East Cambridge v. Silveira

• Court: Court of Appeals for the First Circuit
• Decided: April 22, 1998
• Docket: 97-1917
• Status: Published

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 97-1917

                    IN RE: THOMAS J. SILVEIRA,

                                 

                             Debtor.


EAST CAMBRIDGE SAVINGS BANK,



                            Appellant,



                                v.



                       THOMAS J. SILVEIRA,



                            Appellee.


APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF MASSACHUSETTS



           [Hon. William G. Young, U.S. District Judge]


Before



                     Torruella, Chief Judge,

                                

                Selya and Stahl, Circuit Judges.


Leonard M. Frisoli, with whom Frisoli & Associates was on

brief, for appellant.

     Richard S. Hackel for appellee.


April 21, 1998


STAHL, Circuit Judge.  This bankruptcy appeal requires us

to decide the extent to which a Chapter 7 debtor may, pursuant to

11 U.S.C.  522(f)(1) & (f)(2)(A), avoid the fixing of a judicial

lien on the debtor's property, when the market value of the

property exceeds the sum of (1) all consensual (non-judicial) liens

on the property and (2) the amount of the debtor's exempt interest

under 11 U.S.C.  522(d).  We hold that, in such a situation,

section 522(f)(1) permits the avoidance of the targeted judicial

lien only in part, not in its entirety.  Because the district court

concluded otherwise, we vacate the judgment and remand for further

proceedings.

                                I.

  The debtor and appellee in this action, Thomas J.

Silveira, owns, as his primary residence, a property that has been 

stipulated for purposes of this appeal to have a fair market value

of $157,000.  The property is subject to a mortgage of $117,680. 

The appellant, East Cambridge Savings Bank ("the Bank"), holds a

$209,500 judicial lien (other than a judicial lien that secures a

debt) on the property.

  On May 9, 1995, Silveira filed a voluntary petition under

Chapter 7 of the Bankruptcy Code, 11 U.S.C.  301 et seq.  He

claimed an exemption of $15,000 in the property pursuant to 11

U.S.C.  522(d)(1).  Silveira then filed a motion to avoid the

Bank's $209,500 judicial lien pursuant to 11 U.S.C.  522(f)(1) and

 522(f)(2)(A). The bankruptcy court ruled that those provisions

permitted the debtor to avoid the Bank's lien in its entirety and

thus granted Silveira's motion.  The Bank appealed to the district

court, arguing that on the facts of this case,  522(f)(1) &

(f)(2)(A) permitted only a partial avoidance of its judicial lien. 

The district court disagreed and entered an order affirming the

bankruptcy court's determination.  This appeal followed.

                               II.

     The Bankruptcy Code provides every debtor with a personal

power to avoid certain types of liens that would impinge upon

interests that the debtor would otherwise be entitled to claim as

exemptions from the bankruptcy estate.  11 U.S.C.  522(f)(1). 

Judicial liens are principal targets for this avoidance power:

     (f)(1) . . . [T]he debtor may avoid the fixing

     of a lien on an interest of the debtor in

     property to the extent that such lien impairs

     an exemption to which the debtor would have

     been entitled under [ 522(b)], if such lien

     is--



     (A) a judicial lien, other than a judicial

     lien that secures a debt . . . .



11 U.S.C.  522(f)(1)(A).

     In the years leading up to the Bankruptcy Reform Act of

1994 ("1994 Act"), a wide divergence of views developed concerning

the circumstances in which a judicial lien could be deemed to

"impair" an exemption within the meaning of  522(f)(1), and the

precise extent to which liens causing such impairment could be

avoided.  See, e.g., 2 David G. Epstein, Steve H. Nickles & James

J. White, Bankruptcy  8-28, at 560 (West 1992) (describing various

approaches).  In an effort to resolve this discord, Congress

included in the 1994 Act an amendment to  522(f), which added the

following new subsection:

     For the purposes of this subsection, a lien

     shall be considered to impair an exemption to

     the extent that the sum of--



    (i) the lien;

    (ii) all other liens on the property; and

    (iii) the amount of the exemption that

    the debtor could claim if there were no

    liens on the property;



  exceeds the value that the debtor's interest

  in the property would have in the absence of

  any liens.



