Section 522(f): forward to the past or back to the future?

• Author: Meyer, Robert C.

Recent jurisprudence has provided a division of the authority in the state of Florida regarding the avoidance of judgment liens against exempt property. In bankruptcy, liens are avoided by a motion guided under 11 U.S.C. [section] 522(f) which states: 522 Exemptions

(f)(1) Notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is--

(A) a judicial lien....

In Florida, this device is often used to aid bankruptcy debtors in cleansing the title of their most valuable asset: their totally exempt homestead. (1) During the 1980s, a division of authority arose about the right of a debtor to use this provision of the Bankruptcy Code with a ruling, In re Goodwin, 82 B.R. 616 (Bankr. S.D. Fla. 1984), by Judge Thomas C. Britton, which outlined why judgment liens in Florida were not the topic of avoidance under 11 U.S.C. [section] 522(f). In 1988, Judge Britton published another opinion, In re Bird, 84 Bankr. 858 (Bankr. S.D. Fla. 1988), forbidding [section] 522(f) motions. Subsequently, the U.S. District Court for the Southern District of Florida reversed Britton's Bird decision and, at that time, there was believed not to be any further concern about the right to file [section] 522(f) motions in Florida. (4)

Unfortunately, in 2000, the district court opinion of Cannon v. Cannon, 84 Bankr. 858 (Bankr. S.D.Fla. 1988), by Judge Adalberto Jordan has revived the old law of Judge Britton and a division of authority again exists in the state of Florida.

This article will focus upon how the interpretation of the law has evolved over the past 30 years, and how debtors' practitioners can perhaps assuage the court's concerns by hybridizing the [section] 522(f) motion with pertinent other relief. Lastly, the new Bankruptcy Code adds new, but analogous, issues to the courts, and a review of the new Bankruptcy Code's effect on the issue and another division of authority on [section] 522(f) will be reviewed.

Goodwin Revived

Following the guidance of Cannon, two recent bankruptcy decisions prohibited the debtor from obtaining relief to avoid a lien against his or her homestead: In re Epstein, 298 B.R. 917 (Bankr. S.D. Fla. 2003), and In re Pearlstein, 349 B.R. 317 (Bankr. S.D. Fla. 2006). The Epstein case is a reaction by Judge Friedman to a district court case which reversed another [section] 522(f) ruling by Judge Friedman. Judge Friedman's other [section] 522(f) ruling was Cannon v. Cannon, 243 B.R. 153 (Bankr. S.D. Fla. 2000). The district court, upon reviewing Friedman's Cannon decision--which criticized the Goodwin decision of Britton--reversed the same by agreeing with Goodwin in that "the term 'impair' [as used in [section] 522(f)(1)] encompasses more than the idea of 'legal' impairment. The term 'impair' means 'to weaken, to make worse, to lessen in power, diminish, or relax, or otherwise affect in an injurious manner.'" (3)

The district court in Cannon concluded that, "[T]he lien does not affect Mr. Cannon's ability to claim the residence as exempt property, has no legal effect with respect to Mr. Cannon's homestead property, does not cloud Mr. Cannon's title, and cannot be enforced against anyone when Mr. Cannon sells the residence. . . ." (4) This is deemed to be the minority opinion in the state of Florida. This argument delivered by Cannon or Epstein requires bankruptcy and Florida constitutional law analysis. The core of the argument is that a judgment lien could never attach to the homestead by operation of Florida constitutional law. By that interpretation of Florida law, the minority opinion determines that the avoidance of a lien on exempt property cannot occur as there is no lien to avoid. In short, the minority opinion determines that a bankruptcy court cannot deliver a ruling to a movant as it cannot avoid a nonexistent lien. The minority opinion interprets the lien's nonexistence under Florida, as opposed to federal, legal interpretations. (5) Judge Britton, by interpreting Florida law, concluded, "I believe that the declaration by a court of a right fully enunciated and provided for in the Florida Constitution, art. X, [section] 4, and claimed by a debtor in a bankruptcy case and unchallenged, is duplicative and, therefore, unnecessary." (6)

The effect of Cannon is to drive a wedge between title practitioners and owners of real property. If nothing is done during the bankruptcy, the judgment remains unscathed on the title. Title companies generally disfavor such clouds upon the title and want a recorded instrument that affects the legitimacy or effect the judgment may have or does have upon the homestead. Under the majority opinion in the state of Florida, and prior to Cannon, this was easily handled in the bankruptcy court as it could expediently deliver a [section] 522(f) ruling that avoids the judgment lien's attachment on the homestead. The state law alternatives are not as easily handled7 and that is why debtors' attorneys preferred filing [section] 522(f) motions.

Majority Opinion: Lien is a Cloud on Homestead

It cannot be ignored that almost any judgment lien of a creditor clouds the title. The closing agent most often refuses to deliver money to the debtor based upon the final judgment's recording. Closing agents typically will not release funds unless a [section] 522(f)(1) order grants the debtor's avoidance, or alternatively, the debtor files an action under the Florida statutes to avoid the lien. If none of these events is commenced, the judgment lien is accommodated by an escrow account which will be held for a finite period of time--often less than the allocated limitation's periods of the Florida statutory remedies. (8)

The majority of Florida courts (and almost unanimous within the Middle District Court of Florida) rule that the recording of unenforceable liens does impair title to Florida homesteads. In the case of In re Desai, 54 Collier Bankr. Case 2d 1117 (Bankr. M.D. Fla. 2005); 2005 Bankr. LEXIS 1387, the court wrote:

Although the lien is legally unenforceable by virtue of the protection provided by the Florida Constitution, the lien still creates a cloud on the title by the fact the lien was recorded in the public records. Recording even an unenforceable lien...