The Eighth Circuit and the bankruptcy court are undertaking an analysis of an obtuse question under Missouri law, even though the answer won’t make a hill of beans difference in the debtor’s liability or the creditor’s recovery in bankruptcy.
Although the creditor will have nothing more than an unsecured claim no matter the outcome, the appeals court evidently wants to know the answer just for the sake of knowing the answer.
The issue involves a judicial lien on property owned by a husband and wife as tenants by the entireties. A creditor obtained a judgment of almost $800,000 against the husband and his business. The creditor domesticated the judgment by making the required filing in the county where the husband owned a home together with his wife as tenants by the entireties.
The judgment did not include the wife, and she did not file bankruptcy when the husband became a chapter 7 debtor. The husband moved to “avoid” the judicial lien on the homestead under Section 522(f), saying it impaired the value of his $15,000 homestead exemption.
The bankruptcy court avoided the judicial lien and was upheld by the Bankruptcy Appellate Panel, even though the panel had reservations as to whether there was any lien to avoid in the first place.
In a Nov. 14 opinion, Circuit Judge Diana E. Murphy remanded the case for the bankruptcy judge to decide whether there was any lien, enforceable or not, under Missouri law.
Judge Murphy began from the proposition that the definition of “judicial lien,” in Sections 101(36) and (37), is so broad that a debtor can avoid an inchoate or even unenforceable lien. But “when there is no lien under state law,” there is “nothing to ‘fasten’ upon the property and give rise to an unenforceable lien.”
Judge Murphy then analyzed law from Colorado and Tennessee, where there is no lien on a homestead when a creditor has a judgment against only one spouse. On the other hand, the Fifth Circuit, she said, held that a judgment lien under similar circumstances is perfected but unenforceable under Texas law.
The Eighth Circuit remanded the case to the bankruptcy court to determine whether there was a lien under Missouri law, enforceable or not. If the lien was valid but unenforceable, the circuit court held that Section 522(f) can avoid the lien. On the other hand, if there is no judicial lien, Section 522(f) is “superfluous and without application.”
Either result makes no difference to the debtor in a practical sense. If there is no lien under Missouri law, Judge Murphy said that “the debt would have been discharged through the bankruptcy proceedings.” On the other hand, if there is a lien, she said the lien can be avoided even if it is “presently unenforceable.”