Judicial Lien Need Not Be Enforceable To Be Avoidable

Posted by NCBRC - October 4, 2017

An unenforceable judgment lien on the debtor’s homestead property, which he owned as a tenancy in the entireties with his non-debtor spouse, was an inchoate lien which created a “cloud” over the title and therefore fell within section 522(f)’s purview for avoidance of a lien that impairs an exemption. CRP Holdings v. O’Sullivan, No.17-6012 (B.A.P. 8th Cir. Sept. 22, 2017).

The case came before the BAP upon appeal of the bankruptcy court’s order voiding the lien. The case was before the bankruptcy court for the second time after remand from the Eighth Circuit  on the sole issue of whether CRP had a cognizable lien on Casey Drew O’Sullivan’s interest in the entireties property. CRP Holdings A-1, LLC v. O’Sullivan (In re O’Sullivan), 841 F.3d 786, 790 (8th Cir. 2016); In re O’Sullivan, 569 B.R. 163, 169 (Bankr. W.D. Mo. 2017).

Interpreting Missouri law which, upon state court judgment creates a judicial lien on a debtor’s real estate, the panel found CRP did not have an enforceable lien. Missouri defines real estate as property “liable to be sold upon execution,” and a tenancy by the entireties cannot be subject to forced sale to satisfy the debts of only one spouse. In the event of the death of the non-debtor spouse, however, the property would be wholly owned by Mr. O’Sullivan and would be subject to forced sale to satisfy the state court judgment. Within this statutory framework, the panel found CRP held a cognizable lien that was currently unenforceable. As such it lessened the value of the property and could be avoided as impairing his exemption.

In so holding, the panel disagreed with Arango v. Third Nat’l Bank in Nashville (In re Arango), 922 F.2d 611, 615 (6th Cir. 1993), which similarly dealt with a judicial lien on property owned in the entireties and based on a debt of only one spouse. In that case, the court found that the judicial lien on the debtor’s interest in the entireties property did not exist except upon the debtor’s spouse’s death. Therefore, there was no lien to impair the debtor’s “exempt present possessory interest” which could be avoided under section 522(f). The Arango court noted, however, that a lien would spring into existence upon the death of the debtor’s spouse.

The panel found that its decision was in harmony with Congress’s favorable treatment of exemptions and furthered the overall goal of affording the debtor a fresh start. The panel added that “[i]t would be unfair to allow CRP to defeat the Debtor’s fresh start because it has now devised a scheme whereby it believes it may avoid the protections afforded to the Debtor by §522(f) and still reap the benefit of its lien upon the death of the Debtor’s spouse.”

O’Sullivan 8th BAP opinion Sept 2017

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