Mr. Powers is the owner of a 50% undivided interest in his home, which has a total value of $292,000.00. Bank of America holds a Deed of Trust against the entire property with a mortgage balance of $180,972.92. Mr. Powers also had three judgment liens against his interest, held, in order of seniority, by John Deere for $14,952.50, Evergreen for $4,617.48, and Farrar for $29,346.44. Upon filing of a Chapter 13 bankruptcy, Mr. Powers sought to avoid all three judgment liens as impairing his homestead exemption of $35,000.00.
11 U.S.C. § 522(f)(2)(A) sets forth the following methodology for determining the extent to which a judicial lien impairs an exemption:
[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.
The Court first evaluated the application of § 522(f)(2)(A) through the literal approach, under which “compares the total amount of liens on the property to the debtor’s interest in the property absent any liens.” Under this approach, the impairment of the exemption higher due to an asymmetry between the Mr. Power’s 50% interest in the property and a inclusion of the full amount of liens. This would have resulted in the avoidance in the entirety of all three judgment liens, allowing Mr. Powers to, in effect retain $55,510.54 in equity in his home, despite the $35,000.00 homestead exemption.
Finding that the effect of this in “extend[ing] the protection Congress sought to provide debtors and distorting] priorities between creditors”, In re Ware, 274 B.R. 206, 209 (Bankr. D.S.C. 2001), the Court turned for clarification to § 522(f)(1), which 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…” (Emphasis added.) “Thus, only that part of a lien which actually interferes with the debtor’s homestead exemption may be avoided.” Wachovia Bank & Trust Co., N.A. v. Opperman (In re Opperman), 943 F.2d 441, 444 (4th Cir. 1991).
As such, the court held that the formula in § 522(f)(2)(A) was “unintended quirk in drafting” for jointly held property and instead followed the majority of courts that adjusted the formula to reflect this dissonance between partial ownership and full liability for senior liens. Applying the proration approach, which has also been used in the Middle District of North Carolina, See In re Jeffries, 2002 WL 202108, at *2 (Bankr. M.D.N.C. Jan. 31, 2002), the only senior liens attributable to the debtor’s share of the property are used to calculate the impairment of the exemption and not the total of all senior liens. Alternatively, the Court held that the debtor’s equity approach, where the debtor’s net equity in the property is calculated and the available exemption subtracted, similarly determines the amount of any retained lien. These approaches were supported by the fact that outside of bankruptcy in a judicial sale, this is what judgment creditors and the debtor would receive.
Under either of the proration or debtor’s equity approach, Mr. Powers would retain his full $35,000.00 homestead exemption with the Farrar lien being avoided except in the amount of $940.56 and neither the liens of John Deere nor Evergreen liens being avoided.
A side-by-side comparison of the results of the different approaches, using simplified numbers and a single judgment creditor draws the differences in the results both more starkly and easily:
|Debtor’s Equity Approach||Involuntary
|Formula:||AJ= (LJ+LS+X)-(V*I)||AJ= (LJ +(LS*I)+ X)-(V*I)||QJ=((V-LS)*I)-X||QJ=((V-LS)*I)-X|
|QS||Equity to Mortgage:||$200,000.00||$200,000.00||$200,000.00||$200,000.00|
|QND||Equity to Non-Debtor:||$50,000.00||$50,000.00||$50,000.00||$50,000.00|
|QD||Equity to Debtor:||$50,000.00||$35,000.00||$35,000.00||$35,000.00|
|QJ||Equity to Judicial Lien(s):||$0.00||$15,000.00||$15,000.00||$15,000.00|
|AJ||Avoided/Unpaid Judicial Lien(s):||$40,000.00||$25,000.00||$25,000.00||$25,000.00|
For a copy of the opinion, please see: