IN RE DUNCAN, (Bankr.D.Alaska 1984)

43 B.R. 833

Bankruptcy Nos. 3-83-00161, 3-83-00216.United States Bankruptcy Court, D. Alaska
August 10, 1984.

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M. Jane Pettigrew of Yerbich Stanley, Anchorage, Alaska, for Malcolm E. Duncan and Genita P. Duncan.

Patricia R. Hefferan of Noel H. Kopperud, P.C., Wasilla, Alaska, for Carney Bros. Const. Co.

Jan Samuel Ostrovsky and Mary Ellen Beardsley of Campbell, Ostrovsky Thwaites, Anchorage, Alaska, for Marion George, d/b/a Marion George Janitorial.

Albert D. Patterson, Anchorage, Alaska, for Edwin A. and Judy McEdwards.

OPINION
J. DOUGLAS WILLIAMS, II, Bankruptcy Judge.

The matter before the Court in each of these cases is whether, and to what extent, a judicial lien may be avoided pursuant to § 522(f) of the Bankruptcy Code (“Code”)[1] when there are liens junior to the judicial lien which are not avoidable, and where a failure to avoid the judicial lien will result in the debtor not receiving the full amount of the homestead exemption claimed. The debtors in each case are claiming that the judicial liens impair the debtors’ homestead exemptions.

In Duncan, the debtors are seeking to avoid several judicial liens, including that of the Matanuska-Susitna Borough for the use and benefit of Carney Brothers Construction Company (“Carney Brothers”). The Carney Brothers’ lien has priority over a second deed of trust and several tax liens filed by the Internal Revenue Service in such amounts that the Duncans will not receive the amount of their homestead exemption if the Carney Brothers’ lien is not avoided.

In George, the debtor is seeking to avoid all but a small portion of a judicial lien held by Edwin and Judy McEdwards (“McEdwards”). The McEdwards’ lien is senior to a tax lien filed by the Internal Revenue Service. Without avoidance of the McEdwards’ lien, George will receive only $3,025.75 of her homestead exemption.

For the reasons hereinafter set forth, the Court holds that the Carney Brothers’ lien does not impair the Duncans’ homestead exemption and cannot be avoided under § 522(f), and that the McEdwards’ lien impairs George’s homestead exemption to the extent of $12,062.97, and will be avoided in that amount.

FACTS DUNCAN
Malcolm and Genita Duncan filed their Chapter 7 petition on September 15, 1983. In the schedules filed September 29, 1983, the Duncans claimed a $27,000.00 homestead under Alaska law.[2]
On the date the petition was filed, the Duncans owned a residence with a fair market value of $160,000.00, subject to the following encumbrances:

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ApproximateCreditor Type of Lien Amount Date Recorded

1. Lomas Nettleton Deed of Trust $ 92,000.00 October 24, 1977 Company 2. Matanuska-Susitna Judicial 14,662.00 February 26, 1982 Borough for the use and benefit of Carney Brothers Construction Company 3. Household Finance Deed of Trust 3,900.00 April 8, 1982 Corp. 4. Internal Revenue Tax Liens 56,014.00 April 22, 1982 and Service June 16, 1983[3]
5. Chevron U.S.A., Judicial 1,198.00 July 13, 1983 Inc. 6. C.A. Smith, Inc. Judicial 2,118.00 August 25, 1983 Total $169,892.00

The Duncans filed a motion to avoid the judicial liens of Carney Brothers, Chevron U.S.A., Inc., and C.A. Smith, Inc., on the theory that the total of the amounts owed on the liens which are not avoidable, consisting of the first and second deeds of trust and the tax liens, and the $27,000.00 homestead exemption exceed the fair market value of the property, and accordingly the judicial liens must be avoided under § 522(f) as they impair the homestead exemption. Neither Chevron, U.S.A., Inc. nor C.A. Smith, Inc. filed an objection to the debtors’ motion. Pursuant to the waiver provisions contained in Local Bankruptcy Rule 4B(4) the liens of Chevron, U.S.A., Inc. and C.A. Smith, Inc. will be avoided pursuant to § 522(f).[4]

Carney Brothers objected to the Duncans’ motion, contending that the lien of Carney Brothers is subordinate only to that of the first deed of trust holder and that to allow avoidance of the Carney Brothers’ lien would be inconsistent with the distribution provisions contained in § 724(b). Carney Brothers further argue that the impairment of the Duncans’ homestead exemption is due not to the Carney Brothers’ lien, but to the tax liens which are junior to the Carney Brothers’ lien.