11 U.S.C.  522(f)(2)(A).

  In this case, it is undisputed that the sum of the

targeted judicial lien ($209,500), all other liens ($117,680) and

the amount of the debtor's exemption ($15,000) exceeds the

(stipulated) value of the debtor's property ($157,000), by

$185,180.  Thus, the Bank's judicial lien clearly does "impair" an

exemption of the debtor within the meaning of  522(f)(2)(A).  The

question here concerns the extent of the debtor's power under

 522(f)(1) to alleviate this "impairment."

  The district court concluded that once a debtor's power

of avoidance is triggered by the fact of an impairment of whatever

size, that power permits the debtor to avoid the judicial lien

causing the impairment in its entirety.  The court thus held that

Silveira was entitled to avoid the entire amount of the Bank's

$209,500 lien.  The Bank now argues that the district court

misapplied  522(f)(1)(A), and that Silveira is in fact entitled to

avoid only so much of the Bank's lien as necessary to prevent

impairment of the debtor's exemption within the meaning of

 522(f)(2)(A).  We agree.

  As an initial matter, we find unpersuasive Silveira's

argument that the "plain language" of the statute supports the

district court's view.  On the contrary, the language of the

relevant provisions seems to us to support the Bank's position. 

Section 522(f)(1) permits a debtor to "avoid the fixing of a lien

on an interest of the debtor in property to the extent that such

lien impairs an exemption [of the debtor]."  11 U.S.C.  522(f)(1)

(emphasis added).  Section 522(f)(2)(A), similarly, provides that

a judicial lien "impair[s] an exemption to the extent that" the

targeted lien, in combination with other liens and the value of the

debtor's exemption, exceeds the value of the debtor's property.  11

U.S.C.  522(f)(2)(A) (emphasis added).  If Congress intended for

avoidance of judicial liens to be an "all-or-nothing" matter, one

might wonder why the provisions' drafters chose to use the

connective phrase "to the extent that," in lieu of the word "if,"

which obviously would have been a simpler construction.  See In re

Furkes, 65 B.R. 232, 235 (D.R.I. 1986) ("The 'to the extent that'

clause cannot be seen as some sort of legislative slip of the pen.

. . . [H]ad Congress intended . . . an all-or-nothing proposition,

it would have drafted the statutory language more infrangibly

. . . .").  The statutory directive that a debtor may avoid a

judicial lien "to the extent that" the lien impairs an exemption

favors   or is at least readily amenable to   reading the

definition of "impairment" in  522(f)(2)(A) not only as a

condition of avoidability, but also as a proportional measure of

the scope of the debtor's avoidance power.

  But even if the statute's language does not settle the

issue, the debtor's proposed interpretation is unacceptable in view

of the statute's intended purposes.  Consider the following two

hypothetical scenarios:

     Hypothetical A: The debtor owns a primary

     residence with a market value of $100,000,

     subject to an outstanding mortgage balance of

     $55,000, a judicial lien of $30,000 (not

     securing a debt), and no other liens.  The

     debtor is entitled, under  522(d)(1), to

     claim an exemption of $15,000 with respect to

     the property.



     Hypothetical B: Same as Hypothetical A, except

     that the debtor's property is subject to a

     judicial lien of $30,001 instead of $30,000.



     In Hypothetical A, we can see that the sum of the

judicial lien ($30,000), other liens ($55,000) and the debtor's

exemption ($15,000) does not exceed the value of the debtor's

property ($100,000).  Thus the judicial lien in Hypothetical A does

not impair the debtor's exemption within the meaning of

 522(f)(2)(A), and the debtor is not entitled to avoid any portion

of that lien under  522(f)(1).

     In Hypothetical B, however, the sum of the judicial lien

($30,001), other liens ($55,000) and the debtor's exemption

($15,000) does exceed the property's value (by $1), and so the

targeted judicial lien is deemed under  522(f)(2)(A) to impair the

debtor's exemption.  Under Silveira's proposed interpretation, the

fact of this impairment requires that the debtor in Hypothetical B

be permitted to avoid the $30,001 judicial lien in its entirety. 

