Bank of America National Trust & Savings Ass'n v. Hanger (In Re Hanger)Bank of America National Trust & Savings Ass'n v. Hanger (In Re Hanger)
OPINION
Bank of America National Trust and Savings Association (“bank”) appeals an order allowing Dale and Sandra Hanger (“Debtors”) to avoid its judicial lien in its entirety. The bank contends that its lien only partially impaired Debtors’ homestead exemption and that § 522(f) 2 would allow the partial avoidance of the lien. We REVERSE and REMAND.
STATEMENT OF FACTS
The pertinent facts are undisputed.
Debtors filed a voluntary Chapter 7 on August 26, 1996. Debtors owned a home which the bankruptcy court determined was worth $270,000, according to Debtor’s subsequent appraisal. Debtors claimed a $75,000 homestead exemption pursuant to California law which was not contested.
On November 11, 1996, Debtors filed a motion to avoid judicial liens impairing their homestead exemption. The total liens on the property, rounded off and in order of their priority, was as follows:
Consensual lien................$158,000
Pacific Alternator judicial lien ... 3,817
Bank of America judicial lien____ 92,565
Wells Fargo judicial lien........ 32,843
The bank objected to the motion and requested a hearing. Based on their calculations, the lien of Pacific Alternator could not be avoided, and the bank’s lien could be partially avoided.
Debtors replied that a lien which impairs the homestead exemption “in any way whatsoever” can be avoided in its entirety.
The hearing took place on February 25, 1997, at which tíme the bankruptcy court determined the property value of $270,000, which the bank has accepted for purposes of this appeal. Applying § 522, the bankruptcy court made calculations as follows:
(1) adding the consensual lien and the exemption yielded a sum of $233,000 ($158,000 + $75,000);
(2) subtracting $233,000 from the property value of $270,000 yielded an equity of $37,000;
(3) taking the first priority judicial lien of Pacific Alternator of $3,800: that lien could not be avoided because it was less than the total equity;
(4) subtracting $3,800 from $37,000 yielded an equity balance of $33,200;
(5) taking the Bank’s lien of $92,600: that lien exceeded the equity balance by $59,400 3 ($92,600 - $33,000). In other words there was only enough equity to secure the $92,600 hen up to $33,000.
The bankruptcy court noted that prior to the Bankruptcy Reform Act of 1994 and the amendment to § 522, the court would be allowed to avoid part of a lien and let part of a hen survive. (Citing
In re Chabot,
ISSUE
Whether the resulting calculation under § 522(f)(2) to determine the “extent that [the Bank’s] hen impair[ed] an exemption” required the avoidance of the bank’s hen in its entirety.
STANDARD OF REVIEW
This appeal raises questions of statutory interpretation which are reviewed
de novo. In re Higgins,
DISCUSSION
Section 522(f)(1) provides that a debtor may avoid the fixing of judicial hen “on an interest of the debtor in property to the extent that such hen impairs an exemption to which the debtor would have been entitled under subsection (b) of this section.” Section 522(f)(2) provides a means to calculate how a hen impairs the exemption, as follows:
(2)(A) For the purposes of this subsection, a hen shall be considered to impair an exemption to the extent that the sum of—
(i) the hen,
(ii) ah other hens on the property; and
(Hi) the amount of the exemption that the debtor could claim if there were no hens on the property;
exceeds the value that the debtor’s interest in the property would have in the absence of any hens.
11 U.S.C. § 522 (1994) (emphasis added).
The debtor’s avoiding power is limited “in that it may be employed ‘only to the extent that the hen impairs the debtor’s exemption.’ ” 4 Collier on Bankruptcy § 522.11[1] at 522-74 (15th ed.1997). Section 522(f)(1) was not intended to free the debt- or’s property of judicial hens altogether; rather it was intended to preserve the debt- or’s exemption. The legislative history of this section provides:
Subsection (f) protects the debtor’s exemptions, his discharge, and thus his fresh start by permitting him to avoid certain hens on exempt property. The debtor may avoid a judicial hen on any property to the extent that the property could have been exempted in the absence of the hen.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 362 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 76 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 6318.
