Weinstein, In re

Citation164 F.3d 677
Decision Date05 October 1998
Docket NumberNo. 98-1365,98-1365
PartiesIn re Harry W. WEINSTEIN, Debtor. Patriot Portfolio, LLC, Appellant, v. Harry W. Weinstein, et al., Appellees. . Heard
CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)

Jeffrey D. Ganz, with whom Kevin J. Simard and Riemer & Braunstein were on brief, for appellant.

Joseph P. Bernardo for appellees.

Anne M. Lobell, Attorney, Appellate Staff, Civil Division, U.S. Department of Justice, with whom Frank W. Hunger, Assistant Attorney General, Donald K. Stern, United States Attorney, and William Kanter, Attorney, were on brief for the United States.

John Rao and National Consumer Law Center, Inc. on brief for National Association of Consumer Bankruptcy Attorneys, amicus curiae.

Before BOUDIN, Circuit Judge, REAVLEY, * Senior Circuit Judge, and LIPEZ, Circuit Judge.

REAVLEY, Circuit Judge.

The question in this bankruptcy appeal is whether, under 11 U.S.C. § 522, a Chapter 7 debtor may assert a homestead exemption for his residence acquired after a debt and attachment of a lien, despite the Massachusetts statute excepting the preexisting lien and debt from homestead protection. The bankruptcy and district courts allowed the homestead protection because Bankruptcy Code § 522 preempted the state exceptions. We affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

The dispute centers on a debt and judicial lien, currently held by Patriot Portfolio, LLC ("Patriot"), and recorded against Harry W. Weinstein's residence in Massachusetts. The judgment lien was recorded on August 4, 1992, at which time Weinstein had owned the property for more than two decades. On April 2, 1996, Weinstein acquired an estate of homestead under Massachusetts law by recording a Declaration of Homestead pursuant to the Massachusetts Homestead Act, Mass. Gen. Laws ch. 188.

On August 26, 1996, Weinstein filed a voluntary bankruptcy petition under Chapter 7 of the Bankruptcy Code. In his petition, Weinstein claimed a $55,000 homestead exemption in his residence under the Massachusetts homestead statute. Patriot filed an objection, arguing that because both its lien and the underlying debt from which it derived predated Weinstein's acquisition of the estate of homestead, according to section 1(2) of the homestead statute, the exemption does not apply. The bankruptcy court and district court allowed Weinstein to avoid Patriot's assertion, concluding that the Massachusetts provisions excepting prior contracted debts and preexisting liens from homestead protection were preempted by § 522 of the Code. Because the state exceptions did not apply in bankruptcy, the court avoided Patriot's lien under § 522(f) because, absent the lien, Weinstein would have been entitled to the Massachusetts homestead exemption. The district court affirmed.

II. ANALYSIS
A. Lien Avoidance Under § 522(f)

Bankruptcy Code § 522 allows a debtor to exempt certain property from the bankruptcy estate that the trustee distributes to creditors. See 11 U.S.C. § 522. If the state has not opted out of the federal exemption scheme, § 522(b) allows the debtor to choose between the federal bankruptcy exemptions listed in § 522(d), other nonbankruptcy federal law, and exemptions under state or local law. 1

Once the debtor has claimed property as exempt, § 522(c) provides that such exempt property is not liable for any pre-petition debt except the specific types enumerated in § 522(c)(1)-(3). These types of debt include debts for certain taxes and customs duties; debt for alimony, maintenance, or support; liens that cannot be avoided; liens that are not void; tax liens; and certain nondischargeable debts owed to federal depository institutions. 2 See 11 U.S.C. § 522(c). Assuming for the moment that Patriot's lien can be avoided, none of the above types of debt apply to the facts of this case.

Weinstein chose the state exemption scheme and claimed a $55,000 homestead exemption under the Massachusetts Homestead Act, which provides:

An estate of homestead to the extent of one hundred thousand dollars in the land and buildings may be acquired pursuant to this chapter by an owner or owners of a home ... who occupy or intend to occupy said home as a principal residence. Said estate shall be exempt from the laws of conveyance, descent, devise, attachment, levy on execution and sale for payment of debts or legacies except in the following cases:

(1) sale for taxes;

(2) for a debt contracted prior to the acquisition of said estate of homestead; ....

Mass. Gen. Laws ch. 188, § 1 (emphasis added). Additionally, section 5 of the homestead statute withholds homestead protection from any preexisting lien. Specifically, the statute states: "No estate of homestead shall affect a mortgage, lien or other encumbrance previously existing." Id. § 5.

