MEMORANDUM OPINION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW
Presently before the Court is the latest chapter in the continuing saga of these debtors, who in the course of the past several years have exhausted nearly every option the bankruptcy code has to offer. Given the rather torturous procedural history involved, a chronology of the events relevant to the dispute at hand must be established at the outset. These events are as follows:
10/29/92 Richard L. Grafe Commodities, Inc. (“Grafe”) obtains a state court judgment against Steven Derrick.
11/16/92 Grafe’s judgment is docketed in Wisconsin and Iowa.
02/12/93 The debtors file their chapter 12 case.
02/17/93 The debtors commence an adversary proceeding, seeking to void Grafe’s judicial lien.
10/18/93 The debtors’ chapter 12 plan is confirmed.
03/12/94 The debtors and Grafe execute a stipulation settling the dispute over Grafe’s claim.
03/14/94 An order is entered in the adversary proceeding voiding Grafe’s judicial lien.
09/23/94 The debtors voluntarily dismiss their chapter 12 ease.
10/27/94 The debtors file a chapter 11 case.
01/10/95 The debtors convert the chapter 11 case to chapter 7.
06/01/95 The debtors receive a chapter 7 discharge.
06/16/95 Grafe files a motion to vacate the judgment entered in the adversary proceeding which avoided its judicial lien.
The matter now before the Court is Grafe’s motion to vacate the March 14, 1994, order which avoided its judgment lien as a preference under 11 U.S.C. § 547. The basis for Grafe’s motion is that the chapter 12 proceeding in which the adversary took place was dismissed prior to the completion of the debtors’ confirmed plan, and 11 U.S.C. § 349(b)(1)(B) provides for the reinstatement of any preferential transfer avoided in the course of a dismissed ease. The debtors oppose the motion, and submit that the Court should deny Grafe’s request on a variety of equitable grounds, chief among them Grafe’s purported delay in seeking reinstatement of the lien, the debtors’ intervening chapter 7 discharge, and the presence of a stipulation between the parties regarding Grafe’s claim. Grafe is represented by William P. Skemp, and the debtors are represented by Guy K. Fish.
The facts which surround the bare bones of the chronology set forth above are as follows. Grafe obtained a judgment against Steven Derrick on October 29, 1992, and subsequently docketed the judgment so as to create a judgment lien against certain property. The judgment was apparently not only docketed in Wisconsin but Iowa as well. Thereafter, on February 12, 1993, the debtors filed their chapter 12 petition. In the course of the chapter 12 proceeding, the debtors initiated this adversary proceeding against Grafe, seeking to avoid the judgment lien as a preferential transfer under 11 U.S.C. § 547. The adversary proceeding resulted in the entry of a judgment against Grafe avoiding the lien. The parties also entered into a stipulation in which the debtors agreed to pay Grafe a reduced amount in full satisfaction of its claims.
On September 23, 1994, the debtors filed an application to dismiss their chapter 12 case pursuant to 11 U.S.C. § 1208(b), and the case was dismissed on that date. 1 The debtors subsequently filed for chapter 11 relief, and thereafter converted that ease to chapter 7. The debtors received a discharge in their chapter 7 on June 1, 1995. The issue now before the Court is the effect, if any, of the dismissal of the chapter 12 proceeding upon the avoidance of Grafe’s lien. For a resolution of this issue, the Court must begin with 11 U.S.C. § 349(b), which provides in pertinent part that:
Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title—
(1) reinstates—
(B) any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or preserved under section 510(c)(2), 522(i)(2), or 551 of this title; and
The general idea behind § 349 is that the dismissal of a bankruptcy case should re-establish the rights of the parties as they existed when the petition was filed.
In re Jones,
Therefore, when a proceeding is dismissed, preferential transfers avoided under § 547, such as Grafe’s judgment lien, are reinstated.
Matter of Sadler,
Given that there need only be an “acceptable reason” for denying reinstatement of a lien, “cause” is clearly a loosely defined concept, left to the discretion of the court and the peculiarities of the circumstances. Nonetheless, certain basic principles may guide the court’s inquiry. The legislative history to § 349 states:
The basic purpose of the subsection is to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case.... Where there is a question over the scope of the subsection, the court will make the appropriate orders to protect rights acquired in reliance on the bankruptcy case.
