IN RE: JAMES W. ROSE DEBTOR CASE NO. 94-51320
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
JAMES W. ROSE
DEBTOR CASE NO. 94-51320
This case is before the court on the motion of the debtor, pursuant to 11 U.S.C. § 522(f)(1), to avoid a judgment lien of Richmond Bank and Trust Company on the debtor's residence as a lien that impairs exemptions the debtor has claimed and has been allowed in his interest in the residence.
FINDINGS OF FACT:
The debtor, James Rose, and his wife, Linda Rose, purchased the residence at 803 Slate Lick Road, Berea, Madison County, Kentucky from Willard and Martha Miller for $5300 by deed dated December 14, 1992, filed of record in the Madison County Clerk's Office on the same date in Deed Book 430, Page 234. The deed indicates the sellers, the Millers, resided on adjacent property at 801 Slate Lick Road and that the buyers, the Roses, were residing at 803 Slate Lick Road at the time they purchased the property from the Millers. The debtor and his wife took title to their newly purchased residence jointly with right of survivorship.
At the time the property was conveyed to the debtors it was subject to a mortgage in favor of Berea National Bank which had been placed on the property by the Millers when they acquired the property on January 25, 1990. The original amount of the mortgage was $7500. The deed from the Millers to the debtor and his wife makes no mention of the mortgage. The schedules to the debtor's petition lists the balance due on the mortgage to Berea National Bank on the date of bankruptcy as $4000. Berea National Bank has not filed a claim. The schedules to the debtor's petition indicate that the Millers, or at least Martha Miller, may remain liable on the mortgage. Martha Miller is listed as a secured creditor who is owed $4300.
On January 22, 1990, prior to the acquisition of the property at 803 Slate Lick Road by the debtor and his spouse, Richmond Bank and Trust Company had obtained a default judgment against the debtor, James W. Rose, in the Madison District Court in the sum of $2510.57 plus interest at the rate of 23% from April 25, 1988 until fully paid. The judgment also awarded the bank costs of $38.00 and attorney fees of $250. On February 1, 1990 the bank, by counsel, caused a Notice of Judgment Lien to be filed in the Madison County Clerk's Office, thereby creating a lien on any interest of the debtor in any real property in Madison County. KRS 426.720. Under this statute, when the debtor acquired an interest in the Slate Lick Road property the judgment lien of Richmond Bank and Trust Company attached to his interest in the property.
On May 24, 1994, Richmond Bank and Trust Company commenced an action in the Madison Circuit Court to foreclose on its judgment lien on the debtor's interest in the property at 803 Slate Lick Road, Berea, Madison County, Kentucky. Richmond Bank and Trust Company named as defendants in the action the debtor; his wife, Linda Faye Rose; and Berea National Bank.
On September 1, 1994 a default judgment was entered against the debtor and his wife noting that they had failed to answer. A judgment in the amount of $7771.66 was entered against the debtor, James W. Rose, representing the original amount of the January 22, 1990 District Court default judgment plus interest at the rate of 23% from April 25, 1988. Judgment was also entered against the debtor's wife, Linda Faye Rose, finding that, by reason of her failure to file an answer to the complaint, her interest in the real property is subordinate to the lien of Richmond Bank and Trust Company. The judgment ordered the property sold by the Master Commissioner of the Madison Circuit Court and the proceeds of the sale held subject to further orders of the court.
On September 8, 1994 the debtor, James W. Rose, filed a petition for relief under chapter 7 of the Bankruptcy Code, which operated to stay the judgment lien foreclosure action against his interest in the property at 803 Slate Lick Road.
In the schedules to his petition the debtor claimed a homestead exemption in the amount of $5000 and a "wild card" exemption in the amount of $1000 in his residence. KRS 427.060; KRS 427.160. There were no objections to these claimed exemptions. Thus, the exemptions are allowed as claimed. Taylor v. Freeland & Kronz, 112 S.Ct. 1644 (1992).
On November 8, 1994 the debtor moved, pursuant to 11 U.S.C. § 522(f), to avoid the judgment of Richmond Bank and Trust Company as a lien that impairs the exemptions of the debtor in his residence.
On November 10, 1994 Richmond Bank and Trust Company moved for relief from stay in order that it might complete the foreclosure
action to enforce its judgment lien against the property at 803 Slate Lick Road.
Both of the foregoing motions were heard by the court concurrently.
The court directed that the automatic stay shall remain in effect pending its ruling on the debtor's motion to avoid the judgment lien of the bank.