GEORGE
Marion George, d/b/a Marion George Janitorial, filed a Chapter 7 petition and the schedules and statement of affairs on December 15, 1983. A $27,000.00 homestead exemption was claimed under Alaska law.[5] On the date the petition was filed, George owned a residence with a fair market value

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of $67,000.00. The property is encumbered with the following liens:

ApproximateCreditor Type of Lien Amount Date Recorded

1. Alaska Teamsters Deed of Trust $17,053.07 June 16, 1977 Federal Credit Union 2. Internal Revenue Tax Lien 10,761.71 March 5, 1981 Service 3. Edwin and Judy Judicial 24,248.19 March 19, 1982 McEdwards 4. Internal Revenue Tax Lien 11,911.28 May 17, 1982[6]
Service Total $63,974.25

George filed a motion to avoid the McEdwards’ judicial lien as the liens which are not avoidable total $39,726.06 and the property is valued at $67,000.00. When the liens which are not avoidable and the $27,000.00 homestead exemption are added together and subtracted from the fair market value, the remaining value of the residence is $273.94. George contends that all of the McEdwards’ lien except the $273.94[7] must be avoided. George asserts that if the lien is not avoided and is instead allowed to remain on the property, she will be prevented from receiving her full homestead exemption.

LAW
Section 522(f) provides in pertinent part:

Notwithstanding any waiver of exemptions, the 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. . . .

Avoidance of a judicial lien under § 522(f) is a two-step procedure. First, it must be determined if the debtors have an exemption, here a homestead exemption, which is impaired. Second, it must be determined the extent to which the judicial lien creates that impairment. The analysis begins with the value of the property claimed as exempt as of the filing date of the petition. In re Tarrant, 19 B.R. 360, 9 B.C.D. 413, CCH Bkr.L.Rptr. ¶ 68747 (Bkrtcy.Alaska 1982).

An easier situation to analyze than that of the instant cases is that presented in In re Boteler, 5 B.R. 408, 6 B.C.D. 798 (Bkrtcy.S.D.Ala. 1980), in which the property the debtor claimed as being exempt was encumbered by a mortgage, a judicial lien and a second mortgage in that order of priority. Because the two mortgages had a total balance in excess of the fair market value of the property, the court held the debtor had no exemptible interest, and the judicial lien could not be avoided as there could be no impairment where there was no exemption. The court did not mention the issue presented by the judicial lien being prior to the second mortgage. In both the Duncan and George
cases, the non-judicial liens do not exceed the value of the property.

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The next step to consider is presented in In re Tarrant, supra, in which the property for which an exemption was claimed was encumbered by two deeds of trust and two judicial liens, the senior judicial lien being held by Spenard Builders Supply, Inc. Although the opinion does not note the priority as to the deeds of trust and the judicial liens, the Court’s file reflects that the deeds of trust were recorded prior to Spenard’s lien and that of the second judicial lienholder. Spenard argued that the debtors were not entitled to a homestead exemption because the total of the deeds of trust and the judicial liens exceeded the fair market value, attempting to apply the rationale i Boteler, supra. Spenard’s reasoning was rejected since, unlike the situation in Boteler, the liens which were not avoidable i Tarrant did not exceed the value of the property. Accordingly, the debtors in Tarrant were entitled to a homestead exemption. Thus, the first requirement of § 522(f) was met in Tarrant, as the debtors were entitled to a homestead exemption which was impaired by the encumbrances on the property.

In Tarrant the next step in the analysis was then reached as consideration was given as to what extent the judicial lien of Spenard impaired the homestead exemption, with the focus being on the fact that the sum of the deeds of trust and the homestead exemption exceeded the fair market value of the property. Because the homestead exemption exhausted the value in excess of the deed of trust liens which could not be avoided, the Spenard judicial lien was fully avoided. In a footnote, it was pointed out that if the value of the property exceeds the amount of the exemption, the judicial lien will remain fixed on the excess In re Tarrant, supra at 366-367 n. 8.

