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In re O'Sullivan

United States Court of Appeals, Eighth Circuit

November 14, 2016

In re: Casey Drew O'Sullivan Debtor
v.
Casey Drew O'Sullivan Appellee CRP Holdings, A-1, LLC Appellant

          Submitted: September 22, 2016

         Appeal from the United States Bankruptcy Appellate Panel for the Eighth Circuit

          Before RILEY, Chief Judge, MURPHY and SMITH, Circuit Judges.

          MURPHY, Circuit Judge.

         Casey Drew O'Sullivan filed for Chapter 7 bankruptcy and claimed a $15, 000 exemption in a homestead he owned as a tenant in the entirety with his wife. O'Sullivan then sought an order from the bankruptcy court avoiding CRP Holdings, A-1, LLC's (CRP) judicial lien on the homestead property to the extent that it impaired his claimed exemption. The bankruptcy court granted O'Sullivan's motion to avoid CRP's judicial lien, and the bankruptcy appellate panel (BAP) affirmed. See In re O'Sullivan, 544 B.R. 407 (B.A.P. 8th Cir. 2016). Judgment creditor CRP appeals, asserting that its judicial lien is not subject to avoidance. We reverse and remand to the bankruptcy court for further proceedings.

         I.

         In 2015 CRP obtained a default judgment in Platte County, Missouri circuit court against O'Sullivan and his business in the amount of $765, 151.18. O'Sullivan's wife was not included in the judgment, but she and her husband owned property in Barton County, Missouri (the property) as tenants in the entirety. After obtaining the default judgment, CRP filed a notice of foreign judgment with the Barton County circuit court in an attempt to obtain a judicial lien on that property. See Mo. Rev. Stat. § 511.440.

         A few months later O'Sullivan filed a voluntary Chapter 7 bankruptcy petition which his wife did not join. O'Sullivan listed the property in his schedules and claimed a $15, 000 homestead exemption under both Mo. Rev. Stat. § 513.475 and 11 U.S.C. § 522(b)(3)(B). O'Sullivan simultaneously moved to avoid CRP's purported judicial lien under 11 U.S.C. § 522(f)(1), asserting that the lien impaired his claimed homestead exemption. The bankruptcy court granted the motion, concluding that "CRP's judgment lien - although perhaps not enforceable - certainly affixed upon [O'Sullivan's] home upon CRP's recording of its judgment in Barton County" and therefore impaired O'Sullivan's claimed exemption.

         CRP appealed to the BAP, which affirmed the bankruptcy court order. The BAP similarly concluded that "an unenforceable judgment lien arose" on the property held in the entireties and therefore it was "possible for [O'Sullivan] to avoid it under § 522(f)." In re O'Sullivan, 544 B.R. at 413. CRP appeals the BAP's affirmance of the bankruptcy court order avoiding its purported judicial lien.

         II.

         CRP challenges the BAP's conclusion that O'Sullivan could avoid its purported judicial lien on the property. We have jurisdiction to review final decisions of the BAP under 28 U.S.C. § 158(d). When reviewing a decision of the BAP, "we act as a second reviewing court of the bankruptcy court[] decision, independently applying the same standard of review as the BAP." In re Lasowski, 575 F.3d 815, 818 (8th Cir. 2009). This appeal turns on the bankruptcy court's interpretation of law which we review de novo. Id.

         Chapter 7 of the bankruptcy code provides a means for insolvent debtors to receive a "fresh start" through bankruptcy proceedings. In re Thompson, 750 F.2d 628, 630 (8th Cir. 1984). To ensure that debtors have sufficient property to realize fully that fresh start, the code permits debtors to exempt certain property from their bankruptcy estate. See 11 U.S.C. § 522(b). Ordinarily, "liens and other secured interests survive bankruptcy" and can subsequently be levied against a debtor's exempted property, thereby impeding a debtor's ability to obtain a fresh start. Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991); see 11 U.S.C. § 522(c). To shield exempt property from such post bankruptcy collection efforts, 11 U.S.C. § 522(f)(1) provides a mechanism for bankruptcy courts to avoid, or extinguish, secured debts that would otherwise pass through the bankruptcy proceeding.

         Under § 522(f)(1), debtors may move to "avoid the fixing of [certain] lien[s] on an interest of the debtor in property to the extent that such lien[s] impair[] an exemption to which the debtor would have been entitled under [§ 522(b)]." To avoid the fixing of CRP's purported judicial lien, O'Sullivan therefore had to establish that CRP's notice of foreign judgment had (1) created an avoidable lien under § 522(f)(1), that (2) affixed on O'Sullivan's interest in property exempted under § 522(b), and (3) impaired O'Sullivan's claimed exemption in the property. CRP does not challenge O'Sullivan's claimed $15, 000 homestead exemption or the bankruptcy court's impairment analysis. The only contested issues on appeal are whether a judicial lien existed and, if so, whether that lien affixed on O'Sullivan's interest in the property.

         Throughout the bankruptcy proceedings and on appeal, neither party has addressed whether CRP had a judicial lien properly subject to avoidance under § 522(f)(1)(A). Rather, the parties and the bankruptcy court assumed that CRP had a cognizable judicial lien under Missouri law. On appeal, the BAP noted that it had "serious doubts as to whether CRP has a lien at all, much less one that attached or fixed to [O'Sullivan's] interest in property, " but nonetheless proceeded with the avoidance analysis. In re O'Sullivan, 544 B.R. at 412 n.5. Like the BAP, we have serious doubts as to whether CRP has a lien that affixed onto ...


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