6.7.a Liens On Property Having No Equity

• Jurisdiction: United States

a. Generally

Under the Bankruptcy Code certain valid liens for non-tax claims may be avoided by the debtor by means of motion.

Outside of the tax context the debtor may move to avoid judgment creditor liens that impair exemptions, and non-possessory non-purchase money liens affecting certain exemptions. [11 U.S.C. § 522(f)(1)]. Other than tax liens, the debtor may move to avoid a preferential lien if the trustee does not move to avoid it [§ 522(h)(1), 522(g) Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26 (1st Cir. 1994). Case authority gives the debtor the right to lien avoidance after the trustee has abandoned the property. In re Folendore, 862 F.2d 1537 (11th Cir. 1989); In re Lindsey, 823 F.2d 189 (7th Cir. 1987); In re Leavell, 124 B.R. 535 (S.D. Ill. 1991); and Gaglia v. First Federal Savings & Loan Assoc., 889 F.2d 1304 (3rd Cir. 1989). See also 3 Collier on Bankruptcy ¶ 506.07 (15th ed. 1989).

RULE: A tax lien may be "avoided" by motion only if it is improperly filed or was unenforceable on date of filing the bankruptcy.

However, as a general rule, it is not possible in a bankruptcy proceeding to avoid a valid tax lien that has been properly filed. 11 U.S.C. § 522(c)(2)(B). This section creates an exception to a debtor's ability to avoid liens, barring a debtor from avoiding a tax lien that is "properly filed." "In order for the trustee to avoid a (tax) lien, it must not be perfected or enforceable against a bona fide purchaser at the commencement of the bankruptcy case." In re Merry-Go-Round Enterprises, Inc. 227 B.R. 775, 782 (Bankr. D. Md. 1998).

While the Code does not define "properly filed," Congress, in enacting the section, sought to apply the holding of a landmark Supreme Court decision providing that: "The bankruptcy discharge will not prevent enforcement of valid liens." Long v. Ballard, 117 U.S. 617 (1866); H. Rep. No. 95-595, 95th Cong., 1st Sess. 361 (1977).

The corollary is that invalid tax liens may be set aside even though "properly filed." For example, the lien may have been properly filed but is now expired, thus rendering it a nullity. It would be absurd to allow the government to enforce such a lien.

And another corollary is that an ostensibly valid lien may have been improperly filed, and thus avoidable.

The trustee has the power to avoid an improperly filed tax lien. See, for example, In re Southern Transfer & Storage Co., 157 B.R. 691 (Bankr. M.D. Fla. 1993) (permitting the avoidance of a tax lien that was not recorded on...