08-40445 | Bankr. D. Idaho | Dec 1, 2008
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF IDAHO
______________________________________________________
In Re
KASSIE ASHCRAFT, Bankruptcy Case
No. 08‐40445
Debtor.
______________________________________________________
MEMORANDUM OF DECISION
______________________________________________________
Appearances:
Jay A. Kohler, Idaho Falls, Idaho, Attorney for Debtor.
Stephen J. Blaser, Blackfoot, Idaho, Attorney for Creditor Beneficial
Idaho, Inc.
R. Sam Hopkins, Pocatello, Idaho, Chapter 7 Trustee.
Introduction
Debtor Kassie Ashcraft has filed a Motion to Avoid Lien on Exempt
Property, Docket No. 19, directed at Creditor Beneficial Idaho, Inc.
(“Creditor”), which in turn responded, Docket No. 25. The Court
conducted a hearing on the motion on October 7, 2008, and thereafter took
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the issues under advisement. The Court has now considered the
submissions of the parties, the arguments of counsel, as well as the
applicable law and legal authorities. This Memorandum constitutes the
Court’s findings of fact and conclusions of law. Fed. R. Bankr. P. 7052;
9014.1
Procedural History
In 1998, Debtor and her then‐husband, Ronald Ashcraft
(“Ashcraft”), built a home on approximately four acres of property in
Bingham County, Idaho. Thereafter, and without Debtor’s knowledge,
Ashcraft obtained a loan from Creditor, and later defaulted. Creditor then
sued Ashcraft and obtained a judgment against him, only, for $14,936.36.
Creditor recorded the judgment on May 25, 2007.
Debtor and Ashcraft divorced on November 21, 2007. In accordance
with the divorce decree, Ashcraft executed a quitclaim deed conveying the
Bingham County property to Debtor as her sole and separate property.
1
Unless otherwise indicated, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101 – 1532, and all rule references are to the
Federal Rules of Bankruptcy Procedure, Rules 1001 – 9037.
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The deed was recorded a few days later.
On June 4, 2008, Debtor filed for chapter 7 bankruptcy relief. In her
schedules, she listed the Bingham County property as her homestead and
claimed it exempt. No objections to her claim of exemption were filed.
Analysis and Disposition
Debtor moves to avoid Creditor’s judgment lien under § 522(f),
which provides in pertinent part:
Notwithstanding any waiver of exemptions but
subject to paragraph (3), the debtor may 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 under subsection (b) of this section, if
such lien is –
(A) a judicial lien . . . .
11 U.S.C. § 522(f)(1).
The Ninth Circuit has held that, “under § 522(f)(1), a debtor may
avoid a lien if three conditions are met: (1) there was a fixing of a lien on
an interest of the debtor in property; (2) such lien impairs an exemption to
which the debtor would have been entitled; and (3) such lien is a judicial
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lien.” Culver, LLC v. Chiu (In re Chiu), 304 F.3d 905, 908 (9th Cir. 2002)
(quoting Catli v. Catli (In re Catli), 999 F.2d 1405, 1406 (9th Cir. 1993)).
A.
Debtor’s Property Interest at the Time the Lien Fixed
In deciding a motion under § 522(f)(1), bankruptcy courts must often
first focus on whether the debtor held an interest in the property at the
time the lien fixed:
The operation of Section 522(f) is not to avoid a
“lien”, per se, although that is the practical effect
in most cases. Rather, by its terms, Section 522(f)
provides for the avoidance of the “fixing” of
certain liens. To “fix” means to “fasten a liability
upon.” Thus, Section 522(f) operates
retrospectively to annul the event of fastening the
subject lien upon a property interest.
Accordingly, the fundamental question of
ownership is whether the property encumbered
by the subject lien was “property of the debtor” at
the time of the fixing of that lien upon such
property.
In re Chiu, 304 F.3d at 908‐09 (citing In re Vincent, 260 B.R. 617, 620‐21
(Bankr. D. Conn. 2000) (emphasis in original).
Debtor and Creditor each rely upon case law to support their
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positions. Debtor cites The Law Offices of Moore & Moore v. Stoneking (In re
Stoneking), 225 B.R. 690 (9th Cir. BAP 1998) and argues that avoidance of
Creditor’s lien is appropriate under the circumstances. Creditor relies on
Farrey v. Sanderfoot, 500 U.S. 291 (1991) and In re Mingo, 189 B.R. 514
(Bankr. D. Idaho 1995), in opposition to the motion.
1. Farrey and In re Mingo
In Farrey, the U.S. Supreme Court addressed the status of a lien
created by a divorce decree. In dissolving the marriage, the state court had
awarded the marital homestead to the husband, requiring that he pay a
sum of money to the wife to balance the division of the marital assets. To
secure the husband’s obligation to pay the wife, the court imposed a lien
upon the homestead. Shortly after the divorce, the now ex‐husband filed a
bankruptcy petition and sought to avoid the judicial lien securing the
indebtedness to his now ex‐wife.
