IN RE:  BILLY CARLOS CROSS CASE NO. 93-50547

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

BILLY CARLOS CROSS CASE NO. 93-50547

JANET SUE CROSS

DEBTORS

MEMORANDUM

On motion of the debtors this case was reopened to permit the debtors to file and the court to consider the motion of the debtors, pursuant to 11 U.S.C. 522(f)(1), to avoid the judicial lien of Ricky B. Merrick and Sandra H. Merrick as a lien that impairs the homestead exemption claimed and allowed to the debtors during the course of the administration of their bankruptcy case.

In the schedules to their joint petition for relief under chapter 7 of the Bankruptcy Code the debtors listed as an asset real property located at 3541 King Arthur Drive, Lexington, Fayette County, Kentucky. The debtors maintain their residence at that address. The debtors acquired this property by deed dated August 5, 1992, for a purchase price of $59,400.00, which included assumption of a mortgage dated February 3, 1987, recorded in Mortgage Book 1403, page 682, in the Fayette County Clerk's office, on which there was a balance due at that time of $49,680.42. See deed attached as an exhibit to the proof of claim of ITT Residential Capital Corporation. According to the proof of claim filed by ITT Residential Capital Corporation, the present holder of the mortgage, the balance due on the mortgage when bankruptcy intervened was $49,304.02.

In the schedules to the joint petition the debtors claimed a homestead exemption in their residence under KRS 427.060 in the amount of $15,000. The maximum exemption allowable to the debtors under this statute is $10,000. However, since there were no timely objections to the exemption as claimed, the exemption stands allowed as claimed. 11 U.S.C. 522(l); Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992). This appears to be inconsequential because the equity of the debtors in the property does not appear to exceed $10,000.00. In the schedules to their petition the debtors valued the property at $55,000.00, which is $4,400.00 less than they paid for the property, indicating their equity in the property is only $5,695.98.

On August 21, 1992, the Merricks were awarded a judgment against the debtors in the amount of $1,645.42 for property damage arising out of an automobile accident. They were also awarded costs. Interest is accruing on the judgment at the legal rate of 12% per year. The judgment is based on a jury verdict following a trial held in the Fayette District Court, Sixth Division, in Civil Action No. 91-C-0324. On or about March 18, 1993, the Merricks caused a Notice of Judgment Lien on Real Estate to be filed in the Fayette County Clerk's office, thereby causing the judgment to operate as a lien on any ownership interest of the debtors in real estate in Fayette County. KRS 426.720. Counsel for the Merricks certified that a copy of the Notice of Judgment Lien on Real Estate was served by mail on the debtors.

Shortly thereafter, on April 7, 1993, the debtors filed a joint petition for relief under chapter 7 of the Bankruptcy Code in this court.

On June 10, 1993, the chapter 7 trustee filed a notice of abandonment of the interest of the bankruptcy estate in the debtors' real property based on the mortgage indebtedness encumbering the property. On the same date the trustee filed a Report of No Distribution in the case. The debtors were granted a discharge in bankruptcy on October 14, 1993, and the case was closed on November 3, 1993.

Based on the record, the court finds the judgment lien of the Merricks does impair the homestead exemption of the debtors in their residence.

In the schedules to their joint petition the debtors listed the Merricks as creditors holding a claim secured by a judgment lien. The Merricks timely filed a proof of claim in the debtors' bankruptcy case. The claim was filed as an "unsecured nonpriority claim" in the amount of $1,645.42, plus interest and costs.

The motion to reopen this case for the purpose of avoiding the judgment lien of the Merricks was filed June 30, 1995, some 20 months after the case had been closed.

Counsel for the Merricks, relying on the case of In re Hunter, 164 B.R. 738 (Bkrtcy. W.D. Ky. 1994), argues that this case should not have been reopened to accord the debtors the relief requested and that the court should deny such relief because the debtors are guilty of laches for not exercising their right to avoid the lien while their case was pending.

CONCLUSIONS OF LAW:

Section 350 of the Bankruptcy Code, 11 U.S.C. 350, does not fix a cutoff date after which a case may not be reopened to afford relief to a debtor. Section 522(f) of the Code, 11 U.S.C. 522(f), does not fix a bar date beyond which a request to avoid a lien that impairs an exemption may not be filed. Neither Rule 5010 nor Rule 4003 of the Federal Rules of Bankruptcy Procedure, which implement the foregoing provisions of the Code, imposes a time limit for requesting relief thereunder. There are no provisions of the Code and Rules on which to base an order denying the relief requested in this case.