It has been argued in Duncan that the Court’s reasoning i Tarrant means that the Carney Brothers’ lien must be avoided in full because the sum of the liens which are not avoidable and the homestead exemption is $178,914.00 which far exceeds the fair market value of $160,000.00. In George, the same reasoning is used to argue that most of the McEdwards’ lien should be avoided, as the sum of the liens which are not avoidable and the homestead exemption is $66,726.06 as compared to the fair market value of $67,000.00. Debtors’ argument fails to consider that the Court in Tarrant was not faced with the situation where the judicial lien sought to be avoided was prior to a lien which is not avoidable. Moreover, debtors’ reasoning is inconsistent with the language of § 522(f) which states that a judicial lien may be avoided to the “extent that such lien impairs an exemption. . . .” (Emphasis added).

In order to determine the extent to which a lien impairs an exemption, the priority of the lien for which avoidance is being sought must be considered, as the court recognized In re Hoffman, 28 B.R. 503 (Bkrtcy.Md. 1983). The property in Hoffman
was subject to a federal tax lien and three judicial liens, in that order of priority. The debtors claimed an exemption under § 522(d)(1) and (d)(5) of $15,800.00. The court held that to the extent that the two junior liens exceeded the fund generated by sale of the property, they were unsecured and therefore not liens. The senior judicial lien, junior only to the federal tax lien, impaired the debtors’ exemption to the extent of $15,800.00, and was accordingly the only lien subject to being avoided under § 522, to the extent of the exemption. The court then noted that its analysis:

presupposes the avoidance of liens in the order of their priority, and for good reason. This Court has found no authority, nor have the parties cited any, for the proposition that liens are to be avoided in any other fashion. Section 724(b) . . . supports the proposition by implication and both state and federal courts . . . have recognized the superiority of liens prior in time over later ones.

Id. at 508.

The priority of the liens involved was also considered by Judge Norton in the cases of In re Register, 37 B.R. 708
(Bkrtcy.N.D.Ga. 1983) and In re Orsburn,

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35 B.R. 217 (Bkrtcy.N.D.Ga. 1983). In Register, the debtors requested that a judgment lien recorded prior to the debtor’s first and second purchase money mortgages and third non-purchase money mortgage be avoided to allow debtors to take their homestead exemption under Georgia law. The court pointed out that priority is generally determined by the date of recordation, with the oldest liens having priority. Georgia law, however, provides an exception to the general rule, and gives purchase money mortgages a special priority. Accordingly, the debtors’ first and second mortgages as purchase money mortgages had priority over the judicial lien for which avoidance was sought, but the third mortgage was junior to the judicial lien. The court then subtracted from the value of the residence the first and second mortgages and the judgment lien. The remaining value in the residence was $12,695.77, sufficient for the claimed homestead exemption of $10,800.00. It was then noted that the calculation did not take into account the third mortgage, which was last in priority. When the third mortgage was deducted from the $12,695.77 remaining, there was insufficient value in the property for the debtors to receive their full homestead exemption. Based on its calculation, the court concluded that it was the third mortgage and not the judicial lien that impaired the debtors’ exemption.

A similar result was reached in Orsburn, supra, in which the debtors’ residence was encumbered by a first and second mortgage, a judicial lien and a deed of trust, in that order of priority. Deducting the mortgages and the judicial lien from the value of the residence left more than seven times the amount needed for the debtors’ exemption. It was the deed of trust which encumbered the equity remaining after the mortgages and judicial lien.

Thus, in order to analyze whether the judicial liens impair the debtors’ homesteads, and to what extent, if any, the priority of the liens encumbering the property must be considered. It is not possible to do as the debtors suggest and pull the Carney Brothers’ and McEdwards’ liens out of the ranking of the liens and avoid these judicial liens pursuant to § 522(f) while leaving liens attaching to the property which are junior but cannot be avoided. The judicial liens can be avoided only if they impair the debtors’ homestead exemptions while still occupying their position of priority among the liens on the subject properties.

To determine whether there is such an impairment, the following steps should be taken:

1. Rank all liens in order of priority (and equity, if any) to the extent of the value of the property. (Any liens or portion of a lien in excess of the value of the property will be an unsecured claim under § 506.)
2. Subtract the gross amount of the homestead exemption provided by law from the value of the property.
3. From the remainder left from step two, subtract each lien, one at a time, beginning with the most senior lien, as ranked in step one, until the judicial lien is reached. Then subtract the judicial lien. To the extent that all or any portion of a judicial lien exceeds the remainder derived from step two (i.e., is not part of the remainder), it is voidable as it impairs the exemption.

