CECELIA H. GOETZ, Bankruptcy Judge:
The Debtor is moving to reopen this closed Chapter 7 proceeding in order to reduce and avoid, pursuant to 11 U.S.C. § 522(f), two judgment liens of The Bank of Smithtown ("Smithtown") on his residence. 11 U.S.C. § 522(f) authorizes a debtor to avoid judicial liens that impair the debtor's exemption. The debtor claims that Smithtown's liens impair his homestead exemption. Smithtown opposes the motion in reliance on Alu v. State of New York Department of Taxation and Finance, 41 B.R. 955 (E.D.N.Y.1984) (Wexler, J.) asserting that Alu requires that the debtor's motion be denied as a matter of law.
Issue on which this motion turns is: Does Section 522(f) of the Code give a debtor an exemption broader than that available to him under state law when the state has opted out of the federal exemptions? That issue is now before the Supreme Court on certiorari to the Eleventh Circuit in In re Owen, 877 F.2d 44 (11th Cir.1989), cert. granted, ___ U.S. ___, 110 S.Ct. 2166, 109 L.Ed.2d 496 (1990). Conceivably the Court's decision in that case may be dispositive of the right of the plaintiff to the relief he is now seeking.
The critical facts are not in dispute, although some issues remain to be resolved.
The debtor filed a voluntary petition under Chapter 7 on November 29, 1989. He received a discharge on March 16, 1990. After the Trustee reported no assets for distribution, the case was closed April 18, 1990. The present motion to reopen to avoid judicial liens under 11 U.S.C. § 522(f) was made on August 17, 1990.
The debtor is an owner, as a tenant by the entirety, of real property located at 267 Marktree Road, Centereach, New York. He claimed the fair market value of the property to be $219,000 and his entireties interest to be worth $109,500, against which he claimed a homestead exemption under New York's Civil Practice Rules and Procedure ("CPLR") Section 5206(a) in the amount of $10,000. An appraisal attached to the motion papers estimates the market value of the property to be $215,000 as of March 26, 1990. The property is burdened by a first mortgage in the amount of $164,129.
Because the hearing on the motion was limited to whether or not Section 522(f) can, after Alu, be used to avoid judgment liens where the debtor is claiming a New York homestead exemption, the Court for the present is only granting the motion to reopen. Unless the debtor agrees that Smithtown's lien cannot be reduced below $15,435, the second branch of the motion to avoid Smithtown's judgment liens will have to be the subject of a new motion in the reopened proceeding.
Section 522(f) provides as follows:
Section 522(f) is new to the Code. It was part of the revisions made to broaden and liberalize the debtor's exemptions. H.R. Rep. No. 95-595, 95th Cong., 1st Sess., 126 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787. As Congress pointed out, the historical purpose of the exemptions laws "has been to protect a debtor from his creditors, to provide him with the basic necessities of life so that even if his creditors levy on all of his nonexempt property the debtor will not be left destitute and a public charge." Ibid. Congress liberalized the exemption law in two respects. First it provided a set of federal exemptions new to the law. Second, as the House Report notes, it gave a debtor "certain rights not available under current law with respect to exempt property. The debtor may avoid any judicial lien on exempt property . . ." Ibid. Expatiating on this provision the House Report adds: "Subsection (f) protects the debtor's exemptions, his discharge and thus his fresh start by permitting him to avoid certain liens on exempt property. The debtor may avoid a judicial lien on any property to the extent that the property could have been exempted in the absence of the lien . . . The avoiding power is independent of any waiver of exemptions." H.R. Rep. No. 95-595 at 362, U.S.Code Cong. & Admin.News 1978, p. 6318.
As the Code was finally adopted, a state was given the option of opting out of the federal exemptions, that is, making them unavailable to the state's residents, but was given no such option as to the lien avoidance provision, Section 522(f).
To place Section 522(f) in context, a brief overview of the interrelationship of the pertinent provisions might be helpful. When a debtor files a petition in bankruptcy, his property becomes the property of the bankruptcy estate. 11 U.S.C. § 541(a). The debtor is then allowed to exempt certain property from the bankruptcy estate. 11 U.S.C. § 522(b). If the state law applicable to the debtor does not permit him to select the federal exemptions, then he is limited to exempting property under nonbankruptcy federal law and state law. 11 U.S.C. § 522(b)(2)(A). Despite the exemptions, liens that cover exempted property are preserved and creditors may enforce them. 11 U.S.C. § 522(c)(2). However, a debtor may avoid a lien encumbering exempted real property "to the extent that such lien impairs
In 1982 New York State took advantage of the opt out provision and passed a three part statute. Debtor and Creditor Law, Art. 10-A — Personal Bankruptcy Exemptions, 12 McKinney's (1990). One section specifically took away from New York State debtors the authority to use the federal exemptions. New York's Debtor and Creditor Law, § 284. Another section explicitly authorized a New York debtor to exempt from property of the estate, to the extent permitted by subsection (b) of § 522 of Title 11, "personal and real property exempt from application to the satisfaction of money judgments under sections fifty-two hundred five, fifty-two hundred six of the civil practice law and rules." Debtor & Creditor Law, § 282. The third section of the same law, not relevant here, pertains to personal property, it authorizes a debtor who does not utilize the homestead exemption described in Section 5206 of the CPLR to exempt other property. Debtor & Creditor Law § 283.
