Guy R. Humphrey, United States Bankruptcy Judge.
This matter is before the court on the Motion to Avoid Judicial Lien on Real Estate (doc. 12) and the objection filed by the State of Ohio (doc. 16). The parties also filed additional memoranda concerning the issues presented by the motion (docs. 42, 64 and 65). The issues presented by the motion are whether Ohio Revised Code § 2329.661(A)(4) precludes the debtors' use of their Ohio homestead exemptions to avoid the State's judgment lien pursuant to Bankruptcy Code § 522(f); and if so, whether the debtors may avoid
No party has contested the jurisdiction of the court or its authority to enter a final judgment in this proceeding. The court finds that it has jurisdiction pursuant to 28 U.S.C. § 1334, this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (K) and (O), and that it has the constitutional authority to enter final judgment over this contested matter.
Michael and Nilesen Gokay (the "Gokays") borrowed money from the Ohio Department of Developmental Services (the "State") for their business. The Gokays and their business entity defaulted on the loan, the State obtained judgment against the Gokays, and on January 27, 2014, the State recorded a certificate of judgment in the amount of $696,263.04, which serves as a lien against the Gokays' residence located in Dayton, Ohio.
The Gokays filed this Chapter 7 bankruptcy on March 7, 2014. The Gokays' original Schedule A stated that the value of the residence was $307,200, with a $291,666 secured claim against it on the date of the filing of their bankruptcy case (doc. 1). The Gokays did not assert an exemption in the residence on Schedule C in their original filings (doc. 1).
The Gokays filed a motion seeking to avoid the State's judgment lien as having impaired their homestead exemption provided by Ohio Revised Code § 2329.66(A)(1) (doc. 12). The State filed a memorandum in opposition (doc. 16).
Subsequently, the Gokays filed an amended Schedule A which states that the value of the residence is $288,000, again listing a secured claim of $291,666 against the property (doc. 39). This value also corresponds with an appraisal report which the Gokays filed on July 31, 2014 (doc. 38). Also, the Gokays filed an amended Schedule C which asserted a homestead exemption in the residence in the amount of $15,534 pursuant to § 2329.66(A)(1) and a wildcard exemption in the residence in the amount of $20 pursuant to Ohio Revised Code § 2329.66(A)(18) (doc. 39). The State disputes the Gokays' $288,000 value placed on the residence, arguing that the $307,200 value described by the Gokays' original Schedule A and the Montgomery County, Ohio, Auditor's 2011, 2012, and 2013 value
The Gokays insist that they are entitled to the homestead exemption and that it applies to the State's judgment lien, with 11 U.S.C. § 522(f) permitting the avoidance of the State's judgment lien as impairing their homestead exemption. They argue that subsection (c) of § 522 is at the heart of debtors' fresh start and that, combined with subsection (f), Congress' intent in providing debtors a fresh start free from judgment liens is clearly evinced. The Gokays assert that Ohio Revised Code § 2329.661(A)(4) contravenes and is preempted by § 522(f)(1). They further argue that even if the homestead exemption does not apply due to § 2329.661(A)(4), that provision does not protect the State's judgment from being avoided as impairing their wildcard exemption.
The State does not appear to dispute that the Gokays would be entitled to the homestead exemption as to the bankruptcy trustee and all other creditors holding judgment liens. However, the State argues that it legitimately carved out of the Ohio homestead exemption judgment liens obtained by the State. The State contends that, in allowing the states to opt out of the federal exemptions provided by the Bankruptcy Code, Congress has given Ohio the discretion to define the scope of its exemptions as it deems appropriate. Ohio has chosen to set the parameters of the Ohio homestead exemption so as to apply it to all judgment liens except judgment liens of the State, its agencies, and its political subdivisions. The State claims that, by definition, the Ohio homestead exemption does not apply to judgment liens held by the State and its political subdivisions and agencies and, therefore, its judgment lien cannot impair the Gokays' homestead exemption. In sum, the State explains that because Ohio has defined the homestead exemption in a manner to exclude its own judgment liens from coverage of that exemption, the lien avoidance mechanism is not applicable because the debtors "would [not] have been entitled under subsection (b) [of § 522]" to a homestead exemption as relates to the State judgment lien. 11 U.S.C. § 522(f)(1).