The Farrey court reasoned that “unless the debtor had the property
interest to which the lien attached at some point before the lien attached to
that interest, he or she cannot avoid the fixing of the lien under the terms
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of § 522(f)(1).” Farrey, 500 U.S. at 296 (emphasis in original). The court
stated that “the critical inquiry remains whether the debtor ever possessed
the interest to which the lien fixed, before it fixed. If he or she did not,
§ 522(f)(1) does not permit the debtor to avoid the fixing of the lien on that
interest.” Id. at 299.
Ultimately, the Farrey court viewed the impact of the entry of the
divorce decree as three‐fold: first, it extinguished the pre‐existing
undivided one‐half interests in the homestead held by both the husband
and wife during their marriage; second, it created a new, fee simple
interest in the homestead in favor of the ex‐husband; and third, the decree
created and imposed a lien in favor of the ex‐wife on that homestead. Id.
at 299‐300. Under this paradigm, the court concluded that the ex‐husband
never possessed the fee simple interest in the homestead prior to the fixing
of the ex‐wife’s lien, and thus he could not utilize § 522(f)(1) to avoid the
lien. Id. at 300. The court stated, “[w]e hold that § 522(f)(1) of the
Bankruptcy Code requires a debtor to have possessed an interest to which
a lien attached, before it attached, to avoid the fixing of the lien on that
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interest.” Id. at 301.2
Post‐Farrey, this Court decided In re Mingo. In that case, two
creditors held judicial liens against the Mingos’ community homestead
prior to their divorce. The debtor was awarded the homestead in the
decree, he filed his bankruptcy petition shortly thereafter, and he sought to
avoid the creditors’ liens. This Court noted that it had previously held that
when a divorce decree transfers community property to one party as his or
her separate property, the community property interest is thereby
extinguished and a new property interest is created. In re Mingo, 189 B.R.
at 515‐16 (citing In re Hunt, 94 I.B.C.R. 62, 65‐66 (Bankr. D. Idaho 1994)).
Applying In re Hunt and Farrey, this Court held that because the Mingos’
community property rights were extinguished with the divorce decree,
and because a new ownership right was created in favor of the debtor,
2
The analytical shortcomings of Farrey’s approach, making timing the
critical inquiry, have been highlighted in bankruptcy treatises. See Weeks v.
Pederson (In re Pederson), 230 B.R. 158, 161‐62 (9th Cir. BAP 1999) (citing 4 L. King,
Collier on Bankruptcy, ¶ 522.11[4] (15th ed. Rev. 1998) (noting that “the time of the
fixing of the lien on the debtor’s interest in the property is not relevant . . . .”),
and 2 Epstein, Nickels, White, Bankruptcy § 8‐27 (1992)).
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then the debtor “owned no interest in this property before the liens
attached, and therefore, the fixing of these liens may not be avoided under
§ 522(f)(1).” In re Mingo, 189 B.R. at 516.
Under the rationale expressed in Farrey and In re Mingo, Creditor
contends that Debtor may not avoid its lien on the Bingham County
property. It points out that Ashcraft’s lien attached to the property when it
was held by the parties as community property, and that community
property interest was extinguished by the divorce decree, substituting,
instead, a new property right in favor of Debtor, that of fee simple
ownership. Thus, Creditor insists, Debtor cannot utilize § 522(f)(1) to
avoid the fixing of the lien.
2. In re Stoneking
Debtor, on the other hand, contends that the more recent case of In
re Stoneking casts new light on Farrey’s reach and influence, and compels a
different result than that reached by this Court in In re Mingo.
In In re Stoneking, the attorney for the wife in a divorce action
obtained an order which determined that the fees she incurred for
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representation during the divorce proceedings were a community
obligation payable from community property.3 The court ordered a
judicial lien in favor of the attorney against the community property, while
it was still community property, and before that property was awarded to
the husband in the decree. The attorney recorded the lien before the
husband filed for bankruptcy.
During the course of the bankruptcy proceedings, the debtor moved
to avoid the attorney’s lien. The attorney opposed the motion by arguing
that, under Farrey, the debtor acquired his interest in the property after the
fixing of the lien, and therefore could not avoid it. The bankruptcy court
instead concluded that Farrey was inapplicable under the circumstances
and granted the debtor’s motion to avoid the lien. On appeal, the BAP
affirmed, noting that the facts of the case were distinguishable from those
of Farrey:
3
In California, a motion to obtain such an order securing counsel’s fee
claim is called a “Borson” motion. See In re Marriage of Borson, 112 Cal. Rptr. 432
(Ct. App. Cal. 1974).
