Although state law governs a debtor’s interest in property, federal bankruptcy law defines a “lien.” Consequently, something that is not a “lien” under state law may nonetheless qualify as a lien that can be avoided under Section 522(f)(1), according to Bankruptcy Judge Cynthia A. Norton of Kansas City, Mo.
Judge Norton’s March 17 opinion resulted from a remand from the Eighth Circuit, which we reported in November. To read the story, click here.
A creditor obtained a judgment of almost $800,000 against a husband. The creditor recorded the judgment 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, who did not file bankruptcy alongside her husband’s chapter 7 petition. 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, although the panel was not sure there was any lien to avoid. In November, the Eighth Circuit remanded the case for the bankruptcy judge to decide whether there was any lien, enforceable or not, under Missouri law.
Judge Norton said that Missouri courts for 120 years have recognized that a judgment does not create a lien against exempt homestead property, because the state’s law defines real estate as property that can be sold upon execution. Therefore, Judge Norton said, the judgment was not an enforceable lien on the debtor’s homestead under Missouri law when the debtor filed bankruptcy.
Lacking a lien under Missouri law “does not, however, end the inquiry,” the judge said, because Sections 101(36) and (37) define “judicial lien” and “lien.” Among other things, the term “lien” means an “interest in property.”
Next, Judge Norton said that a lien on an exempt homestead is doubtless a “cloud” on title. A “cloud,” she said, is an interest in property that qualifies as “an existent, but presently unenforceable lien” under the Bankruptcy Code that can be avoided under Section 522(f).
Alternatively, she said that the recorded judgment would be “an interest in property” giving rise to a “judicial lien” that could be avoided for impairing an exemption.
The judgment creditor had another theory, based on the notion that it had a lien on the debtor’s right of survivorship, which would survive bankruptcy to attach if the wife predeceased. According to Judge Norton, the theory “lacks all merit.” She said that Missouri does not recognize survivorship as being different from original entireties ownership.
Even if Judge Norton had decided there was no avoidable judicial lien for federal law purposes, the result for the debtor would have been the same because the Eighth Circuit said the debt in that circumstance would be dischargeable.