This matter is complicated by the fact that only the husband has sought relief in bankruptcy. The judgment of the state district court in the foreclosure action finds that the interest of the debtor's wife, Linda Faye Rose, in the property at 803 Slate Lick Road is subordinate to the lien of the bank. Thus, by reason of the wife's failure to file an answer in the foreclosure action and assert her individual fee simple interest in the property, her interest in the property is no longer protected from sale to satisfy the judgment of the Richmond Bank and Trust Company.
There does not appear to be any dispute about the $5300 value placed on the property by the debtor or over the fact the debtor has a small amount of equity in the property after deduction of the amount of the mortgage indebtedness to Berea National Bank from the value of the property.
CONCLUSIONS OF LAW:
Applicable state law precludes the debtor from claiming the exemptions specified in 11 U.S.C. §522(d) and restricts the debtor's right to claim exemptions to those provided by Federal law, other than section 522(d), or state law applicable on the date of the filing of the petition. 11 U.S.C. § 522(b)(1); KRS 427.170.
The Kentucky statutes relevant to the factual situation presented by this case are as follows:
KRS 427.060 Homestead and burial plot exemptions, exceptions
In addition to any exemption of personal property, an individual debtor's interest, not to exceed $5000 in value, in real or personal property that such debtor or dependent of such debtor uses as a permanent residence in this state, or in a burial plot for such debtor or a dependent of such debtor is exempt from sale under execution, attachment or judgment; except to foreclose a mortgage given by the owner of a homestead or for purchase money due thereon. This exemption shall not apply if the debt or liability existed prior to the purchase of the property or the erection of the improvements thereon.
KRS 427.160 Additional general exemption
In addition to other exemptions provided by this chapter every debtor shall have a general exemption not to exceed $1000 in value to be applied to any property, real or personal, tangible or intangible in his estate when he has filed for bankruptcy under the provisions of The Bankruptcy Code of 1978, 92 Stat. 2549 (1978), Public Law, 95-598.
KRS 426.720 Final judgment to act as lien on realty; judgment creditor's notice requirements
A final judgment for the recovery of money or costs in the courts of record in this Commonwealth, whether state or federal, shall act as a lien upon all real estate in which the judgment debtor has any ownership interest, in any county in which [notice meeting the requirements of the statute of the judgment is on file].
Under the latter statute the money judgment of Richmond Bank and Trust Company, notice of which had been filed in compliance with the statute, became a lien on the debtor's interest in his residence when the debtor acquired an ownership interest in the real estate. The lien does not attach until the debtor acquires an ownership interest in real property. Under Kentucky case law interpreting KRS 427.060, the debtor likewise acquired a homestead exemption in the real property when he acquired an ownership interest therein. The deed recites the address of the grantees, the debtor and his spouse, as 803 Slate Lick Road, Berea, Kentucky, indicating they resided on the property at the time it was deeded to them. Thus, although the indebtedness to Richmond Bank and Trust Company antedates the acquisition of the property by the debtor, the bank did not acquire a lien on the debtor's residence before the debtor acquired a homestead exemption therein under KRS 427.060.
The bank may have acquired its lien on the property before the debtor obtained a "wild card" exemption in the property under KRS 427.160. This exemption becomes available only when a debtor files for bankruptcy.
In any event, under the decision of the Supreme Court in Owen v. Owen, 111 S.Ct. 1833 (1991), the fact the bank may have acquired a judicial lien on the debtor's interest in his residence before the debtor's homestead or other exemption rights therein came into existence does not defeat the debtor's right under 11 U.S.C. § 522(f)(1) to avoid the bank's lien as one that impairs an exemption to which the debtor would have been entitled but for the lien. The debtor's right to an exemption is determined as of the date of bankruptcy. White v. Stump, 266 U.S. 310, 455 S.Ct. 103, 69 L.Ed. 301; see also fn. 6 to the majority opinion in the Owen v. Owen case. The only test is whether the lien impairs an exemption to which the debtor would have been entitled but for the lien itself. The decision of the United States Supreme Court in Owen v. Owen nullifies as precedent the opinion in In re Brooks, 71 B.R. 6 (W.D. Ky. 1986), affirmed, 812 F.2d 104 (6th Cir. 1986).
The Kentucky homestead exemption statute makes the exemption inapplicable to a debt or liability such as that to Richmond Bank and Trust Company which existed prior to the purchase or improvement of the homestead.
This exemption shall not apply if the debt or liability existed prior to the purchase of the property or the erection of improvements thereon.
While this proviso may be fully operative in nonbankruptcy proceedings, it obviously is tempered by numerous provisions of the Bankruptcy Code.
