Bankruptcy Judge Karen S. Jennemann of Orlando, Fla., used her common sense rather than slavish adherence to “plain language” to reach a result that Congress undoubtedly intended.
Fortunately, Judge Jennemann is not an outlier. Her October 29 opinion sides with the majority, including the First Circuit, in preserving a debtor’s ability to avoid a judicial lien that impairs a homestead exemption.
Ten years before bankruptcy, a bank foreclosed real property owned by the debtor. The lender obtained a $95,000 deficiency judgment. The lender recorded the judgment, which became a lien on the debtor’s home.
In 2021, the debtor filed a chapter 7 petition and moved to avoid the judgment lien as an impairment of her homestead exemption under Section 522(f). The holder of the judgment lien objected, pointing to Section 522(f)(2)(C), which says, “This paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure.”
Adhering to the plain language of Section 522(f)(2)(C), the lender argued that the deficiency judgment arose “out of a mortgage foreclosure” and thus could not be avoided.
Judge Jennemann stated the issue as being “whether a mortgage deficiency judgment lien is a ‘judgment arising out of a mortgage foreclosure’ within the meaning of § 522(f)(2)(C).”
Judge Jennemann began her analysis by quoting the Supreme Court in a 1991 decision that came down before “plain meaning” took over as the primary method of statutory interpretation. In Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991), the Court said that “Congress enacted § 522(f) with the broad purpose of protecting the debtor’s exempt property.”
The courts are split, Judge Jennemann said, but the “overwhelming majority” hold that mortgage deficiency liens are not judgments that arise out of a mortgage foreclosure and are therefore avoidable.
The First Circuit, Judge Jennemann said, had the “most persuasive” rationale in Banknorth, N.A. v. Hart (In re Hart), 328 F.3d 45 (1st Cir. 2003). The Boston-based appeals court said that Congress adopted Section 522(f)(2)(C) “to contrast mortgage foreclosure judgments from liens which are avoidable under § 522(f).” Id. at 49.
In other words, the First Circuit said, “a foreclosure judgment does not convert the underlying consensual mortgage into a judicial lien which may be avoided. Mortgage foreclosure judgments do not become judicial liens subject to avoidance under § 522.” Id.
Judge Jennemann paraphrased the First Circuit as holding that “deficiency judgment liens are subject to avoidance under § 522(f) regardless of the underlying state foreclosure process.”
Following the First Circuit, Judge Jennemann granted the motion to avoid the judgment lien, even though it arose from a mortgage foreclosure.
Bankruptcy Judge Karen S. Jennemann of Orlando, Fla., used her common sense rather than slavish adherence to “plain language” to reach a result that Congress undoubtedly intended.
Fortunately, Judge Jennemann is not an outlier. Her October 29 opinion sides with the majority, including the First Circuit, in preserving a debtor’s ability to avoid a judicial lien that impairs a homestead exemption.
Ten years before bankruptcy, a bank foreclosed real property owned by the debtor. The lender obtained a $95,000 deficiency judgment. The lender recorded the judgment, which became a lien on the debtor’s home.
In 2021, the debtor filed a chapter 7 petition and moved to avoid the judgment lien as an impairment of her homestead exemption under Section 522(f). The holder of the judgment lien objected, pointing to Section 522(f)(2)(C), which says, “This paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure.”
Adhering to the plain language of Section 522(f)(2)(C), the lender argued that the deficiency judgment arose “out of a mortgage foreclosure” and thus could not be avoided.
Judge Jennemann stated the issue as being “whether a mortgage deficiency judgment lien is a ‘judgment arising out of a mortgage foreclosure’ within the meaning of § 522(f)(2)(C).”