Naqvi v. Fisher CV-94-335-M 12/29/95 P UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Shirley A. Naqvi, Appellant,

v. Civil No. 94-335-M

Richard F. Fisher, Appellee and Debtor.

Geraldine L. Karonis, Esq.; Lawrence P. Sumski, Esq.; and Richard Erricola, Trustees .

O R D E R

Shirley Naqvi, the former wife of appellee Richard Fisher,

appeals a rulinq by the United States Bankruptcy Court for the

District of New Hampshire allowinq Fisher to avoid a lien she

held on Fisher's property. For the reasons discussed below, the

bankruptcy court's determination that Naqvi's lien is avoidable

is reversed.

I. FACTUAL AND PROCEDURAL BACKGROUND The material facts are not disputed. Shirley Naqvi1 and

Richard Fisher were divorced in December of 1989, pursuant to a

decree entered by the New Hampshire Superior Court. The divorce

decree also divided the parties' marital property, awarding

Fisher the family home2 located on Chadwick Hill Road in

Boscawen, New Hampshire, and awarding Naqvi $91,250. While the

decree required Fisher to pay Naqvi the full sum within 90 days,

it did not secure that payment by placing a judicial lien on

Fisher's real or personal property.

Some five months after entry of the decree, Fisher still had

not paid Naqvi the sum owed. Naqvi filed appropriate motions to

enforce the terms of the decree and, on June 29, 1990, the

parties entered into an agreement resolving their dispute and

establishing terms under which Fisher would fulfill his original

obligations under the divorce decree as well as his newly created

obligations. According to the terms of that agreement, Fisher

1 At all times prior to 1990 and relevant to these proceedings, Ms. Naqvi's legal name was Shirley Fisher. For purposes of clarity, this order will refer to her by her current surname.

2 Prior to the divorce, Fisher held sole legal title to the marital home. Therefore, the complex issues identified and resolved in Farrev v. Sanderfoot,

(1991), relative to one spouse's succession to the other's undivided one-half interest in jointly owned real estate, are not present here.

2 was to pay Naqvi an increased sum, $125,000, on or before October

30, 1990, and he was further obligated to make good faith efforts

to obtain financing within 30 days of the agreement in order to

fund payment of his obligation to Naqvi. Fisher also voluntarily

agreed to secure his revised obligation to Naqvi by granting her

a lien in the amount of $125,000 on all of his assets, including

the Chadwick Hill real estate. In short, in exchange for Naqvi

dropping her enforcement motions and giving Fisher more time to

satisfy his original payment obligation, Fisher agreed to pay an

increased amount and secure that obligation by granting Naqvi a

lien on his assets. The agreement was reduced to writing, in the

form of a stipulation, and that stipulation was recorded at the

Merrimack County Registry of Deeds. The stipulation was also

filed in the Superior Court, which incorporated the stipulated

agreement in a modified divorce decree.

After Fisher also failed to comply with the terms of the

stipulated agreement,3 Naqvi obtained (by Superior Court order

dated March 14, 1991) an additional $250,000 lien on all of

Fisher's real property. Naqvi promptly recorded that lien as

well. Despite extensive efforts on Naqvi's part to collect the

3 On November 11, 1990, Fisher was found by the Superior Court to be in contempt for failing to comply with the terms of the agreement, as incorporated in the modified decree.

3 sum owed her, including obtaining the services of a court-

appointed trustee to sell Fisher's property, Fisher refused to

honor his obligations. He filed for bankruptcy protection under

Chapter 7 of the United States Bankruptcy Code just before his

property was to be sold and the proceeds applied to Nagvi's

claim.

Before the bankruptcy court, Fisher moved to avoid Nagvi's

liens, to the extent of $30,000, under the provisions of

(f)(1), which allow a bankrupt debtor to avoid the

fixing of a judicial lien on the debtor's interest in property to

the extent the lien impairs an exemption to which the debtor

would have been entitled under

(b).

