CRP Holdings A-1, LLC v. O'Sullivan (In Re O'Sullivan)
914 F.3d 1162
| 8th Cir. | 2019Background
- Debtor Casey O’Sullivan and his wife owned a home as tenants by the entirety in Barton County, Missouri; wife did not join the bankruptcy filing.
- CRP obtained a default judgment against O’Sullivan alone in Platte County and recorded a notice of foreign judgment in Barton County to create a judicial lien.
- O’Sullivan filed Chapter 7, claimed a Missouri $15,000 homestead exemption, and moved under 11 U.S.C. § 522(f)(1) to avoid CRP’s purported judicial lien as impairing his exemption.
- Bankruptcy court held CRP’s recorded judgment created an unenforceable but existent lien (a cloud on title) and granted the avoidance; BAP affirmed.
- On prior 8th Circuit review the court vacated and remanded for the bankruptcy court to decide whether a judicial lien existed (enforceable or unenforceable); on remand the bankruptcy court and BAP again held a cloud-on-title constituted a lien under the Code and avoided it.
- The 8th Circuit in this appeal affirms, holding Missouri law supplies a cloud-on-title doctrine that, when recorded, can qualify as an "existing, but presently unenforceable" judicial lien under §§ 101(36),(37) and therefore be avoided under § 522(f).
Issues
| Issue | Plaintiff's Argument (CRP) | Defendant's Argument (O’Sullivan) | Held |
|---|---|---|---|
| Did CRP’s notice of foreign judgment give rise to a "judicial lien" under the Bankruptcy Code? | Recording a foreign judgment against one spouse does not create an enforceable or unenforceable lien on entireties property under Missouri law; it is only a contingent future interest. | The recording created a cloud on title that constitutes a "charge against or interest in property," i.e., an existent but unenforceable judicial lien under the Code. | Held for O’Sullivan: recording created an existent, presently unenforceable lien (cloud on title) within §§101(36),(37). |
| If a lien existed, did it "affix" to O’Sullivan’s interest and impair his exemption under § 522(f)(1)? | No lien existed to affix, so § 522(f) does not apply. | The cloud-lien did affix and impaired the exemption; § 522(f) may avoid it. | Held for O’Sullivan: the cloud fixed a lien for avoidance purposes and impaired the exemption; avoidance proper. |
| Should state law or federal definitions govern whether a lien exists for § 522(f) avoidance? | State law controls whether a lien exists; Missouri law shows no lien on entireties property. | State-law doctrines (e.g., cloud-on-title equity jurisdiction) can produce an interest that fits the federal definitions of "lien." | Held: Use state law to determine the underlying interest, but federal Code definitions are broad; Missouri’s cloud-on-title doctrine yields an interest meeting §§101(36),(37). |
| Does treating a cloud as an unenforceable lien render § 522(f) applicable or superfluous? | If no lien under state law, § 522(f) is inapplicable; treating clouds as liens risks overbroad federal intervention. | Recognizing an existent but unenforceable lien preserves § 522(f)’s role in clearing title and protecting exemptions. | Held: Where recording creates a cloud amounting to an existing but unenforceable lien, § 522(f) is applicable and properly used to clear the cloud. |
Key Cases Cited
- Farrey v. Sanderfoot, 500 U.S. 291 (1991) (federal court looks to state law to determine whether a lien "fixed" on property)
- Baker v. Lamar, 140 S.W.2d 31 (Mo. 1940) (a judgment against one spouse does not constitute a lien on entireties property)
- Mahen v. Ruhr, 240 S.W. 164 (Mo. 1922) (equity may remove void instruments that create a cloud on title when invalidity is not apparent on the face of the record)
- In re Sanders, 39 F.3d 258 (10th Cir. 1994) (distinguishing nonexistent liens from existent but unenforceable liens for § 522(f) purposes)
- CRP Holdings, A–1, LLC v. O’Sullivan (In re O’Sullivan), 841 F.3d 786 (8th Cir. 2016) (prior 8th Cir. opinion addressing whether a cognizable judicial lien existed and remanding for determination)