Debtor May Avoid Transfer under § 522(h) when § 522(f) Not Available

Posted by NCBRC - February 16, 2022

A debtor may avoid a judgment lien impairing her homestead exemption under section 522(h) even though she did not meet the requirements for lien avoidance under section 522(f). In re Garbo, No. 21-11053 (Bankr. W.D. N.Y. Jan. 27, 2022).

Prior to filing for chapter 7 bankruptcy, the debtor and her husband divorced. Their divorce settlement stipulated that the husband would quit claim to the debtor his half-interest in their marital residence. Before he executed the quitclaim deed, however, Discover Bank obtained a judgment lien against him for $3,310.63. He then quitclaimed the property to the debtor. When the debtor filed for bankruptcy, the value of the home was $170,000 and was security for a first mortgage in the amount of $90,640. The debtor claimed her New York homestead exemption in the amount of $89,975, leaving no equity to cover Discover Bank’s lien. She sought to avoid Discover Bank’s lien as a lien against her homestead exemption under section 522(f)(1).

The court found that she did not meet the requirements for avoidance under section 522(f)(1). That section allows a debtor to “avoid the fixing of a lien” that impairs an exemption. In Farrey v. Sanderfoot, 500 U.S. 291, 296, 111 S.Ct. 1825, 1829 (1991), the Court held that section 522(f)(1) applies only if the debtor was the owner of the property when the lien was fixed. Here, the court found the lien attached to the husband’s interest and, therefore, when the debtor acquired the property, the lien was already “fixed.” Therefore, the debtor could not avoid the lien under section 522(f)(1).

However, in her motion, the debtor expanded the basis for her request to such “additional or alternative relief” as the court may order. The court thus determined that the debtor was not limited to section 522(f)(1) for the relief she sought, and it considered whether she was entitled to lien avoidance under section 522(h).

That section permits a debtor to avoid a transfer if: 1) the debtor could have exempted the property under section (g)(1), had the trustee avoided the transfer and recovered the property, and 2) the trustee could have avoided the transfer under section 544, 545, 547, 548, 549, or 724(a), but did not do so. Subsection (g)(1) permits a debtor to avoid a transfer of property that the trustee could have recovered under section 550 which, in turn permits a trustee to recover property upon a transfer that was avoided under the same provisions as those listed in section 522(h), so long as the transfer was not voluntary and the debtor did not conceal the property. Finding that both the pre-conditions of section 550 were met, the court went on to determine whether the trustee could have avoided the transfer and recovered the property under any of the listed provisions.

The court found the trustee could have avoided the lien under section 548, so long as: 1) that the transfer was within two years of the bankruptcy filing, 2) that the debtor did not receive fair compensation for the transfer, and 3) that the debtor was insolvent at the time of the transfer. The first two conditions were met in this case, as the transfer occurred within the necessary proximity to her bankruptcy filing and she received no compensation. The court found, however, that it had no evidence of the debtor’s insolvency at the time of the transfer which preceded her bankruptcy filing by more than twenty months.

Because Discover Bank did not oppose her motion for avoidance, the court denied the motion but gave the debtor the option to present evidence of her insolvency at the time of the transfer. In the face of such evidence, the court would then grant the motion to avoid the lien.

Garbo Bankr WD NY Jan 2022


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