Opinion
Civil Action No. 3:02CV-378-S
March 31, 2003
MEMORANDUM OPINION
This matter is on appeal from the bankruptcy court. At issue is the proper methodology for calculating the extent to which a judicial lien may be avoided because it impairs an exemption in the property to which the debtor is entitled under the Bankruptcy Code.
The facts are straightforward and undisputed. The debtor, jointly with his non-debtor spouse with right of survivorship, owns a house and lot in Louisville, Kentucky with a fair market value of $280,000.00. The debtor claims and wishes to have the benefit of a $6,000.00 exemption in this property.
The property is encumbered by several liens. They are, in order of priority, as follows:
$180,000.00 — first mortgage;
$112.418.35 — judgment lien in favor of LPP Mortgage, Ltd., the appellee (hereinafter LPP);
$80,345.09 — second mortgage.
Title 11, United States Code, Section 522(f)(1) provides, in essence, that a debtor such as appellant may avoid a lien to the extent that the lien impairs the debtor's exemption.
A lien impairs an exemption to the extent that the sum of the judicial lien, all other liens on the property, and the amount of the exemption exceeds the fair value of the debtor's interest in the property in the absence of any liens. 11 U.S.C. § 522(f)(2).
The liens against the property total $372,763.44. Since the agreed value of the property is $280,000.00, it is obvious that the debtor/appellant's $6,000.00 exemption is impaired by LPP's lien.
In this action, the debtor/appellant wishes to avoid LPP's lien completely. He reasons that LPP's lien impairs his exemption because, as provided in 11 U.S.C. § 522(f)(2)(A), the sum of LPP's lien plus all other liens on the property, and the amount of the exemption, exceeds the value of his interest in the property in the absence of any liens.
In its order below, the bankruptcy court calculated the extent to which LPP's lien impaired the $6,000.00 exemption. The bankruptcy court began subtracting the liens from the agreed value of the property, in the order of priority, to determine the extent to which LPP's lien impaired the debtor/appellant's exemption. In essence, after subtracting the debtor's exemption of $6,000.00 and the first mortgage in the amount of $180,000.00, the bankruptcy court found that there was $94,000.00 in equity available to secure LPP's lien, and that the unsecured balance of $18,418.35 impaired the exemption and was therefore avoidable.
On appeal, the debtor/appellant takes issue with two aspects of the bankruptcy court's calculus:
Should the bankruptcy court have considered the liens in order of priority in order to determine the extent to which the lien in question impairs the debtor/appellant's exemption?
Should the bankruptcy court have determined the value of the debtor's interest in the property as being $140,000.00, or one-half of the total value, because the debtor owned the property in joint tenancy with his non-debtor spouse with right of survivorship?
We will address these issues in turn.
A. CONSIDERING LIENS IN ORDER OF PRIORITY
The crux question in this part of the appeal is whether the bankruptcy court properly disregarded the inferior second mortgage of $80,345.09 in determining that just a portion of the LPP mortgage could be avoided by the debtor. The bankruptcy court observed "We do not believe, however, that Congress intended to alter state law lien priorities when it added [ 11 U.S.C. § 522(f)(2)(A)]." While the bankruptcy court found support for its position in several cases cited in the opinion below, it is clear that the bankruptcy court disregarded the precise language of the cited statute.
We have found no authority in the Sixth Circuit on this point.
The situation presented in In re Kolich, 273 B.R. 199 (8th Cir. BAP 2002), is remarkably similar to the facts presented here. We find the rationale in this case persuasive, especially since it encompasses the calculus provided by Congress in § 522(f)(2)(A). State lien priority law, while perhaps useful in state foreclosure proceedings, simply has no applicability when Congress has spoken on the subject, and clearly. Accordingly, the judgment of the bankruptcy court will be reversed in this regard.
B. VALUING THE INTEREST OF THE DEBTOR
AS ONE-HALF OF THE AGREED VALUE OF THE PROPERTY
The bankruptcy court declined to reduce the debtor's interest in the property to $140,000.00, on the basis that Kentucky law provides that owners of a tenancy by the entirety own the entire fee which neither spouse can sever individually, citing Hayes v. Schaefer, 399 F.2d 300, 301-02 (6th Cir. 1968), and United States of America v. Real Property Located at 5205 Mount Howard Court, Louisville, Kentucky, et al, 755 F. Supp. 169, 173 (W.D.Ky. 1990).
The debtor/appellant contends that even though he and his spouse are still alive and married, the court should view the debtor's interest as being $140,000.00, or one-half of the agreed value. It is obvious that the debtor/appellant's interest in the property will either be zero or $280,000.00, depending on whether he or his spouse dies first. The bankruptcy court was absolutely correct in its ruling, and we will therefore affirm in this regard.
C. CONCLUSION
In accordance with this opinion, the bankruptcy court's determination with respect to the partial avoidability of the LPP lien will be reversed. The judicial lien of LPP in the amount of $112,418.35 will be avoided in its entirety. The bankruptcy court's determination with respect to the value of the debtor's interest in the property will be affirmed.
A separate order will be entered in conformity with this opinion.