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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Wilding v. CitiFinancial Consumer Financial Services, Inc.
Court: Court of Appeals for the First Circuit
Date filed: 2007-01-30
Citations: 475 F.3d 428, 356 B.R. 428
Copy Citations