In re Sanderfoot, Bankruptcy No. 87-02046.

• Decision Date: 09 March 1988
• Docket Number: Bankruptcy No. 87-02046.
• Citation: 83 BR 564
• Parties: In re Gerald J. SANDERFOOT, Gerald Sanderfoot, Gerald Sanderfoot, f/d/b/a Improvements Unlimited and d/b/a Ragun's Bar, Debtor(s).
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

83 B.R. 564 (1988)

In re Gerald J. SANDERFOOT, Gerald Sanderfoot, Gerald Sanderfoot, f/d/b/a Improvements Unlimited and d/b/a Ragun's Bar, Debtor(s).

Bankruptcy No. 87-02046.

United States Bankruptcy Court, E.D. Wisconsin.

March 9, 1988.

Harvey G. Samson, Bollenbeck, Block, Seymour, Rowland & Samson, S.C., Appleton, Wis., for petitioner.

Charles J. Hertel, Dempsey, Magnusen, Williamson & Lampe, Oshkosh, Wis., for respondent.

DECISION

M. DEE McGARITY, Bankruptcy Judge.

This case comes before the court on an objection to the debtor's motion for lien avoidance under 11 U.S.C. § 522(f)(1). A decree of divorce entered by a Wisconsin state court granted the debtor's ex-spouse a lien on the debtor's residence to secure payment to the ex-spouse of her portion of the property division. The debtor is seeking to avoid this lien under § 522(f)(1) as impairing his homestead exemption. For the reasons set forth below, the debtor's motion for lien avoidance under § 522(f)(1) will be denied.

The debtor's former spouse has also objected to the debtor's valuation of assets in this bankruptcy and argues that the debtor is bound by the determinations of value in their divorce. The court now determines that it is not bound by those values, but in view of its ruling on the debtor's motion, it is unnecessary for a finding of value to be made at this time.

FACTS

Gerald J. Sanderfoot, the debtor, and Jeanne Farrey Sanderfoot were divorced on February 5, 1987. There was no agreement of the parties as to any provision of the division of property, maintenance or child support, and a trial was held on all issues. In the decree of divorce the state court found that the couple owned property including approximately 27 acres of land with the couple's residence on it valued at $104,000. In addition, there was a business, Ragun's Bar, two cars, a tractor, trailer and numerous items of personal property.

Certain personal property was ordered turned over to the debtor's ex-spouse or sold at auction. The debtor was awarded title to all of the parties' remaining property, including house, land, both cars and the business together with responsibility for its attendant liabilities. In return for her interest in that property, the wife was awarded $29,208.44 in cash, amounting to approximately one-half of the net estate, payable in two equal installments on January 10, 1987, and April 10, 1987. To secure this payment, the court ordered that a lien in her favor be placed on the marital residence. In addition, the decree provided that the debtor pay child support, maintenance to his ex-spouse and attorney fees.

The record in this court shows that up until the time Mrs. Sanderfoot applied for a relief from stay, the debtor had not complied with a single order of the state court. He had not conducted the auction, delivered the personal property to his ex-wife, or made a single payment toward child support, maintenance or attorney fees. He had not made the cash payments that were ordered by the court to be made to his ex-wife as compensation for her interest in the property.

Four months after entry of the decree of divorce, the debtor filed a Chapter 7 bankruptcy. Claiming that it impaired his homestead exemption in the property, he then moved pursuant to 11 U.S.C. § 522(f)(1) to avoid the lien given to his wife on the marital residence.¹ He listed the value of the residence at $82,750 in contrast to the $104,000 which was found by the state court to be the value of that property. The parties later stipulated to an independent appraisal of the property. It was appraised at $95,000, but there was no agreement to accept the appraiser's valuation.

The parties agree that the following are the only issues in contention: Whether the debtor may, pursuant to 11 U.S.C. § 522(f)(1), avoid a lien arising from the contested property division in his divorce proceeding, and whether the debtor is bound by the findings of the divorce court regarding the valuation of assets.

DECISION

The debtor argues that because property division payments are dischargeable under 11 U.S.C. § 523, he should be able to avoid the lien on his homestead. Such payments are indeed dischargeable, but this serves only to relieve the debtor of personal liability. The lien on the residence securing these payments will nevertheless remain in force unless it can be avoided under § 522(f) or another Code provision. In re Williams, 38 B.R. 224, 226-27 (Bkrtcy.N.D. Okl.1984). The court first addresses that issue.