Section 2 was added in 1994 to define the words “impair an exemption” in § 522(f)(1). “This amendment would provide a simple arithmetic test to determine whether a hen impairs an exemption, based upon a decision,
In re Brantz,
Applying this formula to the facts of this case, we can determine that the bank’s lien impairs Debtors’ exemption:
Sum of: the lien...............$ 92,565
all other liens.......... 158,000
......... 3,817
......... 32,843
the exemption......... 75.000
$362,225
The sum of $362,225 exceeds the value of Debtors’ interest in the property in the absence of any liens, or $270,000. Therefore, the bank’s lien impairs the exemption. The question before the Panel, however, is to what extent the lien impairs the exemption and must be avoided. The plain meaning of the statute provides that the lien impairs the exemption “to the extent that the sum of [the liens and exemption] exceeds the value that the debtor’s interest in the property would have in the absence of any lien.” In the present ease, the extent of impairment is $362,225 minus $270,000, or $92,225. The judicial liens may be avoided to that amount.
Applying the formula requires that the liens be subtracted in order of reverse priority and that those which are avoided not be included in the calculation. Section 522(f)(2)(B). The most junior lien is Wells Fargo’s lien of $32,843. Since $32,843 is less than $92,225, it can be avoided in its entirety.
Now, the formula requires a new calculation which would eliminate the lien that has been avoided. To determine the extent to which the bank’s lien impairs Debtors’ exemption, the formula is as follows:
The sum of: the bank’s lien......$ 92,565
all other liens not avoided.......... 158,000
...... 3,817
the exemption...... 75.000
TOTAL:.......$329,382
The extent to which the liens impair Debtors’ exemption is $329,382 minus $270,000, or $59,382, and that amount may be avoided. The amount of impairment does not exceed the amount of the bank’s lien sought to be avoided. Thus, the bank’s lien of $92,565 may be avoided only to the extent of $59,382 because that is the extent of the impairment of the exemption by the bank’s lien. The bank retains a lien of $33,183 ($92,565 - $59,382).
We will show how this result would be the same under the full avoidance formula of
Brantz,
1. Determine the value of the property on which a judicial lien is sought to be avoided. $270,000
2. Deduct the amount of all liens not to be avoided (all non-§ 522 liens) from (1). $270,000 - $158,000 = $112,000.
3. Deduct the allowable exemption. $112,000 - $75,000 = $37,000.
4. Avoidance of all judicial liens results unless (3) is a positive figure. N/A.
5. If (3) does result in a positive figure, does not allow avoidance of liens, in order of priority, to that extent only.
$37,000 minus $3,817 lien of Pacific Alternator yields $33,183. The Bank’s lien cannot be avoided up to $33,183. The amount that can be avoided is $59,- 382($92,565 minus $33,183).
In a recent case, the Bankruptcy Appellate Panel (“BAP”) affirmed the bankruptcy court’s avoidance of a lien in its entirety.
See Higgins, supra.
The BAP held that where the sum of all the liens and the hypothetical value of the exemption without liens exceeded the value of the debtor’s interest in the property in the absence of hens, the debtors were entitled to avoid the hen.
Higgins,
Before the 1994 amendment, two major approaches for determining impairment emerged — full avoidance and partial avoidance. Under the full avoidance approach, as used in
Brantz,
the only way a hen would be avoided “in full” was if the debtor’s gross equity
5
were equal to or less than the amount of the exemption.
See Brantz,
The 1994 amendment adopted the full avoidance approach and the formula given is simply a restatement of the
Brantz
formula. This formula is more favorable for debtors by allowing them the full benefit of the exemption and the benefit of any post-avoidance appreciation in the value of the property.
See In re Witkowski,
The 1994 amendment also did away with the partial avoidance method, which generally defined impairment as not exceeding the amount of the exemption.