Thus, as Silveira would have it, a $1 increase in the amount of the

(unavoidable) judicial lien in Hypothetical A would result in the

debtor's acquiring the power to avoid the lien in full.

     We find it difficult to conceive of any reason that would

counsel in favor of interpreting  522(f)(1)(A) & (f)(2)(A) to

produce such a result.  The district court, in siding with

Silveira, suggested that denying debtors the right to avoid in fullany judicial lien that impairs an exemption would "circumvent"

Congress's goal of providing debtors with a "fresh start" after

bankruptcy and would thus frustrate the basic purpose of

 522(f)(1).  The problem with this argument, however, is that it

proves too much.

     The implication of the district court's reasoning is that

the statute effects a general policy against the fixing of judicial

liens with respect to property in which the debtor holds an exempt

interest.  Clearly, however, the statute cannot be read so broadly. 

Section 522(f) unquestionably contemplates that in some

circumstances   see, for example, Hypothetical A above   a judicial

lien up to some calculable amount will not be deemed to impair the

debtor's exemption and hence will not be subject to the debtor's

avoidance power.  But if, in such a circumstance, the statute would

not permit the debtor to avoid any judicial lien smaller than that

calculable amount, it would seem arbitrary and unfair to permit a

creditor to avoid the entirety of a judicial lien that was largerthan that amount.  Thus, if  522(f)(1) would permit the fixing of

a $30,000 judicial lien on the facts of Hypothetical A above, then

it would border on the absurd not to permit the holder of a $30,001

judicial lien, on otherwise identical facts, to pursue the fixing

of its lien up to the amount of $30,000.

     This reasoning compels an analogous result in this case. 

 Here, the sum of the debtor's exemption ($15,000) and all

consensual liens on his property ($117,680) is $24,320 less than

the value of the property ($157,000); in other words, there is

$24,320 of excess equity available.  This means that if the Bank's

judicial lien here had been for $24,320 or less, that lien would

have been absolutely unavoidable under  522(f)(1), because there

would have been no "impairment" within the meaning of

 522(f)(2)(A).  The fact that the Bank's actual lien is for more

than $24,320 surely provides no reason to place the Bank in a

position worse than it would have been had its lien originally been

limited to that amount.  Fairness requires, therefore, that the

Bank be permitted to pursue the fixing of its $209,500 judicial

lien up to the amount of $24,320.

     In more intuitive terms, it is obvious that the value of

the debtor's property in this case is sufficient to cover the

entire amount of the debtor's mortgage ($117,680) plus his claimed

exemption ($15,000), with $24,320 of equity to spare.  Nothing in

 522(f)(1) or  522(f)(2) can be read to require that this excess

equity be preserved either for the debtor or the bankruptcy estate,

rather than being made available for the partial satisfaction of a

judicial lien.  And, as shown above, the fixing of a judicial lien

in an amount equal to this excess equity would not create any

impairment of the debtor's $15,000 exemption.  See 11 U.S.C.

 522(f)(2)(A).  It follows that no legitimate purpose underlying

the statute would be served by permitting Silveira to avoid so much

of the Bank's lien   $24,320   as could be covered by the excess

equity available in the property.

     In summary, we apply  522(f)(1)(A) and  522(f)(2)(A) to

the facts of this case as follows.  First, pursuant to

 522(f)(2)(A), we determine that the sum of (i) the targeted

judicial lien ($209,500), (ii) all other liens ($117,680), and

(iii) the amount of the debtor's exemption ($15,000)   which sum

equals $342,180   exceeds the value that the debtor's property

would have in an unencumbered state ($157,000), and exceeds that

value by $185,180.  Thus, the Bank's judicial lien impairs the

debtor's exemption to the extent of $185,180.  Because Silveira is

entitled to avoid the Bank's lien to the extent of any impairment,

Silveira is entitled to avoidance in the amount of $185,180.  See11 U.S.C.  522(f)(1)(A).  The remainder of the Bank's judicial

lien, in the amount of $24,320 ($209,500 minus $185,180), is not

subject to avoidance by the debtor under  522(f)(1)(A).

     We note that this result follows the approach recently

adopted by this Circuit's Bankruptcy Appellate Panel.  See In re

Finn, 211 B.R. 780 (1st Cir. BAP 1997); accord In re Ryan, 210 B.R.

