Opinion
Case No. 98-10702-SSM
October 20, 1998
Joel S. Aronson, Esquire, Harold G. Belkowitz, Esquire, Ober, Kaler, Grimes Shriver, Washington, D.C., Counsel, for Frigidaire Financial Corporation
Ronald B. Cox, Esquire, Woodbridge, Virginia, Counsel, for debtor
MEMORANDUM OPINION
This matter is before the court on debtor's motion to reopen the case and to avoid a judgment lien held by Frigidaire Financial Corporation ("Frigidaire") against the debtor's house. A hearing was held on September 29, 1998, in open court, at which the debtor was present in person and represented by counsel. Frigidaire was present by counsel. At the conclusion of the hearing, the court took the matter under advisement. After reviewing the evidence and the applicable law, the court will grant both motions.
Facts
The debtor, Jose S. Sarinana, filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on January 29, 1998, and received a discharge of his dischargeable debts on May 7, 1998. The chapter 7 trustee had previously filed a report of no distribution, and the case was closed on May 12, 1998.
The events giving rise to the present motion occurred several months prior to the filing of the bankruptcy. Frigidaire obtained a default judgment in the amount of $38,750.40 against the debtor on July 25, 1997, in the Circuit Court of Prince William County, Virginia. The subsequent docketing of that judgment lien created a lien against the debtor's real property under Va. Code Ann. § 8.01-446. Frigidaire commenced enforcement of its judgment against the debtor through two wage garnishment actions. The debtor was served with the garnishment summonses in September 1997 and December 1997.
The debtor alleges that he first became aware of the judgment lien sometime around May 1, 1998. According to the debtor's testimony, he did not recall being served with process on Frigidaire's lawsuit. However, the return of service filed with the state court reflects that he was personally served on June 19, 1997. Although the debtor testified that he had no specific knowledge of the judgment before May 1998, he admitted that he received notice of the second garnishment summons in December 1997. In his statement of financial affairs, filed on January 29, 1998, the debtor listed both the garnishment summons and the "pending" lawsuit. Despite this fact, the debtor contends that he was unaware of any judgment lien until his bankruptcy attorney ordered a title search of his real property.
The debtor informed his counsel of the garnishment prior to filing the bankruptcy petition. At first, counsel was under the erroneous belief that the debtor's residence was held in a tenancy by the entirety, and as a consequence, that any judgment against the debtor alone would not constitute a lien against the real estate. No explanation was provided as to the reason for counsel's mistaken belief, but it appears that he did eventually learn some time prior to the closing of the case that the property was titled solely in the debtor's name. The debtor's counsel further explained that the garnishment summons was the only pleading he had with respect to the Frigidaire suit at the time he filed the petition and prepared the schedules. Counsel suspected that a judgment would need to have been docketed before a garnishment could be issued, but he was uncertain. Counsel advised the debtor to have a title search of his property conducted. The debtor testified that he initially intended to do the title search himself. He eventually decided against it, thus causing further delay. Debtor's counsel then ordered a title search, which led to the discovery of the judgment lien. Finally, the debtor's counsel explained that he delayed filing a lien avoidance motion because of a comment made by a colleague suggesting that a debtor cannot avoid a lien if the debtor has no equity in his property. The debtor's counsel conducted research on that issue before filing the motions.
Frigidaire's docketed judgment constitutes a lien against the debtor's home located at 14056 Fall Brook Lane, Dale City, Virginia. The debtor purchased the home in 1989 for $99,000. Crestar Mortgage Corporation ("Crestar") holds a deed of trust on the property. According to the mortgage account statement dated December 30, 1997, the principal balance owed to Crestar, at the time of the bankruptcy filing, was $92,727.86. No other liens are recorded against the property.
The debtor alleges that the present market value of the residence, as of the petition date, was less than the purchase price. The value listed on the debtor's schedules was $88,400.00. The debtor's home is located in a townhouse development. He testified that a similar house in the same development was sold for about $92,000 to $94,000 in December, 1997. In addition, the debtor submitted into evidence a notice of real estate tax reassessment for 1997 from Prince William County. See Debtor's Exhibit 2. The market value of the property, according to the assessment, was $88,400 — $500 less than the previous year. Frigidaire did not introduce any evidence with respect to the market value of the debtor's home.
