Fire-Damaged Home Valued as of Pre-Restoration Petition Date

Posted by NCBRC - January 3, 2020

The chapter 7 debtor was entitled to avoid a judicial lien that impaired her homestead exemption where the home, which had been damaged by fire pre-petition, was valued as of the petition date rather than after post-petition restoration had enhanced the residence’s value. Waltrip v. Sawyers (In re Sawyers), No. 19-6016 (B.A.P. 8th Cir. Dec. 19, 2019).

Prior to filing for bankruptcy, Ruby Sawyers’s home was damaged by fire and she received insurance proceeds in the amount of over $132,000 for its restoration. At the time of her petition, she had not yet restored the home and it was valued at $3,000 – $6,000. She claimed a homestead exemption on 100% of the fair market value of the residence to the maximum exemption of $15,000. After the fire and prior to  the bankruptcy petition, David Waltrip and the debtor entered into a consent judgment in the amount of $256,739.31 which resulted in lien against the property. The trustee made no distributions and abandoned all assets. The case was closed. Using the insurance proceeds, Ms. Sawyers then made improvements to the residence increasing its value to $95,000 – $103,000. The judgment creditor instituted a sheriff’s sale of the property. Ms. Sawyers reopened her bankruptcy and moved to avoid the judgment lien as impairing her homestead exemption. Mr. Waltrip objected. Using a formula under which the value of the property was subtracted from the sum of the liens and the exemption amount, the bankruptcy court found that the judicial lien impaired Ms. Sawyers’s homestead exemption and granted her motion for summary judgment to avoid the lien in full. The creditor appealed to the bankruptcy appellate panel for the Eighth Circuit.

The primary issue on appeal was the proper valuation of the property for purposes of determining whether the judicial lien impaired the homestead exemption. The creditor argued that the insurance proceeds should have been added to the value of the property such that the value of the property should have been the post-restoration amount. The bankruptcy appellate panel disagreed finding that the value of the property was determined at the time the petition was filed. In so holding, the panel devoted the bulk of its opinion to distinguishing the creditor’s cases as being either based on contract interpretation, i.e. Graves v. Stanton, 621 S.W. 2d 524, 528 (Mo. App. 1981), or involving property that was converted from one form to another, i.e. Grand Teton Mountain Invs., LLC v. Beach Props., LLC, 385 S.W.3d 499 (Mo. App. 2012).

On the other hand, the court cited In re Thigpen, 374 B.R. 374 (Bankr. S.D. Ga. 2007), which involved valuation of property for purposes of a judicial lien avoidance action. In that case, the lienholder, like the creditor here, argued that the property should be valued at its current value rather than the value it held at the time of the bankruptcy petition. The court found that the proper valuation date was the petition date notwithstanding post-petition appreciation of the property’s value. The court here noted that Thigpen was consistent with the language of section 522(a)(2) which defines value as of the filing date.

The panel rejected Mr. Waltrip’s argument that the debtor was unfairly enriched by the post-petition use of the insurance proceeds to enhance the value of the property. The panel found that Ms. Sawyers was not enriched at Mr. Waltrip’s expense as any benefit she received was not conferred by Mr. Waltrip but came by operation of Missouri insurance law. In fact, the court noted that the judgment lien attached post-fire and pre-restoration, so calculating value based on post-restoration would unfairly enrich the creditor.

The panel likewise rejected the creditor’s argument that Ms. Sawyers’s fourteen-month delay in seeking to avoid his lien triggered the doctrine of laches and precluded her success. The panel found that she filed the motion immediately upon learning of the sheriff’s sale and, therefore, the timing was not unreasonable. The panel further found that repayment of the creditor’s costs related to the sheriff’s sale was not a precondition to reopening the case. In fact, the bankruptcy court offered Mr. Waltrip the opportunity to move for reimbursement of those fees and he did not do so. Therefore, that argument did not resonate.

The panel affirmed the decision of the bankruptcy court.

Sawyers 8th BAP Dec 2019




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