ROBERT A. GORDON, Bankruptcy Judge.
An apparent collision between the intent of the relatively new Maryland Homestead Exemption statute and the venerable common
On August 26, 2011 (Petition Date), Mr. Raskin filed his Voluntary Petition for Relief under Chapter 7 of the Code. On February 22, 2012, he filed a Motion to Avoid Judicial Lien Impairing Exemption Pursuant to 11 U.S.C. § 522(f) (Motion to Avoid Lien) (Dkt. No. 71). Susquehanna Bank (Susquehanna) filed its Opposition to Motion to Avoid Judicial Lien Impairing Exemption Pursuant to 11 U.S.C. § 522(f) (Dkt. No. 72) on March 26, 2012. The Debtor filed a Reply Memorandum in Support of Motion to Avoid Judicial Lien Impairing Exemption Pursuant to 11 U.S.C. § 522(f) (Dkt. No. 73) on April 2, 2012 and an evidentiary hearing was held on April 13, 2012.
The presentation of evidence took no more than ten minutes. It consisted only of the admission into evidence of Mr. Raskin's Exhibits 1 through 9 without objection, his expert appraiser giving an opinion as to the value ($500,000) of the subject real estate and then Susquehanna's fleeting cross-examination that pointed out the appraiser had not "valued" Mr. Raskin's undivided entireties interest but had only appraised the land. The legal debate that preceded the submission of evidence consumed the lion's share of the time.
When the words were exhausted, the Court requested additional memoranda to address the impact, if any, of the decisional law on a married, single-filing debtor's effort to avoid a joint lien against property owned by the entireties and the hearing was continued until June 15, 2012 for further argument.
The uncontested facts are simple. On March 25, 2011, Susquehanna commenced a state court confession of judgment proceeding (State Court Case) against Mr. Raskin, Mrs. Raskin and others. Susquehanna's claims were based upon the alleged guaranties by the Raskins of indebtedness due from their co-defendants. On April 8, 2011, judgments by confession were entered against the Raskins. These judgments resulted in valid, joint liens (Susquehanna Liens) against 4010 Eland Road, Phoenix, Maryland (Eland Road), the Raskins' principal residence.
While Mrs. Raskin apparently continues to contest the validity of the judgments against her, Mr. Raskin has thrown in the towel in the State Court Case in favor of his hope that the Motion to Avoid Lien will net comprehensive relief for both he and his wife in this Court. Their divergent paths were noted at Paragraph 13 of the Debtor's Objection to Susquehanna Bank's Motion to Terminate the Automatic Stay in Order to Prosecute State Court Proceedings (Dkt. No. 55) which states, "[t]he Debtor admits that Mrs. Raskin currently seeks to have the Confessed Judgments entered against her vacated but denies that the Debtor is seeking to pursue further litigation with the Bank." On Susquehanna's side of the equation, it stated in the preamble to the Motion to Terminate that it was filed to obtain an order from this Court, "terminating the automatic stay ... in order to prosecute the [judgments in the State Court Case] ... and... deferring the Debtor's discharge until such prosecution has been concluded."
Eland Road is encumbered by two senior deeds of trust held by Wells Fargo Home Mortgage in the approximate amounts of $450,692.00 and $32,813.00. Mr. Raskin has claimed a homestead exemption of $16,495.00 on the basis of his interest in Eland Road. He argues that when the formula set forth in Section 522(f)(2)(A) is applied, the Susquehanna Liens impair his exemption and must be avoided. Moreover, he also asserts that the statute's benefit can only be fully realized in this instance if it is interpreted to nullify the joint Susquehanna Liens in their entirety, notwithstanding (a) the fact that his wife's undivided interest is not subject to this Court's jurisdiction and (b) the protection that would normally be afforded to the Susquehanna Liens by otherwise applicable law. Susquehanna, on the other hand, takes the position that the Homestead Exemption cannot be used to negatively affect its lien at all but, if the statute is applied in this context, it must be applied as conservatively as possible in light of the principles embodied within the vast mountain of case law that interprets the entireties estate and the inevitable impact of those principles upon Mr. Raskin's strategy.
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 1334, 157(b)(2)(B) and (K) and Local Rule 402 of the United States District Court for the District of Maryland. Venue is likewise proper under 28 U.S.C. § 1409(a).