On September 10, 1998, the debtor filed the motions presently before the court to reopen his closed case and to avoid Frigidaire's judgment lien under § 522(1), Bankruptcy Code. On his schedules the debtor claimed an interest of $100 in his real property as exempt under the Virginia homestead exemption, Va. Code Ann. § 34-4. The debtor timely recorded a homestead deed on January 28, 1998, claiming $100 of the equity in the property as exempt. Frigidaire opposes lien avoidance, contending alternately that the claimed homestead exemption is invalid and that the property's market value is at lest $99,000.
Conclusions of Law and Discussion I.
This court has subject matter jurisdiction under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Under 28 U.S.C. § 157(b)(2)(A) and (K), this is a core proceeding in which final judgments and orders may be entered by a bankruptcy judge. Venue is proper in this district under 28 U.S.C. § 1409(a). The respondent has been properly served and has appeared generally.
II.
As an initial matter, the court must determine whether the case should be reopened. Under § 350(b), Bankruptcy Code, a closed bankruptcy case may be reopened "to administer assets, to accord relief to the debtor, or for other cause." The decision of whether to reopen a closed case is discretionary. Hawkins v. Landmark Finance Co., 727 F.2d 324 (4th Cir. 1984). In Hawkins, the Fourth Circuit held that a bankruptcy court did not abuse its discretion in denying leave to reopen, 8 months after the case closed, in order to file a motion to avoid a non-possessory non-purchase money security interest in furniture where the secured creditor had incurred expenses in reliance on the continued vitality of the lien.
In the absence of a compelling reason to the contrary, leave to reopen a closed bankruptcy case to file a lien avoidance motion should ordinarily be freely granted because neither the Bankruptcy Code nor the Bankruptcy Rules sets a time limit for lien avoidance, and to not allow the matter to be heard would frustrate Congress's intent to protect a debtor's exemptions as part of the debtor's "fresh start." In re Beneficial Finance Co. of Va., 18 B.R. 174, 175-76 (Bankr. E.D. Va. 1982) (Bonney, J.). It may well be that a hearing on a motion to reopen will not always be the most appropriate context in which to consider equitable defenses to lien avoidance such as laches, unclean hands or equitable estoppel. Frequently such defenses are better weighed in connection with the lien avoidance motion itself. In the present case, however, a combined evidentiary hearing was held on both the motion to reopen and the avoidance motion, and the distinction is therefore of little significance.
Frigidaire contends that the court should deny the debtor's motion to reopen the case since he had notice of the judgment at the time he filed the bankruptcy petition. In light of this knowledge, it is argued the debtor had no justifiable reason for waiting until four months after the case was closed to bring a motion to avoid the judgment lien. Frigidaire attempts to argue the defense of latches — though counsel did not specifically refer to such a defense at the hearing. The doctrine of latches is "based upon the principle that the moving party is barred from seeking relief because she has unreasonably delayed in asserting her rights to the prejudice of the party." In re Caicedo, 159 B.R. 104, 106 (Bankr. D. Conn. 1993). Chief Judge Bostetter in In re Dushole, 32 B.R. 317 (Bankr. E.D. Va. 1983) held that a debtor's delay (in that case 7 months) in asserting his right was not in itself prejudicial to a creditor.
