In re Ricks, BAP No. SC 86-1845 MoVAs
| Decision Date | 09 August 1988 |
| Docket Number | Bankruptcy No. 85-01737 LM7.,BAP No. SC 86-1845 MoVAs |
| Citation | 89 BR 73 |
| Parties | In re Charles A. RICKS, Debtor. ITT FINANCIAL SERVICES, Appellant, v. Charles A. RICKS, Debtor, David L. Buchbinder, Trustee, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Jerry Michael Suppa, Law Office of Jerry Michael Suppa, San Diego, Cal., for appellant.
No appearance for appellees.
Before MOOREMAN, VOLINN and ASHLAND, Bankruptcy Judges.
This appeal arises from the bankruptcy court's order reopening the debtor/appellee's Chapter 7 case and allowing the avoidance of appellant's lien pursuant to 11 U.S.C. § 522(f).1
The debtor filed a Chapter 7 petition on April 16, 1985, and indicated in his schedules that he had no secured consumer debts. The debtor, however, had previously entered into a promissory note and security agreement with the appellant in 1983.2 The appellant had filed its UCC-1 Financing Statement, claiming a secured interest in all household goods of the debtor. Additionally, two months prior to filing his Chapter 7 petition, the debtor had renewed the original loan and again signed a Security Agreement giving the appellant a secured interest in his household goods.
In June 1985, the appellant contacted the debtor's attorney and stated that it had not received "notice" of the debtor's bankruptcy, whereupon the debtor's attorney provided the appellant with the filing date and the case number. The debtor's schedules claimed the following household goods as exempt: a couch, a coffee table, three end tables, a bookcase, fifteen pictures, a bed, a dresser, several chairs, a table, a stereo, a television and a vacuum cleaner. The appellant made no objection to the discharge which was entered on August 19, 1985.
In a letter to the debtor's attorney dated October 21, 1985, the appellant stated that it intended to recover the secured household goods because "no lien avoidance had been filed." On October 30, 1985, the debtor's attorney requested a copy of the note, security agreement, and financing statement, which was forwarded to the debtor on November 4, 1985.
On November 18, 1985, the appellant filed in state court a Complaint for Possession of Personal Property, and on December 10, 1985, the debtor filed his answer which included a Notice of Intention to Avoid the Lien as per Section 522(f). On January 7, 1986, the debtor filed in the bankruptcy court, a Motion to Avoid the Lien, however, because the debtor's bankruptcy had been closed (as of November 5, 1985), the debtor had to refile a new motion to avoid the lien combined with a Motion to Reopen the Case.
After the appellant filed an opposition to the motion and a hearing on the matter was held, the bankruptcy court entered a Memorandum decision allowing the debtor to reopen the case and avoided the appellant's lien. That decision was published at In re Ricks, 62 B.R. 681 (Bankr.S.D.Cal. 1986). The appellant filed a timely notice of appeal.
It is recognized that a trial court's reopening of a closed case pursuant to 11 U.S.C. § 350, to avoid a lien under § 522(f), is reviewed for an abuse of discretion. Hawkins v. Landmark Finance Co., 727 F.2d 324, 326-27 (4th Cir.1984). See also In re Daniels, 34 B.R. 782 (9th Cir. BAP 1983).
A previous Bankruptcy Appellate Panel has recognized that "in the absence of prejudice to creditors . . . neither the entry of discharge nor the closing of the case will bar lien avoidance actions under 11 U.S.C. § 522(f)(2)." In re Yazzie, 24 B.R. 576, 577 (9th Cir.Bankr.1982) () (citations omitted). See also In re Hawkins, 727 F.2d 324; In re Smart, 13 B.R. 838 (Bankr.D.Ariz.1981); In re Quackenbos, 71 B.R. 693 (Bankr.E.D.Pa.1987); In re Costello, 72 B.R. 841 (Bankr.E.D.N.Y.1987).3 As recognized by the Quackenbos court, the above rule has been based on several rationale 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; (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.
In re Quackenbos, 71 B.R. at 695 (citations omitted).
