In re Stone, Bankruptcy No. 88-03102-R3K

CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Eastern District of Washington
Citation119 BR 222
Docket NumberBankruptcy No. 88-03102-R3K,88-02842-R3C and 88-03346-K13.
PartiesIn re Jeffrey B. STONE, Debtor. In re Sharon Rae ALBRIGHT, Debtor. In re Doris Ann HAYES, Debtor.
Decision Date17 September 1990

Donald D. Bundy, Yakima, Wash., for Jeffrey Stone.

Robert M. Boggs, Yakima, Wash., for Sharon Albright.

John W. Campbell, Spokane, Wash., for Doris Ann Hayes.

Reed C. Pell, Yakima, Wash., for Jeanna K. Stone.

R. Wayne Bjur, Yakima, Wash., for Donald Albright.

Donald A. O'Neill, Spokane, Wash., for Jack Hayes.

MEMORANDUM OPINION

JOHN A. ROSSMEISSL, Bankruptcy Judge:

Background

This trilogy of cases presents various issues regarding a debtor's power under Section 522(f)(1) of the Bankruptcy Code to avoid liens awarded to the debtor's former spouse to secure a property division in the course of a marital dissolution.1 These cases have been consolidated for argument and decision for the convenience of the court. § 522(f)(1) allows the avoiding of "judicial liens" to the extent such liens impair the debtor's exemptions.

These cases present variations on the same theme. In the case of In re Jeffrey B. Stone, the former spouses executed a property settlement agreement that provided for the division of their marital property. Although the settlement agreement was incorporated by reference into the decree, the parties took the additional step of documenting the transaction with a promissory note and a deed of trust. In In re Sharon Rae Albright, the spouses also entered into an agreement concerning property settlement, which was incorporated into the dissolution decree. The agreement provided for the transfer of the marital residence to debtor subject to a lien in favor of her former spouse. The parties did not execute additional documentation. Finally, In re Doris Ann Hayes, presents the situation where the property division was made by the superior court following a contested dissolution proceeding. The court finds none of these liens may be avoided.

Jurisdiction

This court has jurisdiction of this matter pursuant to 28 U.S.C. Section 157. This matter is a core proceeding under 28 U.S.C. Sections 157(b)(2)(B) and (K).

Facts

The following is a more detailed discussion of the facts of the specific cases.2

In re Jeffrey B. Stone

Debtor Jeffrey B. Stone and Jeanna Kay Stone were married in 1981. The Stones separated and in November 1987 executed a separation agreement.

The separation agreement provided that the debtor would pay and hold Jeanna harmless for debts in the amount of $39,820, including the mortgage on the marital residence in the amount of $35,000. The agreement also provided that the debtor would receive the marital residence and that Jeanna would receive a promissory note in the amount of $5,100 secured by a deed of trust on the residence. The note, payable in monthly installments, was interest free. The deed of trust was recorded on November 19, 1987. The agreement contains this language:

This agreement shall operate as a conveyance by wife to husband and by husband to wife of all items enumerated herein, and henceforth such items shall be the sole and separate property of husband or wife, respectively.

On February 18, 1988 the superior court signed findings of fact, conclusions of law and a decree of dissolution. The superior court found that neither of the parties was seeking an award of maintenance and approved the separation agreement incorporating it into the decree. Neither the decree, the findings, nor conclusions refer to the conveyance of the residence to debtor or the grant of a lien to Jeanna.

Debtor on September 22, 1988 filed a petition for relief under chapter 7 of the Bankruptcy Code. Debtor's schedules listed debts in the amount of $44,400 and total property valued at $38,606. Debtor listed $3,750 as owing to Jeanna. Debtor's schedules indicated that the residence had a value in the amount of $32,500 and that the liens against the house totaled $36,250 ($32,500 first mortgage, plus $3,750 on the second deed of trust owing to Jeanna). The debtor claimed a homestead exemption in the residence in the amount of $3,750 pursuant to § 522(d)(1) of the Code. On October 4, 1988 debtor moved to void Jeanna's lien pursuant to § 522(f) and Jeanna objected.3

In re Sharon Rae Albright

The record does not indicate when Donald and Sharon Albright were married. It is uncontested, however, that they acquired their marital residence as community property and that it remained community property until 1983 when their marriage was dissolved. The decree of dissolution was entered in accordance with a property settlement agreement, apparently without trial. Sharon was awarded the marital residence subject to a lien in the amount of $9,000 in favor of Donald. The decree required Sharon to pay Donald's claim in full when the parties' youngest child reached 20 years of age.