The most troubling aspect of this case is the failure of debtor's counsel to focus on the lien issue while the case was still open. The neglect of counsel is one of the permissible factors that a court may consider when determining the reasonableness of a debtor's motion to reopen a closed case. Caicedo, 159 B.R. at 107, citing In re Shondel, 950 F.2d 1301, 1305 (7th Cir. 1991). The existence of the garnishment would have indicated to any reasonably competent attorney that a judgment had been obtained. Furthermore, any attorney should have known that a docketed judgment in Virginia constitutes a lien against the judgment debtor's real estate. In the present case, however, counsel was also under the mistaken factual belief that the property was held as tenants by the entirety. Property so held is exempt under Virginia law from the claims of creditors of either the husband or wife alone and is liable only for their joint debts. Vasilon v. Vasilon, 192 Va. 735, 66 S.E.2d 599 (1951). Hence, it is understandable that counsel would not have been overly concerned about the existence of a judgment against the debtor alone. Once counsel learned the truth about how title was held, however, he should have recognized immediately that there must have been a lien against the property. At that point, however, counsel was made aware of reported decisions in this district, issued prior to the Bankruptcy Reform Act of 1994, that held that § 522(f) lien avoidance was unavailable where the debtor had no equity in the property to which the lien attached. In re Sheaffer, 159 B.R. 758 (Bankr. E.D. Va. 1993). Given the existence of that precedent, it was certainly reasonable for counsel to conduct further legal research to determine whether those opinions had been undermined as a result of the 1994 amendments. Accordingly, while counsel's handling of this matter is hardly a model of expedition or of attention to detail, the court cannot find that the delay in bringing the lien avoidance action was so egregious as to constitute a basis, in and of itself, for denying relief. Frigidaire has not shown any actual prejudice from the delay and is simply relying on the fact that the debtor knew of the judgment and should have acted before the closing of the case. Although the court to some extent shares Frigidaire's annoyance, the court also agrees with the observation set forth in In re Quackenbos, 71 B.R. 693 (Bankr. E.D. Pa. 1987):
Needless to say, counsel should never rely on a lay client's understanding as to how real property is titled but should always insist on seeing a copy of the deed.
Delay, by itself, is not sufficient to support a finding of prejudice `because a creditor is normally aware that his interest is subject to avoidance by a . . . debtor.' Rather, prejudice occurs only when there is a change in position, during the period of delay, which will cause injury to the rights of the creditor or third parties.
Id. at 695 (citations omitted). Here, Frigidaire has not suffered a change in position as a result of the debtor's actions.
The court finds that the circumstances weigh in favor of permitting the debtor to reopen his case. Nevertheless, a case should not be reopened if doing so would be fufile and a waste of judicial resources because the court could not grant effective relief. In re Carberry, 186 B.R. 401, 402-03 (Bankr. E.D. Va. 1995). The court therefore turns to whether Frigidaire's judgment lien against the debtor's property can be avoided.
III.
The general rule is that liens and other security interests survive bankruptcy and are not affected by the debtor's discharge. Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 2153, 115 L.Ed.2d 66 (1991). Furthermore, after discharge such liens may be enforced even against exempt property. § 522(c)(2), Bankruptcy Code. The Bankruptcy Code, however, does permit certain liens to be "avoided," or set aside. In particular, and relevant to the present motion, a debtor may avoid judicial liens and certain non-possessory, non-purchase-money security interests if the lien or security interest "impairs" an exemption to which the debtor is otherwise entitled. § 522(f), Bankruptcy Code. The initial inquiry, then, is whether the debtor is entitled, but for the lien, to an exemption of his interest in the Fallbrook Lane property. If so, the next inquiry is whether, and to what extent, the judgment lien impairs that exemption.
A.
The filing of a bankruptcy petition creates an "estate" composed of all legal and equitable interests of the debtor in property. § 541(a), Bankruptcy Code. Nevertheless, an individual debtor is permitted to exempt from property of the estate — and thus to keep, free from the claims of the trustee and most creditors — either the property listed in § 522(d), Bankruptcy Code ("the Federal exemptions") or, alternatively, the exemptions allowable under the law of the state where the debtor has resided for the greater portion of the 180-day period prior to the filing of the bankruptcy petition and under general (nonbankruptcy) Federal law. § 522(b), Bankruptcy Code. A state, however, is expressly permitted to "opt out" of allowing its residents to take advantage of the Federal exemptions. § 522(b)(1), Bankruptcy Code. Virginia has done precisely that. Va. Code Ann. § 34-3.1. Accordingly, residents of Virginia filing bankruptcy petitions may not elect the Federal exemptions under § 522(d) but may claim only those exemptions allowable under state law and general Federal law. In re Smith, 45 B.R. 100 (Bankr. E.D. Va. 1984).