H.R.Rep. No. 595, 95th Cong., 1st Sess., 338 (1977); 1978 U.S.Code Cong. & Admin.News, 5963, 6294 (emphasis added). As a result, in determining whether “cause” exists under § 349(b), the court’s focus should be toward protecting rights acquired in rebanee upon the bankruptcy, and in the absence of such interests there is no basis for altering the natural impact of the section.
Ethington,
In this regard, it must be remembered that the underlying intent behind the code is not only to provide financial relief for overburdened debtors, but also to offer equitable treatment to creditors. Subordinating the debtor’s interests to those of the creditors when considering the effects of dismissal is in harmony with this twofold purpose. The rights the debtor acquires as a result of the bankruptcy are usually an extension of the debtor’s ability to abide by the terms of the code, and a debtor who is unwilling or unable to comply with the code generally should not receive the benefits of bankruptcy once the case is dismissed.
See Jones,
Other creditors would have better equitable claims than do the [debtors]. Preference actions are designed to achieve ratable distributions among creditors. Several lenders in addition to the [creditor] filed claims in the Chapter 13 proceeding. These creditors might be entitled to protest the dismissal and refiling that denied them access to any share of the cash realized [from reinstatement of the creditor’s lien]_ As things stand, the only claimants to the funds are the [debtors] and the [creditor]. Between the two, the [creditor]has the better claim: the [debtors] borrowed money that they have yet to repay.
A finding of “cause” therefore requires the presence of a superior right or interest which was gained in the course of or in reliance upon the bankruptcy. For example, in
Jones
the court noted that lien reinstatement might be denied if the property to which the lien would attach had been transferred to a third party.
If this ease is dismissed, § 349(b) would operate to reinstate the movant’s lien and vacate the judgment against the movant in the preference adversary proceeding, unless [it is] ordered for cause that it not be reinstated, [cite omitted]. Preserving a judgment avoiding a preference for use in a subsequent case might be cause for such an order.... [i]f [the court] dismisses] the case, do[es] not order the preference judgment preserved, and the debtors file no new petition, the movant would be able to enforce its admittedly preferential attachment. That result would benefit the mov-ant at the expense of all unsecured creditors and the debtors, and would permit the movant to reap the benefits of its attachment contrary to code policy ... [assuming [the court] could find cause to preserve the judgment, the windfall [if the debtors do not file another petition] would be to the debtors at the expense of all of the creditors.
However, to equate dismissal with some form of time travel, unceremoniously dumping the parties where they were the moment before the debtor made the fateful choice to file bankruptcy, would be to say both too much and too little about the effect of § 349. Implementing the code’s directive that dismissal is to undo the bankruptcy case “as far as practicable,”
see Ethington,
In this regard, one of the more conceptually challenging issues involving § 349(b)(1)(B) is whether the entry of a dismissal order after the confirmation of a reorganization plan operates to reinstate a lien avoided prior to confirmation. Section 349 does not expressly revoke confirmation, which might suggest a conflict between the provisions concerning confirmation and those outlining the results of dismissal. For example, in
Matter of Depew,
vacates only those orders or judgments which avoided various transfers or interests pursuant to the powers given to the trustee or debtor in possession by the Bankruptcy Code. Furthermore, it operates only as to the property which remains property of the estate on the date of dismissal. [cites omitted]. Except to the extent that the avoidance of an interest in exempt property is concerned, avoided pre-petition interests are not reinstated as to property which has passed out of the bankruptcy estate.
Id. at 972. [emphasis added].
This holding was premised in part upon the fact that confirmation of a chapter 11
It is true that the bankruptcy code is not a “fragmented and disconnected collection of miscellaneous rules” but is instead “a complex tapestry of ideas.”
Depew,
The only reference to “property of the estate” in § 349 is located in § 349(b)(3), which itself contains no language justifying a limitation upon § 349(b)(1)(B). Section 349(b)(3) provides that dismissal “revests the property of the estate in the entity in which such property was vested immediately before the commencement of the ease under this title.” Given the clear language of § 349(b)(1)(B), there is nothing in the code which necessitates the inference that the absence of any property of the estate at the time of dismissal would preclude lien reinstatement. Further, the cases which the
De-pew
court cited in support of the proposition that confirmation and the resulting transfer of estate property to the debtor mandates a limitation upon lien reinstatement simply do not stand for this conclusion. Instead, they merely describe the operation of § 349(b)(3).
See Searles,
Finally, perhaps the most compelling reason weighing against acceptance of the
De-pew
analysis is the Seventh Circuit’s subsequent decision in
Sadler.
