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Where There is No Lien, There is No Lien Avoidance

By Karl Johnson posted 08-19-2019 02:25 PM

  
​BANKRUPTCY BULLETIN
Editors-in-Chief
Karl Johnson, Briggs and Morgan, P.A.
Alexander J. Beeby, Larkin Hoffman DalyLindgren Ltd

 Contributing Editor: Amanda Schlitz, U.S. Bank
Mus_3_1_19.pdf

In In re Mus, 598 B.R. 623 (Bankr. D. Minn. Mar. 1, 2019) (Ridgway, J.), the Bankruptcy Court addressed the power of the debtor to avoid judicial liens pursuant to 11 U.S.C. § 522(f). The debtor had reopened his bankruptcy case and sought to avoid a number of purported “judicial liens” – three money judgments and four orders arising out of his divorce and related state court proceedings, which the state court described as “substantial and tortured.” The debtor claimed all of those liens impaired his homestead exemption.

Section 522(f) of the Bankruptcy Code gives the debtor a powerful tool to extinguish a judicial creditor’s lien on property that, but for the creditor’s judgment, the debtor would have been able to exempt. Consensual, statutory and tax liens are not “judicial liens” subject to avoidance under section 522(f), and a judicial lien securing a nondischargeable domestic support obligation (“DSO”) is specifically precluded from avoidance.

There are three requirements for a debtor to avoid a judicial lien under section 522(f):

(1) the lien must have affixed to an interest of the debtor in property;

(2) the lien must impair an exemption to which the debtor would have been entitled; and

(3) the lien must be a judicial lien other than one that secures a debt that is a DSO.

In Mus, the Bankruptcy Court clarified the misconception that a debtor must have equity in the property in order to avoid liens under this provision – a debtor need not have equity in the property, only an interest. Impairment is a “mathematical test” and the statute provides a formula to determine whether a lien impairs an exemption: Sum of the liens to be avoided + All other liens on the property (i.e., mortgage, mechanic’s lien, tax lien, etc.) + Amount of the exemption the debtor could claim – Value of the debtor’s interest in the property = Amount by which liens exceed the debtor’s interest in the property. 522(f)(2)(A). Stated another way:

Sum of the liens to be avoided (Judgment lien 1 + Judgment lien 2, etc.)

Add        All other liens on the property (i.e., mortgage, mechanic’s lien, tax lien, etc.)

Add        Amount of the exemption the debtor could claim

=             Subtotal

Less        Value of the debtor’s interest in the property

=             Amount by which liens exceed the debtor’s interest in the property

 

Applying this formula to the three money judgments, the court found the liens + the amount of the exemption the debtor could claim significantly exceeded the debtor’s interest in the property, and therefore were avoidable as they impaired the debtor’s exemption.

However, the analysis differed as to the four orders emanating from the parties’ divorce and related state court proceedings – there, the Bankruptcy Court considered three issues: (1) whether the Rooker-Feldman doctrine precluded it from ruling on the debtor’s motion to avoid the liens; (2) whether the state court orders meet the definition of a “judicial lien”; and (3) whether the debtor had an interest in the property to which a lien from the state court orders fixed.

  • Rooker-Feldman Doctrine Was Not Applicable in this Case

The Bankruptcy Court found that the debtor’s request was not a collateral attack on the validity of the state court judgments. Rather, it was a “core” proceeding to avoid a lien, which a bankruptcy court is uniquely situated to consider. The Bankruptcy Court had the authority and ability to hear the debtor’s request under 28 U.S.C. § 157(b)(2)(B), (K), so the Rooker-Feldman doctrine was inapplicable.

  • The State Court Orders Were Not “Judicial Liens” Subject to Avoidance.

The state court orders at issue involved the right of occupancy to the property that the parties lived in during their marriage. The court analyzed whether those orders were “judicial liens,” and in doing so looked to several definitions in the Bankruptcy Code and Minnesota statute:

  • “Judicial liens” – defined by 11 U.S.C. § 101(36) as liens “obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
  • “Lien” – defined by 11 U.S.C. § 101(37) as “a charge against or interest in property to secure payment of a debt or performance of an obligation.”
  • “Lien” – also defined by Minn. Stat. § 513.41(9) as “a charge against or an interest in property to secure payment of a debt or performance of an obligation, and includes a security interest created by agreement, a judicial lien obtained by legal or equitable process or proceedings, a common-law lien, or a statutory lien.”
  • “Debt” – defined by 11 U.S.C. § 101(12) as “liability on a claim”
  • “Claim” – defined by 11 U.S.C. § 101(5)(A), (B) as a “right to payment, . . . ; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, . . . .”

Here, none of the state court orders imposed a payment obligation on the debtor that would attach to the property. The court read the statutory language defining a “lien” as a “charge against or interest in property” that is “to secure payment of a debt” or “to secure performance of an obligation.” None of the orders contained language suggesting the property was subject to a lien as security for payment of debt; they simply modified the terms of the parties’ divorce decree to prohibit the debtor’s occupancy of the property. Since those state court orders were not “liens,” let alone “judicial liens,” they were not subject to avoidance.

  • Where There is No Lien, There Can Be No Lien Avoidance.

Having found that the state court orders arising out of the parties’ divorce and related proceedings were not “liens,” the Bankruptcy Court looked to recent case law from the Eighth Circuit Court of Appeals stating that if a “judgment fails to give rise to any judicial lien . . . , § 522(f)(1) is superfluous and without application.” CRP Holdings A-1, LLC v. O’Sullivan (In re O’Sullivan), 914 F.3d 1162, 1166-67 (8th Cir. 2019) (citations omitted). The Bankruptcy Court concisely held that “where there is no lien, there can be no lien avoidance” and denied the debtor’s motion to avoid those state court orders.

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