See In re West,
In the midst of much diversity in the application of former § 522, the Ninth Circuit Court of Appéals changed the course of partial avoidance eases in its
Chabot
opinion. The creditor in
Chabot
had a hen of $241,579. The debtors’ residence was valued at $400,-000. There was a first deed of trust in the amount of $86,412 and a second deed of trust in the amount of $38,540. The debtors claimed a $45,000 homestead exemption. To figure impairment, the Court of Appeals deducted the deeds of trust and the exemption from the value of the home and found that there was a surplus equity of $230,046.
Chabot,
The bankruptcy court in this appeal was concerned that it did not apply the law that was rejected by the Bankruptcy Reform Act,
ie.,
partial avoidance or
Chabot.
Let’s apply the
Chabot
approach to the facts of this ease. Under
Chabot,
we would look at the surplus equity. We subtract the amount of the consensual lien ($158,000) plus the exemption ($75,000), or a sum of $238,000, from the value of the property, or $270,000. The remainder is $37,000 in surplus equity. Therefore, the lien could not be avoided at all. That is not the result we propose herein.
See In re Hastings,
Congress was concerned because the
Chabot
holding meant that any postpetition appreciation would go to the benefit of the lienholder whose partial lien remained on the property, even if the debtor had to use his exempt interest to make the mortgage payments. H.R.Rep.,
supra.
The new formula would protect the debtor’s interest in any appreciation because it would not allow a lien to remain when there was no equity, but hypothetically there would be equity in the absence of the liens.
See Owen v. Owen,
Congress gave an example in the legislative history of the 1994 amendment of how the new § 522(f) formula would change a Chabot situation where the lien was partially secured. The example was of a debtor with a house worth $50,000, encumbered by a mortgage of $40,000, a judicial lien of $20,-000, and entitled to an exemption of $10,000.
Applying Chabot, $50,000 minus $40,000 minus the $10,000 exemption yields zero. Since there is no surplus equity, the lien impaired the exemption and could be avoided to the extent it impaired the exemption. According to Chabot, the lien could only impair the exemption to the extent to diminished the exemption, thus, a $20,000 lien would diminish a $10,000 exemption by $10,000. Therefore, only $10,000 of the lien could be avoided. Likewise, applying a simplified partial avoidance method to the same example, the full amount of the exemption could be avoided, or $10,000, leaving a hen of $10,000. Both the Chabot result and the partial avoidance result of leaving a $10,000 hen was sought to be reversed by the new § 522(f) formula.
Applying the “frill avoidance” formula of Brantz and the new § 522(f) formula results in full avoidance in the same example. Using the Brantz formula: the value of $50,000 minus $40,000 equals $10,000; subtracting the exemption of $10,000 from the $10,000 remainder equals zero, which is not a positive figure. Therefore, the judicial hen could be avoided in full. Applying the new § 522(f) formula: ah hens and the exemption amount yields a sum of $70,000. Subtracting the value of $50,000 from $70,000 yields an impairment of $20,000. Since the judicial hen is also $20,000, it can be avoided in its entirety.
In other words, the only reason the judicial hen in the example was avoided in its entirety was because there was no surplus equity ($50,000 minus $40,000 minus $10,000 equals $0).
See Nielsen,
While the bankruptcy court’s formula yielded the same numbers, it did not go on to determine the extent of the impairment, therefore the decision did not reflect the correct principle behind the numbers. Therefore, the plain language of § 522(f) requires that the bank’s hen is not impairing
CONCLUSION
The bank’s lien was avoidable only in part. The bankruptcy court’s order avoiding the lien in its entirety is REVERSED and the case is REMANDED so that the Bank will retain a secured claim in the amount of $33,-183.
Notes
. Unless otherwise indicated, references to "Chapter,” "Section/ § ,” or "Code” are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330.
. The hearing transcript shows that the court incorrectly calculated this figure as $49,400, but the difference is immaterial.
. For purposes of this disposition, surplus equity is defined as the remainder after subtracting the consensual liens, and the exemption amount, in the absence of any liens, from the value of the debtor’s interest in the property.
See Chabot,
. For purposes of this’disposition, “gross equity” is calculated as the value of the property less the nonavoidable liens and less any senior avoidable liens. Gross equity does not include a deduction of the exemption amount.