New York CPLR Section 5206(a) provides:
A problem which surfaced early in this Circuit, as it did elsewhere, was whether a debtor could avoid any judgment liens when the mortgages on his property exceeded the fair market value so there remained no equity for him to claim as exempt. The answer given in In re Chesanow, 25 B.R. 228 (Bankr.D.Conn.1982) was that he could. He could do so for the future benefit he would derive from removing the judicial liens. The debtor argued there that he should be given the opportunity to build up equity and then "apply his exemption to that property interest and thus avail himself of the fresh start intended by Congress." 25 B.R. at 229. Framing the issue as whether an exemption of an interest is impaired by a judicial lien when other unavoidable liens exceed the fair market value of the property, the Court read Section 522(f) as intended to allow debtors to create equity by avoiding certain liens. In the view of the Court the judicial liens impaired the debtor's ability to achieve an equity position in the future and "thus frustrate the debtor's congressionally mandated fresh start." 25 B.R. at 231.
In Chesanow the debtor had claimed the federal homestead exemption. When that option was closed to New York residents in 1982, Bankruptcy Judge Hall held that "New York debtors could not avoid judicial liens under Section 522(f)." In re Zuaro, 29 B.R. 37 (Bankr.E.D.N.Y.1983). In that case the debtors who owned approximately $10,000 in equity over and above all mortgages, claimed the New York State homestead exemption and moved to set aside the judgment liens on their equity. Bankruptcy Judge Hall refused the relief requested saying:
29 B.R. at 38-39.
However, one year later, Bankruptcy Judge Hall reversed himself and held § 522(f) to be available to debtors claiming New York's homestead exemption. He explained that his earlier opinion had not given proper consideration to section 282 of the New York Debtor and Creditor Law. In re Henry, 38 B.R. 971 (Bankr.E.D.N.Y. 1984).
38 B.R. at 973.
The opinion then goes on to quote from Zuaro and continues:
38 B.R. at 973.
Judge Hall then observes:
38 B.R. at 974.
Judge Hall then went on to hold that if the equity in the debtor's homestead was not sufficient to satisfy both the exemption and the judgment lien the debtor would be permitted to avoid the judgment lien.
The next development in this area was a decision by the Court of Appeals in a case with a complex procedural history. In re Brown, 734 F.2d 119 (2d Cir.1984). In Brown, before the debtor had occasion to resort to the bankruptcy laws, a foreclosure sale of her residence took place which left a surplus of $8,667.02. The lien of a pre-existing judgment creditor was transferred automatically to the surplus funds which were deposited with a representative of the New York State Supreme Court. Brown filed a notice of claim to the surplus funds saying she was exempting them under New York State's homestead exemption, New York Civil Practice Law, Section 5206(a). One month later she and her husband filed under Chapter 7. She listed the surplus funds among her assets and claimed them as exempt under New York law and, therefore, under the Code. The Appellate Division held that the homestead exemption did not apply to the surplus funds because the exemption applies only to real property and the surplus money arising out of a foreclosure sale is personal property to which Section 5206 has no application. First Federal Savings and Loan Ass'n of Rochester v. Brown, 78 A.D.2d 119, 434 N.Y.S.2d 306 (4th Dep't. 1980). However, the Appellate Division did add that its decision should not be construed as foreclosing any right which the debtor might possess under the Bankruptcy Code. Mrs. Brown thereupon returned
The issue before the Court was the reach of Section 522(f). That Court concluded that since the creditor's lien was a judicial lien, and since in the absence of that lien Brown would have been able to exempt the surplus funds from her bankruptcy estate, Section 522(f)(1) allowed her to avoid it. During the course of that opinion the Court cited and relied on Chesanow.
In re Brown, 734 F.2d at 125.
Alu v. State of New York Department of Taxation & Finance, 41 B.R. 955 (E.D.N.Y.1984), the case relied on by Smithtown, was decided a few months later. In Alu, the debtor had no equity in the property in which he claimed a homestead exemption. The mortgages on the property which totalled $69,000 exceeded the property's market value of $65,000. The District Court held that, nevertheless, the debtor had an "interest" within the meaning of Section 522(f), an interest which he was entitled to protect so that he could build up his equity in the future. Citing Chesanow as authority, the opinion continues: "Indeed, the aim of 11 U.S.C. Section 522(f), at least in part, is to enable a debtor to create equity which otherwise would not exist, by avoiding certain liens." 41 B.R. at 957 (Emphasis in original).
Turning next to the defendants, the District Court held that the judgment lienors held liens despite the fact that there was no equity against which they could enforce their judgments. Their "potential right to interfere with debtor's future right of possession and right to build up equity, is sufficient to constitute a "lien" on debtor's interest in the residence within the meaning of 11 U.S.C. Section 522(f)." 41 B.R. at 957.