The Code defines "debt" to mean liability on a claim. 11 U.S.C. §101(12). "Claim" is defined as a right to payment, whether or not reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. 11 U.S.C. §101(5).
With certain exceptions not here material, a discharge in bankruptcy discharges the debtor from all debts that arose before the commencement of the case. 11 U.S.C. § 727(b). The discharge voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any discharged debt. 11 U.S.C. § 524(a)(1). The discharge operates as an injunction against the commencement or continuation of any action, the employment of process, or any act to collect, recover or offset any such debt as a personal liability of the debtor. 11 U.S.C. § 524(a)(2).
Obviously, collection of prepetition unsecured debts that are dischargeable in bankruptcy from the debtor or from property of the debtor is barred by the discharge in bankruptcy. To the extent that KRS 427.060 may appear to provide otherwise, the Kentucky statute is rendered unenforceable by the Supremacy Clause of the United States Constitution. Const., Art. VI.
In allowing states to opt out of exemptions provided for by 11 U.S.C. §522(d), Congress did not go so far as to authorize states to permit collection from exempt property of debts other than as provided by the Bankruptcy Code.
Subsection (c) of section 522 of the Bankruptcy Code permits the collection from exempt property of nondischargeable debts for taxes or for alimony maintenance or support, and allows enforcement of unavoided liens against exempt property. That section provides:
(c) Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose...before the commencement of the case, except--
(1) a debt of a kind specified in section 523(a)(i) or 523(a)(5) of this title;
(2) a debt secured by a lien that is--
(A)(i) not avoided under subsection (f) or (g) of this section or under section 544, 545, 547, 548, 549, or 724(a) of this title; and
(ii) not avoid under section 506(d) of this title[.]
11 U.S.C. § 522(c)
The judgment lien of Richmond Bank and Trust Company, as substantiated by the proof of claim filed by the bank, is not void under section 506(d) of the Code. Under section 506(a) the bank's claim may be bifurcated and allowed, as of the date of bankruptcy, as a secured claim to the extent of the bank's interest in the estate's interest in property securing the claim. The remainder of the claim may be allowed as an unsecured claim. Otherwise, the judgment lien of the bank passes through the bankruptcy case unaffected, unless the lien is avoided under one of the lien avoidance provisions of the Code exercisable by the debtor or the trustee.
In this case the debtor requests avoidance of the judgment lien of the bank under 11 U.S.C. § 522(f)(1) as a lien that impairs exemptions to which the debtor would have been entitled but for the bank's lien. The court is of the opinion the debtor is entitled to the relief requested.
There are no exceptions to the debtor's right to exempt his interest to the extent of $1000 in real or personal property from the bankruptcy estate under KRS 427.160. This so-called "wild card" exemption becomes available to an individual debtor upon the filing of a petition for relief under the Bankruptcy Code. This exemption can hardly be construed to be inapplicable to debts incurred prior to the availability of the exemption. That would make the exemption inapplicable to all prepetition debts. Unlike KRS 427.060, which exempts homestead property from sale under
execution, attachment, or judgment, this statute, like the federal statute, authorizes the debtor to exempt real or personal property not to exceed $1000 in value from the estate. Obviously, the judgment lien of Richmond Bank and Trust Company is avoidable as a lien that impairs this exemption to which the debtor would have been entitled on the date of bankruptcy but for the lien. Owen v. Owen, 111 S.Ct. 1833 (1991).
Under Kentucky law the right to the homestead exemption provided for by KRS 427.060 vests upon the acquisition of the homestead property. In re Grisanti, 58 F.Supp. 646 (W.D. Ky. 1945); see also Opinion by Judge Howard Oct. 18, 1994 in In re Powell, E.D. Ky. case no. 94-60042, and In re Mains, E.D. Ky. case no. 94-20253. Consequently, the debtor's right to claim this exemption is not contingent on the advent of a judicial sale or involuntary disposition of homestead property as may be the case under Ohio law. In any event, a judicial sale of the debtor's property to satisfy the judgment lien of Richmond Bank and Trust Company had been ordered in this case before the intervention of bankruptcy. Therefore, in this case the lien of the bank is avoidable as a lien that impairs an exemption to which the debtor would have been entitled but for the lien even under the rationale of the decision in In re Moreland, 21 F.3d 102 (6th Cir. 1994).
Accordingly, the motion of the debtor pursuant to 11 U.S.C. § 522(f)(1) to avoid the judicial lien of Richmond Bank and Trust
Company shall be sustained.
By the court -
Stuart K. Olds
U. S. trustee