The determination of the applicability of §§ 2329.66(A)(1) and 2329.661(A)(4) and § 522(f)(1)(A) under the circumstances of this case present a difficult question concerning the extent to which Congress intended to permit the "opt out" states to define their exemptions versus the extent to which Congress intended to give debtors a fresh start through the ability to avoid judgment liens under § 522(f)(1). The issue as relates to these Ohio statutes appears to present a case of first impression. However, in the end, the court determines that the Supreme Court's decision in Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991) is dispositive and supports the Gokays' avoidance of the State's judgment lien in its entirety.
Any issue as to the application of the Gokays' wildcard exemption is rendered moot as a result of the court's determination as to the Gokays' homestead exemption. Accordingly, the court will not address application of the wildcard exemption.
Section 522 is the general section of the Bankruptcy Code which describes debtors'
11 U.S.C. § 522(b) (emphasis added). As permitted by § 522(b)(2), Ohio has expressly opted out of the federal bankruptcy exemptions provided in § 522(d), stating that: "Pursuant to the `Bankruptcy Reform Act of 1978,' 92 Stat. 2549, 11 U.S.C. 522(b)(1), this state specifically does not authorize debtors who are domiciled in this state to exempt the property specified in the `Bankruptcy Reform Act of 1978,' 92 Stat. 2549, 11 U.S.C. 522(d)." Ohio Revised Code § 2329.662. See In re Kyle, 510 B.R. 804, 808 (Bankr.S.D.Ohio 2014) (Walter, J.) (explaining that pursuant to § 2329.662, Ohio is an opt-out state).
It has been stated that the "opt-out" states were given wide discretion and broad authority to define their exemptions. Thus, the Court of Appeals for the Sixth Circuit has adopted the following statement:
Rhodes v. Stewart (In re Rhodes), 705 F.2d 159, 163 (6th Cir.1983) (quoting In re McManus, 681 F.2d 353, 355-56 (5th Cir. 1982) (abrogated on other grounds by Owen). See also Granger v. Watson (In re Granger), 754 F.2d 1490, 1492 (9th Cir. 1985) ("state that has opted out [of the federal exemption scheme] has considerable freedom in creating exemptions and eligibility requirements for those exemptions").
Kyle, 510 B.R. at 818.
The significance of property being exempted from the bankruptcy estate is set forth in subsection (c) which provides, as relevant to this case, that:
11 U.S.C. § 522(c) (emphasis added). Thus, if property is not secured by a lien and is fully exempt, the debtor may retain that property free from claims of the trustee and creditors. However, § 522(c)(2)(A)(i) provides for an important exception to the rule that property otherwise exempt from creditors is still subject to the claims of secured creditors.
Subsection (f) of § 522 furthers the goal of the Bankruptcy Code of providing debtors with a fresh start from their financial woes by allowing debtors to set aside judgment liens which impair their exemptions. It provides that:
To implement this lien avoidance provision, § 522(f)(2)(A) provides a mathematical formula for determining whether a lien impairs an exemption:
11 U.S.C. § 522(f)(2)(A). The Sixth Circuit explained how this formula works in Brinley v. LPP Mortgage Ltd. (In re Brinley), 403 F.3d 415, 421 (6th Cir.2005). See also In re Bowshier, 389 B.R. 542, 546 (Bankr.S.D.Ohio 2008) (reviewing the
In 2012, through House Bill 479 ("H.B. 479"), the Ohio legislature significantly increased the Ohio homestead exemption provided by § 2329.66(A)(1), raising it to $125,000 for each debtor.
The State's argument that § 2329.661(A)(4) precludes the Gokays' use of the Ohio homestead exemption to avoid the State's judgment lien through § 522(f)(1) fails for at least four related reasons: 1) a plain meaning reading of § 522(f)(1) provides for the avoidance of the State's judgment; 2) the State's argument contravenes Congressional policy as embodied in § 522(f); 3) to the extent § 522(f)(1) and § 2329.661(A)(4) conflict, the state statute is preempted by the federal statute; and 4) the Supreme Court's decision in Owen compels the granting of the Gokays' § 522(f) motion to avoid the State's judgment lien so that they may use their homestead exemption.