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Creditor’s argument, however, fails to
acknowledge the critical distinction between this
case and the Farrey case. Here, unlike Farrey and
its progeny, the judicial lien attached to the
Debtor’s community property; Debtor held this
community property interest before the lien
attached. In the other cases, the lien attached to
newly‐created property interests and the debtors
did not hold those interests before the fixing of
the lien. As a result of this material distinction,
Debtor can avoid the lien under the “critical
inquiry” of Farrey [quoted above].
In re Stoneking, 225 B.R. at 693.
The BAP explained why these factual differences compel an
outcome different than that reached in Farrey:
While a debtor may not avoid a lien that attached
before he held any interest in the property, it does
not necessarily follow that a debtor cannot avoid
a lien merely because his property interests were
augmented after attachment of the lien. If a
debtor could have avoided such a lien on
community‐held real property pursuant to
section 522(f)(1) before acquiring sole ownership
of the property, that debtor should not lose the
right to avoid that same lien after acquiring sole
ownership. . . . Applying Farrey under such
circumstances to preclude the avoidance of a
third‐party lien “is inconsistent with [section
522(f)’s] main purpose, is not fair, and is contrary
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to common sense.” In re Ulmer, 211 B.R. 523, 524
(Bankr. E.D.N.C. 1997). Instead, Farrey’s focus on
the time of lien attachment should be sufficient to
prevent efforts by a debtor to avoid a judgment
lien that is created as part and parcel of the
creation of the interest that it encumbers.
Id. at 695 (emphasis in original).
3. Application of Case Authority
The BAP in In re Stoneking noted three significant distinctions
between the facts therein, and those found in Farrey:
Unlike the lien in Farrey, the lien in this case
explicitly encumbered the community property of
Debtor and Former Spouse. Further, unlike
Farrey, the creation of Creditor’s judicial lien . . .
was an event separate from – not simultaneous
with – the transformation of Debtor’s community
property into separate property . . . . Moreover,
unlike Farrey, when Creditor’s lien was created,
Debtor still held a community property interest in
the Residence.
Id. at 694.4 All three of these factual distinctions are likewise presented in
this case.
4
Indeed, the In re Stoneking panel noted that it believed the U.S. Supreme
Court specifically limited its holding in Farrey to liens created simultaneously
with the creation of “new” property interests. Id. at 695, 690 n. 3.
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First, Creditor’s lien predates the parties’ divorce and affixed to their
community property interest while Debtor and Ashcraft were married.
Whether Debtor possessed an interest in the homestead property
prior to the fixing of Creditor’s lien is answered by reference to state law.
Farrey, 500 U.S. at 299; In re Catli, 999 F.2d at 1408; In re Barnes, 198 B.R.
779, 782 (9th Cir. BAP 1996). There appears to be no factual dispute about
this issue. During oral argument, counsel for Debtor stipulated to the
existence of certain facts, which Debtor’s counsel read into the record. One
of those stipulated facts was that Debtor and Ashcraft had acquired the
homestead property in Bingham County in 1998, and built a home on it
while they were married. In Idaho, there is a “presumption that all
property acquired after marriage is community property.” Reed v. Reed, 44
P.3d 1108, 1113 (Idaho 2002) (citing Barton v. Barton, 973 P.2d 746, 748
(Idaho 1999); Idaho Code § 32‐903. Thus, as the homestead was acquired
during their marriage, the property was indeed the parties’ community
property when Creditor obtained and recorded its judgment lien against
the property.
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In Idaho, both husband and wife have equal, vested rights in their
community property. In re Hunt, 94 I.B.C.R. 62, 65 (Bankr. D. Idaho 1994)
(citing Hansen v. Blevins, 367 P.2d 758 (Idaho 1962); Compton v. Compton,
612 P.2d 1175 (Idaho 1980)). They both have an equal right to possess and
control their community property. In re Hunt, 94 I.B.C.R. at 65; Idaho Code
§ 32‐912. In a similar vein, a husband and wife each has the “power to
encumber more than their own half of the community,” See Compton, 612
P.2d at 1182. Thus, the “debts of one partner encumber the community
property interests of both partners.” In re Hunt, 94 I.B.C.R. at 65. Simply
put, while Ashcraft incurred the debt, Creditor’s judgment lien attached to
both Debtor’s and Ashcraft’s community property interests in the
Bingham County property at the time the lien was recorded.
The second distinction noted by the BAP as to the facts of Farrey and
In re Stoneking is also present here: the creation of Creditor’s lien did not
occur simultaneously with the entry of the divorce decree. Rather, that
lien was created and attached about six months prior to entry of the decree,
and was wholly unconnected with the divorce.
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Third and finally, unlike Farrey, when Creditor was granted its
judgment, and recorded its judicial lien, Debtor still held a community
property interest in the homestead.
