MICHAEL B. KAPLAN, U.S.B.J.
This matter comes before the Court on a motion by Debtor Stephen Zullo ("Debtor") seeking to avoid two judgment liens pursuant to 11 U.S.C. § 522(f)(1): one held by the State of New Jersey, and the other by New Jersey Title Insurance Company ("NJTIC"). The State of New Jersey did not file an opposition or otherwise respond to Debtor's motion. NJTIC opposes Debtor's motion and objects to confirmation of Debtor's Amended Chapter 13 Plan. The Court has considered the submissions of the parties, as well as the arguments raised during oral argument on November 7, 2017. For the reasons set forth below, Debtor's motion is DENIED as to both of the judgment liens.
The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended September 18, 2012, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (K) & (L). Venue is proper in this Court pursuant to 28 U.S.C. § 1408. The following constitutes the Court's findings of fact and conclusions of law as required by FED. R. BANKR. P. 7052.
The State of New Jersey and NJTIC are the holders of judgments against Debtor's non-filing spouse, Sheila Zullo. Based on the information supplied by Debtor, it appears that the State of New Jersey obtained its judgment against Sheila Zullo in 2012 in the amount of $42,404.88.
On January 30, 2017, Debtor filed a voluntary petition under chapter 13 of Title 11 of the United States Code ("Code"). Shortly before the petition was filed, Sheila Zullo transferred her interest in the Property to Debtor for a consideration of one dollar.
Debtor seeks to avoid the liens pursuant to 11 U.S.C. § 522(f). That section provides, in relevant part:
11 U.S.C. § 522(f)(1). Section 522(f)(2)(A) sets forth a formula for determining the extent to which a lien impairs an exemption. This section provides:
11 U.S.C. § 522(f)(2)(A).
In applying subsection (2)(A)(iii) of this formula, Debtor asserts that the amount of the exemption that he could claim if there were no lien on the Property is $23,675.00. Debtor also lists the following values: an approximate fair market value of the Property in the amount of $505,000.00; a First Mortgage on the Property in the amount of $462,610.23; and the superior judgment lien on the Property held by the State of New Jersey in the amount of $37,990.88. Using these figures and the formula set forth in § 522(f)(2)(A), Debtor calculates that the judgment lien held by the State of
With respect to the transfer of the Property, Debtor explains that the primary purpose behind the transfer was to protect title to the Property and salvage the equity to assist with payment of his daughter's college education. Debtor states that he was aware that Sheila Zullo had been sued by credit card companies and other entities, but Debtor maintains that the judgments against Sheila Zullo were never disclosed to him. Likewise, Debtor further asserts that he was never informed of the potential clouds on title to the Property as a result of the judgment liens.
In response to Debtor's position regarding the transfer of the Property, NJTIC contends that it is irrelevant whether Debtor was informed or noticed of the judgments against Sheila Zullo. NJTIC states that the judgments were properly filed of record; therefore, Debtor was charged with knowledge of them. NJTIC further notes that Debtor neither explains nor identifies the person or entity who he believes held such a duty to notify him of the judgments before transferring the Property. Moreover, NJTIC points out that the deed transferring the Property does not reference a title insurance company and, instead, the accompanying documents list Sheila Zullo as the "settlement officer." Finally, NJTIC contends that in explaining the purpose behind the transfer of the Property, Debtor all but concedes that the transfer was a fraudulent conveyance in that he acknowledged his intent was to hinder, delay, or defraud creditors in an effort to preserve equity.
With respect to Debtor's effort to avoid the liens under 11 U.S.C. § 522(f), NJTIC emphasizes that its judgment lien was recorded against Sheila Zullo's interest in the Property prior to the transfer of her interest to the Debtor. NJTIC concludes that the NJTIC Lien became "fixed" within the meaning of § 522(f)(1) upon the interest of Sheila Zullo, held as a tenant by the entirety, as opposed to Debtor's fee simple interest held at the time of the bankruptcy filing. As a consequence, NJ posits that Debtor cannot use § 522(f)(1). NJTIC cites to a case from a bankruptcy court in the Eastern District of Pennsylvania in support of its position: In re Jackaman, No. 99-19029DWS, 2000 WL 192973, at *1 (Bankr. E.D. Pa. Feb. 15, 2000).
