In re Guadie

In re LULSEGED GUADIE, Debtor.

Case No. 17-00054

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLUMBIA

Filed: January 16, 2018

January 12, 2018

(Chapter 7)

Not for publication in West's Bankruptcy Reporter.

MEMORANDUM DECISION AND ORDER RE MOTION TO DISMISS MOTION TO AVOID LIEN

The Debtor's Motion to Avoid Judicial Lien as Impairing Exemption and as Preferential Transfer (Dkt. No. 107) seeks to avoid a judicial lien (a charging order) in favor of Santorini Capital, LLC ("Santorini") on the debtor's 2% interest in an LLC (Guadie Developments, LLC). In turn, Santorini has moved for dismissal of the debtor's motion. Santorini's request for dismissal must be denied for the following reasons.

I

The debtor has valued his interest in the LLC at zero dollars, but has claimed an exemption of $1 in that asset. Santorini argues, erroneously, that the debtor may not invoke 11 U.S.C. § 522(f) to avoid Santorini's lien when the debtor values the asset subject to the lien as worthless.

Santorini holds the only lien on the asset. Under 11 U.S.C. § 522(f)(1), a judicial lien is avoidable "to the extent that such lien impairs an exemption to which the debtor would have been entitled." The formula for determining whether the lien impairs an exemption is found under § 522(f)(2)(A):

(2)(A) For the purposes of this subsection, a lien shall be considered to impair an exemption to the extent that the sum of—

(i) the lien;

(ii) all other liens on the property; and

(iii) the amount of the exemption that the debtor could claim if there were no liens on the property;

exceeds the value that the debtor's interest in the property would have in the absence of any liens.

Accordingly, the court must first add Santorini's charging order lien, for $1,893,407.23,¹ to the $8,300 that the debtor asserts he could claim as exempt pursuant to 11 U.S.C. § 522(d)(5),² asum of $1,901,707.23, and then determine whether that foregoing sum of $1,901,707.23 "exceeds the value that the debtor's interest in the property would have in the absence of any liens." If the asset is worthless the $1,901,707.23 sum exceeds the value of the debtor's interest in the LLC by $1,901,707.23, and, accordingly, the entire lien of $1,893,4707.23 is avoidable.

It matters not that the exemption claimed of $1 may be worth nothing if the debtor was correct in valuing the asset as worthless. Congress intended that debtors would be allowed to avoid certain liens even if they hold no equity in the property. Kolich v. Antioch Laurel Veterinary Hospital(In re Kolich), 273 B.R. 199, 202 (B.A.P. 8th Cir. 2002); aff'd, 328 F.3d 406 (8th Cir. 2003). In Kolich, the debtors sought to avoid a judicial lien on the debtors' home where two other consensual liens on the home consumed all the equity the debtors would have had. Id. at 201. The Bankruptcy Appellate Panel approved the bankruptcy court's analysis finding that Congress intended to overrule earlier cases barring a debtor from avoiding the lien where there was no equity. Id. at 204. Similarly, in In re May, 340 B.R. 633, 635 (Bankr. W.D. Ark. 2006), the court held that the debtors were able to avoid a lien that impaired the debtors' homestead exemption. The court held:

A debtor is entitled to avoid a judicial lien that impairs a homestead exemption even if the debtors have no equity in the property. Kolich v. Antioch Laurel Veterinary Hosp. Inc., (In re Kolich), 273 B.R. 199, 204(8th Cir. BAP 2002)(citing F.D.I.C. v. Finn (In re Finn), 211 B.R. 780, 782-84 (1st Cir. BAP 1997) and quoting H.R.Rep. No. 835, 103d Cong., 2d Sess. 45 (1994)), aff'd, 328 F.3d 406 (8th Cir.2003). See also Higgins v. Household Fin. Corp. (In re Higgins), 201 B.R. 965, 967-968 (9th Cir. BAP 1996) (holding that "Congress has made it clear in amending section 522 that a lien will be deemed to impair an exemption, even when there is no equity in the property, if the sum of all the liens on the property and the hypothetical value of the exemption without liens exceeds the value of the debtor's interest in the property in the absence of liens."); In re Whitehead, 226 B.R. 539, 541 (Bankr.W.D.N.Y.1998) (stating that the amendments to section 522, for the purposes of determining impairment, create equity, "even if the debtor otherwise has no equity in the property"); In re VanZant, 210 B.R. 1011, 1016 (Bankr.S.D.Ill.1997) (concluding that the debtor was entitled to avoid the creditor's lien in its entirety although she had no equity in the property above the amount of her homestead exemption).

Id.