Based upon these critical facts, the Court concludes that Farrey does
not control, and In re Stoneking represents the better‐reasoned view of the
applicable law.5 Other courts have reached a similar conclusion. See e.g.,
In re Pederson, 230 B.R. 158 (9th Cir. BAP 1999) (a judgment lien that
attached simultaneously with the debtor’s acquisition of property may not
be avoided; the decision followed Farrey and stated it was “consistent”
with In re Stoneking); In re Perez, 391 B.R. 190 (Bankr. S.D. Fla. 2008) (Farrey
distinguishable as to a previously recorded judgment is at issue); In re
Mariano, 311 B.R. 335, 341 (Bankr. D. Mass. 2004) (“Farrey does not stand
for the proposition that a lien, once “affixed” may not be avoided”).
This is not the first occasion on which the Court has distinguished
Farrey. In In re Vierra, 93 I.B.C.R. 128 (Bankr. D. Idaho 1993), the debtor
5
The Court acknowledges that its holding here may cast doubt on the
continued viability of In re Mingo.
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and his wife executed a property settlement agreement during the
pendency of their divorce which provided, inter alia, that the debtor would
assume a loan made to the parties by the wife’s parents to purchase the
homestead, but which was not secured by the property. Id. at 129. While
the state court’s decree adopted the agreement, it did not provide that the
agreement to repay the wife’s parents would be secured by the homestead.
As a result, this Court held that when the debtor first obtained title to the
homestead, it was not subject to a judicial lien in favor of the wife’s
parents, and thus any subsequent lien was not protected under Farrey. Id.
at 130.
This same analysis applies here. Both Debtor and Ashcraft had a
community interest in the homestead when Creditor’s lien first affixed to
the property. While Debtor’s interest was later augmented by the decree,
such does not change the analysis. Because Creditor’s lien affixed to
Debtor’s interest in the property prior to the parties’ divorce, the first
element required for lien avoidance under § 522(f)(1) is met.
B.
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Impairment
The second element to consider under § 522(f)(1) is whether
Creditor’s lien impairs an exemption to which Debtor would have been
entitled. The Code provides a formula that, when applied, dictates
whether a lien impairs an exemption. § 522(f)(2)(A).6 Pursuant to the
statutory formula, the Court is instructed to total Creditor’s lien, as well as
any other liens on the property, plus the amount of the homestead
exemption, and compare that sum with the value of Debtor’s residence in
order to determine the extent to which, if any, Creditor’s lien impairs
Debtor’s homestead exemption. Cal. Cent. Trust Bankcorp v. Been (In re
Been), 153 F.3d 1034, 1035 n. 1 (9th Cir. 1998); In re Taylor, 03.2 I.B.C.R. 132,
6
§ 522(f)(2)(A) provides:
For the purposes of this subsection, 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.
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133 (Bankr. D. Idaho 2003).
In Schedule A, Debtor valued the homestead property at $94,000,
and listed the amount due on consensual secured claims at $120,386.53.
Docket No. 1. However, Debtor’s motion represents that the secured claim
balance is $104,386.53, Docket No. 19, and at the hearing, her counsel
stated that the property was encumbered by $104,000 in consensual liens.
Creditor, on the other hand, provided no information to the Court
concerning the value of the property, or the amount due on consensual
liens on Debtor’s homestead property. Therefore, while the precise
amount due is uncertain, there does not appear to be any dispute that the
amount owed on consensual secured claims exceeds the value of the
homestead property. As a result, the Court concludes that Creditor’s lien
impairs Debtor’s homestead exemption, and the second element is met.
C.
Judicial Lien
Under § 522(f)(2)(A), the final element for avoidance requires that
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the lien in question be “a judicial lien, other than a judicial lien that secures
a debt of the kind that is specified in section 523(a)(5) . . . .” A “judicial
lien” means a lien “obtained by judgment, levy, sequestration, or other
legal or equitable process or proceeding.” § 101(36).
There is no dispute concerning this element. The debt owed by
Ashcraft to Creditor was for a loan, not a support obligation of the type
described in § 523(a)(5). When Ashcraft defaulted on the loan, Creditor
sued him and obtained a money judgment against him, which it recorded.
The recording of the judgment in the county real property records created
the lien on the Bingham County property. Idaho Code § 10‐1110.
Therefore, Creditor’s lien is a judicial lien.
Conclusion
All the elements required for avoidance of Creditor’s lien under
§ 522(f)(1) are met under the facts presented in this case. Accordingly, the
Court concludes that Debtor’s motion should be granted, and that
Creditor’s lien as against the Bingham County property should be
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avoided.7 A separate order will be entered.
Dated: November 30, 2008
Honorable Jim D. Pappas
United States Bankruptcy Judge
7
Of course, the Court’s decision does not impact Creditor’s right to
enforce its judgment against Ashcraft or his assets; it merely avoids the judgment
as a lien against Debtor’s fee simple interest in the Bingham County property.
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