yingling; In re Yazzie; In re Ricks, 62 B.R. 681 (Bankr.S.D.Cal.1986); In re Palmquist; In re Moser.
Delay, by itself, is not sufficient to support a finding of prejudice "because a creditor is normally aware that his security interest is subject to avoidance by a . . . debtor." Noble v. Yingling, 37 B.R. at 651. Rather, prejudice occurs only when there is a change in position, during the period of delay, which will cause injury to the rights of the creditor or third parties. Matter of Swanson, 13 B.R. at 851; accord, Matter of Williamson, 804 F.2d 1355, 1358 (5th Cir.1986) (). Some courts have ruled that a creditor's action to enforce its lien, after the entry of discharge or the closing of the case, constitutes sufficient detrimental reliance to bar a debtor's exercise of the right to avoid a lien under section 522(f). See, e.g., In re Hawkins, 727 F.2d 324 (4th Cir.1984); In re Serafini, 30 B.R. 606 (Bankr.W.D.Pa. 1983), aff'd, 41 B.R. 880 (W.D.Pa.1984); cf. In re Blossom, 57 B.R. 285 (Bankr.N.D. Ohio 1986) (). Other courts have rejected that view that a creditor who files a lawsuit or initiates execution proceedings has been prejudiced and, instead of barring lien avoidance altogether, have considered whether the debtor should be required to reimburse the creditor for expenses it incurred during the period of delay as a condition of reopening the bankruptcy case for lien avoidance proceedings. See, e.g., Noble v. Yingling, 37 B.R. at 651; In re Ricks, 62 B.R. at 682-84; In re Bennett, 13 B.R. 643, 644 (Bankr.W.D.Mich.). See also In re Mitchell, 47 B.R. 209, 212 (Bankr.N. D.Tex.1985) ().
I will follow and apply the principle, accepted by the majority of courts, that a debtor may reopen a bankruptcy case in order to initiate lien avoidance proceedings unless the creditor has been prejudiced by the delay. In this case, there was no evidence introduced at trial of any actions taken by the bank to enforce its lien or any change in position of any party since the case was closed. It follows that the bank has not been prejudiced and the debtors are entitled to reopen this bankruptcy case. See, e.g., In re Palmquist, 54 B.R. at 24.
The bank argues that it has been prejudiced by the delay, asserting that if the debtors had moved to avoid the bank's lien during the pendency of the case, the bank would have filed a complaint objecting to the dischargeability of the underlying debt.2 I reject the bank's argument both as a matter of fact and of law.
In this case, the creditor was notified that the deadline for filing objections to discharge and dischargeability complaint was April 30, 1985. On March 19, 1985, the same day the court signed the discharge order, it also inexplicably signed an order closing the case.3 There is no evidence, however, that the order closing the case was served upon all creditors, including the bank; indeed, the docket suggests the contrary. I therefore find that the bank was unaware of the March 19, 1985 order closing the case and could not have relied, in any respect, on the debtor's failure to initiate lien avoidance proceedings prior to that date. Since the deadline for filing a nondischargeability complaint had not yet expired as of March 19, 1985, this is simply a case in which the bank did not timely file a dischargeability complaint before the deadline imposed by the court.4See Bankr. Rule 4007(c). That the court entered an order, unbeknownst to the bank, before the expiration of the bank's deadline was an unrelated event which had no effect on the bank's conduct.
Moreover, a creditor cannot justifiably assume that a debtor's failure to initiate lien avoidance proceedings prior to the expiration of the deadline for filing a dischargeability complaint constitutes a decision by the debtor not to exercise his rights under section 522(f). While it may not be unreasonable, in a business sense, for a creditor's decision whether to contest the dischargeability of a debt to depend on whether its lien will survive the bankruptcy proceeding, the Bankruptcy Rules themselves...
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