Admittedly, these cases deal with situations where there is no equity because other liens consume all the equity, unlike the situation here where the asset is worthless. Nevertheless, the statute does not distinguish between worthless property and property completely encumbered by liens. Under the formula in § 522(f)(2), a lien is not avoidable only if the value of the property exceeds the amount that the debtor could claim exemptible. The debtor's burden of proof is to show that the value of the property is less than the amount of the exemption that he could claim against the property. If the value is less than such exemptible amount, the entirety of Santorini's lien impairs the exemption that could be claimed and is avoidable.The debtor will carry his burden of proof even if his evidence shows that the 2% interest in the LLC is worthless.

If, on the other hand, the chapter 7 trustee were able to sell that asset for $1, the debtor would be entitled to assert the $1 exemption (or such higher amount he could claim as exempt) against the net proceeds of the sale, and to avoid Santorini's judicial lien as impairing the debtor's exemption. The avoidability of the entirety of the lien does not differ depending on whether the value of the interest in the LLC is zero or $1.

In short, a debtor is not barred by the debtor's valuation of an asset as being worthless from claiming an exemption in the asset and from seeking to avoid a judicial lien pursuant to 11 U.S.C. § 522(f) as impairing that exemption. There may be a different outcome if the debtor claims zero as the amount of a claimed exemption in an asset, where effectively no exemption has been claimed. See, e.g., In re Berryhill, 254 B.R. 242, 244 (Bankr. N.D. Ind. 2000) (holding that "a claimed exemption of $0.00 is the equivalent of no exemption whatsoever. Without a claimed exemption in property, there is nothing that § 522(f) can be used to protect." (citations omitted)); In re Forti, 224 B.R. 323 (Bankr. D. Md. 1998) (when a debtor lists zero as the "Value of Claimed Exemption" on Schedule C, no dollar amount has been claimed as exempt). Here, in contrast, the debtor has claimed anexemption in the asset, an exemption of $1, and under the test of § 522(f)(2), the entirety of Santorini's lien impairs that exemption and is avoidable (unless the value of the debtor's interest in the LLC exceeds the exemptible amount).

II

The debtor also moves to avoid Santorini's lien as a preference under 11 U.S.C. § 547, invoking 11 U.S.C. § 522(h). The arguments raised by Santorini do not warrant dismissing the motion to avoid its lien under § 522(h).

A.

Santorini asserts that under Fed. R. Bankr. P. 7001, avoidance under § 522(h) must be pursued via an adversary proceeding. As explained in In re Cramer, 393 B.R. 611, 612 n.1 (Bankr. N.D. Ill. 2008):

Under Rule 7001(2), lien avoidance under section 522(h) ordinarily requires an adversary proceeding. See Fed. R. Bankr. P. 7001(2); In re Lafoon, 278 B.R. 767, 770 (Bankr. E.D. Tenn. 2002). But the rule is not jurisdictional, In re Pence, 905 F.2d 1107, 1109 (7th Cir. 1990), and parties can waive its requirements and resolve lien validity issues by motion if they prefer, id.; see also In re Zolner, 249 B.R. 287, 292 (N.D. Ill. 2000).

Santorini has forfeited the right to insist on an adversary proceeding. On August 23, 2017, Santorini filed an objection to the debtor's motion to avoid Santorini's lien, and in that objection Santorini raised no argument that avoidance of its lien as a preference under § 522(h) must proceed by way of anadversary proceeding. Moreover, on August 24, 2017, Santorini appeared at a scheduling conference and raised no objection that the avoidance of its lien under § 522(h) could only proceed by way of an adversary proceeding, and agreed to a schedule for disposing of the motion to avoid its lien, leading to a scheduling order entered on September 20, 2017, setting a November 30, 2017 deadline for completing discovery, and setting the trial of the motion to be held on January 16, 2018. Santorini waited until November 30, 2017, the deadline for completing discovery, to file its motion to dismiss the motion to avoid its lien. Rule 7001, in requiring an adversary proceeding for avoidance of a lien as a preference, is not jurisdictional, and the right to an adversary proceeding can be forfeited by failing to raise the right in a timely fashion. See Kontrick v. Ryan, 540 U.S. 443, 456 (2004) (holding that "a claim-processing rule, on the other hand, even if unalterable on a party's application, can nonetheless be forfeited if the party asserting the rule waits too long to raise the point."). Without raising any objection at the scheduling conference regarding its entitlement to an adversary proceeding, Santorini let the court issue a scheduling order treating the entirety of the motion to avoid its lien as a contested matter under Fed. R. Bankr. P. 9014, instead of insisting that part of the matter proceed only by way of an adversary proceeding. See In re Pilate, 487 B.R.345, 352 n.5 (Bankr. D.D.C. 2013). Santorini has thus forfeited its right to insist on an adversary proceeding by failing timely to raise an objection asserting its entitlement to an adversary proceeding.

B.

Santorini also argues that only the trustee can avoid its lien as a preference. However, Santorini fails to take account of § 522(h). Santorini's lien on the debtor's 2% interest in the LLC constitutes an...