Alu, up to that point, parallels both Brown and Chesanow. In fact, Alu and Brown are often cited together for the principle that lack of equity does not mean lack of a protectible property interest in bankruptcy.
41 B.R. at 957-958.
Chesanow was distinguished with the observation that is unclear what the scope of the liens and exemption involved there were. 41 B.R. at 958. Chesanow and Alu reach contrary conclusions mainly due to the opposing views taken of the right of the debtor to avoid liens which will affect him only in the future. Chesanow explicitly held that a judicial lien, even where the debtor had no equity in the property, impaired his right to "achieve an equity position in the future" (emphasis added) and thus "frustrate[d] the debtor's congressionally mandated fresh start." Chesanow, at 231. By contrast, Alu regards the lienor's ability to destroy the debtor's future equity should it exceed $10,000 as not triggering the lien avoidance power of Section 522(f).
As Judge Hall observed respecting Zuaro which took the same position as did Alu, the result is virtually to nullify the avoidance power of a debtor under 11 U.S.C. § 522(f)(1). The debtor is allowed nothing except what he already enjoys under NYCPLR Section 5206. No extra protection is given him by Section 522(f). He gets only what he would have had had he not gone into bankruptcy, no more and no less.
Despite the fact that Alu virtually closes the door on New York residents to the use of Section 522(f) it has had little impact on actual practice. In In re Braddon, 57 B.R. 677 (Bankr.W.D.N.Y.1986), Bankruptcy Judge Edward D. Hayes refused to follow Alu holding that where the debtor had no equity, all judgment liens could be avoided in their entirety:
57 B.R. at 679.
Accord, In re Hager, 74 B.R. 198 (Bankr. N.D.N.Y.1987), aff'd, 90 B.R. 584 (N.D.N.Y.1988); In re Yackel, 114 B.R. 349 (Bankr.N.D.N.Y.1990). But see, In re Bovay, 112 B.R. 503 (Bankr.N.D.N.Y.1989) (where there is no equity to which the homestead exemption can attach avoidance of judicial liens would not allow the debtor to enjoy any exemption and therefore the liens cannot be avoided.)
Outside New York, the federal courts have been grappling with the interface between state exemption provisions and Section 522(f). See, Bowmar, Robert H., Avoidance of Judicial Liens That Impair Exemptions in Bankruptcy: The Workings of 11 U.S.C. § 522(f)(1), 63 American Bankruptcy Law Journal, 375 (1989). During the course of a recent review of avoidance powers in bankruptcy the Bankruptcy Appellate Panel of the Ninth Circuit lumped Alu with a number of decisions of which it was critical, including the decision of the bankruptcy court (In re Owen, 70 B.R. 366 (Bankr.N.D.Ind.1987)) in the case now being reviewed by the Supreme Court:
In re Galvan, 110 B.R. 446, 451 (9th Cir. BAP 1990)
Other courts describe in strong terms the consequences of not allowing avoidance of judicial liens even where there is no equity to which the exemption can attach.
In re Berrong, 53 B.R. 640, 643 (Bankr.D. Col.1985)
"The debtors' `fresh start' as provided by the Bankruptcy Code would be undermined by allowing the defendant's lien to subtly lie in ambush until after bankruptcy and suddenly, when the debtors accumulate equity, the defendant goes on the attack." In re Gunter, 100 B.R. 311, 314 (Bankr.E.D.Va.1989) (Emphasis in original).
The problem of how to reconcile Section 522(f) with state exemptions comes before the Supreme Court in a slightly different context. In In re Owen, supra, the Eleventh Circuit refused to allow the debtor to avoid a judicial lien that would be enforceable under Florida law because it attached itself to the property before the debtor claimed his homestead exemption. The Eleventh Circuit said: "Congress did not intend through section 522(f), however, to provide a federal exemption greater than that protected by state law where the exemption is created by state law." 877 F.2d at 47. The approval, or disapproval, of that statement by the highest court should clarify the rights of New York debtors under Section 522(f)(1).
Decision of the present motion need not be delayed until then, however, because this case is distinguishable from both Alu and Bovay in that, unlike the debtors there, the debtor here enjoys a substantial equity in his property so that he would be entitled to his $10,000 homestead exemption but for Smithtown's liens. While Alu can be read as not allowing the avoidance of a judicial lien, even where an equity exists, since Smithtown has indicated that in the event of an adverse decision by the undersigned it intends to appeal, the District Court will
The debtor is entitled to avoid Smith-town's judicial liens to the extent that they exceed present fair market value of his entirety interest reduced by unavoidable encumbrances and the debtor's homestead exemption. The bankruptcy proceeding will be reopened to permit him to do so. However, because it is unclear from the moving papers how the debtor arrives at the figures recited there, an evidentiary hearing will be necessary respecting how much of the liens the debtor is entitled to avoid.
The fee for reopening is waived.