7 (Bankr. D. Mass. 1997); In re Corson, 206 B.R. 17 (Bankr. D.

Conn. 1997); In re Moe, 199 B.R. 737 (Bankr. D. Mont. 1995); seealso 2 Norton Bankruptcy Law & Practice 2d  46:23, at 334-35

(Supp. 1997) (applying same approach); David G. Carlson, Security

Interests on Exempt Property After the 1994 Amendments to the

Bankruptcy Code, 4 Am. Bankr. Inst. L. Rev. 57, 65 (1996) (same).

                               III.

     We add a postscript concerning the legislative history of

11 U.S.C.  522(f)(2)(A).  The House Report that accompanied the

1994 Act makes negative reference to two cases   In re Gonzalez,

149 B.R. 9 (Bankr. D. Mass. 1993) and In re Chabot, 992 F.2d 891

(9th Cir. 1993)   which both endorsed conclusions similar to the

one we reach here today.  But we, like other courts who have

addressed this issue, find it difficult to draw any reliable

inferences from the House Report's allusions to these two cases. 

See Ryan, 210 B.R. at 10-12; Moe, 199 B.R. at 739-40.

     First, the various hypothetical factual scenarios

sketched out in the House Report do not speak to the circumstances

of this case, insofar as those scenarios all posit situations in

which the debtor has no equity in his or her property over and

above the sum of the claimed exemption and all liens other than the

judicial lien being targeted for avoidance.  See H.R. Rep. No. 103-

835, at 52-54 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3361-62. 

It is only when such excess equity is available that the question

presented in this case arises at all.

     Second, to the extent that the drafters of the

legislative history intended Gonzalez and Chabot to serve as real-

world examples of the hypothetical scenarios sketched in the

Report, the Report misreads both cases.  The fact patterns in

Gonzalez and Chabot   unlike the hypothetical scenarios posited in

the House Report   presented situations in which there was some

equity in the debtor's property in excess of the debtor's exemption

and all non-judicial liens.  See Gonzalez, 149 B.R. at 10; Chabot,

992 F.2d at 892; see also Ryan, 210 B.R. at 10-11 (describing the

facts of Gonzalez and Chabot).  Because the authors of the House

Report apparently believed that the facts of their hypothetical

cases were analogous to the facts of Gonzalez and Chabot, it

appears they incorrectly understood the rule adopted in those cases

to permit only partial avoidance of judicial liens even in

situations where there was no available equity in the debtor's

property.  In actuality, the rule of Gonzalez and Chabot, like the

rule we adopt here, only limits the debtor's avoidance power under

 522(f)(1) to the extent that there is equity available in the

property in excess of the debtor's exemption and all non-judicial

liens on the property.

     Finally, the import of the House Report's negative

references to Chabot and Gonzalez is rendered even more doubtful by

the Report's statement that the measure of "impairment" set forth

in  522(f)(2)(A) is based upon the formula articulated in In re

Brantz, 106 B.R. 62 (Bankr. E.D. Pa. 1989).  See H.R. Rep. No. 103-

835, at 53, 1994 U.S.C.C.A.N. at 3361.  The outcomes reached in

Chabot and Gonzalez are consistent with the approach to avoidance

adopted in Brantz.  See Brantz, 106 B.R. at 68; see also Ryan, 210

B.R. at 10-12 (discussing Gonzalez, Chabot and Brantz); Moe, 199

B.R. at 739-40 (explaining that the Brantz formula permits only

partial avoidance of judicial liens where there is some equity in

debtor's property in excess of the debtor's exemption and all

consensual liens).  We conclude, therefore, that the House Report's

apparent criticisms of the Chabot and Gonzalez cases do not, on

scrutiny, provide any meaningful support for Silveira's position in

this case.

                               IV.

     The interpretation of 11 U.S.C.  522(f)(1)(A) and  522

(f)(2)(A) advocated by the Bank is consistent with the text of

those provisions, fully vindicates the statute's basic purpose, and

averts the unfair consequences that the debtor's interpretation

would entail.  Because the district court rejected the approach we

adopt here, we vacate the judgment below and remand this case for

further proceedings consistent with the principles set forth

herein.

     So Ordered.