Wilding v. CitiFinancial Consumer Financial Services, Inc.

United States Court of Appeals
For the First Circuit

No. 05-9011

In re DONALD J. WILDING,

Debtor.

DONALD J. WILDING,

Debtor-Appellant,

v.

CITIFINANCIAL CONSUMER FINANCIAL SERVICES, INC.,

Appellee.

APPEAL FROM THE BANKRUPTCY APPELLATE PANEL

FOR THE FIRST CIRCUIT

Before

Torruella and Howard, Circuit Judges,
and Woodlock *, District Judge.

Christopher M. Lefebvre, with whom Law Offices of Claude
Lefebvre & Sons was on brief, for appellant.
Americo M. Scungio, with whom Scungio & Priolo was on brief,
for appellee.

January 30, 2007

*
Of the District of Massachusetts, sitting by designation.
 WOODLOCK, District Judge. The question presented is

whether 11 U.S.C. § 522(f) permits a debtor to avoid a judicial

lien if the lien existed at the filing of the bankruptcy petition

but was satisfied after the bankruptcy case closed and before the

debtor filed a motion to avoid. The Bankruptcy Court and the

Bankruptcy Appellate Panel below concluded that it does not. We

disagree and will remand the matter to permit the Bankruptcy Court

to address any equitable defenses that might be available to the

creditor under these circumstances.

I.

The bare bones1 factual background is as follows:

In May 2001, appellee CitiFinancial Consumer Financial

Services ("CitiFinancial") recorded a judicial lien on the

residence of appellant Donald J. Wilding. Some six months later in

November 2001, Wilding filed for bankruptcy under Chapter 7. He

did not identify the CitiFinancial debt of approximately $10,000 as

secured in his schedules; rather, he listed a debt to CitiFinancial

in roughly that amount as unsecured. Wilding received a discharge,

in what the Bankruptcy Judge termed “a garden variety Chapter 7

1
We join the Bankruptcy Court and the Bankruptcy Appellate
Panel in lamenting the lack of factual detail to be found within
the record created by the parties for this case. Nevertheless, we
find in the record the information material to our disposition. We
note, however, that a full record would have made this case more
easily comprehensible and might have avoided the unseemly spectacle
of lawyers asserting inconsistent statements about facts nowhere to
be found in the record in briefing and in oral argument before this
court.

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bankruptcy no-asset case” on February 7, 2002, and the case was

closed on February 15, 2002.

In the course of refinancing the mortgage on his

residence nearly two years later in 2004, Wilding found it

necessary to address CitiFinancial's lien.2 As a matter of law,

the lien remained in place because “[a]lthough the unsecured

portion of a secured creditor’s claim may be discharged in a

Chapter 7 . . . case, its lien in the collateral normally survives

the bankruptcy proceeding and the discharge, and is enforceable in

accordance with state law.” In re Pratt, 462 F.3d 14, 17 (1st Cir.

2006). On December 22, 2004, Wilding filed a motion to reopen his

bankruptcy case for the purpose of avoiding the previously

unscheduled judicial lien on his property. Before the motion to

reopen was acted upon, Wilding consummated his refinancing and

satisfied the lien. On December 29, 2004 a release of the lien was

recorded in the Registry of Deeds.

The Bankruptcy Court granted the motion to reopen on

January 5, 2005. On January 6, 2005, Wilding filed a motion to

2
Wilding concedes he did not disclose the related debt as
being secured by the CitiFinancial judicial lien in the schedules
he filed when seeking Chapter 7 discharge. Although the record
does not establish whether this omission was inadvertent or
intentional, his counsel suggested at oral argument that Wilding,
like many Chapter 7 debtors, might have been unaware that a
judicial lien had attached. Since it is not apparent how Wilding
could have benefitted by failing to schedule an avoidable lien,
there is no reason to assume that he intentionally misrepresented
the nature of the debt.

