In re Strother

• Decision Date: 05 August 2005
• Docket Number: Bankruptcy No. 04-71826.,BAP No. EO-05-010.
• Citation: 328 B.R. 818
• Parties: In re Stephani Dawn STROTHER, Debtor. Don R. Willis, Appellant, v. Stephani Dawn Strother, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

Page 818

328 B.R. 818

In re Stephani Dawn STROTHER, Debtor.

Don R. Willis, Appellant, v. Stephani Dawn Strother, Appellee.

BAP No. EO-05-010.

Bankruptcy No. 04-71826.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

August 5, 2005.

Submitted on the briefs:^*

Steven M. Harris and Douglas R. Haughey of Doyle Harris Davis & Haughey, Tulsa, Oklahoma, for Appellant.

Paul R. Tom, Tulsa, Oklahoma, for Appellee.

Before McFEELEY, Chief Judge, BROWN, and THURMAN, Bankruptcy Judges.

OPINION

BROWN, Bankruptcy Judge.

Don R. Willis appeals an order of the United States Bankruptcy Court for the Eastern District of Oklahoma allowing avoidance of his judicial liens under 11 U.S.C. § 522(f)¹ and denying his objection to Debtor Stephani Dawn Strother's homestead exemption. We AFFIRM.

I. Background

Strother built a home on a tract of land in Wagoner County, Oklahoma ("Property"). Willis performed construction work on her home. When Strother failed to pay him in full, Willis filed a lawsuit alleging breach of contract, and obtained a judgment in the amount of $5,000.00. He recorded the judgment in Wagoner County, thereby acquiring a judgment lien. Willis later obtained a separate judgment in the amount of $12,820.00, plus costs of $236.00 for his attorney's fees and costs. Once again he recorded the judgment and acquired a judgment lien on the Property.

On May 13, 2004, Strother filed her voluntary Chapter 7 petition. On her Schedule C, she claimed the Property as exempt under Oklahoma Statute title 31, section 1. Willis filed an objection to the exemption.² Strother filed a motion to avoid Willis's liens under § 522(f)(1)(A).³ Following an evidentiary hearing, the bankruptcy court entered its order granting Strother's motion to avoid Willis's liens and denying Willis's objection to Strother's homestead exemption. Willis filed a timely notice of appeal.

II. Jurisdiction and Standard of Review

The Court has jurisdiction over this appeal. Willis timely filed a Notice of Appeal from the bankruptcy court's order, which is a final order under 28 U.S.C. § 158(a).⁴ The parties have consented to this Court's jurisdiction because they have not elected to have the appeal heard by the United States District Court for the Eastern District of Oklahoma.⁵

Where, as here, the salient facts are undisputed, we conduct a de novo review of the bankruptcy court's conclusions of law.⁶ When conducting a de novo review, we are not constrained by the bankruptcy court's conclusions, and may affirm the bankruptcy court on any legal ground supported by the record.⁷

III. Discussion

This appeal requires us to consider two types of liens, which are mutually exclusive: statutory liens and judicial liens.⁸ Only judicial liens are subject to avoidance under § 522(f)(1)(A). For the reasons discussed below, the bankruptcy court did not err when it concluded that Willis did not demonstrate a valid statutory lien. Willis's liens were judicial liens that were properly subject to avoidance under § 522(f), and Willis's objection to Strother's homestead exemption was properly denied. Each issue will be discussed in turn.

A. Willis Did Not Demonstrate a Valid Statutory Lien

Oklahoma law recognizes a statutory lien for mechanics and materialmen when one, under contract with a property owner, performs labor or furnishes material to build, alter, or repair a building on the property.⁹ However, the lien must be perfected in order to be enforceable.¹⁰ A materialman's lien may be perfected by filing either a lien statement or a lawsuit within four months of the date that work is last performed on the property.¹¹

Assuming that Willis's work on the Property falls within the scope of the materialman's lien, Willis did not demonstrate that he properly perfected a statutory lien. There was no evidence of the date that he last performed work on the Property. Willis testified that shortly after he completed his work on the Property, Strother paid him $8,000.¹² The $8,000 check was dated May 15, 2001. The bankruptcy court held that the evidence was insufficient to show that Willis's lawsuit, filed September 13, 2001, was filed within four months of the date that Willis last performed work on the Property. We find no error with the bankruptcy court's conclusion.¹³

