Opinion and Order Denying Motion to Avoid Lien that Does Not Impair Homestead
RANDOLPH J. HAINES, Bankruptcy Judge.
Debtors have moved to avoid a judgment lien on their homestead pursuant to Bankruptcy Code § 522(f)(1).
I. Factual and Procedural Background.
Porsche Financial Services, Inc ("Porsche") obtained a judgment for attorneys' fees against the debtors, Neil and Shirlene Rand. This judgment was subsequently recorded in Maricopa County where the debtors' home is located.
Debtors filed a voluntary Chapter 11 petition and claimed a homestead exemption. At the time of filing, the debtors declared their equity
The debtors argue that fixing a lien on any portion of the homestead property impairs the debtors' right to fully realize any homestead exemption and post-petition property appreciation, and for that reason seek to avoid the purported lien pursuant to Code § 522(f)(1).
Code § 522(f)(1) allows a debtor to "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." The exemptions a debtor is entitled to claim vary from state to state because the Code allows each state to permit debtors to choose between claiming the exemptions provided by the Bankruptcy Code or by state law, or to prohibit debtors from claiming the Bankruptcy Code exemptions.
Arizona law provides a judgment creditor two alternative methods to collect a judgment from the value in a judgment debtor's home. The traditional method is
To protect the debtor and the debtors' family "against [the] forced sale of their home,"
The issue here is whether a recorded judgment creates a lien on the value of a property claimed as a homestead to the extent that value exceeds $150,000, as Porsche argues, or whether a recorded judgment never can become a lien on property claimed as a homestead, regardless of value as the Debtors argue. Debtors rely primarily on the language of the statute that creates a lien upon the recording of a judgment, which expressly does not create such a lien when the real property is exempt from execution, i.e., is claimed as a homestead. This exception for homestead property is found in the same subparagraph of the statute that generally makes recorded judgments into liens on real property, A.R.S. § 33-964(A): "[F]rom and after the time of recording as provided in § 33-961, a judgment shall become a lien for a period of five years from the date it is given, on all real property of the judgment debtor except real property exempt from execution, including homestead property ...." Debtors argue that means there is no lien created on the
Porsche, however, relies on language in the next paragraph, A.R.S. § 33-964(B), that redundantly states there is no lien on homestead property but that also cross references an exception:
Porsche argues that the initial "except" clause refers to subparagraph (A)(4) of A.R.S. § 33-1103, which is an exception when "a judgment or other liens may be satisfied from the equity of the debtor exceeding the homestead exemption under § 33-1101."
Before turning to how Arizona courts have interpreted these relevant statutes, there are at least two problems with Porsche's reading of them. First, Porsche is relying on the exception found in the first sentence of paragraph B for the creation of a lien from the recording of its judgment, but it is only paragraph A that actually creates any such liens. But paragraph A does not create such a lien on "real property exempt from execution, including homestead property." If no lien is created by paragraph A, it is difficult to see how it can be created by an exception in paragraph B, which does not create any liens at all. And the limitation on the creation of judgment liens in paragraph A is not limited by either the value of a homestead exemption or even by a cross reference to a provision that references such a value limitation. Rather, the limitation on the creation of judgment liens in paragraph A seems to apply to all "real property" that is exempt, regardless of whether there is a value limitation on the amount of the exemption.
Second, if Porsche's analysis were correct that the first sentence of paragraph B creates such a lien on the excess value of homestead property, it would be directly contradictory to very next sentence of the same paragraph, which clearly states that the homestead real property is held free and clear of any judgment lien, without any reference to a value limitation or a cross reference to another provision that contains such a value limitation. And, again, the second sentence of paragraph B refers to the "homestead property" and the "real property," not to the value of such property or even to the debtor's equity in such property. At a minimum, this apparent contradiction between the first and second sentences of paragraph B that arises under Porsche's analysis requires courts to attempt to find an interpretation that gives meaning to both sentences while avoiding a contradiction that renders either of them meaningless.
The Evans court also concluded that its result was compelled by a 1922 decision to the same effect by the Arizona Supreme Court.
Porsche correctly argues that both the homestead and the judgment lien statutes have been amended since the Evans decision. Some of these changes have been substantial but did not necessarily affect the analysis or the result. For example, whereas there used to be an appraisal procedure for determining when an execution should be allowed to proceed against homestead property, the statute now simply prohibits the sheriff from accepting a bid at the sale unless it exceeds the consensual liens plus the amount of the homestead exemption.
But as noted above, a plain language reading of the revised § 33-964(B) reveals that this provision still does not create any judgment liens. Judgment liens are only created by § 33-964(A), which contains no exception to the prohibition of any such liens on homestead property. And, as noted
More importantly, however, the statutory amendment has no effect on the analysis or reasoning of Evans. It remains the case that both the homestead statute and the judgment lien statute both conceive of the "homestead" as being the real property, not the equity value of such real property. So when A.R.S. § 33-964(A) and (B) both prohibit judgment liens from attaching to "homestead property," they mean the lien does not attach to the real property, regardless of its value. It would have taken far more extensive amendments to both the homestead statute and the judgment lien statute to change that interpretation of those statutes as clearly held in Evans. It also remains the case that there remains another method in A.R.S. § 33-1105 for a judgment creditor to reach the value in excess of the homestead value cap, not by obtaining and foreclosing a judgment lien but rather by requiring an execution sale and obtaining a bid in excess of the consensual liens and the homestead amount. And finally it remains the case that the judgment lien statute still does not expressly permit a judgment lien to attach to property claimed as a homestead, but merely contains an oblique cross reference in an exception to the exception to the statute that creates judgment liens.
Perhaps it remains to consider what purpose is served by the statutory amendment that added that cross reference to A.R.S. § 33-964(B). According to the historical and statutory note in the Arizona Revised Statute, that cross reference was added by Chapter 194 of the Laws of 2007. The cross reference is to A.R.S. § 33-1103, which according to the same authority was also amended by that same Chapter 194 of the Laws of 2007. That amendment to § 33-1103 added a new paragraph 3, which created a new exception from the homestead for "a lien for child support arrearages or spousal maintenance arrearages," expressly including an "arrearage [that] has been reduced to judgment." Thus it is logical to conclude that the exception in § 33-964(B) was added to avoid any conflict with this new exception to the homestead statute, so that there would be no doubt that a judgment lien could be created against homestead property when the judgment is for child support or spousal maintenance arrearages. In other words, the cross reference refers to § 33-1103(a)(3), rather than to § 33-1103(a)(4) as Porsche argues.
But because the revisions in A.R.S. § 33-964 do not create a judgment lien on homestead property in § 33-964(A), and do not change the Evans' analysis that it is the property that is the homestead, not its value,
It should be noted, however, as the Evans court noted over a quarter of a century ago,
Porsche's recorded judgment does not constitute a lien on the debtors' real property claimed as a homestead. Because it is not a lien at all, it is not a lien that impairs the debtors' homestead that can be avoided pursuant to Code § 522(f). The debtors' motion to avoid this nonexistent lien is therefore denied.