The formula defining impairment provides:
11 U.S.C. § 522(f)(2)(A). The State does not dispute that its judgment lien qualifies as a judicial lien as that term is defined by § 101(36).
Applying the formula to the State's judgment lien, as the Sixth Circuit stated in Brinley, must be done in literal conformity with the text of the statute. Accordingly, the computation of the impairment to the Gokays' homestead exemption resulting from the State's judgment lien is as follows:
State of Ohio Judgment Lien: $696,263.04
Mortgage: $291,666.00
Exemption Gokays could claim
absent liens on the property: $265,800.007
_________________
Total of Liens & Exemptions: $1,253,729.04
Value of Gokays' Interests in the Property: $288,000.00
Amount by which total of liens & exemption
Exceeds value of debtors' interest: $965,729.04
[
Under the formula provided by § 522(f)(2)(A), the State's judgment lien impairs the Gokays' homestead exemption in the full amount of the State's judgment lien—$696,263.04. That conclusion is the same regardless of whether the Gokays' value for the property is used or the State's highest suggested value is used.
The crux of the parties' arguments concerning the homestead exemption is whether the State's lien may impair the Gokays' homestead exemption notwithstanding the State's attempt by statute to define impairment in such a way as to exclude its own liens. The State urges that the formula provided by § 522(f)(2)(A) does not apply to its lien because Ohio, through § 2329.661(A)(4), has carved out its own liens, including judgment liens, from the increased Ohio homestead exemption. This argument fails for several reasons.
First, the formula applies to define "impairment" under the Bankruptcy Code—state law does not apply to define impairment. Brinley, 403 F.3d at 421 ("[T]his court has already `expressly stated that § 522(f)(2)(A) is a federal definition of impairment. . . and, in light of [its] explicit language, we no longer look to state law to define impairment.'" (quoting In re Northern, 294 B.R. 821, 830-31 (Bankr. E.D.Tenn.2003)). As stated by the Court of Appeals for the Eighth Circuit:
Kolich v. Antioch Laurel Veterinary Hosp. (In re Kolich), 328 F.3d 406,410 (8th Cir. 2003).
Section 522(f)(2)(A) specifically states that the judicial lien (in this case the State's judgment lien) and all other liens must be considered and that the homestead exemption that would be available to the debtors absent any liens is added to the total of the liens on the property. Even in this case, the State cannot argue that absent any liens on the Gokays' residence, including the State's judgment lien, the Gokays would not be entitled to their respective homestead exemptions in the property. Thus, regardless of how the State defines the contours of the homestead exemption, the formula provided by § 522(f)(2)(A) applies to determine "impairment" of the homestead exemption and here the State judgment lien impairs the Gokays' respective homestead exemptions. There can be no state "work around" § 522(f)—the Bankruptcy Code trumps state law in defining impairment of an exemption.
As recently noted by the Court of Appeals for the Second Circuit in a similar case in which the State of New York had significantly increased its homestead exemption, "§ 522(f) allows a debtor to avoid a judgment lien in bankruptcy to the extent that the lien impairs an exemption
Botkin v. DuPont Cmty. Credit Union, 650 F.3d 396, 400 (4th Cir.2011) (citing Owen, 500 U.S. at 310-11, 111 S.Ct. 1833) (emphasis in original and footnote omitted). As the court pointed out, the legislative reports accompanying the Bankruptcy Reform Act of 1978 also note that the focus is not on the exemption which the debtor may take with the existence of the lien, but rather, the exemption to which the debtor would be entitled in the absence of the lien. See H.R.Rep. No. 95-595, at 362 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6318 ("The debtor may avoid a judicial lien on any property to the extent that the property could have been exempted in the absence of the lien." (emphasis added)); S.Rep. No. 95-989, at 74 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5862 (same). Botkin, 650 F.3d at 400, n. 2.