B. Willis's Judicial Liens Were Properly Avoided

Section 522(f)(1) provides in pertinent part that "the debtor may avoid the fixing of a lien on an interest of the debtor in 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(A) a judicial lien...."¹⁴ Subsection (b) of § 522 sets forth certain federal exemptions, but allows states to opt out of the federal exemptions, which Oklahoma has done.¹⁵

Oklahoma provides a homestead exemption for "[t]he home of [a debtor], provided that such home is the principal residence of such person."¹⁶ There is no dispute that the Property is Strother's principal residence. The Property would be exempt as a homestead but for Willis's judicial liens. Willis's judicial liens impair Strother's homestead and Strother is therefore entitled to avoid them.¹⁷

Willis argues that Strother is not entitled to an exemption, because the Oklahoma Statutes provide an exception to the exemption for work performed to construct a home:

The exemption of the homestead provided for in this chapter shall not apply where the debt is due:

. . .

3. For work and material used in constructing improvements thereon.¹⁸

Clearly, under this Oklahoma statute, Strother cannot claim her exemption at Willis's expense. Bankruptcy law, however, preempts state law in determining what liens may be avoided in bankruptcy.

In In re Leonard,¹⁹ the debtors sought to avoid a nonpossessory, nonpurchase-money security interest in household goods under § 522(f)(1)(B). Applicable state law limited debtors' exemption for household goods to their equity in the goods, and the debtors had no equity in the goods at issue. The creditor argued that because the debtors were not entitled to an exemption under state law, its lien could not be avoided. The Leonard court rejected that argument, holding that "a state may elect to control what property is exempt under state law but federal law determines the availability of the lien avoidance provision."²⁰ The court stated:

The language [of § 522(f)(1)] is not ambiguous, and no rules of construction need be applied. All the subsections must be given meaning and they must coexist. A debtor is entitled to avoid a lien to the extent the debtor would have been entitled to an exemption under either the federal or the state exemptions statutes. The debtor's right to claim avoidance of a lien on property under § 522(f) is determined by considering whether the property, if unencumbered, is exempted under the state statutory exemptions. If unencumbered property may be exempted under the state exemptions, then any nonpossessory, nonpurchase-money lien on that property could be avoided under § 522(f). Congress did not say a debtor is entitled to avoid a lien to the extent the debtor is entitled to an exemption, which is the construction Appellant is urging us to adopt. The word "would" obviously has been used by Congress in an auxiliary function to express a possibility, i.e. if the debtor would have been entitled to an exemption, he is entitled to avoid the lien.²¹

Although Leonard dealt with avoidance of a nonpossessory, non-purchase money lien, its rationale is equally applicable to judgment liens. Here, Willis urges this Court to adopt a construction that if Strother is not entitled to an exemption because of an exception to the exemption under state law, then his liens cannot be avoided. But, using the Tenth Circuit's construction, Strother would have been entitled to a homestead exemption if the Property were not encumbered by Willis's judicial liens. The liens may therefore be avoided.

Similarly, in In re Snow,²² the creditors obtained a judgment against the debtors for rent. The applicable state homestead exemption included an exception for a claim for rent. The debtors sought to avoid the judgment lien as impairing their homestead exemption, while the creditors argued that because the debtors were not entitled to a homestead exemption against a claim for rent, their lien could not be avoided. The Snow court followed Leonard, finding that the debtors would have been entitled to a homestead exemption if the property were not encumbered by the creditors' lien, and it avoided the lien.²³

After Leonard and Snow were decided, the Supreme Court decided Owen v. Owen.²⁴ In Owen, applicable state law prohibited a debtor from asserting a homestead exemption against liens that attached to property before the property acquired homestead status. The debtor attempted to avoid a lien that attached to his property before the property acquired homestead status. The Supreme Court applied the same interpretation of § 522(f)(1): "ask first whether avoiding the lien would entitle the debtor to an exemption, and if it would, then avoid and recover the lien...."²⁵

In Owen, the creditor argued that the Court should defer to the state's ability to define its own exemptions. The Court rejected that argument, stating:

Respondent asserts that it is inconsistent with the Bankruptcy Code's "opt-out" policy, whereby the States may define their own exemptions, to refuse to take those exemptions with all their built-in limitations. That is plainly not true, however, since there is no doubt that a state exemption which purports to be available "unless waived" will be given full effect, even if it has been waived, for purposes of § 522(f) — the first phrase of which, as we have noted, recites that it applies "[n]otwithstanding any waiver of exemptions." Just as it is not inconsistent with the policy of permitting state-defined exemptions to have another policy disfavoring waiver of...