The debtor in this case claimed an exemption of $100 of the equity in his real property under Va. Code Ann. § 34-4. Frigidaire does not dispute that a homestead deed was timely filed in the correct jurisdiction, but does contend that the debtor's exemption of his interest in the real property is invalid. At the hearing, Frigidaire's counsel argued for the first time that under Va. Code Ann. § 34-5 a homestead exemption cannot be taken against the purchase price of the property claimed exempt, and that to allow a claim of exemption where the debtor had no equity over and above the remaining balance of the purchase price would contravene the statute. The court is unpersuaded by this argument. Section 34-5 only applies to debts for the purchase price of such property. Frigidaire's claim is not of that type. Frigidaire simply holds a judgment lien against the debtor's property. Its judgment lien is not a debt for the purchase price of the debtor's home, and Frigidaire cannot piggy-back on the rights of some other creditor. Put another way, the fact that the homestead exemption cannot be claimed against one particular kind of debt does not mean it cannot be claimed against an entirely different kind of debt. Accordingly, the court finds that the debtor is entitled to the $100 exemption.
Under the Virginia homestead exemption, a "householder" — defined as any resident of Virginia — may exempt from creditor process up to $5,000.00 worth of real and personal property by filing for record an instrument known as a homestead deed listing such property. Va. Code Ann. §§ 34-4, 34-6, 34-13, 34-14, and 34-17. The exemption is increased by $500.00 for each dependent under 19 years of age. Va. Code Ann. § 34-4. A disabled veteran may claim an additional $2,000.00 exemption. Va. Code Ann. § 34-4.1. A debtor who has filed for bankruptcy must, in order to claim the exemption in the bankruptcy case, file the homestead deed not later than the fifth day after the meeting of creditors. Va. Code Ann. § 34-17.
Va. Code Ann. § 34-5 reads:
The property exemptions created under this Code shall not be claimed against the following debts:
1. For the purchase price of such property or any part thereof. If the property purchased and not paid for is exchanged for or converted into other property by the debtor, such last named property shall not be exempted from the payment of such unpaid purchase money.
2. For spousal or child support obligations.
For the purpose of this ruling, I am assuming, for the sake of argument, that the claimed exemption would indeed be invalid in bankruptcy against an unsecured claim for the purchase price. But see In re Scott, 199 B.R. 586 (Bankr. E.D. Va. 1996) (under Supremacy Clause, § 522(c), Bankruptcy Code, not state law, governs which debts that can be enforced against exempt property).
B.
The next step is to determine whether the lien impairs the debtor's exemption. A considerable number of reported decisions, in this district and others, have wrestled with the question of when a lien "impairs" an exemption. Compare, e.g., Gunter v, GMAC Financing Corp. (In re Gunter), 100 B.R. 311 (Bankr. E.D. Va. 1989) (Bonney, J.) (debtors with no equity in their personal residence nevertheless had an "interest" which allowed them to avoid judicial lien) with Sheaffer v. Marshall Nat'l Bank Tr. Co. (In re Sheaffer), 159 B.R. 758 (Bankr. E.D. Va. 1993) (Tice, J.) (unless debtor had equity in property, judgment lien would not "impair" an exemption). With the enactment of the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394 (Oct. 22, 1994), however, Congress resolved the conflicting (and sometimes metaphysical) interpretations of when a lien "impairs" an exemption by creating a straightforward mathematical test. Specifically, § 302 of the 1994 Act added a new § 522(f)(2)(A), Bankruptcy Code, which provides as follows:
(2)(A) 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.
The application of this test clearly allows a debtor to avoid a judgment lien — and thus to benefit from any subsequent appreciation in the value of the property — even if the debtor has no equity in the property. That such was Congress's intent plainly appears from the legislative history:
Because the Bankruptcy Code does not currently define the meaning of the words "impair an exemption" in section 522(f), several court decisions have, in recent years, reached results that were not intended by Congress when it drafted the Code. This amendment would provide a simple arithmetic test to determine whether a lien impairs an exemption, based upon a decision, In re Brantz, 106 B.R. 62 (Bankr. E.D. Pa. 1989), that was favorably cited by the Supreme Court in Owen v. Owen, 111 S.Ct. 1833, 1838, n. 5.