At the outset, this Court acknowledges that — as the decision of a sister bankruptcy court — the ruling in Jackaman is not binding. Notwithstanding, the court's rational and the circumstances present in Jackaman are substantially similar to the facts of the instant case. Furthermore, this Court could not identify — and Debtor does not cite — any controlling case law from the Third Circuit which directly addresses the issue presented; namely, whether a debtor may use § 522(f)(1) to avoid a lien on an interest acquired after the lien previously had attached. In addressing this precise issue, the Jackaman court relies on decisions from several other courts — including
In Jackaman, a creditor had obtained a judgment lien against a debtor's property which the debtor owned in fee simple. The debtor then conveyed his fee simple interest in the property to himself and his spouse as tenants by the entireties. Thereafter, the debtor filed a petition for bankruptcy and sought to avoid the creditor's lien under § 522(f). The Jackaman court held that the debtor possessed a different interest, as a tenant by the entirety, than he had before the conveyance, when he held his individual fee simple interest. Thus, because the interest the debtor held at the time of the bankruptcy differed from the interest to which the lien originally had fixed, the debtor could not use § 522(f) to avoid the judgment lien.
In reaching this conclusion, the Jackaman court relies heavily on the Supreme Court's rationale in Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825, 114 L.Ed.2d 337. In Farrey, the lien at issue was created by a divorce decree which divided the parties' marital property. The ex-husband was awarded the marital residence in fee simple, and the ex-wife was granted a lien against that residence to secure an amount she was owed as a result of the property division. After the divorce, the ex-husband filed for bankruptcy under chapter 7 and sought to avoid the ex-wife's lien pursuant to § 522(f).
In its analysis, the Supreme Court first examines the language of § 522(f)(1) and states that, "unless the debtor had the property interest to which the lien attached at some point before the lien attached to that interest, he or she cannot avoid the fixing of the lien under the terms." Farrey, 500 U.S. at 296, 111 S.Ct. 1825 (emphasis in original). The Court then reconciles this interpretation with the purpose and history of the statute. Specifically, the Court explains that avoidance under § 522(f)(1) was designed primarily to provide protection from the fixing of a judicial lien on exempt property because creditors often used the fixing of liens as a means to circumvent the protections that bankruptcy law afforded exempt property against debts. Id. at 297-98, 111 S.Ct. 1825. In light of this protective purpose, the Supreme Court observes as a corollary that § 522(f)(1) was not intended to permit lien avoidance where the liens "fixed on an interest before the debtor acquired that interest," and that to do so "would be to allow judicial lienholders to be defrauded through the conveyance of an unencumbered interest to a prospective debtor." Id. Accordingly, the Farrey Court determined it "settled that a debtor cannot use § 522(f)(1) to avoid a lien on an interest acquired after the lien attached." Id. at 299, 111 S.Ct. 1825 (citing In re McCormick, 18 B.R. 911 (Bankr. W.D. Pa.), aff'd sub nom. McCormick v. Mid-State Bank & Tr. Co., 22 B.R. 997 (W.D. Pa. 1982); Matter of Stephens, 15 B.R. 485 (Bankr. W.D.N.C. 1981); In re Scott, 12 B.R. 613 (Bankr. W.D. Okla. 1981)).
The Farrey Court then applied its interpretation of § 522(f)(1) to the facts of the case before it and concluded that the debtor was not entitled to avoid his ex-wife's lien because the debtor "took the interest
Likewise, in McCormick — one of the cases cited by the Supreme Court in Farrey — the property at issue previously belonged to a wife and husband as tenants by the entireties, and a creditor obtained a joint judgment against them both. In re McCormick, 18 B.R. 911. Seven days before the wife filed for bankruptcy, the couple had conveyed the property to her individually. She then attempted to avoid the lien under § 522(f)(1). The McCormick court examined the language and legislative history of the statute and ruled that the wife was not entitled to avoid the judicial lien because "the interest in the property she seeks to exempt was acquired subject to the lien." Id. at 914. The Jackaman court noted that McCormick presented an inverse set of circumstances to those it faced — the debtor in Jackaman originally owned the property individually and then conveyed it to himself and his wife as tenants by the entireties; whereas the debtor in McCormick originally owned the property at issue with her spouse as a tenant by the entireties and later owned it individually. Nevertheless, the Jackaman court reasoned that the McCormick rationale was applicable based on the language and underlying purpose of § 522(f)(1).
