A judicial lien impairing otherwise exempt property of debtor is avoidable in some states under Section 552(f) of the Bankruptcy Code but is not avoidable in other states. May a debtor avoid a judicial lien on a homestead under Section 522(f) when the judgment is against the debtor but not also against the debtor’s spouse?
The Eighth Circuit recently held that a judicial lien is avoidable in Missouri as an impairment of the debtor’s homestead exemption. In CRP Holdings A-1 LLC v. O’Sullivan (In re O’Sullivan), 17-3226 (8th Cir. Feb. 1, 2019), a husband and wife owned their home as tenants by the entireties. A creditor obtained a judgment of almost $800,000 against the husband but not against the wife. The creditor then domesticated the judgment in the Missouri county where the property was located.
The husband later filed for chapter 7 bankruptcy protect but the wife did not. The debtor/husband moved to “avoid” the lien on the homestead under Section 522(f), claiming it impaired the value of his $15,000 homestead exemption. The bankruptcy court avoided the judicial lien and was upheld by the Bankruptcy Appellate Panel and later was upheld again by the Eighth Circuit.
Section 522(f) permits a debtor to “avoid the fixing of a [judicial] lien on an interest of the debtor in property to the extent such lien impairs an exemption . . . .” The Eighth Circuit has previously found that the broad definition of “lien” under the Bankrutpcy Code suggests that a “lien” includes charges against property that are both enforceable and unenforceable.
Writing for the Eighth Circuit, Judge Lavenski Smith addressed the question of whether the creditor’s domestication of the judgment gave rise to a lien on the debtor’s property under Missouri law. Given that the judgment creditor could not foreclose the judgment lien on the homestead, was there no lien at all, or was there a lien, albeit unenforceable?
In Missouri, judgments give rise to liens on “real estate.” The term “real estate,” however, is narrowly defined to mean property that may be sold upon execution. Because the home was entireties property, it was not subject to execution. Therefore, a judgment against only one spouse was not a lien on real property under Missouri law.
Digging further into the issue, Judge Smith found that although there was no lien under Missouri law, there was a cloud on title under Missouri law. A cloud on title, he said, “constitutes a ‘charge against or interest in the property,” citing the definition of “lien” under Section 101(37). Therefore, although though there was no lien under state law, there nonetheless was “a ‘lien’ as federal law defines it because a ‘cloud on title’ to the property exists under Missouri law.”
Judge Smith then went on to affirm the lower courts by holding that the debtor could avoid the lien because recording the judgment gave rise to a presently unenforceable lien on the homestead that was a cloud on title.