Under Section 522(f)(1), "the debtor may avoid the fixing of a [judicial] lien on an interest of the debtor in property to the extent that such lien impairs an exemption...". Section 522(f)(2)(A) supplies the mandatory arithmetic for determining impairment:
A debtor must have an allowable exemption available that applies to the property subject to the lien in order to realize the benefit of the statute. Section 522(b) allows a debtor to choose between federal or state exemptions, "unless the State law that is applicable to the debtor... specifically does not so authorize." 11 U.S.C. § 522(b)(2). Maryland has opted out of the federal exemptions, see Md. Code, Cts. & Jud. Proc. § 11-504(g), and hence Mr. Raskin is limited to selecting from only the Maryland exemptions. These include the Homestead Exemption which provides in relevant part that, "in any [bankruptcy proceeding] any individual debtor ... may exempt the debtor's aggregate interest in ... [o]wner-occupied residential real property...". Md.Code, Cts. & Jud. Proc. § 11-504(f)(1)(i). Companion subsection 11-504(f)(1)(ii) limits the total value of the exemption to no more than the adjusted total exemption allowed under Section 522(d)(1).
Applying subsection 522(f)(2)(A), and the Homestead Exemption to the facts presented yields this result:
Susquehanna Liens $1,334,310.91 Wells Fargo Mortgage I $450,692.00 Wells Fargo Mortgage II $32,813.00 Allowable Homestead Exemption10 + $21,625.00 _____________ Total $1,839,440.91
Debtor's Interest 11 $500,000.00 ___________ Amount by which sum of all liens and Debtor's exemption exceeds the value of the Debtor's interest in the absence of any liens$1,339,440.91
If Mr. Raskin was an unmarried debtor and everything else was equal, then the foregoing calculation would be the beginning and end of the inquiry. The Court could easily find that the Susquehanna Liens impair his exemption and enter an appropriate order. Unfortunately for Mr. Raskin, in this instance his marriage complicates things. Indeed, Susquehanna has labored mightily to establish that his marriage, and the fact that Mrs. Raskin is not in bankruptcy, disqualifies him from utilizing the Homestead Exemption in any way that negatively impacts its lien rights. Susquehanna argues that:
The first contention relies upon language included in In re Ford, 3 B.R. 559, 570-71 (Bankr.D.Md.1980), aff'd sub nom., Greenblatt v. Ford, 638 F.2d 14 (4th Cir.1981). The argument is that the Susquehanna Liens do not impair Mr. Raskin's exemption because they attached to only the "entire, combined, and unsevered interests, as a unity, of," both Mr. and Mrs. Raskin in Eland Road as opposed to his individual undivided interest in the whole. Id. at 576. Yet Ford also acknowledges that upon the filing of bankruptcy, "what passed to the estate and became an asset of the estate was [the debtor's] individual undivided interest as a tenant by the entirety." Ford, 3 B.R. at 575; see also Section 541(a)(1). Therefore, Mr. Raskin's undivided interest in Eland Road is within this Court's jurisdiction. Matter of Paeplow, 972 F.2d 730, 736 (7th Cir. 1992); Sumy, 777 F.2d at 923-24; Bondurant, 716 F.2d at 1058.
Viewed in this light, Susquehanna's argument that its liens do not attach to Mr. Raskin's individual interest splits the hair too finely. Notwithstanding the language in Ford that Susquehanna relies upon, and the often confounding metaphysics of an entireties estate, Sumy long ago acknowledged the possibility that the passage to the estate of an individual debtor's undivided interest in entireties property could result in the avoidance of a joint lien secured by that undivided interest if the lien impairs an exemption. The Court
Sharpening its aim, Susquehanna nevertheless contends, relying upon In re Hunter, 284 B.R. 806 (Bankr.E.D.Va.2002), that in order to avoid the Susquehanna Liens, this Court must also have jurisdiction over Mrs. Raskin's undivided interest.
