Sanderfoot, In re, No. 88-3148

CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)
Citation899 F.2d 598
Docket NumberNo. 88-3148
Parties, 22 Collier Bankr.Cas.2d 780, 20 Bankr.Ct.Dec. 651, Bankr. L. Rep. P 73,322 In re Gerald J. SANDERFOOT, Debtor. Jeanne FARREY, f/k/a Jeanne Sanderfoot, Objector-Appellant, v. Gerald J. SANDERFOOT, Debtor-Appellee.
Decision Date30 March 1990

Charles J. Hertel, David Crist, Dempsey, Magnusen, Williamson & Lampe, Oshkosh, Wis., for objector-appellant.

Harvey G. Samson, Bollenbeck, Block, Seymour, Rowland & Samson, Appleton, Wis., for debtor-appellee.

Before POSNER and RIPPLE, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

RIPPLE, Circuit Judge.

Jeanne Farrey, formerly known as Jeanne Sanderfoot, appeals from the district

court's order reversing the bankruptcy court's determination that Gerald Sanderfoot could not avoid, pursuant to 11 U.S.C. Sec. 522(f), a lien held by Ms. Farrey on Mr. Sanderfoot's homestead property. Because we agree with the district court that the lien is avoidable, we affirm.

A. Facts

Jeanne and Gerald Sanderfoot were married on August 12, 1966. The Wisconsin Circuit Court for Outagamie County granted a judgment of divorce and property division on September 12, 1986, and entered a written judgment of divorce on February 5, 1987. The court awarded Ms. Farrey half the refund and/or liability with respect to the couple's 1985 income taxes, certain personal property, and half the proceeds of items ordered sold at auction. The marital home, valued by the court at $104,000.00, and all remaining personal property were awarded to Mr. Sanderfoot. 1

After all assets and debts were assigned to the parties, Ms. Farrey was left with a net estate of $1,091.90, while Mr. Sanderfoot had a net estate of $59,508.79. To achieve a more appropriate distribution, the court ordered Mr. Sanderfoot to pay Ms. Farrey $29,208.44. Mr. Sanderfoot was to pay half that amount ($14,604.22) on or before January 10, 1987; the remaining portion was due on or before April 10, 1987. To secure this debt, the court awarded Ms. Farrey a lien against the home to remain attached until the debt was paid in full. 2 Mr. Sanderfoot has not yet paid any part of the debt. Accordingly, Ms. Farrey has not relinquished her record title interest in the property.

Mr. Sanderfoot voluntarily filed for Chapter 7 bankruptcy on May 4, 1987, and listed the residential home on his schedule of assets. He identified the real estate as his homestead and claimed it was exempt property pursuant to Wis.Stat. Sec. 815.20. 3

B. The Bankruptcy Court

Pursuant to 11 U.S.C. Sec. 522(f)(1), 4 Mr. Sanderfoot moved to avoid the lien against his property. Ms. Farrey filed her objection to the motion, claiming section 522(f)(1) could not operate to divest her of her interest

                in the marital home. 5   The United States Bankruptcy Court for the Eastern District of Wisconsin denied Mr. Sanderfoot's motion on March 9, 1988.  The bankruptcy court applied the reasoning of In re Boyd, 741 F.2d 1112, 1114-15 (8th Cir.1984), which held that a lien created by a divorce decree protects the non-debtor spouse's preexisting interest in the marital home and thus does not attach to the debtor's interest.  In this case, the court determined that Mr. Sanderfoot acquired his interest in the property by virtue of the divorce decree and took that interest subject to Ms. Farrey's lien.  In re Sanderfoot, 83 B.R. 564, 567-68 (Bankr.E.D.Wis.1988).  Consequently, the court held that, even though the lien impaired Mr. Sanderfoot's exemption, it could not be avoided because it did not attach to his interest in the home
C. The District Court

In determining whether the requirements of section 522(f) had been satisfied, the district court concluded that there was "no dispute that the lien is a judicial lien that impairs Mr. Sanderfoot's homestead exemption." 6 In re Sanderfoot, 92 B.R. 802, 803 (E.D.Wis.1988). The court rejected the reasoning of Boyd and held that the divorce decree both extinguished all preexisting interests and simultaneously created new interests. Accordingly, the bankruptcy court's order denying Mr. Sanderfoot's motion to avoid the lien under section 522(f)(1) was reversed. Ms. Farrey filed a timely notice of appeal on November 3, 1988.

A. Standard of review

The issue before the court is whether 11 U.S.C. Sec. 522(f)(1) allows a bankruptcy debtor to avoid a lien against his homestead where the lien was granted to the debtor's former spouse under a divorce decree. There are no questions of fact. The issue is one of law, subject to de novo review. See Park Terrace Townhouses v. Wilds, 852 F.2d 1019, 1021 (7th Cir.1988); In re Evanston Motor Co., Inc., 735 F.2d 1029, 1031 (7th Cir.1984).