Here, the Court is presented with a debtor who — like the debtor in McCormick — owned the Property as a tenant by the entireties when the lien initially attached, and who now owns the Property individually in fee simple.
Farrey, 500 U.S. at 296, 111 S.Ct. 1825 (emphasis in original).
It is undisputed that both judgment liens attached to Sheila Zullo's interest in the Property — and "fixed" for purposes of
Moreover, the purpose of the statute weighs against its application here. As previously discussed, § 522(f)(1) was intended to protect a debtor from creditor action against unencumbered property. See In re McCormick, 18 B.R. at 913. Here, the Property was already encumbered by the judgment liens when Debtor acquired his new, fee simple interest as a result of the 2017 transfer. Thus, the Debtor and the property interest at issue in this case are not the type that § 522(f)(1) was designed to protect.
This conclusion is further buttressed by Debtor's stated purpose for transferring the Property. As noted above, Debtor certifies that he transferred the Property to protect its equity from Sheila Zullo's creditors. Given this intent, NJTIC questions the validity of the transfer. Without making any determination as to fraudulent intent, this Court notes that it would be contrary to the statute's purpose — and contrary to existing case law — to permit any debtor to benefit at the expense of a legitimate creditor through a calculated, prepetition transfer of property. See Farrey, 500 U.S. at 298, 111 S.Ct. 1825 (holding that permitting lien avoidance in these circumstances would defraud judicial lienholders); see also Matter of Stephens, 15 B.R. at 486 (commenting on the debtor's fraudulent intent in transferring the property and observing that a court of equity should not permit him to benefit from deceitful actions).
In his brief, Debtor contends that "there is nothing wrong with one spouse transferring title to another and avoiding an encumbrance that is wholly unsecured." (Brief 2, ECF No. 36-8). Debtor cites In re White, 460 B.R. 744 (8th Cir. BAP 2011), aff'd, 470 Fed.Appx. 538 (8th Cir. 2012) and In re Mensah-Narh, 558 B.R. 134 (Bankr. D.N.J. 2016). However, as the decisions of a bankruptcy appellate panel in the Eighth Circuit and a sister bankruptcy court in this Circuit, neither of the cases cited by Debtor is binding. Additionally, for the reasons discussed below, this Court does not find them to be persuasive. As an initial matter, both White and Mensah-Narh are factually distinguishable from the matter presently before this Court. First, Mensah-Narh involved the application of 11 U.S.C. §§ 506(a) and 1322(b), and did not discuss the statute at issue in this case. This is significant because 506(a) — which permits debtors to modify secured claims by "stripping" or "cramming down" the secured portion of the claim to the value of the collateral when the value of the collateral is less than the secured portion — does not implicate a temporal component in the way that § 522(f)(1) does. Section 506(a) concerns itself simply with "a lien on property in which the estate has an interest," 11 U.S.C. § 506(a)(1), and — unlike § 522(f)(1) — does not require any inquiry into when such a lien became "fixed."
Moreover, both White and Mensah-Narh involve debtors who were divorced and whose property had been divided and/or transferred as a result of the divorce proceedings. Although White involved the application of § 522(f)(1), the lower court discussed the Supreme Court's decision in Farrey and distinguished the facts in Farrey from those before it. See In re White, 460 B.R. at 749 ("Those facts [in Farrey] are very different from the facts in these cases."). In White, the debtors acquired the property in question while they were married and owned the property as tenants by the entireties when a judgment lien attached. The parties then filed
For the foregoing reasons, the Court determines that Debtor is not entitled to avoid either the lien held by the State of New Jersey or the NJTIC Lien under 11 U.S.C. § 522(f)(1), and his Motion is denied. Counsel for NJTIC should submit a proposed form of order consistent with this Court's Opinion.