In a pre-Owen decision, the Court of Appeals for the Eleventh Circuit rejected an argument similar to the argument being made by the State in this case. In that case creditors argued that the Georgia Legislature defined the exemptions in question in a manner which prevented the debtors from using § 522(f) to avoid their nonpossessory, purchase money security interests. Specifically, they contended that Georgia law only permitted a debtor to exempt property if it is not encumbered by a lien. In rejecting that argument, the Eleventh Circuit stated:
Hall v. Fin. One of Ga. (In re Hall), 752 F.2d 582, 586 (11th Cir.1985) (overruled on other grounds by Fin. One v. Bland (In re Bland), 793 F.2d 1172 (11th Cir.1986) (en banc)). In that case the court affirmed the bankruptcy court's avoidance of nonpossessory, nonpurchase money security interests in the debtor's household goods. See also Aetna Fin. Co. v. Leonard (In re Leonard), 866 F.2d 335, 338 (10th Cir. 1989) (federal law determines availability of lien avoidance).
Accordingly, as a matter of pure statutory construction, the State's argument must be rejected.
Enforcement of § 2329.661(A)(4) in a bankruptcy case would preclude the Gokays' ability to exercise their rights under § 522(f)(1). For this reason, it is preempted under a federal conflict preemption analysis.
Conflict preemption is "where it is impossible to comply with both federal and state law, or where state law stands as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress." Id. at 425 (citing Bibbo v. Dean Witter Reynolds, Inc., 151 F.3d 559, 562-63 (6th Cir.1998)). See also Chrysler Group LLC v. Fox Hills Motor Sales, Inc., 776 F.3d 411, 424 (6th Cir.2015) ("Conflict preemption occurs when a state law `stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'") (citations omitted). Stated another way, "[i]f the purpose of the act cannot otherwise be accomplished—if its operation within its chosen field . . . must be frustrated and its provisions be refused their natural effect—the state law must yield to the regulation of Congress." Id. (citing Savage v. Jones, 225 U.S. 501, 533, 32 S.Ct. 715, 56 L.Ed. 1182 (1912)).
In Pertuso, the Sixth Circuit emphasized the "exclusively federal nature of bankruptcy proceedings." 233 F.3d at 425. The court noted the Constitution's grant to Congress of the authority to establish "uniform Laws on the subject of Bankruptcies" and the "pervasive nature of Congress' bankruptcy regulation." Id. Quoting a Ninth Circuit decision, the court stated:
Id. (quoting in part MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910, 914 (9th Cir.1996)).
510 B.R. at 815-16.
Because Congress has permitted states to opt out of the federal bankruptcy exemptions, the tension between state law and federal bankruptcy in the exemption area is great. As Judge Walter noted in Kyle, "considerable disagreement exists regarding the `outer limits of a state law's ability to control an exemption's operative characteristics in the bankruptcy universe' especially when a state created exemption scheme conflicts with various aspects of the exemption framework in 11 U.S.C. § 522 or other provisions of the Bankruptcy Code." Kyle at 815-16, (citing In re Betz, 273 B.R. 313, 321 (Bankr.D.Mass. 2002)).
Section 522(f) and Ohio Revised Code § 2329.661(A)(4) cannot be construed to work together in harmony as pertains to judicial liens—they directly conflict—either
Allowing the State to define Ohio's homestead exemption in a manner to exempt state judgments from the coverage of § 522(f)'s judicial lien avoidance stands as an obstacle to the accomplishment and execution of Congress' purpose and objectives in permitting bankruptcy debtors to avoid judicial liens which impair their exemptions. Congress' purpose and objective in providing this lien avoidance remedy is to give debtors a fresh start, free from the chains and shackles of preexisting debt. The United States Supreme Court has acknowledged that
Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230, (1934)). See also Richardson v. Schafer (In re Schafer), 689 F.3d 601, 616 (6th Cir.2012) (listing cases recognizing that "the goal of the Bankruptcy Code is to provide debtors in bankruptcy with a fresh start"). The Supreme Court has specifically linked the avoidance of judicial liens under § 522(f) to assuring debtors their fresh start:
Farrey v. Sanderfoot, 500 U.S. 291, 297-98, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991). See also Holland v. Star Bank, N.A. (In re Holland), 151 F.3d 547, 550 (6th Cir.1998) (quoting In re Miller, 198 B.R. 500, 505 (Bankr.N.D.Ohio 1996) ("if a judgment creditor [were] allowed to retain its lien on the real property of the debtor . . . the debtor would likely be precluded from ever gaining any equity in the property, therefore impairing his fresh start.")).
