Lien Avoidance Four Years after Discharge

How late is too late to amend schedules to include a secured creditor and claim a homestead exemption for purposes of section 522(f) lien avoidance? The BAP for the Ninth Circuit addressed the question in the case of Green v. HAPO Community Credit Union (In re Green), No. 12-1486 (Aug. 12, 2013), in which it reversed the bankruptcy court’s dismissal of the debtor’s motion to avoid lien and ordered that, upon remand, the lower court grant the motion.

The debtor completed her chapter 13 plan under which she showed her residence to be underwater and, therefore, did not claim a homestead exemption. The motor home creditor was listed in the plan as an unsecured creditor based on a deficiency left over from the pre-petition sale of the debtor’s motor home. Unbeknownst to the debtor, however, shortly before she filed her bankruptcy petition the creditor had sought and obtained a judgment lien in state court for the deficiency. The creditor did not file a claim as a secured creditor. Four years after her bankruptcy discharge the debtor sought to refinance her home and discovered the judgment lien. She reopened the bankruptcy, filing amended schedules and seeking to avoid the lien under section 522(f)(1)(A) as impairing her homestead exemption. The bankruptcy court denied debtor’s motion to avoid the lien stating that the debtor’s lack of equity in the residence precluded her entitlement to the exemption. The court also found prejudice to the creditor in the delayed motion to avoid the lien. On rehearing, the bankruptcy reversed itself and held that equity was not a prerequisite to use of the homestead exemption. Nonetheless, the court went on to find that the debtor’s attempt to use that exemption was simply too late and, therefore, upheld its earlier denial of the motion to avoid the lien.

The Ninth Circuit has stated three requirements for lien avoidance under section 522(f): 1) there must be a lien on debtor’s interest in property, 2) the lien must impair an exemption, and 3) the lien must be a judicial lien. Culver, LLC v. Chiu (In re Chiu), 304 F.3d 905, 908 (9th Cir. 2002). There is no deadline in the Bankruptcy Rules for filing a motion to avoid a lien under this section. In Goswami v. MTC Distrib. (In re Goswami), 304 B.R. 386, 390-91 (B.A.P. 9th Cir. 2003), the BAP for the Ninth Circuit added a fourth requirement that the lien must be listed on the debtor’s bankruptcy schedules. It was this fourth requirement that led to the bankruptcy court’s decision denying the debtor’s motion to avoid the lien.

The BAP in Green likewise relied on Goswami to reach the opposite conclusion. Goswami involved almost identical facts as those set forth in Green and ultimately turned on whether the creditor was prejudiced by the years-long delay in the amendment to the debtor’s schedules to include the lien and the homestead exemption. Relying on Goswami the court in Green found that mere delay does not establish prejudice; there must be economic loss to the creditor and that loss must not be counterbalanced by greater loss to the debtor in denying the avoidance motion. Because the court below evidently based it’s denial of the debtor’s motion on the mere fact of the passage of time, with no showing of loss to the creditor or bad faith on the part of the debtor, the BAP found its decision clearly erroneous. Furthermore, the court found that an impairment to the exemption may be established even where the debtor claims the exemption amount as “$0.00” because to find otherwise would simply be another way of stating that the debtor must have equity in the home before he or she can claim an exemption and the court rejected this notion.

Green BAP 9th opinion