(f)(Supp. 1995). Section 522(b) incorporates the exemptions

available under state law applicable at the time a debtor

petitions for bankruptcy protection. Fisher claimed that Nagvi's

liens impaired the homestead exemption to which he was entitled

under

, and that he could, therefore,

avoid her liens under section 522(f) to the full extent of that

impairment. The property Fisher claimed as gualifying for the

exemption was the Chadwick Hill home.4

4 It is undisputed that the Chadwick Hill home gualifies as Fisher's homestead under New Hampshire law and that New Hampshire's exemptions apply. See

.

4 Prior to January 1, 1993, New Hampshire's homestead

exemption was set at $5,000. Effective January 1, 1993, the

exempt amount was increased to $30,000.

(Supp. 1994). Fisher argued in the bankruptcy court that

because he filed for bankruptcy protection after the statutory

change became effective, he was entitled to invoke his homestead

exemption and avoid Nagvi's liens to the extent of the new

$30,000 limit. Nagvi countered that Fisher could avoid her

liens, if at all, only to the extent of the $5,000 homestead

exemption available at the time her liens were perfected.

The bankruptcy court ruled that Nagvi's liens were avoidable

judicial liens and that Fisher could avoid those liens to the

extent of $30,000, because the homestead amount in effect on the

date Fisher filed his bankruptcy petition was controlling in the

context of the federal bankruptcy proceeding. The bankruptcy

court further ruled, in a thorough and well-reasoned opinion,

that application of the new $30,000 homestead exemption to avoid

judicial liens perfected prior to its effective date does not

violate any provision of either the United States Constitution or

New Hampshire Constitution.

The Chadwick Hill home has since been sold, and $30,000 of

the proceeds have been placed in escrow pending final

5 determination of the respective rights of these parties to those

proceeds.

II. STANDARD OF REVIEW

The relevant facts are not in dispute, and the question

before the court is one of law. In considering a bankruptcy

appeal, the district court applies a de novo standard when

reviewing the bankruptcy court's conclusions of law. In re

G.S.F. Corp.,

(1st Cir. 1991); Robb v.

Schindler,

(D. Mass. 1992).

III. DISCUSSION

In order to set the stage for discussion of the precise

issue at hand, a brief overview of applicable bankruptcy law is

helpful. Recently, in Owen v. Owen,

(1991), the

United States Supreme Court described the basic mechanism and

purposes of lien avoidance under the bankruptcy code ("Code").

The following discussion of the relevant statutory framework is

borrowed largely from that opinion.

A bankruptcy estate consists of all interests in property,

both legal and equitable, held by a debtor at the time he or she

files for bankruptcy protection, as well as those interests the

6 debtor recovers through lien avoidance provisions of the Code.

. An "exemption" is an interest of the debtor that is

withdrawn from the estate, and hence from the reach of creditors,

for the benefit of the debtor. Section 522(b) of the Code

describes property a debtor may exempt from the estate and allows

states to "opt out" of those federal exemptions in favor of their

own state-created exemptions. If a state does opt out of the

federal exemptions, that state's debtors are limited to the

exemptions provided by state law.

New Hampshire is an opt-

out state. As mentioned. New Hampshire law provided for a

homestead exemption in an amount set at $30,000 as of the filing

of Fisher's petition.

,4.

Property exempted under section 522 is, as a rule,

unavailable to satisfy pre-bankruptcy debts.

(c).

Property cannot be exempted from the estate, however, unless that

property is first made part of the bankruptcy estate. Simply

put, an interest that is not part of the bankruptcy estate cannot

be exempted from it. Owen,

. Thus, if a debtor

holds only bare legal title to his or her house — if, for

example, the house is subject to a mortgage or lien up to its

full value and the debtor thus has no eguitable interest in the

house — only the debtor's legal title passes into the bankruptcy

7 estate.

The equitable interest in the house in such a case

belongs to, and remains with, the mortgageholder or lienholder.

And, since no equitable interest passes into the estate, no

equitable interest can thereafter pass out to the debtor as an

exempt interest in property.