The decisions that would be overruled involve several scenarios. The first is where the debtor has no equity in a property over and above a lien senior to the judicial lien the debtor is attempting to avoid. . . . Most courts and commentators had understood that in that situation the debtor is entitled to exempt his or her residual interests, such as a possessory interest in the property, and avoid a judicial lien . . . in any amount that attaches to that interest. Otherwise, the creditor would retain the lien after bankruptcy and could threaten to deprive the debtor of the exemption Congress meant to protect, by executing on the lien. Unfortunately, a minority of court decisions, such as In re Gonzalez, 149 B.R. 9 (Bankr. D. Mass. 1993), have interpreted section 522(f) as not permitting avoidance of liens in this situation. The formula in the section would make clear that the liens are avoidable,
Floor Statement of Congressman Brooks, 140 Cong. Rec. H 10,764 (daily ed. Oct. 4, 1994), reprinted in App. E, Collier on Bankruptcy, App. Pt. 9-70 (15th ed. rev. 1998) (emphasis added). See Butler v. Southern O Corp., 196 B.R. 329 (Bankr. W.D. Va. 1996) (in light of amendments to § 522(f) made by Bankruptcy Reform Act of 1994, a debtor may avoid a judicial lien even when the debtor has no equity in the property over and above a lien which is senior to the judicial lien the debtor is attempting to avoid).
The starting point for application of the impairment test is what the value of the debtor's interest in the property would have been in the absence of the lien. For lien avoidance purposes, property is valued as of the filing date. Fitzgerald v, Davis, 729 F.2d 306, 308 (4th Cir. 1984); In re Canalos, 212 B.R. 249 (Bankr. D. Md. 1997); In re Cooper, 197 B.R. 698, 701 (Bankr. M.D. Fla. 1996); In re Grube, 54 B.R. 655, 657 (Bankr. D. N.J. 1985). The debtor testified that he had purchased the property in 1989 for $99,000, and that a similar house from his townhouse development was sold for about $92,000 to $94,000 in December 1997. The debtor also offered into evidence a notice of tax reassessment for 1997 from Prince William County. The market value of the property, according to that assessment, was $88,400. No other evidence was offered by either party as to the value of the property. For the purpose of the present motion, the court finds the 1997 Prince William County tax assessment to be the most probative indication of the property's value. The court can take judicial notice that in Virginia real estate is required to be assessed at 100% of fair market value. Va. Const. Art. X, § 2. How closely the assessment actually tracks market values depends on how frequently a given jurisdiction reassesses, but in general it is reasonable to assume that assessments will lag the market to some extent, being high when housing prices are falling and low when prices are rising. No evidence has been provided to the court as to how the housing market in general has changed during the time frame in question. Frigidaire argues that the purchase price is a more objective and reliable indication of the value of the residence. Given the turbulence of the Northern Virginia real estate market in the last ten years, however, the court is disinclined to find that the price paid eight years previously for the property is a particularly reliable indication of its value at the time the petition is filed. Although the matter is not free from doubt, the limited evidence available to the court would justify a finding of value midway between the county tax assessment and the reported sale price ($92,00 to $94,000) of a similar house in the same subdivision. Accordingly, the court fixes the fair market value of the property at $90,700.00
By value, the court means the fair market value of the property. See Fitzgerald v. Davis, 729 F.2d 306, 308 (4th Cir. 1984). "The fair market value is the price which a willing seller under no compulsion to sell and a willing buyer under no compulsion to buy would agree upon after the property has been exposed to the market for a reasonable time." Taffi v. United States, 96 F.3d 1190 (9th Cir. 1996), cert. denied, 117 S.Ct. 2478 (1997).
The "other" lien against the property — Crestar's deed of trust — totaled $92,727 according to the debtor's exhibit. As no other evidence was offered, the court will accept this amount. Therefore, application of the test in § 522(f)(2)(A) gives the following result:
Judgment lien $38,750.40 Other liens 92,727.00 Exemption 100.00
Total $131,577.40 Value of property $90.700.00 Excess $40,877.40
Thus, the judgment lien impairs the exemption "to the extent" of $40,877.40. Since this exceeds the amount of the lien, the lien is avoidable in its entirety.
IV.
In summary, the court concludes that, because the debtor has properly exempted the interest in his real property, he can avoid the judgment lien now held by Frigidaire. Since there is effective relief the court can grant, reopening the case would not be a waste of judicial resources. Accordingly, a separate order will be entered granting both the motion to reopen and the motion to avoid the lien.