In
Sadler,
the court was faced with the dismissal of a confirmed chapter 13 plan, and yet held that § 349(b)(1)(B) nonetheless operated to reinstate a creditor’s lien.
It is thus clear that in the normal course Grafe’s judgment lien would be reinstated by the natural operation of § 349(b)(1)(B), and the parties would return to the position they were in prior to the filing of the chapter 12 proceeding.
Sadler,
However, the debtors’ arguments involve misunderstandings of not only the operation of § 349 but also other sections of the bankruptcy code and Wisconsin law as well. As to the debtors’ argument that Grafe’s delay in filing its motion somehow prevents reinstatement of its lien, the simple response is that § 349(b)(1)(B) operates to reinstate a lien
as of the dismissal
unless the court, “for cause,” orders otherwise. Implicit from the
Sadler
decision is that the burden is upon the debtors to demonstrate an appropriate reason for not reinstating the lien.
See Sadler,
Next, the debtors’ contention that the “transfer” in question is the judgment, not the lien, is premised upon an erroneous interpretation of § 547. To constitute a preferential transfer under § 547, there must be a transfer
4
of an interest in property of the debtor.
See
11 U.S.C. § 547(b). As a leading authority on bankruptcy has stated, “[a]ny judicial proceeding that creates or fixes a lien upon the debtor’s property will constitute a preference [provided the other elements of § 547(b) are met].”
See
4
Col-
Collier
further notes that the state law in question must be examined to determine what “act” — entry or docketing of the judgment, or issuance of execution — actually creates the lien, and indicates that “more commonly the judgment becomes a lien against real property when properly entered in a judgment docket or otherwise enrolled.”
See Collier
at 547-21 — 547-22;
see also Norton
at 57-120 (‘‘Whether the judicial lien arose during the 90-day period ... will be determined by state law as to when a lien by judicial process arises and is valid against the. parties specified in Code § 547(e)(1).”). Thus, in a state in which the entry of a judgment does not of itself create a lien, the docketing of the judgment is a “transfer” for purposes of § 547(b).
See In re Lifchitz,
In Wisconsin, a judgment itself does not constitute a lien upon property.
In re Spore,
It is clear that in Wisconsin Grafe’s docketing of the judgment created the lien. It is unclear whether the same is true in Iowa, although it does appear that a judgment lien does not attach to property until properly recorded in the county in which the property is located. See Iowa Code § 624.24. 5 A judicial proceeding must create or fix a lien upon the debtors’ property to constitute a preference. Collier, ¶ 547.03[1][A] at 547-20. Thus, as Grafe’s mere taking of a judgment against Steven Derrick did not create the lien, it did not rise to the level of a “transfer” of an interest in the debtors’ property. Id. Until the lien was created, there was no “transfer” of an interest in property.
Consequently, it was not the judgment which was voided in the adversary proceeding. The creation of the judgment lien (a transfer of an interest in the debtors’ property) was found to be preferential, and avoided for the benefit of other creditors of the estate.
Sadler,
The debtors are also mistaken in their claim that § 524 somehow acts to preclude reinstatement of the judgment lien. As stated, the lien was reinstated at the time the chapter 12 was dismissed, absent a request to the contrary by the debtors.
6
Given that fact, Grafe held a judgment lien when the debtors filed their chapter 11 case; this lien remained when they converted the chapter 11 proceeding to chapter 7. Sections 524(a)(1) and (a)(2) provide an injunction against the pursuit of actions intended to determine or collect a discharged debt as a “personal liability” of the debtor, but they do not affect the validity of a lien against property in which the debtor may claim some interest.
See In re Walker,
A discharge under section 524 of the Bankruptcy Code does not void a judicial lien in any respect; only sections 506(d), 522(f) or (g), 544, 545, 547, 548, 549, or 724(a) of the Bankruptcy Code can effectively void a judgment lien.... A discharge does not fail to void any aspect of a judgment; a discharge in bankruptcy voids all aspects of all judgments to the extent of the debt- or’s personal liability.
There is some authority which would support the debtors’ argument that a discharge in bankruptcy operates to void a judgment lien.
See In re Thomas,
While
Johnson
dealt with a mortgage rather than a judgment lien, it relied upon the definition of “claim” found in 11 U.S.C. § 101(5), which provides that a “claim” is a “right to payment” or a “right to an equitable remedy for breach of performance.” The court noted that the mortgage holder retained a “right to payment” in the form of its right to the proceeds from the ■ sale of the debtor’s property.
