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")
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.
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.
Approximate Creditor Type of Lien Amount Date Recorded1. Lomas & Nettleton Company Deed of Trust $ 92,000.00 October 24, 1977 2. Matanuska-Susitna Borough Judicial 14,662.00 February 26, 1982 for the use and benefit of Carney Brothers Construction Company 3. Household Finance Corp. Deed of Trust 3,900.00 April 8, 1982 4. Internal Revenue Service Tax Liens 56,014.00 April 22, 1982 and June 16, 1983 35. Chevron U.S.A., Inc. Judicial 1,198.00 July 13, 1983 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).
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.
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.
Approximate Creditor Type of Lien Amount Date Recorded1. Alaska Teamsters Federal Credit Deed of Trust $17,053.07 June 16, 1977 Union 2. Internal Revenue Service Tax Lien 10,761.71 March 5, 1981 3. Edwin and Judy McEdwards Judicial 24,248.19 March 19, 1982 4. Internal Revenue Service Tax Lien 11,911.28 May 17, 1982 6__________ 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
Section 522(f) provides in pertinent part:
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.
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 in 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:
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,
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:
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.
$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
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).