Impairment to Exemption Calculation Based on Debtor’s Half Interest in Property

Posted by NCBRC - October 24, 2018

A debtor seeking to avoid a lien as impairing a homestead exemption must calculate the impairment using his proportionate interest in the property and the sum of the corresponding mortgage liens in proportion to that interest. Sandoval Irrevocable Trust v. Taylor, No. 17-1241 (10th Cir. Aug. 14, 2018).

As a result of Mark Taylor’s misappropriation of funds from an Irrevocable Trust for which he was trustee, the Trust (Sandoval) obtained state court judgments against him and liens against his residence. Mr. Taylor filed for chapter 13 bankruptcy and listed the property, which he co-owned with his ex-wife, as having a total value of $560,000 with his portion amounting to $280,000. He later converted his case to chapter 7 and moved to avoid the judgment liens as impairing his state homestead exemption of $37,500.

The parties disagreed about the proper way to calculate the exemption impairment under the formula provided in section 522(f)(2)(A). Specifically, the parties disagreed as to whether the mortgage liens should be included in the sum of all the liens on the property in their entirety, in which case the judgment liens would be fully avoidable, or in proportion to Mr. Taylor’s one-half ownership interest, in which case approximately $200,000 would remain on Sandoval’s liens. Relying on a case decided by a Bankruptcy Appellate Panel for the Tenth Circuit, the bankruptcy court adopted Mr. Taylor’s treatment of the mortgage liens and granted his motion.

The Tenth Circuit accepted direct appeal.

The court began with the text of section 522(f)(2)(A)(ii) which instructs that the calculation of impairment should include “all other liens on the property.” The Tenth Circuit agreed with Sandoval that, based on the text and the structure of the Bankruptcy Code, “all other liens” refers to mortgage liens only to the extent that they correspond to the debtor’s ownership interest. The circuit court noted that the First, Third, and Eleventh Circuits have all addressed the issue and agreed with the position taken by Sandoval. The Tenth Circuit reasoned that the majority view effectuated Congress’s intent to protect the debtor against “actual” interference with his homestead exemption. It found that, consistent with other provisions in the Code, the correct reading of the word “property” in section 522(f)(2)(A)(ii), refers to the debtor’s interest rather than the property as a whole. Furthermore, where the debtor’s interest in the property and the amount of the exemption he could claim under state law were both halved in accordance with his proportional interest, the court deemed it sensible to halve the mortgage debt as well.

On the other hand, adopting Mr. Taylor’s reasoning would result in attributing more equity in property to a debtor at a lienholder’s expense.

The court reversed and remanded.

Taylor 10th Cir Aug 2018


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