Bankruptcy; Deficiency Liens

In re Linane, 2003 WL 1493062 (BK ND IL 2003).

Facts: The Linanes, Chapter 13 debtors, had their principal place of residence encumbered with several mortgage deficiency liens. The mortgage deficiency liens were obtained through the foreclosure of non-residential property and perfected against their residence by the Community Investment Company. The Linanes motioned to avoid the liens pursuant to 11 USC § 522(f)(1), because the liens impaired their homestead exemption. Section 522(f)(1) states that a debtor may avoid a fixing of a lien on an interest of a debtor in property, to the extent that the lien impairs an exemption. Community Investment Company argued that Section 522(f)(2)(c) created an exemption from Section 522(f)(1).

Holding: Motion granted. Section 522(f)(2)(c) states: "This paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure." The court ruled that application of what constituted a mortgage foreclosure, for the purpose of Section 522(f)(2)(c), depended on the relevant state law interpretation of a mortgage foreclosure. Under Illinois law, deficiency judgments are distinct from, and complementary to, foreclosures. While they relate back to the associated mortgage foreclosure, they do not arise "out of a mortgage foreclosure" as required by Section 522 (f)(2)(c) and therefore Section 522 (f)(2)(c) was not applicable.

Additionally, the court held that even without reliance on a state law interpretation of mortgage foreclosure, the deficiency judgment was not covered by the Section 522(f)(2)(c) exemption. This is because such an interpretation would run counter to the policy basis of Section 522(f), which is to enhance a debtor's "fresh start," and to offer debtors a remedy to protect exempt property. Further, the court reasoned that holding that a deficiency lien was exempt under Section 522(f)(2)(c) would lead to inconsistent outcomes because it would provide greater rights for holders of judgment liens from foreclosures of non-exempt property, than of holders of judgment liens from exempt properties. Therefore irrespective of state law, it was improper to allow the Section 522(f)(2)(c) exemption to apply.

© ATG atgc0404vol28

 

Print this page