In re Serapiglia, Bankruptcy No. 089-91352-21.
| Decision Date | 24 December 1990 |
| Docket Number | Bankruptcy No. 089-91352-21. |
| Citation | 123 BR 481 |
| Parties | In re Anthony SERAPIGLIA, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Daniel W. DeLuca, Ronkonkoma, N.Y., for debtor.
Pinks, Brooks, Stern & Arbeit by Steven G. Pinks, Hauppauge, N.Y., for The Bank of Smithtown.
The Debtor is moving to reopen this closed Chapter 7 proceeding in order to reduce and avoid, pursuant to 11 U.S.C. § 522(f), two judgment liens of The Bank of Smithtown ("Smithtown") on his residence. 11 U.S.C. § 522(f) authorizes a debtor to avoid judicial liens that impair the debtor's exemption. The debtor claims that Smithtown's liens impair his homestead exemption. Smithtown opposes the motion in reliance on Alu v. State of New York Department of Taxation and Finance, 41 B.R. 955 (E.D.N.Y.1984) (Wexler, J.) asserting that Alu requires that the debtor's motion be denied as a matter of law.
Issue on which this motion turns is: Does Section 522(f) of the Code give a debtor an exemption broader than that available to him under state law when the state has opted out of the federal exemptions? That issue is now before the Supreme Court on certiorari to the Eleventh Circuit in In re Owen, 877 F.2d 44 (11th Cir.1989), cert. granted, ___ U.S. ___, 110 S.Ct. 2166, 109 L.Ed.2d 496 (1990). Conceivably the Court's decision in that case may be dispositive of the right of the plaintiff to the relief he is now seeking.
The critical facts are not in dispute, although some issues remain to be resolved.
The debtor filed a voluntary petition under Chapter 7 on November 29, 1989. He received a discharge on March 16, 1990. After the Trustee reported no assets for distribution, the case was closed April 18, 1990. The present motion to reopen to avoid judicial liens under 11 U.S.C. § 522(f) was made on August 17, 1990.
The debtor is an owner, as a tenant by the entirety, of real property located at 267 Marktree Road, Centereach, New York. He claimed the fair market value of the property to be $219,000 and his entireties interest to be worth $109,500, against which he claimed a homestead exemption under New York's Civil Practice Rules and Procedure ("CPLR") Section 5206(a) in the amount of $10,000. An appraisal attached to the motion papers estimates the market value of the property to be $215,000 as of March 26, 1990. The property is burdened by a first mortgage in the amount of $164,129.
The application in support of the motion, after reciting the foregoing figures, asserts that "the judgment liens of the Bank of Smithtown should be reduced to the sum of $8,500.00 to be paid out of the proceeds of the future sale, if any, of the premises after applicant has received his homestead exemption and paid all applicable closing costs." It is not apparent from the motion papers how the debtor arrives at the figure of $8,500. For the reasons which follow, the Court is granting the motion to reopen to permit the debtor to seek relief under § 522(f). However, according to the calculations normally made by the bankruptcy courts in applying Section 522(b), the maximum reduction of Smithtown's liens to which the debtor would be entitled is the sum of $15,435 (½ × ($215,000 - $164,129) - $10,000). See, In re Cohen, 13 B.R. 350 (Bankr.E.D.N.Y.1981); In re Braddon, 57 B.R. 677 (W.D.N.Y.1986); In re Yackel, 114 B.R. 349 (Bankr.N.D.N.Y.1990); In re Galvan, 110 B.R. 446 (9th Cir.BAP 1990).
Because the hearing on the motion was limited to whether or not Section 522(f) can, after Alu, be used to avoid judgment liens where the debtor is claiming a New York homestead exemption, the Court for the present is only granting the motion to reopen. Unless the debtor agrees that Smithtown's lien cannot be reduced below $15,435, the second branch of the motion to avoid Smithtown's judgment liens will have to be the subject of a new motion in the reopened proceeding.