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avoid the lien. In opposition, CitiFinancial, which had not

opposed the motion to reopen, argued that the lien could not be

avoided because it had been satisfied. Both the Bankruptcy Court

and the Bankruptcy Appellate Panel concluded that since the lien

was no longer in effect, there was no longer a lien which could be

avoided. The Bankruptcy Court stated, “[q]uite simply, there are

no rights or justiciable property interests before the Court, and

it is clearly too late to raise any.” The Bankruptcy Appellate

Panel held that “because the lien was fully satisfied, it was no

longer fixed on property of the Debtor at the time he filed his

Motion to Avoid the Lien. Accordingly, it was too late to employ

the benefits of § 522(f) of the Code.” In re Wilding, 332 B.R.

487, 491 (1st Cir. BAP 2005).

II.

We think the Bankruptcy Court and the Bankruptcy

Appellate Panel, by essentially embracing a per se rule, took too

narrow a view of the powers of lien avoidance under 11 U.S.C. §

522(f). Because this is a question of law, we review the

Bankruptcy Court’s determination de novo. See In re Lazarus, No.

06-1982, 2007 WL 49640, at *1 (1st Cir. Jan. 9, 2007).

Section § 522(f)(1) states, in relevant part:

[T]he debtor may avoid the fixing of a lien on an interest of
the debtor in property to the extent that such lien impairs an
exemption to which the debtor would have been entitled under
subsection (b) of this section, if such lien is --

(1) a judicial lien . . .

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11 U.S.C. § 522(f)(1). Thus, under the statute, a debtor may avoid

the fixing of a lien if three requirements are met: (1) there was

a fixing of a lien on an interest of the debtor in property; (2)

the lien impairs an exemption to which the debtor would have been

entitled; and (3) the lien is a judicial lien. See Culver, LLC v.

Chiu, 304 F.3d 905, 908 (9th Cir. 2002).

The parties do not dispute that Wilding has met the first

and third requirements; Wilding had an interest in his house before

the lien attached and the lien was a judicial lien. See Farrey v.

Sanderfoot, 500 U.S. 291, 297-98 (1991) (holding that the debtor

must have had an interest in the property before the lien attached

to take advantage of § 522(f)); see also Patriot Portfolio LLC v.

Weinstein (In re Weinstein), 164 F.3d 677, 680 (1st Cir. 1999).

As for the second requirement, the parties do not dispute

that Wilding "would have been entitled to"3 a homestead exemption.4

The only matter in dispute is whether Wilding can take advantage of

3
In Owen v. Owen, 500 U.S. 305 (1991), the Supreme Court held
that the proper question to ask in determining what the debtor
"would have been entitled to" is whether the lien impairs a state
or federal exemption to which the debtor would have been entitled
but for the lien itself. See id. at 310-13.
4
Wilding contends he failed to value the real property
properly on his schedules. He notes in his brief that he listed
the property at $60,000 with a first mortgage lien of $58,000.
Consequently, only a modest sum -- far less than that which was the
subject of the judicial lien -- would be covered by the exemption.
In his brief before us, Wilding’s counsel contends that “[i]f
valuation were truly an issue Debtor would obviously move to amend
his exemptions to permit him to exempt up to $150,000 in his
homestead” under the Rhode Island exemption.

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§ 522(f) now that he has satisfied the lien, i.e. whether the lien

"impairs the exemption" if it no longer exists when the motion to

avoid is filed.

CitiFinancial contends that Wilding cannot avoid a lien

that does not currently impair the exempt property. At first

glance, the language of § 522(f) might seem to support

CitiFinancial's position, because the requirement that the lien

"impairs" the exempt property is worded in the present tense.

Linguistically, the word "impairs" suggests that a lien must

actually impair the exempt property at the time the judge renders

the decision to avoid.

Wilding, on the other hand, essentially argues that §

522(f) applies as long as the lien impaired his interest in

property at the time he filed his bankruptcy petition. He relies

upon several cases in which courts have held that the debtor need

not have an interest in the exempt property at the time the debtor

files his motion to avoid to take advantage of § 522(f). See,

e.g., Chiu, 304 F.3d at 908-09; In re Orr, 304 B.R. 875, 877

(Bankr. S.D. Ill. 2004) (following Chiu); In re Mailhot, 301 B.R.

774, 776 (Bankr. D.R.I. 2003) (same); In re Vincent, 260 B.R. 617,

620-21 (Bankr. D. Conn. 2000). But see In re Sizemore, 177 B.R.