Bankruptcy Code § 522(f) governs lien avoidance. This provision allows avoidance of a judicial lien to the extent the lien impairs an exemption to which the debtor would otherwise be entitled. Section 522(f) provides:

Notwithstanding any waiver of exemptions ... 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....

11 U.S.C. § 522(f)(1) (emphasis added). The United States Supreme Court interpreted the requirements of § 522(f) in two 1991 decisions. In Farrey v. Sanderfoot, the Court held that in order to "avoid the fixing of a lien on an interest of the debtor in property" under § 522(f), the debtor must have "possessed the interest to which the lien fixed, before it fixed." 500 U.S. 291, 299, 111 S.Ct. 1825, 1830, 114 L.Ed.2d 337 (1991). In Owen v. Owen, the Court held that to determine whether a lien "impairs an exemption to which the debtor would have been entitled" under § 522(f), the proper question to ask is not whether the lien impairs an exemption to which the debtor is in fact entitled, but rather whether the lien impairs a state or federal exemption to which the debtor would have been entitled but for the lien itself. See 500 U.S. 305, 310-13, 111 S.Ct. 1833, 1836-38, 114 L.Ed.2d 350 (1991). In short, two requirements must be met before a debtor can avoid a lien under § 522(f): (1) the debtor must have had an ownership interest in the property before the lien attached; and (2) avoidance of the lien must entitle the debtor to a state or federal exemption.

We begin our analysis with the Supreme Court's decision in Owen and assume for the moment that the prior contracted debt exception is preempted by the Bankruptcy Code. In Owen, the Supreme Court considered whether a Chapter 7 debtor can avoid a judicial lien encumbering exempt property, even though the State has defined the exempt property to specifically exclude property encumbered by preexisting liens, i.e., liens that attached before the property acquired its homestead status. See 500 U.S. at 306-07, 111 S.Ct. at 1834-35. At the same time the debtor purchased a condominium in Sarasota County, Florida, a judgment lien previously recorded by the debtor's former wife immediately attached to the property. See id. The debtor did not qualify for the homestead exemption until a year after he purchased the property, when Florida broadened its homestead exemption. See id. at 307, 111 S.Ct. at 1835. When the debtor later filed for bankruptcy under Chapter 7, he claimed a homestead exemption in the condominium. Following discharge, the bankruptcy court denied the debtor's motion to avoid the lien under § 522(f). The district court and the Eleventh Circuit both affirmed. See id. at 307-08, 111 S.Ct. at 1835.

The Supreme Court, however, rejected the interpretation of § 522(f) urged by the creditor and employed by the courts below--that the state exemption statute's built-in limitations are fully operative in bankruptcy. Under the creditor's view, the lien obviously did not impair the debtor's homestead exemption since under Florida law, the exemption does not apply to preexisting liens. See id. at 309, 111 S.Ct. at 1836. Noting that bankruptcy courts had uniformly rejected this approach with respect to federal exemptions, the Supreme Court saw no justification for treating federal and state exemptions differently. See id. at 310-13, 111 S.Ct. at 1836-38. Tracking the language of the Code, the Supreme Court held that when applying § 522(f) to either federal or state exemptions, the question is "not whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which [the debtor] would have been entitled but for the lien itself." Id. at 310-11, 111 S.Ct. at 1836-37. In other words, if "avoiding the lien would entitle the debtor to an exemption ... then avoid and recover the lien." Id. at 312-13, 111 S.Ct. at 1837. In reaching this conclusion, the Owen Court expressly rejected the notion that because the Code's "opt-out" policy allows States to define their own exemptions, those exemptions must be applied with all their built-in limitations. See id. at 313, 111 S.Ct. at 1838 ("We have no basis for pronouncing the opt-out policy absolute, but must apply it along with whatever other competing or limiting policies the statute contains."). The Court ultimately concluded that Florida's exception for preexisting liens did not preclude avoidance of the lien in bankruptcy under § 522(f):

On the basis of the analysis we have set forth above with respect to federal exemptions, and in light of the equivalency of treatment accorded to federal and state exemptions by § 522(f), we conclude that Florida's exclusion of certain liens from the scope of its homestead protection does not achieve a similar exclusion from the Bankruptcy Code's lien avoidance provision.

Id. at 313-14, 111 S.Ct. at 1838. The Supreme Court then remanded the case to the Eleventh Circuit to determine if the requirements of Farrey...

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