A Judgment Lien on Entireties Property Is Avoidable in Missouri, Eighth Circuit Says

May a debtor avoid a judicial lien on a homestead under Section 522(f) when the judgment is against the debtor but not also against the debtor’s spouse?

The results vary depending on state law, but the Eighth Circuit has ruled that a judicial lien is avoidable in Missouri as an impairment of the debtor’s homestead exemption.

A husband and wife owned their home as tenants by the entireties. A creditor obtained a judgment of almost $800,000 against the husband but not also against the wife. The creditor domesticated the judgment by making the required filing in the Missouri county where the husband and wife owned their home.

The wife did not file bankruptcy when her husband became a chapter 7 debtor. The husband moved to “avoid” the judicial lien on the homestead under Section 522(f), claiming 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.

The judgment creditor appealed, to lose again in a February 1 opinion by Chief Circuit Judge Lavenski R. Smith.

Section 522(f) permits a debtor to “avoid the fixing of a [judicial] lien on an interest of the debtor in property to the extent such lien impairs an exemption . . . .”

Other statutory definitions are pivotal. Section 101(37) defines “judicial liens” as liens “obtained by judgment, levy, sequestration or other legal or equitable process . . . .” 

A judicial lien is a subset of the term “lien,” which is defined in Section 101(36) as a “charge against or interest in property to secure payment of a debt . . . .”

The Eighth Circuit previously had said that the broad definition of “lien” suggests that “lien” includes charges against property that are both enforceable and unenforceable.

Judge Smith addressed the question of whether the domestication of the judgment gave rise to a lien on the debtor’s property under Missouri law. Judge Smith noted how other circuits distinguish between nonexistent liens and those that are presently unenforceable. Given that the judgment creditor could not foreclose the judgment lien on the homestead, was there no lien at all, or was there a lien, albeit unenforceable?

Having laid the groundwork, Judge Smith plunged into the details of Missouri property law.

In Missouri, judgments give rise to liens on “real estate.” The term “real estate,” however, is narrowly defined to mean property that may be sold upon execution. Because the home was entireties property, it was not subject to execution. Therefore, a judgment against only one spouse was not a lien on real property under Missouri law.

Had Judge Smith ended the analysis there, the debtor would have lost. However, there was more to explore under Missouri law.

Although there was no lien under Missouri law, there was a cloud on title under Missouri law, Judge Smith said. A cloud on title, he said, “constitutes a ‘charge against or interest in the property,” citing the definition of “lien” under Section 101(37).

Although there was no lien under state law, there nonetheless was “a ‘lien’ as federal law defines it because a ‘cloud on title’ to the property exists under Missouri law,” Judge Smith said.

Piecing the definitions together, Judge Smith affirmed the lower courts by holding that the debtor could avoid the lien because recording the judgment gave rise to a presently unenforceable lien on the homestead that was a cloud on title.

Because state laws differ, a judicial lien may not be avoidable elsewhere. For example, see In re Jaffe, 568 B.R. 292 (Bankr. N.D. Ill. 2017), holding that a judicial lien under similar circumstances is not avoidable in Illinois.

In states where the lien is not avoidable, the debt is nonetheless dischargeable as personal liability of the debtor. In those states, the lien would ride through chapter 7.