Section 522(f) provides as follows:
Section 522(f) is new to the Code. It was part of the revisions made to broaden and liberalize the debtor's exemptions. H.R. Rep. No. 95-595, 95th Cong., 1st Sess., 126 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787. As Congress pointed out, the historical purpose of the exemptions laws "has been to protect a debtor from his creditors, to provide him with the basic necessities of life so that even if his creditors levy on all of his nonexempt property the debtor will not be left destitute and a public charge." Ibid. Congress liberalized the exemption law in two respects. First it provided a set of federal exemptions new to the law. Second, as the House Report notes, it gave a debtor Ibid. Expatiating on this provision the House Report adds: H.R. Rep. No. 95-595 at 362, U.S.Code Cong. & Admin.News 1978, p. 6318.
As the Code was finally adopted, a state was given the option of opting out of the federal exemptions, that is, making them unavailable to the state's residents, but was given no such option as to the lien avoidance provision, Section 522(f).
To place Section 522(f) in context, a brief overview of the interrelationship of the pertinent provisions might be helpful. When a debtor files a petition in bankruptcy, his property becomes the property of the bankruptcy estate. 11 U.S.C. § 541(a). The debtor is then allowed to exempt certain property from the bankruptcy estate. 11 U.S.C. § 522(b). If the state law applicable to the debtor does not permit him to select the federal exemptions, then he is limited to exempting property under nonbankruptcy federal law and state law. 11 U.S.C. § 522(b)(2)(A). Despite the exemptions, liens that cover exempted property are preserved and creditors may enforce them. 11 U.S.C. § 522(c)(2). However, a debtor may avoid a lien encumbering exempted real property "to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is — (1) a judicial lien;" 11 U.S.C. § 522(f)(1).
In 1982 New York State took advantage of the opt out provision and passed a three part statute. Debtor and Creditor Law, Art. 10-A — Personal Bankruptcy Exemptions, 12 McKinney's (1990). One section specifically took away from New York State debtors the authority to use the federal exemptions. New York's Debtor and Creditor Law, § 284. Another section explicitly authorized a New York debtor to exempt from property of the estate, to the extent permitted by subsection (b) of § 522 of Title 11, "personal and real property exempt from application to the satisfaction of money judgments under sections fifty-two hundred five, fifty-two hundred six of the civil practice law and rules." Debtor & Creditor Law, § 282. The third section of the same law, not relevant here, pertains to personal property, it authorizes a debtor who does not utilize the homestead exemption described in Section 5206 of the CPLR to exempt other property. Debtor & Creditor Law § 283.
New York CPLR Section 5206(a) provides:
A problem which surfaced early in this Circuit, as it did elsewhere, was whether a debtor could avoid any judgment liens when the mortgages on his property exceeded the fair market value so there remained no equity for him to claim as exempt. The answer given in In re Chesanow, 25 B.R. 228 (Bankr.D.Conn.1982) was that he could. He could do so for the future benefit he would derive from removing the judicial liens. The debtor argued there that he should be given the opportunity to build up equity and then "apply his exemption to that property interest and thus avail himself of the fresh start intended by Congress." 25 B.R. at 229. Framing the issue as whether an exemption of an interest is impaired by a judicial lien when other unavoidable liens exceed the fair market value of the property, the Court read Section 522(f) as intended to allow debtors to create equity by avoiding certain liens. In the view of the Court the judicial liens impaired the debtor's ability to achieve an equity position in the future and "thus frustrate the debtor's congressionally mandated fresh start." 25 B.R. at 231.
In Chesanow the debtor had claimed the federal homestead exemption. When that option was closed to New York residents in 1982, Bankruptcy Judge Hall held that "New York debtors could not avoid judicial liens under Section 522(f)." In re Zuaro, 29 B.R. 37 (Bankr.E.D.N.Y.1983). In that case the debtors who owned approximately $10,000 in equity over and above all mortgages, claimed the New York State homestead exemption and moved to set aside the judgment liens on their equity. Bankruptcy Judge Hall refused the relief requested saying:
Section 5206(a), however, does not allow the homestead owner to free the exempt equity in his property from all claimants. Rather, it is a limited exemption which only prohibits judgment creditors from...
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