§ 144.2 — Lien Avoidance at Conversion
Revised: June 17, 2004
Lien avoidance under § 522(f) is available in Chapter 13 cases.1 When a lien is avoided by a Chapter 13 debtor, it is difficult for the creditor to preserve its position for the possibility that the avoided lien will be reinstated by § 349 if the case is dismissed.2
Although there is nothing in § 348 to suggest this result, one reported decision holds that, upon conversion, the creditor is not bound by lien avoidance under § 522(f) that was accomplished through the plan during the Chapter 13 case.3 There is contrary authority.4 Lien avoidance under § 522(f) is equally available in Chapter 7 as in Chapter 13. Lien avoidance during the Chapter 13 case could be repeated in the subsequent Chapter 7, even if conversion has some reversing or undoing effect. Reinstating a lien avoided during the Chapter 13 case may be empty satisfaction for the creditor—if the debtor has disposed of the property that was subject to the lien or the property has depreciated, reinstatement of the lien may not fully restore the creditor’s rights.
The Supreme Court’s interpretation of Bankruptcy Rule 4003(b) in Taylor v. Freeland & Kronz5 impacts the use of § 522(f) to avoid liens in Chapter 13 cases generally and at conversion. In Taylor, the Supreme Court held that a Chapter 7 debtor’s exemption claims could not be challenged after the 30-day period described in Bankruptcy Rule 4003(b), notwithstanding that the exemptions were defective under state law.6 Taylor affects the use of § 522(f) because the predicate for lien avoidance is that the debtor has an exemption that is impaired by an avoidable lien. If the debtor claims exemptions and no one objects within the 30 days in Bankruptcy Rule 4003(b), those exemptions form the basis for lien avoidance under § 522(f).7 It has been held that a creditor’s failure to timely object precludes challenge to the underlying exemptions as a defense in a subsequent lien avoidance action under § 522(f).8
The Taylor issue and lien avoidance under § 522(f) are presented in several different fact patterns at conversion from Chapter 13. If the debtor claimed exemptions without objection in the original schedules and if those exemptions are not amended or supplemented, in a § 522(f) action after conversion, Taylor and Bankruptcy Rule 4003(b) defeat any defense based on defects in the exemptions. If the debtor files an amended or supplemental exemption schedule at conversion and neither the Chapter 7 trustee nor any creditor objects within 30 days, Taylor precludes collateral attack on the debtor’s exemptions in subsequent lien avoidance litigation. An aggressive debtor contemplating conversion might file amended exemptions in the Chapter 13 case before conversion to allow the 30 days in Bankruptcy Rule 4003(b) to run before filing a § 522(f) motion in the Chapter 7 case.
The message for creditors is that Taylor requires attention to exemptions during the Chapter 13 case and at conversion to Chapter 7. Any creditor with a potentially avoidable lien must timely police exemptions. If there is a defect in the underlying claim of exemptions, the creditor must challenge exemptions within the 30 days in Bankruptcy Rule 4003(b) or risk forfeiting the defense.
The Bankruptcy Reform Act of 1994 affects lien avoidance at conversion from Chapter 13. In Chapter 13 cases filed after October 22, 1994, property of the estate after a good-faith conversion is redefined by § 348(f)(1)(A) to “consist of property of the estate, as of the date of the filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”9 If the conversion is in “bad faith,” the estate in the converted case “shall consist of the property of the estate as of the date of conversion.”10 Because an (impaired) exemption is the predicate for lien avoidance under § 522(f), redefining property of the estate could change the exemptions available to a debtor at conversion11 and thus change a Chapter 13 debtor’s lien avoidance rights under § 522(f).
Some odd outcomes are possible as a result of the 1994 amendments. What if the debtor’s avoidance actions under § 522(f) are different at conversion than they were at the filing of the original Chapter 13 case? Could a Chapter 13 debtor avoid liens under § 522(f) to protect the exemptions that were available at the filing of the Chapter 13 petition and then bring additional or different avoidance actions after conversion to Chapter 7? Imagine a Chapter 13 debtor who exhausts the personal property exemption available at the petition by claiming an exemption in a savings account. A creditor has a non-purchase money, nonpossessory lien on household goods that the debtor cannot void under § 522(f) because the debtor has exhausted the personal property exemption. During two years in a confirmed plan, the debtor spends the savings account, the Chapter 13 case fails and the debtor converts the case in good faith to Chapter 7. At conversion, the bank account no longer “remains in the possession of” the debtor and thus is excluded from the Chapter 7 estate by § 348(f)(1)(A).12 The debtor then amends Schedule C to exempt the household goods and moves under § 522(f) to void the nonpossessory, non-purchase money lien.