These cases are grounded upon (1) the premise that the debtor's interest in entireties property becomes property of the estate and (2) Section 522(f)'s unambiguous right to avoid a lien that encumbers "an interest of the debtor in property" if an exemption is available and is impaired by the lien. The available exemption in this case — the Homestead Exemption — falls squarely in Mr. Raskin's favor. The statute's plain language permits him to exempt his "aggregate interest" in his "owner occupied residential real estate" without conditioning the right upon the form of ownership. Section 522(f)(1) allows him to "avoid the fixing of a lien" on his "interest" in property to the extent the lien impairs his exemption. These benefits are not made dependent upon a joint filing by a married couple. To the contrary, the Homestead Exemption takes the opposite approach by limiting the exemption's use to only one spouse, especially if there is a jointly-filed bankruptcy. And that peculiar limitation extends for eight years after the exemption is used. Moreover, the fact that the exemption is only available in bankruptcy proceedings (as opposed to a state court execution or foreclosure case) is even stronger evidence that the legislature knew exactly the impact it sought to achieve by enacting the statute.
The exercise of an exemption grants two practical benefits to a debtor. One is the ability to keep the exempt property and the other is the right to
In part because there appear to be no meaningful Section 522(f) cases that support its position, Susquehanna instead turns to cases which address Section 506, especially Hunter, whose reasoning and holding were adopted in Alvarez. At this stage, Alvarez is the opinion that must be addressed. Were it not for the Homestead Exemption, and if all else were equal, Alvarez, and the common law it is built upon, would likely mandate victory for Susquehanna. Indeed, Alvarez's holding, "that the bankruptcy court correctly determined that it lacked authority to strip off the debtor's valueless lien because only the debtor's interest in the estate, rather than the complete entireties estate, was before the bankruptcy court ..." 733 F.3d at 138, seems to require that result. However, the Alvarez decision is distinguishable.
Alvarez interprets Section 506(a)(1) (which divides a lienholder's claim into secured and unsecured depending upon the value of the estate's interest in the property) and evaluates Mr. Alvarez's assertions within the context of deeply rooted entireties jurisprudence. Because Mr. Alvarez's wife did not file bankruptcy and her undivided interest was not before the bankruptcy court, the Fourth Circuit decided that the joint lien could not be stripped
Id. at 141 (internal citations omitted).
However, the Court also recognized that the legislature (in that instance Congress) can alter the playing field. Mr. Alvarez argued that since Section 363(h) permits a trustee to sell entireties property with neither the consent nor presence of a non-debtor spouse, the entire entireties estate must be subject to bankruptcy court administration. In response the Court explained, "[t]his provision represents a narrow legislative exception to the general common law rule prohibiting any unilateral severance of an entireties estate." Id. at 142.
In Phillips, Mrs. Krakower held a $5,500 note signed by the debtor, Mr. Phillips, and his wife, who together owned a parcel of Baltimore real estate by the entireties. When Mr. Phillips was adjudged bankrupt, Mrs. Krakower sought to delay the entry of his discharge in order to secure a state court judgment and lien against the land. In affirming the bankruptcy court's deferral of the discharge, the Fourth Circuit noted that Mr. Phillips' undivided interest did not become a part of his bankruptcy estate and therefore was not subject to administration by the trustee.
Phillips, 46 F.2d at 764.
The Court observed that if Mr. Phillips' sleight of hand was allowed it would amount to "legal fraud" and therefore, the bankruptcy court's protection of Ms. Krakower's joint debt and state law enforcement rights was affirmed. Id. The use of equity to achieve justice in Phillips is beyond reproach. However, Mr. Phillips raised no independent state law that mandated a different result. Nor was any mentioned in any of the subsequent `legal fraud' decisions. Because that is precisely what the Homestead Exemption does, it cannot be `legal fraud' to allow Mr. Raskin to exercise his exemption rights. See Section 522(b)(2); Eaton v. Boston Safe Deposit & Trust Co., 240 U.S. 427, 429, 36 S.Ct. 391, 60 L.Ed. 723 (1916) ("The policy of the bankruptcy act is to respect state exemptions...."); Herbert v. Fliegel, 813 F.2d 999, 1002 (9th Cir.1987) ("Whatever the policy considerations, the [exemption] issue is still governed by the Oregon statute."); Paeplow, 972 F.2d at 736-37; In re Donaldson, 156 B.R. 51, 53 (Bankr. N.D.Ca.1993).