B. Lien avoidance under 11 U.S.C. Sec. 522(f)

The inquiry in this case is the proper interpretation of section 522(f)(1). Though the issue seems straightforward, courts have had "some difficulty in defining precisely the interest of an ex-spouse arising out of a property settlement made during a divorce proceeding." In re Donahue, 862 F.2d 259, 262 (10th Cir.1988). The issue is one of first impression in the Seventh Circuit, though this "difficulty" has led to a split among the courts of appeals that have examined the statute. Compare In re Borman, 886 F.2d 273 (10th Cir.1989) and Boyd v. Robinson, 741 F.2d 1112 (8th Cir.1984) with In re Pederson, 875 F.2d 781 (9th Cir.1989) and Maus v. Maus, 837 F.2d 935 (10th Cir.1988). The bankruptcy and district courts that have "wade[d] into waters muddied before [them]" are similarly divided. In re Rittenhouse, 103 B.R. 250, 252 (D.Kan.1989).

Interpretation of a statute must begin with the statute's plain language. United States v. Ron Pair Enterprises, Inc., --- U.S. ----, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989); United States v. Rosado, 866 F.2d 967, 969 (7th Cir.), cert. denied, --- U.S. ----, 110 S.Ct. 117, 107 L.Ed.2d 79 (1989). In this case, the bankruptcy code defines most of the terms relevant to our analysis of the nature of Ms. Farrey's lien. A "lien" is a "charge against or interest in property to secure payment of a debt or performance of an obligation." 11 U.S.C. Sec. 101(33). The parties do not contest the conclusion that Ms. Farrey has a lien as that term is defined. Rather, their disagreement arises from contrary interpretations of the application of section 522(f)(1), which allows the debtor to avoid liens if three requirements are met:

(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 Sanderfoot, 92 B.R. at 803 (citing In re Hart, 50 B.R. 956, 960 (Bankr.D.Nev.1985)). We shall analyze each of these requirements.

1. Is the lien fixed on an interest of the debtor?

Ms. Farrey first claims that her lien does not attach to Mr. Sanderfoot's interest in his homestead. The bankruptcy court agreed with this position and found that Mr. Sanderfoot could not avoid the lien because it did not attach to his interest in the property. 83 B.R. at 568-70. The district court rejected that argument, as has the only other Wisconsin court that has examined this issue. See In re Duncan, 85 B.R. 80, 82 (W.D.Wis.1988) (discussed infra ).

The Tenth Circuit noted in Maus v. Maus, 837 F.2d 935, 939 (10th Cir.1988) that "[m]any courts have struggled to find theories under which a lien to enforce a property settlement survives bankruptcy." The "survival" theory that numerous courts have relied upon, including the bankruptcy court in this case, was first articulated in Boyd v. Robinson, 741 F.2d 1112 (8th Cir.1984). In Boyd, the debtor commenced a bankruptcy action seeking to avoid her ex-husband's lien, acquired during the parties' divorce proceeding, on their former homestead. The Eighth Circuit held that liens granted by a divorce decree do not attach to an interest of the debtor, but rather protect a preexisting property right of the non-debtor spouse in the marital home arising under state law during the marriage. Id. at 1114-15. The court determined that applicable Minnesota law recognized the non-debtor spouse's property interest in a homestead acquired during the marriage with marital assets or assets contributed by that spouse. Id. at 1114. Since Boyd, several courts similarly have recognized the non-debtor spouse's preexisting rights in the marital home and refused to let the debtor avoid the lien. 7

Other courts have declined to follow the Eighth Circuit's rationale. In In re Pederson, 875 F.2d 781 (9th Cir.1989), a split panel of the Ninth Circuit expressly repudiated Boyd and determined that a lien granted in a divorce proceeding to a non-debtor spouse against the debtor's property was subject to avoidance. The Pederson court rejected the Eighth Circuit's analysis that the debtor's lien attached to a preexisting interest in the property. In the Ninth Circuit's view, the state court awarded the homestead to the non-debtor spouse before imposing the lien. Id. at 783. The debtor spouse had an interest in the property prior to the order of dissolution, but

"that is all it was--pre-existing. [The non-debtor's] prior interest in the house was dissolved. In its place, the court gave him a debt ... enforceable by a lien on the house. What had been a property interest became simply collateral for a debt. Since the house was simultaneously vested solely in [the debtor spouse], the lien must have attached to her interest in the house, for no one else possessed any ownership interest in the house."

Id. (quoting Boyd, 741 F.2d at 1115 (Ross, J., dissenting) (emphasis in original)).

The Tenth Circuit also rejected the reasoning of Boyd in Maus v. Maus, 837 F.2d 935 (10th Cir.1988). 8 There, a settlement agreement incorporated in the divorce judgment awarded the debtor the marital home subject to a lien 9 in favor of the non-debtor spouse. Because the ...

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