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In the context of judicial-lien avoidance, the petition date is the proper date for assessing the property’s value.

By Alexander Beeby posted 09-26-2021 14:21

Contributing Editor: C.J. HaraydaFaegre Drinker

In Waltrip v. Sawyers (In re Sawyers), 2 F.4th 1133 (8th Cir. July 2, 2021), the Court of Appeals for the Eighth Circuit considered whether it was clearly erroneous for the bankruptcy court to hold that a judicial lien could be avoided based on the value of the debtor’s homestead as of the petition date rather than the value of the property enhanced by the amount of insurance proceeds received by the debtor due to destruction by a prepetition fire. The BAP previously affirmed the grant of summary judgment in favor of the debtor.

The appellant had a prepetition judicial lien on the debtor's primary residence for more than $250,000. The residence was damaged in a prepetition fire. The debtor received insurance proceeds of $132,000 to repair the damage to her residence. The appellant did not have a lien in the insurance proceeds. As of the petition date, the value of the home was estimated to be $3,000–6,000. The debtor claimed a homestead exemption in the amount of $15,000 under Missouri statute, and the Chapter 7 trustee abandoned all of the debtor's assets. After the debtor received the discharge and the case was closed, the appellant instituted a sheriff's sale on the debtor’s residence.  The debtor reopened the case to avoid the debtor's lien under 11 U.S.C § 522(f) to the extent it limited her exemptions. The bankruptcy court granted summary judgment in favor of the debtor avoiding the lien, and the lienholder appealed.

The appellant argued that the valuation of the debtor's residence should have included the insurance proceeds she received. The Eighth Circuit found the appellant's argument unavailing and that there was no precedent to support that approach to the valuation. Instead, the court relied on cases that had similarly excluded insurance proceeds from valuation as exempt. The Eight Circuit agreed with the bankruptcy court that the proper time to value the residence was as of the petition date, without inclusion of the insurance proceeds and that avoiding the lien would not result in a windfall to the debtor. It accordingly affirmed the bankruptcy court’s decision.

Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman Daly & Lindgren Ltd.
Kesha Tanabe, Tanabe Law