Debtor Cant Avoid Judgment Lien That Attached Prior to Homestead Declaration

By: Alyssa Baer

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Bailey,[1] the United States Bankruptcy Court for the District of Idaho held that Debtors were not entitled to avoid a judicial lien, pursuant to 11 U.S.C. § 522(f), when Debtors purchased a homestead[2] after the judgment was recorded, since the debtors did not have a prior interest in the encumbered property.[3]  In an unrelated state court case, Mountain West Bank (the “Creditor”) obtained a valid judgment lien against the debtors in the amount of $103,847.00, and recorded it in the Office of the Canyon County Recorder in accordance with Idaho law.[4]  Then, the debtors purchased undeveloped land in Canyon County,[5] at which time the creditor’s judgment lien attached to the property by operation of Idaho state law.[6]  The debtors’ subsequent recording of a homestead declaration with the recorder’s office was insufficient to protect the homestead from encumbrance by the creditor’s judgment lien.  However, the debtors later filed for chapter 7 bankruptcy, and claimed their property exempt pursuant to Idaho’s homestead exemption. The debtors then moved to avoid the creditor’s judgment lien, pursuant to § 522(f), claiming that it impaired their homestead exemption.[7] 

A debtor can avoid a creditor’s judgment lien if he or she can show that “(1) there was a fixing of the lien on an interest of the debtor in property; (2) such lien impairs an exemption to which the debtor would have been entitled; and (3) such lien is a judicial lien.”[8]   The debtors did not provide any evidence to show that the creditor’s lien attached to their interest in the property, or that the lien impaired their homestead exemption, but the court examined the issues in detail in reaching its decision. The court reviewed two United States Supreme Court cases that are on point in deciding whether the debtors were entitled to lien avoidance pursuant to § 522(f)(1).  In Owen v. Owen[9]the Court held that a debtor in bankruptcy may avoid a valid judgment lien so long as the lien impairs an exemption that the debtor would be entitled to absent the lien.[10]  However, in Farrey v. Sanderfoot,[11] the Supreme Court held, when a judgment lien attaches to property obtained by a debtor contemporaneously with the acquisition of that property, as per state law, the lien does not attach to the debtor’s interest in the property and cannot be avoided,[12] even if the debtors would have been entitled to the homestead exemption absent the lien.[13]  Applying existing precedent, the Bailey court reached the conclusion that the debtors were not entitled to lien avoidance, due to the effect of Idaho state law on the timing of when the lien attached to the property and when the debtors obtained their interest in the property.  Here, the debtors could not show that they had an interest in the property prior to the fixing of the creditor’s lien, since Idaho law dictates that a recorded judgment will automatically attach to any after-acquired property.[14]  Since the debtors did not have a prior interest in the property to which the creditor’s lien attached, the debtors could not avoid the lien pursuant to 11 U.S.C. § 522(f), even though they would have been entitled to the homestead exemption absent the lien’s existence.  

The Bailey court’s ruling is demonstrable of a state’s ability to draft its homestead exemption statutes in a manner which will provide greater protection to creditors in bankruptcy and leave debtors unprotected by the Bankruptcy Code’s lien avoidance provision.  The Idaho statute provides that a debtor does not obtain an interest in an undeveloped property through the homestead exemption until a declaration of homestead is properly recorded;[15] however, once a creditor properly records a judgment against a debtor the resulting lien will automatically attach to any property that the debtor purchases.[16]  The Code provides for lien avoidance when a creditor’s judgment lien impairs a debtor’s homestead exemption, but state law may limit a debtor’s eligibility as illustrated by the Bailey court’s decision.  If other states adopt similar exceptions to their homestead exemption statutes, § 522(f) lien avoidance will continue to be denied to debtors.  While the decision has negative implications for debtors, the holding makes creditors such as Mountain West Bank more likely to lend money, as creditors know that a debtor’s home is always an asset which they can attach a judgment lien to in order to recover debts.

[16] See id. at *15.