By 1988, approximately the time that the youngest child turned 20, the amount of Donald's claim had been reduced to $5,650. In August of that year, Sharon filed bankruptcy under chapter 7. Sharon reported debts in the amount of $17,959 and property with a value of $32,900. The property schedules listed the former marital residence with a fair market value of $30,000. According to the schedules, the residence was subject to a first mortgage in the amount of $6,155. Sharon utilized the exemption allowances provided for by state law, claiming a $30,000 homestead exemption pursuant to RCW 6.13.030. Promptly after filing her bankruptcy petition Sharon moved to void Donald's lien under § 522(f)(1). Donald timely objected.4

In re Doris Ann Hayes

Jack and Doris Hayes were married in 1966. During their marriage, Jack and Doris Hayes purchased a residence. In 1984 they separated and filed a petition for dissolution. The parties did not enter into a separation agreement, and apparently litigated all matters involving the dissolution. In dividing the property, the superior court awarded the Debtor the house, subject to both the existing first mortgage and a lien in favor of Jack in the amount of $15,750, plus interest at 6%. The conveyance of the residence to the debtor was effected by a quit claim deed implementing the court's ruling. The deed was recorded on August 30, 1984, and purports to reserve or grant Jack a lien in accordance with the decree. Under the terms of the dissolution decree, the amount due to Jack was payable upon the earliest of several events: the sale of the residence, the debtor's remarriage or cohabitation, or the 18th birthday of the child of whom debtor had custody.

Jack, on at least one occasion, cured the debtor's default on the home mortgage. He also paid the delinquent real estate taxes on the residence. Consequently, the superior court on February 17, 1987 entered a judgment for these payments against debtor in the amount of $3,848.62. The superior court's order states that this sum "is hereby added to Jack's existing lien on the family home." The order also recites that "Petitioner's total lien against the family home located at West 5238 Navahow, Spokane, Washington shall be nineteen thousand five hundred ninety-eight dollars sixty-two cents ($19,598.62) all to bear interest as heretofore mentioned."

Debtor Doris Hayes on October 12, 1988 filed a petition for relief under chapter 13 of the Code. Debtor's schedules reported total debts in the amount of $38,000 and property with a fair market value of $77,550. The list of unsecured creditors was comprised of 13 persons, including Jack Hayes, each scheduled as holding an unsecured claim in the amount of "$1.00 +."5 The schedules reported that the value of the residence was $74,000 and that it was subject only to two liens, viz a first mortgage in the amount of $33,000 and a deed of trust to debtor's counsel in the amount of $5,000.6 Debtor elected the state exemptions, claiming a $30,000 homestead exemption pursuant to RCW 6.13.030.

In November 1988, debtor moved to void Jack's lien. Jack timely objected. Debtor subsequently moved to sell the residence free and clear of all liens, which were to attach to the proceeds. Upon stipulation of the parties, the court approved the sale of the residence for $62,000 and ordered that the proceeds be held by debtor's counsel pending the resolution of this matter.

DISCUSSION

The law in this area is very confusing. The Code provisions are complex and unclear. The case law is often contradictory with no emerging consensus apparent. Dissents are common and frequently cited. It appears the United States Supreme Court may soon by considering some of the issues presented here. Faced with this labyrinth, this court shares the sentiments of District Judge Crow who said when he confronted the area a year ago, "With some trepidation, the court wades into waters muddied before it with little hope of settling anything but the instant dispute." In re Rittenhouse, 103 B.R. 250 at 252 (D.Kan.1989).

I. A GENERAL STATEMENT OF THE PROBLEM

The debtors in these three cases all seek to avoid liens on property which they claim exempt. 11 U.S.C. § 522(f) sets forth three conditions which are prerequisites for avoidance of the liens in these cases. These three conditions are:

i. . . . "the debtor may avoid the fixing of a lien on an interest of the debtor in property" . . .
ii. . . . "to the extent that such lien impairs an exemption to which the debtor would have been entitled . . ." and
iii. . . . "if such lien is — (1) a judicial lien. . . . "

The debtors must meet each of these conditions to avoid a lien. The court will discuss the legal principles applicable to each condition and then apply its conclusions to the facts of the specific cases.

II. DOES THE LIEN AFFIX TO AN INTEREST OF THE DEBTOR IN PROPERTY?

This analysis begins with the language of the judgment or decree creating the lien.

In Maus v. Maus, 837 F.2d 935 (10th Cir.1988), the divorce decree awarded the...

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