Lien Avoidance

Before any lien may be avoided under § 522(f)(1), the debtor must prove three elements:

1. The lien is fixed on an interest of the debtor in property;

2. The lien impairs an exemption to which the debtor would otherwise be entitled; and

3. The lien is a judicial lien.

In re Hart, 50 B.R. 956, 960 (Bkrtcy.D. Nev.1985); In re Thomas, 32 B.R. 11, 12 (Bkrtcy.D.Or.1983).

The lien this debtor seeks to avoid is not of the type that Congress intended to address by § 522(f)(1).

Congress intended by § 522(f)(1) to allow the removal of judicial liens obtained by creditors on a debtor\'s exempt property. ". . . the bill gives the debtor certain rights not available under current law with respect to exempt property. The debtor may avoid any judicial lien on exempt property . . . (This) right 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 the creditor beats the debtor into court, the debtor is nevertheless entitled to his exemptions . . ." House Report 95-595, 95th Cong., 1st Sess., 1977, p. 126, U.S.Code Cong. & Admin.News, 1978, pp. 5787, 6087.

In re Thomas, supra, at 12.

This legislative history makes clear that the policy behind 11 U.S.C. § 522(f) was not to circumvent a divorce court's decision by allowing one spouse to acquire substantially all of the predivorce assets to the exclusion of the other. Mr. Sanderfoot is attempting to manipulate bankruptcy law for this very purpose, and to permit such a result would be inequitable and contrary to public policy. However, in addition to policy grounds, there are legal grounds for denying avoidance of the lien.

Mrs. Sanderfoot's lien is without question a type of judicial lien. 11 U.S.C. § 101(32). But see Wozniak v. Wozniak, 121 Wis.2d 330, 359 N.W.2d 147 (1984), which characterized such a lien as a mortgage. Furthermore, even if the $104,000 value found by the divorce court is used, as she has argued, and the amount of the first and second mortgages ($37,490 and $9,935, respectively) is deducted, the lien impairs the debtor's homestead exemption.

Section 522(f) permits avoidance of the "fixing of a lien on an interest of the debtor." The statute uses the word "fixing" instead of "fixed;" "interest" instead of "property." The implication of the House Report and this language in § 522(f) is that Congress intended the avoidance of liens that became fixed after the debtor's acquisition of the interest in property, not before. In re Williams, 38 B.R. 224, 226-27 (Bkrtcy.N.D.Okl.1984); Thomas, supra, at 12. More explicitly, § 522(f) provides that "a judicial lien which attached to an interest in property prior to the debtor's acquisition of that interest is not avoidable" pursuant to § 522(f) inasmuch as "the phrase `an interest of the debtor in property' refers to an unencumbered interest at the time of acquisition." Williams, supra, at 228, quoting from In re McCormick, 18 B.R. 911 (Bkrtcy.W.D.Pa.1982).

As stated in Williams:

it is clear that a lien imposed by a divorce decree does not even remotely resemble the scenario presented here, where creditors rush to turn their unsecured claims into judicial liens before the debtor can file bankruptcy which presupposes the existence of a property interest in the debtor before the attachment of a judicial lien to that interest. (emphasis original)

Id. at 227-28.

In a divorce proceeding, the document which conveys one spouse's interest in the homestead to the other spouse simultaneously creates a lien in favor of the spouse who will no longer be allowed to live in the residence. In effect, the property is conveyed to the debtor subject to a lien to secure payment of the nonresident spouse's share of the property settlement. Thomas, supra. As such, the debtor's property interest is an "interest of the debtor in property" which was not owned by him before it was conveyed to him with the judicial lien attached. A lien of this kind, whether or not the creditor is an ex-spouse, may not be avoided. McCormick, supra. (Debtor acquired her interest in property after the creditor's lien attached. Since she received it subject to the lien, it was unavoidable under § 522(f).)

This issue has not yet been decided at the appellate level in the 7th Circuit. The Court of Appeals of the 8th and 10th Circuits and the Bankruptcy Appellate Panel of the 9th Circuit have considered it but reached inconsistent results. In Boyd v. Robinson, 741 F.2d 1112 (8th Cir.1984), the bankruptcy court found that a lien imposed by a divorce decree could be avoided as a judicial lien if the lien was the result of a contest as opposed to an agreement between the parties. The district court reversed, and the 8th Circuit Court of Appeals affirmed the district court. The Court of Appeals held that the lien in question protected the debtor's ex-spouse's "pre-existing" property right in the marital residence arising under state law during the marriage. Id. at 1115.

In Boyd v. Robinson, the wife had owned the homestead prior to marriage and had continued to hold the property in her own name following marriage. The court analyzed Minnesota law to determine whether the nondebtor husband had acquired an interest in the homestead prior to the divorce. Minnesota law restricts conveyance of a homestead without a spouse's consent and provides for an inchoate right upon the death of...