Federal Lien Broader than State Lien for Avoidance Purposes

Posted by NCBRC - March 2, 2019

Federal law defines a lien more broadly than Missouri law, and for that reason, the debtor was able to avoid a judgment lien as impairing the exemption he claimed on his residence, which he owned as a tenancy in the entireties with his wife, even though state law did not recognize the creation of the lien. CRP Holdings A-1, LLC v. O’Sullivan, No. 17-3226 (8th Cir. Feb. 1, 2019).

Chapter 7 debtor, Casey O’Sullivan, and his wife acquired their residence as tenants in the entirety. CRP obtained a foreign judgment in the amount of $765,151.18 against the debtor and registered the judgment in the debtor’s resident county in an effort to obtain a judicial lien against the property. When Mr. O’Sullivan filed for bankruptcy, he claimed an exemption for the property and sought to avoid CRP’s judicial lien under section 522(f)(1) as impairing that exemption. The bankruptcy court found that the judgment lien, even though unenforceable, placed a “cloud” on the debtor’s title and could therefore be avoided as impairing his bankruptcy exemption. The BAP affirmed.

In an initial appeal to the Eighth Circuit, that court remanded with instructions to the bankruptcy court to address the initial question of whether, under state law, CRP’s judgment gave rise to a judicial lien at all. CRP Holdings, A–1, LLC v. O’Sullivan (In re O’Sullivan), 544 B.R. 407, 413 (B.A.P. 8th Cir.), vacated, 841 F.3d 786 (8th Cir. 2016). The bankruptcy court found that it did, and the BAP affirmed. In re O’Sullivan, 569 B.R. 163, 165 (Bankr. W.D. Mo. 2017), aff’d, No. 17-6012, 2017 WL 4844244 (B.A.P. 8th Cir. Sept. 22, 2017).

On appeal, CRP argued that, under Missouri law, no lien was created when it registered its foreign judgment. Rather, CRP maintained that it had “a contingent future interest that may vest upon the happening of a future event.”

To some extent, the circuit court agreed. Missouri law provides that a judgment against one party to a tenancy in the entireties does not create a lien against the property. This did not end the question, however. The court went on to note that under Mahen v. Ruhr, 240 S.W. 164 (Mo. 1922), “Missouri law nonetheless recognizes that courts must act in equity to clear a cloud upon a title to real estate that is not apparent on the face of the document.”

The court then turned to the Bankruptcy Code to determine whether, under these circumstances, section 522(f)(1) may still apply. Section 101(36) defines a judicial lien as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” The Code goes on, in section 101(37), to describe a “lien” as a “charge against or interest in property to secure payment of a debt or performance of an obligation.” “Lien,” as defined here, is broadly interpreted to include inchoate and unenforceable liens. The court found that under these definitions, the “cloud” that surrounds the title because of the judgment, is a sufficient interest in property to qualify as a lien and that application of section 522(f) would effectively clear that cloud.

The court affirmed the decision of the BAP.

O’Sullivan 8th Cir Feb 2019


Post a Comment

You must be logged in to post a comment.