Id.
Similarly, the creditor’s right to foreclose may be viewed as a “right to an equitable remedy.”
Id.
By the same definition, a judgment lien is a claim.
In re Bursee,
In this case, Derrick’s personal KabiKty to Grafe on the judgment was clearly extinguished by the entry of the discharge.
Johnson,
As Grafe concedes, there may be debate regarding the continued vaKdity of this lien under Wisconsin law.
See Spore,
AdditionaUy, Grafe’s Ken is also docketed in Iowa, which has a different statutory scheme concerning satisfaction of judgments. It appears that under Iowa law a discharge in bankruptcy does not result in the voiding of a judgment Ken, although the Ken may not attach to the debtors’ subsequently acquired real estate.
See
Iowa Code § 624.23(3). However, these issues can and should be decided in state court, if and when Grafe initiates proceedings to enforce its Ken. Furthermore, the possibiKty that the Ken
may
be void under state law does not rise to the type of “cause” required by § 349(b). These issues, which are in essence defenses to enforcement of the Ken, are not an “acceptable reason” to prevent Ken reinstatement because they do not implicate the type of interests which a court is to protect under § 349(b)(1)(B).
Sadler,
Finally, the debtors cite equity and the stipulation entered into between the parties. However, in their reply brief the debtors clearly state that Wisconsin contract law will control the interpretation of this stipulation. Given that fact, there is Kttle reason for this Court to decide an issue the state courts can dispatch with relative ease. Further, this is a dispute which may be resolved if and when Grafe acts to enforce its Ken; it has nothing to do with the reinstatement of that Ken. As with all of the debtors’ other reasons why this Court should deny reinstatement of the Ken, this argument is nothing more than a defense to the enforcement of the Ken. Es-sentiaky, the debtors argue that because the Ken should no longer be vaKd, it should not
Were there other creditors protesting the reinstatement of Grafe’s lien, the equities might be different. Here, however, the debtors decided, for whatever reason, not to continue their chapter 12 proceedings. They may not retain the benefits of that proceeding if they are unwilling to make the sacrifices associated with it.
Smith,
This decision shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
Notes
. The chapter 12 trustee subsequently objected to the dismissal, and the Court overruled these objections by an order dated October 6, 1994.
. Chapter 12 contains an identical provision. See 11 U.S.C. § 1227(b).
. In fact, when deciding the appeal in
Standard State Bank,
the Eighth Circuit found that the bankruptcy court's orders refusing to reinstate the government’s priority status constituted a finding of “cause” under § 349(b), a finding which would be unnecessary if the
Depew
court were correct in its approach to post-confirmation dismissals.
See U.S. v. Standard State Bank,
. 11 U.S.C. § 101(54) states that:
“transfer” means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption.
This definition "is as broad as possible.” See S.Rep. No. 989, 95th Cong., 2d Sess. 27 (1978). It includes any transfer of an interest in property, including a transfer of possession, custody, or control, as possession, custody and control are interests in property. See H.R.Rep. No. 595, 95th Cong. 1st Sess. 314 (1977).
. It appears that in Iowa a judgment becomes a lien upon the defendant’s property "at the time of such rendition.” Iowa Code § 624.23(1). However, this provision is limited to judgments "in the appellate or district courts of this state, or in the circuit or district court of the United States within the state."
Id.
Consequently, a foreign judgment does not become a lien until it is properly docketed, and in any event a judgment lien in Iowa does not attach to specific property outside the county in which the judgment was rendered until the judgment is "filed in the office of the clerk of the district court of the county in which the real estate lies.” Iowa Code § 624.24;
see also Crawford v. Hall,
. It must be remembered that it was the
debtors’
obligation to demonstrate why the lien should not be reinstated.
Sadler,
. Although this might facially appear in conflict with Spore's comment that "a judgment does not consist of an 'in rem’ aspect and an 'in person-am’ aspect,”
see
. Indeed, this conclusion is only bolstered by the fact that, prior to 1984, § 524(a)(2) operated as an injunction against the commencement or continuation of an action to collect a discharged debt "as a personal liability of the debtor or from property of the debtor.” The reference to "property of the debtor” was removed by the 1984 amendments to the code, apparently in an effort to clarify congressional intent that post-discharge actions to enforce valid liens were not prohibited.
Hunter,