Bankruptcy Judge Joseph G. Rosania, Jr., of Denver told holders of judicial liens how to prevent loss of their liens if chapter 13 debtors avoid the liens as impairments on homestead exemptions, but turn around and sell the homes and dismiss the cases before discharge.

To avoid holding the reader in suspense, here’s the answer: Judge Rosania suggested having the judicial lienholder object to revesting the home in the debtor on confirmation of a chapter 13 plan. As a fallback, the lender still has its state-law remedies.

The Home and the Liens

The chapter 13 debtors owned a home with a $700,000 mortgage. There was a tax lien of about $14,000 plus a judicial lien of about $1,500. The homestead exemption in Colorado is $250,000.

Conveniently, the debtors scheduled the home as worth $952,000 and filed a motion to avoid the $1,500 judicial lien as an impairment of the debtors’ homestead exemption under Section 522(f). The subsection allows a debtor to “avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption . . . , if such lien is — (A) a judicial lien . . . .”

The debtors moved to avoid the judicial lien before confirmation. The lienholder did not object to confirmation, so Judge Rosania confirmed the plan, which revested estate property in the debtor on confirmation, in accordance with the standard confirmation order in the district.

The motion to avoid the judicial lien came on for hearing after confirmation. The lienholder didn’t want the lien avoidance to become effective until the debtors received their discharges. As Judge Rosania explained, the lienholder reasoned that “the Debtors could obtain a windfall if the Residence is sold prior to the completion of the plan and the Debtors thereafter dismiss their bankruptcy case.”

The objection also brought Section 349(b)(1)(B) into play. It provides that “dismissal of a case . . . reinstates — . . . any transfer avoided under section 522 . . . .”

The debtors opposed the objection, pleading with Judge Rosania to give lien avoidance immediate effect as other judges in the district had done.

The Rationale for Delaying Avoidance

Judge Rosania cited “a series of bankruptcy decisions outside this District that express the view that the avoidance of the lien is delayed until the debtor receives a discharge.” They reason that the protections in Section 349(b)(1)(B) are “ineffectual” in reinstating the judicial lien if the property is sold after confirmation, because the lien cannot reattach to the property.

Before turning to the operation of the Bankruptcy Code, Judge Rosania explained that Colorado allows a judicial lien to attach to a homestead if there is equity in the property above consensual liens and the homestead exemption. The judicial lienholder conceded that there was no equity to cover the lien as of the filing date, but contended that the property could appreciate in value over the five-year life of the plan.

Estate Termination in the Tenth Circuit

Judge Rosania cited Rodriguez v. Barrera (In re Barrera), 22 F.4d 1217 (10th Cir. 2022), and explained how the Tenth Circuit “terminates the estate’s interest in the pre-petition property upon confirmation, and any proceeds resulting from a sale of property belong to the debtor, not the estate.” To read ABI’s report on Barrera, click here.

As a result, Judge Rosania said that a debtor may sell property after confirmation without court order and without notice to creditors or the chapter 13 trustee. “Without modification to the vesting provision of a chapter 13 plan,” he concluded, “a court cannot place restrictions on the lawful use or sale of the property.” Consequently, he said it had been his practice and that of “other courts in this District to grant the avoidance of the lien without restriction, or delayed effectiveness.”

The judicial lienholder had not objected to the provision in the plan revesting property in the debtor on confirmation. In view of Law v. Siegel, 571 U.S. 415 (2014), Judge Rosania saw “no reading of 11 U.S.C. § 522(f) that allows a court to impose restrictions in contravention of and beyond the plain language of the statute conditioning how or when the judicial lien is avoided.”

Judge Rosania therefore “decline[d] to impose judicially crafted conditions to the avoidance of liens that are not contained in 11 U.S.C. § 522. The avoidance of the lien has an immediate effect and is not delayed until the completion of the chapter 13 plan and entry of discharge.” Furthermore, he said that the idea of having the trustee hold sale proceeds in escrow “is found nowhere in the Bankruptcy Code and places an undue burden and potential liability on the chapter 13 Trustee.”

“The Bankruptcy Code,” Judge Rosania said, “provides avenues to protect a judgment creditor against this theoretical situation through the plan confirmation process but does not grant authority under 11 U.S.C. § 522(f) to condition the avoidance of a lien.”

Granting the motion to avoid the judicial lien, Judge Rosania offered the lienholder a fig leaf by saying that it “will have access to all collection remedies provided under Colorado state law, including the attachment of the judicial lien against after-acquired real estate.”