530, 531 (Bankr. E.D. Ky. 1995) (holding that debtor cannot take

advantage of § 522(f) after debtor has transferred his exempt

property); In re Vitullo, 60 B.R. 822, 824 (D.N.J. 1986)(same); In

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re Riddell, 96 B.R. 816 (Bankr. S.D. Ohio 1989) (same); In re

Carilli, 65 B.R. 280, 282 (Bankr. E.D.N.Y. 1986) (same).

Chiu and similar cases -- including Mailhot, which was

decided by the Bankruptcy Judge who decided this case -- are

distinguishable from the case before us. In Chiu, for example, the

debtor sold the exempt property before filing the motion to avoid.

The Ninth Circuit reasoned that the appropriate time to determine

whether a debtor has an exempt interest in property is the filing

of the petition, not the filing of the motion to avoid the lien.

But the liens in Chiu and Mailhot were still effectively in force

when the Bankruptcy Court acted upon the motion to avoid. Indeed,

in both cases the debtor took care not to satisfy the lien in

question when disposing of the exempt property; funds generated by

a sale of the property were escrowed pending judicial determination

of the validity of the lien. See Chiu, 304 F.3d at 907; Mailhot,

301 B.R. at 776. Thus, the liens in those cases continued to

impair the equivalent of exempt property at the time the debtor

filed his motion to avoid.

For reasons that do not appear on the record, Wilding

failed to protect himself in that fashion. Rather, before filing

his motion to avoid, Wilding consummated the refinancing

transaction and satisfied the lien in full without holding the

funds in escrow pending a determination by the Bankruptcy Court.

Yet although the Chiu line of cases is distinguishable, we

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conclude that the lien itself need not exist at the moment the

debtor files a motion to avoid for § 522(f) to apply.

CitiFinancial's position is based upon a narrow grammatical reading

of § 522(f); a broader consideration of § 522 as a whole yields a

different result.

The textual touchstone for retrospective relief under §

522(f) is found in the definition of “value” provided for by the

statute. Section 522(f)(2)(a) reads:

For the purposes of this subsection, a lien shall be
considered to impair an exemption to the extent that the sum
of --

(i) the lien;
(ii) all other liens on the property; and
(iii) the amount of the exemption that the debtor could
claim if there were no liens on the property;

exceeds the value that the debtor's interest in the property
would have in the absence of any liens.

(emphasis supplied). In § 522, “‘value’ means fair market value

as of the date of the filing of the petition or, with respect to

property that becomes property of the estate after such date, as of

the date such property becomes property of the estate.” 11 U.S.C.

§ 522(a) (emphasis supplied). It would be an odd result if the

statute required the court to measure the value of the property

interest as of the petition date, but to measure the value of the

lien as of an unrelated point in the future, for example, when the

judge actually addresses a motion to avoid. We think the petition

date is the operative date for determining the various § 522(f)

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calculations. In order to determine whether a lien impairs an

exemption, the Bankruptcy Court must calculate the value of the

lien as of the filing of the petition. If the lien “impairs” the

exemption on that date, the court may thereafter address whether

the lien should be avoided. Consequently, it is not determinative

that the lien did not exist (or, in other words, had zero value)

when Wilding ultimately filed his motion to avoid.

This reading comports with the mechanics of § 522(f). As

the Ninth Circuit in Chiu noted,

[t]he operation of Section 522(f) is not to avoid a
“lien”, per se, although that is its practical
effect in most cases. Rather, by its terms,
Section 522(f) provides for the avoidance of the
“fixing” of certain liens. To “fix” means to
“fasten a liability upon.” Thus, Section 522(f)
operates retrospectively to annul the event of
fastening.

Chiu, 304 F.3d at 908 quoting In re Vincent, 260 B.R. at 617

(emphasis in original, citations omitted). We find this reasoning

persuasive. Section 522(f) seeks to implement the strong public

policies -- in particular, "the fresh start policy of the Code

which encourages the full application of the Code's exemption

provisions," In re Quackenbos, 71 B.R. 693, 695 (Bankr. E.D. Pa.

