Matter of Schwartz, Bankruptcy No. 80-10843
| Decision Date | 21 October 1985 |
| Docket Number | Civ. No. F 85-320.,Adv. No. 81-1109,Bankruptcy No. 80-10843 |
| Citation | 53 BR 1018 |
| Parties | In the Matter of Paul Frederick SCHWARTZ and Soundra Sue Schwartz, Debtors/Appellants. AUTO DRIVEWAY, INC., Plaintiff/Appellee, v. Paul Frederick SCHWARTZ and Soundra Sue Schwartz, Defendants/Appellants. |
| Court | U.S. District Court — Northern District of Indiana |
Robert E. Grant, Shoaff, Parker & Keegan, Fort Wayne, Ind., for Auto Driveway, Inc.
Ralph R. Blume, Blume, Wyneken & Connelly, Fort Wayne, Ind. for debtors.
Howard B. Sandler, Beckman, Lawson, Sandler, Snyder & Federoff, Fort Wayne, Ind., Trustee.
This matter is before the court on appeal from the bankruptcy court's order of June 25, 1985. The issue on appeal is whether Soundra Sue Schwartz can claim a homestead exemption on the proceeds of the trustee's sale of the debtors' residential real estate. For the following reasons, the decision of the bankruptcy court will be reversed.
The facts relevant to this case, as found by the bankruptcy court in its orders of February 15, 1985 and June 25, 1985 and a stipulation of fact signed by the parties and filed August 2, 1983 in the bankruptcy court, are as follows. The debtors, Paul Frederick Schwartz and Soundra Sue Schwartz, husband and wife, filed a joint petition in bankruptcy on September 29, 1980. One asset of their estate was residential real estate located at 127 South Cornell Circle ("property") in Fort Wayne, Indiana. The property was sold by the trustee on December 16, 1982, and netted proceeds of $15,958.92.
Auto Driveway, Inc. ("Auto") claimed the entire amount of the proceeds by virtue of a judgment lien on the property. The lien grew out of a judgment in the Adams County Circuit Court in 1980. In the state court proceedings, Auto sued the debtors for breach of an agency contract. In December, 1979, Auto obtained two orders of attachment on the property totaling $40,000.00. Judgment was entered in favor of Auto for $35,271.08 on July 17, 1980, and the Adams Circuit Court entered an execution in aid of the judgment that same day. The trustee instituted an adversary proceeding to avoid the judgment lien as preferential and subject to 11 U.S.C. § 547. In a compromise approved by the bankruptcy court on December 22, 1981, the judgment lien was allowed, but only to the extent of $20,000.00.
The debtors also claimed a share of the proceeds from the sale of the property, with Paul and Soundra each requesting a homestead exemption in the amount of Seven Thousand Five Hundred Dollars ($7,500.00). In its order of February 15, 1985, the bankruptcy court held that Paul's claim of exemption should be disallowed, but that Soundra should be entitled to an exemption, because "a judicial lien can be avoided to the extent that it impairs an exemption to which the debtor is entitled," citing 11 U.S.C. § 522(f)(1). Auto objected, and filed a motion to reconsider. In its order of June 25, 1985, the bankruptcy court found that Soundra could not claim an exemption because a previous motion under § 522(f) to avoid the Auto lien to the extent of the exemption had been denied on the ground that it was filed two years after the bar date for filing such motions. In effect, the bankruptcy court ruled that Soundra waived her claim to exemption via § 522(f) by failing to assert it prior to the bar date. Soundra now appeals this ruling.
On appeal, the issue of Soundra's entitlement to an exemption does not turn on the application of § 522(f). Counsel for Auto recognized that there are in effect two possible ways to assert an exemption: to assert it in the underlying proceeding itself, § 522(b); and to assert it in the bankruptcy proceeding despite a waiver of the exemption in the underlying proceeding, § 522(f). While the bankruptcy court addressed this latter method, oral argument on appeal focused on the former. As counsel agreed, if Soundra successfully asserted the exemption in the underlying proceeding, then the tardiness of claiming the exemption via § 522(f) is irrelevant.
Under § 522(b), a state may choose to "opt-out" of the exemptions set forth in § 522(d) and limit debtors subject to its law to state law exemptions. Indiana has elected to opt-out, so that Indiana debtors may exempt from their estate only that property specified by Indiana law. I.C. XX-X-XX-X.5. The court therefore looks to Indiana exemption law to determine whether Soundra successfully claimed the exemption.
The homestead exemption asserted here is set forth in I.C. XX-X-XX-X. That section provides in pertinent part:
In order to claim the exemption, the debtor must present an inventory of his property, and an affidavit attesting to the truth and completeness of the inventory to the sheriff or other officer seeking to enforce the writ of execution. I.C. 34-2-8-1.
As argued on appeal, the ability of Soundra to claim a homeowner's exemption under I.C. XX-X-XX-X depends on the time when Soundra was required to claim the exemption. Auto argues that the exemption had to be claimed after the orders of attachment issued in December, 1979 but before the final judgment in July, 1980. Because Soundra did not assert the exemption until she filed bankruptcy in September, 1980, Auto argues that Soundra waived her claim to the exemption. On the other hand, Soundra argues that she did not have to claim the exemption prior to judgment, so that her claim of the exemption in her schedules filed with her petition for bankruptcy adequately invoked the exemption, thereby entitling her to its benefits now.
Lowry v. McGee, 75 Ind. 508, 510 (1881). See 3 I.L.E. Attachments, § 63. Thus, an attachment lien is a temporary lien, designed to "freeze" a defendant's assets until judgment and a writ of execution issues. Once judgment is entered and a writ of execution issues, the attachment lien perishes, Lowry, and a judgment lien takes its place. See Blake v. First Crown Financial Corp., 443 N.E.2d 871, 875 (Ind.App. 1983); Deetz v. McGowan, 403 N.E.2d 1160 (Ind.App.1980).
Therefore, what Auto seeks to enforce in bankruptcy is its judgment lien, and not an attachment lien. Soundra was not required to assert her exemption prior to judgment, as the lien which existed prior to judgment has been extinguished in favor of a judgment lien.
Several factors support the conclusion that the homestead exemption need not be asserted prior to judgment. First, the nature of the attachment lien itself suggests that there is nothing to claim exemption from, and little reason to justify its assertion prior to entry of a judgment. The attachment lien is temporary, designed to freeze the assets. It does not give the plaintiff a right to seize the property and sell it;1 it merely acts to keep the property available for seizure in event of a judgment. Precisely because there is no judgment on the property, and no liability found against the defendant in the main action, there is little reason to believe that an exemption need be asserted prior to judgment. Not all cases end in verdicts for the plaintiff; a defendant may not assert his homeowner's exemption for the justifiable reason that he believes it will not need to be invoked.
After judgment, however, the situation is dramatically different. The plaintiff has won, and seeks to sell off the defendant's property to obtain satisfaction of the judgment. Defendant's liability is no longer a mere possibility, but a proven legal conclusion. Now defendant's interest in protecting his property is present and compelling, and assertion of the homeowner's exemption is reasonable.
Second, assertion of an exemption prior to judgment may be impossible. Attachment is an ex parte proceeding; a writ can be obtained by filing the appropriate documents with the clerk of the court. I.C. XX-X-XX-X. Other than the constructive notice obtained through plaintiff's filing of a lis pendens notice, a defendant may not even know his property has been attached. It would be most unfair to require a defendant to assert an exemption when he might not even be aware of the attachment on his property.
Third, and perhaps most important, the language of the homestead exemption itself suggests that it applies to...
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