Can a chapter 7 bankruptcy debtor avoid a judicial lien securing a divorce debt to his former spouse using his homestead exemption?
Not in Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825 (1991), where the United States Supreme Court held that the debtor’s interest in the property had not been created prior to the fixing of the judicial loan upon the property, and, thus, the debtor could not avoid the lien, because the interest and the lien were simultaneously created.
Although the Farrey case was decided in part under the laws of Wisconsin, a community property state where a divorce court equally divides the marital assets of the parties starting with a 50-50 division, in contrast to the Commonwealth of Virginia, an equitable distribution state where a divorce court equitably distributes the marital property according to a number of factors, the interplay between bankruptcy and divorce law in the case may still be relevant to Virginia divorce and bankruptcy cases.
In Farrey, the parties were married in Wisconsin and had three children prior to filing for divorce after twenty years of marriage. In the final decree of divorce, the divorce court judge awarded the husband and the wife one-half of the marital estate, following the state statutory presumption of equal division of the parties. The divorce decree granted the husband sole title to all of the real estate, subject to a mortgage, and a majority of the parties’ personal property. The wife received the other portion of the personal property and the proceeds from an auction of the home’s furniture. The Court also equally distributed the liabilities of the parties and ordered the husband to pay the wife one-half of the difference between their net assets. As security for this payment, the divorce court judge awarded to wife a lien against the real property awarded to the husband for the sums he owed wife. The husband failed to make the payments ordered by the divorce court judge; instead, the husband filed a Chapter 7 bankruptcy petition. In his petition, he listed the marital home and real estate as exempt homestead property. He filed a motion to avoid the wife’s lien, citing 11 U.S.C. §522(f)(1), arguing that the wife had a judicial lien against his property that impaired his homestead exemption. In response, the wife argued that §522(f)(1) could not divest her of her interest in the marital home. The Bankruptcy Court in In re Sanderfoot, 83 B.R. 564 (Bankr. E.D. Wis.1988), denied the husband’s motion, and held that the lien could not be avoided. The U.S. District Court reversed, in In re Sanderfoot, 92 B.R. 802 (U.S. E.D. Wis. 1988) holding that the lien had been fixed on an interest of the debtor in the property. Following that decision, a divided panel for the U.S. Circuit Court of Appeals affirmed, Sanderfoot v. Sanderfoot, 899 F.2d 598 (7th Cir.1990), and the U.S. Supreme Court granted certiorari to resolve the issue.
The statute in dispute in this case, 11 U.S.C. §522(f)(1), states, “Notwithstanding any waiver of exemptions, 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, is such lien is—(1) a judicial lien.” Neither party disputed that the lien at issue was a judicial loan; instead, the question involved whether the language of the statute permitted the husband to avoid the fixing of the wife’s lien on the interest obtained by the divorce decree.
In this case, the entire case revolved around the language and interpretation of 11 U.S.C. §522(f)(1). The husband argued the language meant a lien could be avoided if it were currently attached to the debtor’s interest. In contrast, the wife asserted the text only allowed a debtor to avoid a lien if the lien attached after the debtor had obtained an interest in the property. Applying the plain meaning of the statute, the Supreme Court held that the gerund “fixing” refers to the fastening of liability upon a pre-existing object; hence, unless the debtor had the interest before the lien attached, he cannot avoid the fixing of the lien. To support this decision, the Supreme Court examined the provision’s purpose and history. According to the court, Congress intended this statute to counter the problem of creditors filing claims against a debtor prior to a bankruptcy petition and, thus, defeating his exemption claims. Therefore, in this case, the question was whether the husband possessed his interest prior to the attaching of the judicial lien. The wife claims that prior to the final divorce decree, she and her husband held title in the property as joint tenant, each with an undivided one-half interest; therefore, the divorce decree extinguished these interests and created new interests (giving the husband fee simple in the home and real estate and various assets and the lien to the wife). After hearing both sides, the U.S. Supreme Court held that the decree transferred the wife’s interest to the husband while simultaneously granting the wife a lien. Using this application, the Court determined that the husband could not have had a pre-existing interest in the property prior to the attachment of the lien. Furthermore, given the legislative history of the statute, the Supreme Court stated that §522(f)(1) was not enacted to avoid this type of situation. As a result, the Supreme Court held that §522(f)(1) of the Bankruptcy Code “requires a debtor to have possessed an interest to which a lien attached, before it attached, to avoid the fixing of the lien on that interest…” Farrey v. Sanderfoot, 500 U.S. 291 (1991), and the Court reversed the Court of Appeals’ decision by holding that the husband could not avoid the lien payment under the statute.
Interestingly, in a concurring opinion, while agreeing with the outcome, Justices Kennedy and Souter noted that the reasoning was better suited to a jurisdiction (like Virginia) that recognized the tenancy by the entirety with the common-law right of survivorship, where a single interest owned by the married couple because the estate dissolves when the marriage ends. Thus, the husband would not have had any individual interest prior to the divorce, whereas under the joint tenancy under Wisconsin law, he had at least an undivided half-interest to which the lien might attach. Fortunately for the wife in Farrey, the husband had conceded that the property rights under the joint tenancy were wholly extinguished and new rights were put in place.
You should consult with your Virginia bankruptcy law and divorce law lawyers, or Richmond bankruptcy law and divorce attorney James H. Wilson, Jr., concerning how your or your spouse’s bankruptcy filing might affect the results of your divorce case.