As recognized in Owen, while the states have broad authority to legislate the parameters of their exemptions, they cannot do so in a manner which directly conflicts with the express terms and policies of the Bankruptcy Code. Section 2329.661(A)(4) stands as an obstacle to the accomplishment and execution of Congress' purpose and objectives by eliminating the Gokays' entitlement to avoid a judicial lien which impairs their homestead exemption, an entitlement which is expressly granted to them in § 522(f) to effectuate their fresh start.
Any question concerning whether states may enact exceptions to their exemptions to carve out liens from the reach of § 522(f) was resolved through the Supreme Court's decision in Owen. In addition, following Owen, a number of other courts have addressed issues as to whether particular state-enacted exceptions to exemptions trump § 522(f). The courts following Owen have uniformly concluded that § 522(f) prevails over any state exemption statute or exception to a state exemption which conflicts with § 522(f).
Owen involved a Florida residential condominium, which became encumbered with a judgment lien held by the debtor's ex-wife upon the debtor's purchase of the condo. In 1985, the Florida legislature expanded the state homestead exemption law to include condos. The debtor filed a bankruptcy which was closed following administration of the estate. The debtor then reopened the case to avoid the ex-wife's judgment lien. The bankruptcy court overruled the debtor's § 522(f)(1) motion, in a manner consistent with Florida state court decisions holding that the new condominium exemption did not apply to pre-existing judgment liens. The district court and the Eleventh Circuit Court of Appeals affirmed the bankruptcy court. The Supreme Court, however, reversed the lower courts.
In an 8-1 decision, Justice Scalia, writing for the majority, noted that:
Owen, 500 U.S. at 310-311, 111 S.Ct. 1833. Justice Scalia concluded that:
Id. at 313-14, 111 S.Ct. 1833.
A number of lower federal courts have addressed similar issues following Owen. They have uniformly held that § 522(f) trumps any attempt by states to carve out property as being nonexempt because they are the subject of a lien described by § 522(f)(1)(A) or (B). Thus, in Tower Loan of Mississippi, Inc. v. Maddox (In re Maddox), 15 F.3d 1347 (5th Cir.1994), the court addressed whether a Chapter 13 trustee could avoid nonpossessory, nonpurchase money security interests under § 522(f)(1)(B). The court found that the Chapter 13 trustee had standing to avoid the lien under § 522(f) and went on to
Following Owen, the courts follow a "but for" analysis to determine whether a lien may be avoided. Thus, if the property would be exempt but for the lien and the lien is one described by § 522(f)(1), then the lien may be avoided so that the debtors may assert and be entitled to claim their exemption in that property. See Kennedy, 139 B.R. at 396 ("But for the voluntary nonpurchase-money security interests, the debtors could claim exemptions in their tangible personal property. Therefore, pursuant to § 522(f)(2), the security interests can be avoided to the extent that the debtors' exemptions are impaired."). See also Wink, 137 B.R. at 301 ("This Court fully agrees with the majority view as espoused by Owen—that the proper inquiry under that provision is whether a debtor would be entitled to an exemption but for the existence of the lien. If so, then that lien can be avoided.").
Owen and its progeny teach us that states may not except out from their exemptions property subject to the liens that may be avoided under § 522(f)(1). If the liens are liens described by § 522(f)(1), those liens may still be avoided by debtors such as the Gokays, despite a state's attempt to exclude such property from being impaired by the state's liens. Just as in Owen, the Gokays would be entitled to a homestead exemption but for the State judgment lien. Under such circumstances, Owen and it progeny direct that the State's judgment lien be avoided so that the Gokays may assert and enjoy their homestead exemption.
For the reasons stated in this Decision, the court finds that the State's judgment lien may be avoided in its totality as fully impairing the Gokays' homestead exemption available to them under § 2329.66(A)(1). The Gokays' motion to
Ohio Rev.Code § 2329.66(B). The adjusted dollar amounts do not appear in the text of the statute; however, that information may be accessed by visiting the Ohio Judicial Conference website. Ohio Judicial Conference, http://www.ohiojudges.org/ (follow "Exemptions" hyperlink). At the time the Gokays filed their bankruptcy petition, the adjusted dollar amount for each debtor was $132,900.