Initially the appellant argues that the debtor had constructive and actual notice of the existence of the lien and that therefore Judge Malugen was incorrect by stating in her opinion, "the primary reason the debtor did not avoid the appellant's alleged lien during the pendency of his case is because he did not know the lien existed." In re Ricks, 62 B.R. at 683. Although, it appears from the record that the debtor should have known about the lien or at least had "constructive notice" of the claim of an existing lien, this factor alone is not determinative of whether the lien may be properly avoided. In almost every case a debtor is going to have constructive notice that a claim of lien on § 522(f) property exists. The problem arises, however, when a debtor through his own mistake or the mistake of his attorney fails to avoid that lien during the pendency of the bankruptcy proceedings.
The key factor in allowing the late avoidance of a lien pursuant to § 522(f) is whether the creditor is sufficiently prejudiced so that it would be inequitable to allow avoidance of the lien. The appellant argues that it has been prejudiced by the debtor's failure to avoid the lien because it had, subsequent to the discharge, brought a state court action to recover the "secured property." Whether a creditor's subsequent action to enforce a lien constitutes sufficient prejudice so as to prevent the avoidance of the lien is unclear.
While few courts have specifically addressed this issue, some courts have determined that the creditor's independent action to execute on the lien may be sufficient prejudice to bar avoidance of the lien. See, e.g. In re Hawkins, 727 F.2d at 327. Other courts have allowed the reopening of the case and avoidance of the lien, subject to the debtor reimbursing the creditor for "any extra costs attributable to the delay." E.g. Noble v. Yingling, 37 B.R. 647, 651 (D.Del.1984). In the instant case, however, the bankruptcy court determined that the appellant could not "reasonably explain its action of pursuing this debtor in state court on an obviously worthless and avoidable lien," apparently also taking into consideration the ordinary nature of the household goods involved. In re Ricks, 62 B.R. at 684. Accordingly, the lower court held that the appellant did not detrimentally rely on the debtor's inaction.
The appellant argues that at the very least it should be entitled to attorney's fees and costs incurred in bringing the state court action. In support of its position, the appellant cites the cases of Hassler v. Assimos, 53 B.R. 453 (D.Del.1985), and Noble v. Yingling, 29 B.R. 998 (D.Del.1983), where certain factors were identified for purposes of addressing the issue of prejudice to a judgment creditor whose judgment lien is sought to be avoided pursuant to § 522(f)(1). Those factors are equally applicable to § 522(f)(2) considerations and are set forth as follows:
1) vigor with which the . . . creditor pursued the debtor prior to the filing of the bankruptcy petition, 2) communication of positions by and between debtor and . . . creditor after filing of the petition and prior to discharge, 3) motivating cause of failure to file lien avoidance complaint prior to discharge, 4) length of time between discharge and filing of lien avoidance complaint, 5) reasons for delay in filing lien avoidance complaint, 6) prejudice to the . . . creditor, and 7) good faith, or lack thereof, of the creditor.
As to the first factor, there is no indication from the record before this Panel that the appellant made any attempts to pursue the debt prior to the filing of the bankruptcy petition.
As to the second factor, it is undisputed that the appellant contacted the debtor's attorney in June 1985 and prior to discharge, to obtain information on the debtor's bankruptcy filing. However, there is no indication that the appellant notified the debtor's attorney at that time or at any subsequent time as to the appellant's lien on the debtor's household goods. As the trial court stated, "Aetna made no attempt to clarify the character of its debt until after the debtor was discharged." In re Ricks, 62 B.R. at 683. Although the appellant argues that no such duty exists, if the appellant would have communicated the character of its claim, then the argument that the failure to avoid the lien was due to excusable neglect would be less persuasive.
As to the third factor, the trial court stated that the debtor did not know of the existence of the lien. This is evidenced by the fact that the debtor's schedules did not list any secured creditors and it is undisputed that the instant lien was clearly avoidable under § 522(f). Further, the bankruptcy judge is in the best position to determine whether...
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