The court is not persuaded by the reasoning in In re Hunter, 164 B.R. 738 (Bankr. W.D. Ky. 1994). In Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992), the Supreme Court enforced the 30-day time limit imposed by Rule 4003(b) of the Federal Rules of Bankruptcy Procedure for objecting to an exemption. Rule 4003(b) implements section 522(l) of the Code. 11 U.S.C. 522(l). Once approved by Congress the Federal Rules of Bankruptcy Procedure have the force of law. Thus, Congress, rather than the court, fixed this time limit. The case is not authority for imposing a bar date where none has been fixed by Congress. As a matter of fact, Owen v. Owen, 500 U.S. 305, 111 S. Ct. 1833, 114 L. Ed. 2d 350 (1991) involved a chapter 7 case that had been reopened at the request of the debtor for the purpose of avoiding a judicial lien. The court held the lien was avoidable. Consequently, this court must overrule the Merricks' objection on procedural grounds to the relief requested by the debtors. The Bankruptcy Code should be construed, when reasonably possible, so as to effectuate its general purpose of relieving an honest debtor of the weight of oppressive indebtedness, and local rules subversive of that result do not bind the federal courts. Local Loan Co. v. Hunt, 292 U.S. 234, 54 S. Ct. 695, 78 L. Ed. 1230 (1934).

The debtors listed the Merricks as creditors holding a judgment lien. However, the proof of claim filed in behalf of the Merricks was filed as an unsecured claim. There was no objection to the claim so the claim was allowed as filed, as an unsecured claim. 11 U.S.C. 502(a). There is authority for the view that creditors lose their lien by filing their claim as unsecured. 3 Collier on Bankruptcy, 14th Ed. 57.07 [3.1]. This is not an invariable result. The decision as to whether the creditor may thereafter amend the claim to assert secured status is largely a matter of judicial discretion. Because there were no dividends to creditors in this case, the court does not consider the Merricks to have waived their secured status. However, a conclusion that the court may relieve the Merricks but not the debtors of inadvertence would be less than evenhanded.

In this particular case the creditors' judicial lien was obtained within 90 days of bankruptcy and possibly would have been avoidable by the trustee under 11 U.S.C. 547(b) as a preferential transfer of property of the debtor. Or alternatively, the debtors might have avoided the lien under 11 U.S.C. 522(h) and (g). Such action must be taken by the trustee or the debtors, standing in the shoes of the trustee, before the case is closed. 11 U.S.C. 546(a)(2). This is but another illustration of the fact that Congress knew very well how to fix a cutoff date for lien avoidance when Congress meant to do so. As stated above there is simply no indication that Congress intended to fix a bar date for reopening a case or for moving under 11 U.S.C. 522(f) to avoid a lien that impairs an exemption.

The decision in In re Hunter, 164 B.R. 738 (Bkrtcy. W.D. Ky. 1994) seems to recognize the "right" granted to a debtor by 11 U.S.C. 522(f) to avoid a lien is a substantive right, but apparently fails to take into account the fact that Congress has precluded the courts from adopting rules to abridge or modify any substantive right. 28 U.S.C. 2075. Only Congress can place limitations on a substantive right it creates.

On the merits of this matter, in a recent opinion in In re Lynch, case no. 93-50442 (E.D. Ky., Lexington Division), this court recognized the right of a debtor to avoid a judicial lien that impairs the homestead exemption allowable to a debtor under KRS 427.060. In re Lynch, _____ B.R. _____ (Bankr. E.D. Ky. 1995). The conclusions of law set forth in that case are adopted in this case.

Accordingly, the motion of the debtors to avoid the judicial lien of the Merricks shall be sustained.

Dated:

By the court -

 

_____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Paul D. Ross, Esq.

Yvette Horigan, Esq.

U.S. Trustee

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

 

IN RE:

 

BILLY CARLOS CROSS CASE NO. 93-50547

JANET SUE CROSS

 

DEBTORS

 

 

ORDER

 

 

In conformity with the Memorandum of the court this day entered, the motion of the debtors, pursuant to 11 U.S.C. 522(f)(1), to avoid the judicial lien of Ricky B. Merrick and Sandra H. Merrick as a lien that impairs the debtors' homestead exemption in their residence at 3541 King Arthur Drive, Lexington, Fayette County, Kentucky, is sustained.

The Merricks shall cause the lien to be released of record in the office of the Fayette County Clerk. The debtors are released from the debt owed by them to the Merricks by the discharge granted to the debtors in their bankruptcy case.

Dated:

By the court -

 

____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Paul D. Ross, Esq.

Yvette Horigan, Esq.

U.S. Trustee