In Duncan, the formula given above works to show the Carney Brothers’ judicial lien does not impair the Duncans’ homestead exemption. The steps outlined above are applied as follows:

1. The liens in order of priority, as stated at page 835, supra, are (to the extent of the value of the property):
First Deed of Trust $92,000 Carney Brothers’ Judicial Lien 14,662 Second Deed of Trust 3,900 Tax Liens (to the extent secured) 49,438

$160,000

2. The fair market value of the property, as stipulated by the parties and as previously noted, is $160,000. The homestead claimed is $27,000.

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$160,000 value of property -27,000 homestead exemption $133,000 remainder
3. $133,000 remainder from step 2 -92,000 less: first deed of trust from step 1 41,000 -14,662 less: Carney Brothers’ judicial lien from step 1 $26,338

The only lien senior to the Carney Brothers’ judicial lien is the first deed of trust, with a balance of $92,000.00. Absent the Carney Brothers’ judicial lien and all liens junior to it, there would be more than sufficient value in the property for the Duncans to receive their homestead exemption. Subtracting the Carney Brothers’ judicial lien of $14,662.00 from the remainder left from the first deed of trust, however, does not change that result. It is only when the federal tax liens are subtracted from the remainder left after deducting the first deed of trust, the Carney Brothers’ judicial lien, and the second deed of trust, that there is insufficient value in the property to support a $27,000.00 homestead exemption:

$26,338 remainder from step 3 -3,900 less: second deed of trust from step 1 22,438 -56,014 less: full amount of tax liens from step 1 $(33,576)

Although the Duncans’ homestead exemption is impaired, it is not the Carney Brothers’ judicial lien which creates that impairment. The requirements of § 522(f) have not been met, and the Carney Brothers’ judicial lien may not be avoided.

In George, the analysis shows an impairment of George’s homestead exemption, and so the McEdwards’ judicial lien may be avoided in part, although not to the extent urged by George:

1. The liens in order of priority, as stated at page 836, supra, are (to the extent of the value of the property):
Deed of Trust $17,053.07 Tax Lien 10,761.71 McEdwards’ Judicial Lien 24,248.19 Tax Lien 11,911.28 Equity 3,025.75

$67,000.00

2. As outlined earlier, the fair market value of the property is $67,000.00, and the homestead claimed is $27,000.00.
$67,000.00 value of property -27,000.00 homestead exemption $40,000.00 remainder
3. $40,000.00 remainder from step 2 -17,053.07 less: deed of trust from step 1 22,946.93 -10,761.71 less: tax lien from step 1 12,185.22 -24,248.19 less: McEdwards’ judicial lien from step 1 (12,062.97)

The McEdwards’ judicial lien exceeds the remainder by $12,062.97 and therefore the McEdwards’ judicial lien must be avoided to that extent. George will not actually receive the full $27,000.00 homestead exemption, however, as the exemption will still be subject to the tax lien junior to the McEdwards’ lien in the amount of $11,911.28 which is not avoidable.

For the Court to hold otherwise than above would turn § 522(f) from a provision allowing for avoidance of a judicial lien to one creating subordination of a judicial lien in some circumstances. By way of illustration, assume a debtor owns a piece of property with a fair market value of $100,000.00, encumbered by a first deed of trust with a $50,000.00 balance, a judicial lien of $20,000.00, and a second deed of trust with a $30,000.00 balance, in that order of priority. The debtor has claimed a $10,000.00 homestead exemption. If the reasoning of the debtors was followed, the liens which are not avoidable and the homestead exemption would be added together for a total of $90,000.00, leaving an excess of $10,000.00 to which the judicial lien would attach. The result of the reasoning would be to allow the second deed of trust holder payment in full, while the judicial lien, senior to the second deed of trust, would be secured for only half of the debt owed to the judicial lienholder. Congress cannot

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have intended § 522(f) to have such a result.[8]

Accordingly, the Court finds in Duncan that the lien of Carney Brothers does not impair the debtors’ exemption and cannot be avoided. The liens of Chevron U.S.A., Inc. and C.A. Smith, Inc. are avoided pursuant to § 522(f).[9] I George, the Court finds that the lien of the McEdwards impairs the debtor’s homestead to the extent of $12,062.97, and will be avoided in that amount. Orders will be entered in conformance with this opinion.