The outcome of this example could turn on whether exemptions at conversion are based on the facts at the original petition or the facts at the time of conversion.13 Equitable exceptions to the right of debtors to amend schedules at any time14 could defeat the effort to change exemptions and void liens at conversion.
The message here for Chapter 13 debtors is that the 1994 amendments require reanalysis of the estate, exemptions and available avoidance actions at conversion to Chapter 7. For creditors, the 1994 amendments to § 348(f) may change the exposure to lien avoidance actions at conversion.
The 1994 Act also redefined “impairment” for purposes of lien avoidance under § 522(f).15 The new “mathematical” test for whether a lien impairs an exemption in § 522(f)(2) is applicable at conversion of any Chapter 13 case filed after October 22, 1994.
3 In re Shaffer, 48 B.R. 952 (Bankr. N.D. Ohio 1985).
4 In re Weaver, No. 03-26184, 2003 WL 22331786 (Bankr. W.D. Tenn. Oct. 10, 2003) (unpublished) (Lien avoidance under § 522(f) during Chapter 13 case is binding after conversion to Chapter 7 under § 348, the law of the case doctrine and res judicata.).
5 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992).
6 See §§ 49.1 [ Available and Important in Chapter 13 Cases ] § 48.1 Available and Important in Chapter 13 Cases, 49.2 [ Timing and Procedure ] § 48.4 Timing and Procedure and 317.1 [ Exemptions at Conversion ] § 144.1 Exemptions at Conversion.
7 See § 50.2 [ Procedure for Lien Avoidance ] § 49.2 Procedure for Lien Avoidance.
8 In re Fulton, 148 B.R. 838, 841 (Bankr. S.D. Tex. 1992) (Bank does not have a secured claim because its judicial lien impairs an exemption to which the debtor would otherwise be entitled and the lien is avoidable under § 522(f)(1). “As to the property at Leamont and the automobiles, debtor lists these properties as exempt, showing no equity in the real property and equity of $687.50 in one automobile. No objection was made to debtor’s exemptions, and the time period for objecting to exemptions has passed. Therefore, debtor’s exemptions are allowed. Taylor v. Freeland & Kronz, [503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992)]. Under Bankruptcy Code section 522(f)(1), [the bank’s] claimed judicial lien is avoidable to the extent it impairs an exemption otherwise available to the debtor. Since debtor has claimed these properties as exempt, [the bank’s] claimed judicial lien is avoidable.”). But see In re Maylin, 155 B.R. 605, 613 (Bankr. D. Me. 1993) (“[Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992),] cannot not [sic] mean that secured creditors lose important rights by doing exactly what the law has long said they can do: Ignore the bankruptcy proceeding until hailed [sic] into court. . . . [The rule in Taylor] does not foreclose a secured creditor from defending a § 522(f) or § 522(h) action by denying that the property involved is exempt under applicable law. Notwithstanding Rule 4003(b) and Taylor, affected secured creditors may contest the bona fides of an exemption in defense of a § 522(f) lien avoidance motion.”).
9 11 U.S.C. § 348(f)(1)(A), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 311, 108 Stat. 4106 (1994). See § 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2 In Cases Filed after October 22, 1994.
10 11 U.S.C. § 348(f)(2), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 311, 108 Stat. 4106 (1994). See § 143.2 In Cases Filed after October 22, 1994 and § 143.5 Bad-Faith Conversion.
11 See § 317.1 [ Exemptions at Conversion ] § 144.1 Exemptions at Conversion.
12 See § 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2 In Cases Filed after October 22, 1994.
13 See § 317.1 [ Exemptions at Conversion ] § 144.1 Exemptions at Conversion.
14 See Fed. R. Bankr. P. 1009; § 317.1 [ Exemptions at Conversion ] § 144.1 Exemptions at Conversion. See also § 41.3 [ Preconfirmation Amendment of Petition, Statements, Schedules and Lists ] § 41.2 Preconfirmation Amendment of Petition, Statements, Schedules and Lists.
15 See discussion beginning at § 49.1 Available in Chapter 13 Cases.