. The bare legal title

that does pass to the estate can be the object of an exemption

(e.g., homestead), but the property will remain subject to the

equitable interest of the mortgageholder or lienholder.

(citing Long v. Bullard,

(1886)). Therefore, only

when the Code empowers a debtor to avoid liens can an interest

originally not in the estate (but in the hands of a creditor) be

passed to the estate, and subsequently, perhaps, to the debtor

through application of an exemption.

Here, the facts of record establish that Fisher held sole

legal title to the Chadwick Hill home. His equity in the home

and accompanying property at the time of his divorce from Naqvi

was $74,000. The home was, however, subject to Naqvi's two liens

of $125,000, and $250,000, respectively. The $125,000 lien,

created by the agreement between them and recorded on July 11,

1990, being first in time, takes precedence over the later

$250,000 lien (which was created by court order and recorded in

March of 1991). Naqvi's first lien of $125,000, then, would effectively eliminate all of Fisher's $74,000 of claimed equity

in the Chadwick Hill home. Given the relative values of the

Chadwick Hill property and the attached liens, Fisher's interest

did not extend beyond bare legal title to the home. Therefore,

absent some way to avoid Naqvi's liens, Fisher had no equitable

interest in the home to exempt from the bankruptcy estate and

insulate from the reach of his creditors. So, in order to

reserve to himself a portion of the value of the home, Fisher had

to find a means to avoid Naqvi's $125,000 lien.

Fisher sought to avoid that lien by invoking the avoidance

mechanism of

(f), which provides:

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, if such lien is . . . a judicial lien . . . .

(f) (1) (emphasis added) . Section 522 (f) (1)

establishes several conditions necessary to lien avoidance.

Primary among those conditions, for purposes of this case, is

that the debtor may not avoid a lien under section 522(f)unless

that lien is a iudicial lien.

(f); see also Bovd v. Robinson,

(8th Cir. 1984); In re Lowell,

(Bankr. D. Mass. 1982).

"Judicial liens" are specifically defined by the Code, and

are to be distinguished from other types of liens. A "lien,"

generally, is a "charge against or interest in property to secure

payment of a debt or performance of an obligation."

(37). There are three types of liens recognized by the Code:

(1) statutory liens; (2) security interests; and (3) judicial

liens. These three categories are mutually exclusive and

exhaustive, except for certain common law liens. Midlantic

National Bank v. DeSeno,

(3d Cir. 1994) (citing

S. Rep. No. 95-989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787,

5811) . Only judicial liens and security interests are relevant

to this case.5 A judicial lien is a "lien obtained by judgment,

levy, seguestration, or other legal or eguitable process or

proceeding."

(36). A "security interest," on the

other hand, is "a lien created by an agreement."

(51).

5 A statutory lien is a "lien arising solely by force of a statute on specified circumstances or conditions . . . but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute."

(53).

10 Accordingly, judicial liens are created by judicial action

while security interests are created by consent of the parties.

Klein v. Civale & Trovato,

(2d Cir. 1994) .

Congress intended that all liens created by agreement (sometimes

called "consensual liens") be defined as security interests.

H.R. Rep. No. 95-595, 95th Cong., 1st Sess. at 314 (1977); S.

Rep. No. 95-989, 95th Cong., 2d Sess. at 26 (1978), reprinted in

1978 U.S.C.C.A.N. 5787, 5813, 6271; In re Dunn,

(Bankr. N.D. Ind. 1988) ("security interest" should be construed

liberally to include all liens created by agreement).

As evidenced by statutory definition, a judicial lien is

distinguished from a security interest based upon the method by

which the lien is created, and not based upon the method by which

it is enforced. Wicks v . Wicks,

(Bankr. D.

Minn. 1982). Thus, a lien created by an agreement between the

parties remains a security interest "regardless of the method or

means employed to make [the lien] enforceable either between the

parties or against the world." Dunn,

(guoting

Wicks,

).

