An update to our previous article

In our May, 1996 Newsletter in an article entitled Bankruptcy Judgments and Liens - Revisited With Emphasis on 11 U.S.C. Sec. 522(f), we outlined the aspects of real property law in regard to the troublesome language of 522(f). In that article we cited In Re Love, 42 B.R. 317 (Bankr. E.D.N.C. 1984), which held that there is not complete lien avoidance under 522(f) because a judgment creditor can enforce the lien when the debtor or a dependent ceases using the property as a residence or when ownership ceases.

Because of the holding in the case of In Re McQueen (U.S.D. Ct., Eastern D., Western Div., No. 5: 94-CV-631-BR 1996), there is some doubt about what 522(f) actually means. The facts of In Re McQueen are as follows. The debtors owned their residence which was subject to over $898,000.00 in voluntary liens and over $400,000.00 in involuntary liens, one of which was a judicial lien to BB&T in the amount of $350,000.00 which is the subject of the case. The debtors had no equity in their residence, and they flied a motion to avoid the judgment lien. The motion was denied at a bankruptcy hearing "on the ground that the debtors have no equity in their residence and that an exemption is impaired only to the extent that the debtor has equity in the property." The court, in overruling the bankruptcy court’s decision, held that 522(f) was originally intended to provide a debtor the opportunity to avoid a judicial lien on a residence without regard to the debtor’s monetary interest in that residence; therefore, the debtors should have been allowed to avoid BB&T’s judicial lien in its entirety, as partial avoidance is not in line with the original intent of 522(f).

It should be noted that In Re McQueen construed 11 U.S.C. Sec. 522(f) before that section’s amendment by the Bankruptcy Reform Act of 1994. However, the court noted that the legislative history to the amendment indicated that the intent of former 11 U.S. C. Sec. 522(f) was to be construed as in In Re McQueen. The court noted that the legislative history cited in the October 4, 1994 Congressional Record (which is also reproduced in the annotation to 11 U.S.C. Sec. 522) states that the current version of 522(f) overrules decisions which do not allow complete lien avoidance in such a case. It is noted that (1) In Re McQueen dealt with the issue of whether lack of equity above the amounts of liens prior to BB&T’s judicial lien precluded relief under 522(f) and (2) In Re Love dealt with the effect on use of 522(f) of the debtor or a dependent ceasing to use the property as a residence or own the property. Does an In Re McQueen complete lien voidance survive an In Re Love change of status of the real property?

In sum, what the In Re McQueen court might be saying is that, regardless of the limitations in North Carolina’s homestead exemption law, the debtor can obtain complete lien avoidance under 522(f) regardless of the fact that subsequently, the debtor or a dependent might cease to use the property as a residence or cease to own the property. If a procedurally valid 522(f) order is entered stating that the lien is avoided in its entirety and the order is not appealed, we can rely upon the order. Any timely appeal taken must uphold the order. The bankruptcy docket should contain notation of the order and appeals, etc. Bankruptcy Rule 5003(a). The clerk is required to keep a correct copy of every final judgment or order affecting title to or a lien on real property. Bankruptcy Rule 5003(c).

Incidentally, the U.S. Supreme Court has held that 11 U.S.C. Sec. 522(f) cannot be used unless the debtor possessed the encumbered interest in the property prior to the attachment of the lien. Farrey v. Sanderfoot, 500 U.S. 291, 111 S. Ct. 1825, 114 L. Ed2d 337 (1991).

It would seem that 11 U.S.C. Sec. 522(f) could be made more concise and straight forward if In Re McQueen is correct. 522(f) could have been changed in 1994 to clearly state that an order permanently avoiding and cancelling the lien can be entered. Let us hear from you or your bankruptcy law partners or associates regarding this confusing area.