In December, we reported on a decision where Bankruptcy Judge David T. Thuma of Albuquerque, N.M., held that he could avoid a judicial lien based on a judgment for fraud. In re Mirabal, 23-10862, 2024 BL 438307 (Bankr. D.N.M. Dec. 2, 2024). To read ABI’s report, click here.

In Mirabal, Judge Thuma had not yet decided whether the claim was, in fact, nondischargeable. In commentary at the foot of the ABI report in December, we questioned whether the bankruptcy court could avoid a judicial lien placed on the property after the bankruptcy judge decides that the debt was nondischargeable.

As it turns out, Bankruptcy Judge Daniel P. Collins answered that question in an opinion on February 5. Having decided that the debt was nondischargeable, he avoided a judicial lien under Section 522(f) that attached to the debtor’s homestead after filing.

The Judicial Lien Based on a Nondischargeable Debt

A creditor had obtained a default judgment against an individual debtor before she filed bankruptcy. The judgment became a judicial lien on the debtor’s home. The judgment did not state the basis for the claim.

Several months later, the debtor filed a chapter 7 petition and claimed a $400,000 Arizona homestead exemption on her home, which she scheduled with a value of $800,000. The home was subject to a $650,000 mortgage. There having been no objections, the homestead exemption was allowed.

After the exemption was allowed, the judgment creditor filed a complaint, pursuant to which Judge Collins declared that the debt was nondischargeable under Section 523(a)(2). The nondischargeable judgment was recorded and became what Judge Collins referred to as a “Nondischargeable Judgment Lien” against the home.

As impairments on her homestead exemption, the debtor moved under Section 522(f) to avoid both the original judgment lien and the subsequent Nondischargeable Judgment Lien. To avoid a judicial lien, the debtor must prove that she owned the property when the lien attached, establish the existence of the judicial lien, and prove that the lien impairs her homestead exemption.

The elements of judicial lien avoidance were shown, because the debtor had no equity in the home above the mortgage and the state homestead exemption, but that wasn’t the end of the story.

Jurisdiction

The creditor contended that the bankruptcy court had no subject matter jurisdiction because the home was no longer estate property after the exemption was allowed. Indeed, the Ninth Circuit had held in a split decision in 2022 that exempt property is not estate property. U.S. v. Warfield (In re Tillman), 53 F.4th 1160, 1169 (9th Cir. Nov. 18, 2022); cert. den. sub nom. Warfield v. U.S., 144 S. Ct. 1392 (2024). To read ABI’s report, click here.

However, Judge Collins said that “§ 522(f) does not pertain to property of a bankruptcy estate.” He quoted the Ninth Circuit Bankruptcy Appellate Panel for saying that “the ‘right to avoid a lien under § 522(f) is a “personal” right of the debtor which exists independent of the case administration.’” In re Goswami, 304 B.R. 386, 392 (B.A.P. 9th Cir. 2003). He quoted another Ninth Circuit BAP opinion that said that Section 522(f) “was enacted to insulate exempt property from any nondischargeable prepetition debts which are not listed as exceptions.” In re Farr, 278 B.R. 171, 177 (B.A.P. 9th Cir. 2002).

Judge Collins said it “is the debtor’s property interests, not the bankruptcy estate’s property interests, that are implicated in § 522(f).” Were it otherwise, he said that “§ 522(f) motions could never be addressed by a bankruptcy court because the subject property, by definition, must be exempt.”

Judge Collins held that the bankruptcy court had “jurisdiction to enter final orders on exemption issues and this Court has jurisdiction to enter final orders on § 522(f) motions.”

Avoidance of the Prepetition Judgment Lien

There having been no objection to the debtor’s homestead exemption, Judge Collins easily found that the debtor was entitled to avoid the prepetition judgment lien under Section 522(f).

Avoiding the postpetition Nondischargeable Judgment Lien was a more complex question, in light of In re Morgan, 149 B.R. 147, 150 (B.A.P. 9th Cir. 1993). In Morgan, the Ninth Circuit BAP had held that a creditor could challenge the validity of an exemption in defending a lien avoidance action even though the creditor had not raised a timely objection to allowance of the exemption.

Although Judge Collins believes that the opinion is “debatable,” he followed Morgan, having “found no contrary holding by this District’s Article III bench.”

Avoiding Liens that Attach Postpetition?

“On its face,” Judge Collins said, “§ 522(f) does not preclude avoidance of a judgment lien on a debt which is nondischargeable.” He cited Mirabal, where he described Bankruptcy Judge Thuma as having decided that “§ 522(f) could be employed to avoid a pre-bankruptcy judicial lien if the debt was incurred by fraud.”

On point, Judge Collins quoted a decision by Bankruptcy Judge Elaine Hammond from California’s Northern District, who said that “a judgment creditor’s ‘judicial lien . . . recorded post-petition does not prohibit it from being avoided pursuant to 11 U.S.C. § 522(f).’” In re Feathers, No. 13-52816, 2015 WL 1598087 (Bankr. N.D. Cal. Apr. 7, 2015).

Judge Collins said that Feathers reiterates holdings by the Third Circuit and the Tenth Circuit Bankruptcy Appellate Panel. However, he cited the Ninth Circuit BAP for having twice said that lien avoidance is determined as of the filing date.

Judgment Liens for Nondischargeable Debts May Be Avoided

In view of Morgan, Judge Collins said that the judgment creditor’s “objection to the Debtor’s homestead exemption is timely in connection with Debtor’s efforts to avoid the Nondischargeable Lien.” Still, Judge Collins said that he was obliged to “determine whether this Court’s post-Petition Date finding that [the creditor’s] claim is nondischargeable precludes avoidance by the Debtor of the Nondischargeable Lien.”

Judge Collins said that he “agrees” with Mirabal and with “the decision in [In re Farr, 278 B.R. 171, 177 (B.A.P. 9th Cir. 2002)], which held that § 522(f) does not distinguish between dischargeable and nondischargeable judicial liens.”

“Since § 522(f) does not explicitly exclude its applicability to nondischargeable judgments based on fraud (or any other nondischargeable claim beyond certain taxes and DSO’s),” Judge Collins held that “§ 522(f) does not bow to nondischargeable judgment liens which, by their very nature, are post-petition liens.”

Judge Collins went on to hold that “§ 522(f) does not preclude avoidance of a lien recorded against a debtor’s homestead after their bankruptcy was filed, at least until the underlying bankruptcy case is closed.” Since the case before him had not been closed, he avoided the Nondischargeable Judgment Lien and said that the “Debtor’s homestead exemption protects her equity in the Property against [the creditor’s] post-Petition Date Nondischargeable Lien.”