1987) -- that are at play when lien avoidance is sought. As the

Supreme Court has observed, § 522(f) was designed to mitigate the

impact of judicial liens “because they are a device commonly used

by creditors to defeat the protection bankruptcy law accords exempt

property against debts.” Farrey, 500 U.S. at 297-98. These

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policies support what we conclude is the most reasonable reading of

§ 522: that, for the purpose of retrospective relief, the value of

the lien is to be calculated as of the filing of the petition.

Thus, we hold that a debtor may avoid a judicial lien

under § 522(f) even if he has satisfied the lien prior to filing a

motion to avoid, so long as the lien in question impaired an

exemption as of the bankruptcy petition date (or the later acquired

property date) as reflected in the statutory definition of "value"

under § 522.

III.

That a court sitting in bankruptcy may deploy its

equitable powers under § 522 to issue an order avoiding a lien,

nunc pro tunc, does not mean that it necessarily should exercise

those powers to do so. Although § 522(f) permits a debtor to avoid

a lien in cases such as this, CitiFinancial might have available

equitable defenses to oppose the motion to avoid. Defenses such as

laches, fraud, detrimental reliance, and prejudice are often raised

in opposition to a motion to reopen. It is well-settled that a

Bankruptcy Judge has discretion to determine -- in light of such

defenses -- whether to reopen a bankruptcy petition at all. See,

e.g., First National Bank of Park Falls v. Maley, 126 B.R. 563, 567

(E.D. Wis. 1991); In re Procaccianti, 253 B.R. 590 (Bankr. D.R.I.

2000); In re Walters, 113 B.R. 602, 603 (Bankr. D.S.D. 1990); In re

Quackenbos, 71 B.R. at 695-96.

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 In this case, CitiFinancial did not oppose the reopening.

But the motion to reopen stage is not the only or perhaps even the

best point at which finality concerns may be addressed and balanced

against the policy of the Bankruptcy Code to provide “a fresh

start” and protect exempt property. It is at the avoidance motion

stage when the relative interests of the respective parties are

most fully crystallized. Thus, although applying essentially the

same test as that applicable for the motion to reopen, the

Bankruptcy Court must be prepared to exercise its informed

discretion with respect to the motion to avoid filed after

bankruptcy proceedings are closed. Cf. In re Levy, 256 B.R. 563

(Bankr. D.N.J. 2000) (granting a motion to reopen but denying the

motion to avoid a judicial lien because relief was barred by the

defense of laches).

The courts below did not address or calibrate the

equities of granting a motion to avoid. Rather, they concluded as

a matter of law that it was too late to do so. Consequently, we

leave to the Bankruptcy Court in the first instance to address any

equitable defenses that might be available. In that connection, we

observe that the Bankruptcy Judge may establish conditions so as to

avoid any demonstrable prejudice to CitiFinancial from belated

avoidance of its judicial lien. See, e.g., In re Dator, 2006 WL

2056678 at *3 (Bankr. D. Mass. 2006) (conditioning reopening on

satisfaction by debtors of reasonable fees and expenses, including

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attorneys fees, of judicial lienholders between date of closing

Chapter 7 case and date of filing motion to reopen); In re Orr, 304

B.R. at 878 (finding no dispute over value of real estate for

purposes of determining extent of impairment and consequently

creditor did not need to incur cost of appraisal); but see In re

Levy, 256 B.R. at 566-67 (declining to reopen Chapter 13 proceeding

because delay in seeking lien avoidance caused “difficult and

costly task of hiring appraiser to offer an opinion as to the value

of the debtor’s property” four years earlier). We leave to the

Bankruptcy Court’s informed discretion such issues as how, if at

all, the costs or uncertainty of post hoc appraisal of the property

should be factored into conditioning the availability of lien

avoidance. We also leave to the Bankruptcy Court's discretion the

proper valuation of any impairment of the homestead exemption. See

Note 4 supra.

The Bankruptcy Court’s denial of the motion to avoid the

CitiFinancial lien is VACATED. This case shall be REMANDED to the

Bankruptcy Court for further proceedings consistent with this

opinion. The parties to bear their own costs.

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