Avoiding a Lien Requires that the Lien Exist

Posted by NCBRC - November 29, 2016

Where the creditor sought to establish a judicial lien against the debtor’s interest in a tenancy in the entirety the threshold question is not whether the lien impairs the homestead exemption and may be avoided under section 522(f)(1), but whether a lien has been created at all. CRP Holdings v. O’Sullivan, No. 16-1526 (8th Cir. Nov. 14, 2016).

CRP obtained a default judgment against Casey Drew O’Sullivan and, attempting to secure a judicial lien on his real property, filed a notice of foreign judgment in the county where Mr. O’Sullivan’s residence was located. Mr. O’Sullivan filed for chapter 7 bankruptcy and claimed the property, which he owned as tenants in the entirety with his wife, as his homestead. The bankruptcy court sustained Mr. O’Sullivan’s motion to avoid the judicial lien. The BAP affirmed, finding that while CRP’s lien may not have been enforceable, it could still be avoided. In re O’Sullivan, 544 B.R. 407 (B.A.P. 8th Cir. 2016).

On appeal, the Eighth Circuit found that there was no question that Mr. O’Sullivan had a valid homestead exemption, nor did it disagree with the bankruptcy court’s impairment analysis. It questioned, however, whether CRP had a lien against the property that could be avoided.

A judicial lien is broadly defined as a lien obtained by judgment and secured by an interest in property. Under Missouri law, when CRP filed its notice of foreign judgment it created a lien against Mr. O’Sullivan’s real estate. “Real estate itself is narrowly defined as an interest in property liable to be sold upon execution. Mo. Rev. Stat. § 511.010.” As a tenancy in the entirety, the property was not owned by Mr. O’Sullivan, but by “the marital community,” and neither spouse had an interest separate from the other’s. Therefore, a judgment against only one party could not constitute a lien on the entireties property. The court found that “[w]hen a judgment fails to give rise to any judicial lien” enforceable or otherwise, the debt is subject to discharge in bankruptcy and avoidance under section 522(f)(1) would be superfluous.

The court then looked to how other circuits have dealt with similar cases and found that the Sixth and Tenth Circuits have declined to apply section 522(f)(1) to a lien that did not come into existence under operation of state law, while the Fifth Circuit has interpreted Texas homestead exemption law broadly enough to encompass such liens.

The court remanded to the bankruptcy court to determine whether, under Missouri law, CRP had a judicial lien against Mr. O’Sullivan’s homestead.




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