Bankruptcy: Lien Avoidance Case Review: Avoidance of Exemptions Impaired by a Judicial Lien

     In the case of Massie v. Yambrose the United States District Court at Harrisonburg, Virginia, decided that where a creditor had obtained a judgment lien that was docketed against real property that the debtor owned with her non-debtor spouse as tenants by the entirety, that lien impaired the debtor's exemption and may be avoided. This decision reversed a bankruptcy court decision. In summary, the District Court decided that although the creditor's judgment lien would not have been enforced against the debtor's property unless and until the tenancy by the entirety dissolved, the lien nevertheless impaired the exemption. The focus of the exception granted in Bankruptcy Code §522(b)(2)(B) was the property itself, not the tenancy. If it was not avoided, the lien could be enforced against the property after the tenancy by the entirety dissolved. This would constitute an impairment of the debtor's exemption; therefore, the District Court ruled that the debtor may avoid the lien pursuant to Bankruptcy Code §522(f)(1). The issue before the Court in Massie was whether the creditor's docketed judgment was a "judicial lien" that "impaired" an exemption to which the debtor would be entitled as a tenant by the entirety, even though the lien could not be enforced while the tenancy survived. Although this was a judgment lien pursuant to Virginia law, that did not determine whether it was a judicial lien as defined by the bankruptcy code. The interest held by the creditor was obtained pursuant to Virginia Code §8.01-458, which clearly qualified as being obtained by judgment or other legal process. The core issue, therefore, was whether there truly was "a charge against or interest in" the property held by debtor and her non-debtor spouse given the invalidity of any lien against property held by tenants by the entirety. For all practical purposes, this question was the same as whether the lien impaired the exemption. If the creditor did not have a charge against or interest in the property, then nothing existed that could impair the exemption. Conversely, if the lien (assuming that it was one) did impair the exemption, then it must have been a charge against or an interest in the property. As a result, for the purposes of the issue involved in this case, the Court assumed that the creditor held a judicial lien in order to decide whether such lien impaired the debtor's exemption. The determinative issue was whether a lien "impaired" an exemption pursuant to Bankruptcy Code §522(f) if it was not capable of being enforced until the basis of the exemption itself disappeared. In this case, the creditor's lien was completely ineffective against the property held by the debtor and her non-debtor spouse as tenants by the entirety, unless and until the tenancy itself dissolved and the debtor was left with an interest in the property other than as a tenant by the entirety. The District Court stated that it was guided in its decision by the 4th Circuit Court of Appeals case of In re Opperman. As applied to Massie, Opperman suggested that the proper question was not whether the basis for the exemption was impaired, but whether the property currently subject to the exemption could become impaired by the lien. This implication was buttressed by the language granting the exemption in Bankruptcy Code §522(b). That section allowed the debtor to exempt from property of the estate the property specified in the remainder of the section. Bankruptcy Code §522(b) further states that such exempt property was any interest in property in which the debtor had, immediately before the commencement of the case, as a tenant by the entirety. In Massie the exemption was granted to the property itself, rather than to the tenancy by the entirety, and the relevant date in determining the exemption was the date that the debtor filed the bankruptcy petition. The exemption was granted to the debtor's interest in the property because on the date that debtor filed her bankruptcy petition, the property was owned by tenants by the entirety, and this was not dependent on how it is owned at anytime in the future. As the 4th Circuit implied in Opperman, therefore, the question was whether the creditor's lien could attach to the property, not to the tenancy, thereby impairing the exemption to which the debtor currently is entitled. Absent avoidance of the lien pursuant to Bankruptcy Code §§522(f)(1), the lien could attach to the property if the tenancy by the entirety dissolved. If the unity of husband and wife is broken, the tenancy by the entirety would be lost along with it. The debtor's husband could die, or she could divorce him and retain an individual interest in the property. If either of these events occurred, the creditor then would be able to enforce the lien against the property. Although the tenancy could never be impaired, the exemption surely could be. The Court therefore ruled that the creditor's lien impaired an exemption to which the debtor would be entitled but for the lien. Pursuant to Bankruptcy Code §522(f)(1), the Court held that the debtor may avoid the lien.