Nevertheless, the reach of the Homestead Exemption can extend no farther than what is permitted by its language. Hence, at this juncture the Court must part ways with Mr. Raskin's reasoning in favor of Susquehanna's. This is so because the express language of the Homestead Exemption cannot be interpreted to permit the complete avoidance of the Susquehanna Liens. While this result is ungainly, it is required by basic principles of statutory construction. Caminetti v. U.S., 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917) (If the language of a statute is plain, and does not lead to an absurd or impracticable result, it is the sole evidence of legislative intent and the sole function of the court is to enforce it). Subsection (f)(1)(i) of the Homestead Exemption grants the exemption to only "any individual debtor" in a bankruptcy proceeding and applies it to only "the debtor's aggregate interest in ... [o]wner-occupied residential real property." A debtor may not claim the exemption if the debtor's spouse has successfully claimed the exemption within the past eight years. Md. Code, Cts. & Jud. Proc. § 11-504(f)(2)(i). And the exemption may not be claimed by both spouses in a joint bankruptcy proceeding. Md.Code, Cts. & Jud. Proc. § 11-504(f)(3). Applying these restrictions at face value, the conclusion is inescapable that only one spouse can use the Homestead Exemption and, in the case of property owned as tenants by the entireties, that spouse is limited to avoiding a joint lien only to the extent that it attaches to his or her aggregate interest in the property and impairs his or her exemption. While this result crashes like a wave into the principles articulated in Ford, reviewed in Sumy and reaffirmed in Alvarez, the Court cannot see any other way to make sense of — and rationally apply — the language. The legislature only granted the right to use the exemption to a lone spouse. Without an explicit bar against using the exemption for an entireties interest, it must be assumed that the legislature understood fundamental aspects of Maryland real property law-chief among them the way property is normally owned by husband and wife — when the statute was enacted and, nevertheless, chose this awkward, but not quite absurd, result. Stated another way, a worse outcome would be to rob Mr. Raskin of his express statutory right by grafting on a judge — made exception that excludes entireties interests
However, because no two spouses can ever utilize the exemption at the same time (or by one for eight years after its use by the other), and in light of the common law principles of unity that generally govern the entireties estate, it appears the exemption can never be used in the same time frame to completely avoid a joint lien against property owned by the entireties.
Mr. Raskin argues passionately that this incongruity could not have been intended:
(Debtor's Post-Hr'g Mem. 13.)
For these reasons, Mr. Raskin claims that the legislature must have intended the Homestead Exemption to benefit both spouses — and for joint liens to be entirely avoided from entireties property — notwithstanding the express application to only the "aggregate interest" of the individual who files bankruptcy and the limitation on its availability to only one spouse. The reasons why the legislature would decide to withhold from a married, single-filing debtor the ability to avoid entirely a joint lien against entireties property are readily understandable; they are the same reasons that underlie Alvarez and are likely based upon a respect for the unity of the entireties estate.
In Ades, Section 67f of the Bankruptcy Act of 1898 was interpreted as automatically discharging from an insolvent debtor's property any lien obtained within four months of the bankruptcy filing. Ades, 103 A. at 94. The debtor and his wife owned property by the entireties and the creditor obtained a joint judgment within the four month period. Later, when the creditor sought to enforce the judgment in a post-bankruptcy collection action, the debtor sought an injunction on the basis of Section 67f. The Court of Appeals observed that the effect of Section 67f would have to be honored unless the entireties estate required, "a different meaning to be given to the act." That notion was rejected:
Id. at 95.
In essence, this is the same result reached by the courts in Janitor, Staples and Sisk and this Court sees no plausible
For the reasons stated above, Mr. Raskin is entitled to avoid the Susquehanna Liens on only his interest in the Residence he owns with Mrs. Raskin. An Order memorializing this holding will be issued.
Ades v. Caplan, 132 Md. 66, 103 A. 94, 95 (Md.1918) (internal citations omitted). The Court in In re Beihl, 197 F. 870, 873 (E.D.Pa. 1912), after listing a handful of the attributes of the entireties estate wrote, "[a]nd this catalogue of difficulties could easily be extended, if it were necessary to exhibit more plainly the peculiar structure that has been built on the foundation of pure fiction."