In determining whether the lien at issue here is in reality

a judicial lien or a security interest, the court must focus on

the method by which the lien was created, not the means by which

11 Naqvi sought to enforce it. In re Havnes,

(Bankr.

S.D. Ind. 1992) ("The key is . . . whether the lien arose by

agreement or by a nonconsensual legal . . . process."). Proper

characterization of Naqvi's liens requires the court to resolve

pure questions of law, the facts being undisputed.

The bankruptcy court assumed that Naqvi's liens were of the

judicial type, and were, therefore, avoidable liens.6 The

bankruptcy court also focused on the $250,000 lien that was

indeed created by court order, and so was clearly a judicial lien

under the Code. As noted above, however, the critical lien here

is Naqvi's prior $125,000 lien, created by the post-decree

agreement between Naqvi and Fisher and subsequently incorporated

in the modified divorce decree by stipulation.

Precedent describing the distinction between judicial liens

and security interests demonstrates that Naqvi's $125,000 lien is

in reality a consensual lien or security interest and is.

6 In the proceedings before the bankruptcy court, this case was consolidated with three others raising like issues related to which homestead exemption (the old $5,000 or the new $30,000) amount applied in calculating lien avoidance. Each of the other three cases involved liens that were clearly judicial in character. As a result of the consolidation and the parties' focus on the retroactivity issue, and because no party raised the point of distinction, the bankruptcy court's order did not specifically discuss the nature of Naqvi's $125,000 lien, but simply considered it, too, to be a judicial lien.

12 therefore, not avoidable under section 522(f). To be sure, liens

created by divorce decrees are often considered to be judicial

liens because they arise from judicial action awarding a divorce,

dividing marital property, and imposing liens to secure the

fulfillment of obligations created by the court itself. See,

e.g.. In re Buffington,

(Bankr. E.D. Tex. 1994);

McVav v. Parrish,

(5th Cir. 1993), cert, denied, 114 S.

C t . 1373 (1994); Yerrington v. Yerrington,

(Bankr.

9th Cir. 1992). However, courts that have considered the nature

of liens created by settlement agreements which are subseguently

incorporated into divorce decrees by stipulation have held with

near unanimity that such liens are consensual in nature and are,

therefore, unavoidable security interests under the Code. See,

e.g., Dunn,

; In re Shands,

(Bankr. D.S.C. 1985); In re Thomas,

(Bankr. D.

Ore. 1983); Wicks,

. But see In re Wells,

(Bankr. D.N.M. 1992) (holding that lien created by

settlement agreement and later incorporated into divorce decree

was judicial lien because it "came into existence as the result

of the commencement of a legal marital dissolution proceeding").

The particular circumstances leading to the agreement

between Nagvi and Fisher in this case strongly support the legal

13 conclusion that Naqvi's $125,000 lien was a consensual security

interest and not a judicial lien. By the time the parties agreed

to the lien, the divorce court had already handed down its decree

and order dividing their marital property. The completed divorce

proceedings merely formed the backdrop against which subsequent

bargaining between the two parties occurred. Thus, this case is

easily distinguished from Wells,

, in which the

court found that a settlement agreement entered into after the

institution of divorce proceedings but bn anticipation of a

pending decree was not sufficiently consensual to render it a

security agreement under the Code.

Here, incorporation of the agreed upon lien into a modified

divorce decree (by stipulation) merely served to establish yet

another method by which the lien might be enforced by Naqvi (i.e.

contempt) against Fisher, a method certainly justified given

Fisher's repeated past failures to satisfy his financial

obligations under the initial decree. Furthermore, the

stipulated agreement embodies the essence of a bargained-for-

exchange. Fisher, unable or unwilling to meet his obligations

within the time allowed under the original decree, voluntarily

sought and received from Naqvi an agreement giving him more time

to pay. In return, Naqvi bargained for a larger sum, payment of

14 which was to be secured, this time, by Fisher's real property.

The $125,000 lien granted by Fisher was not the result of any

judicial compulsion whatsoever — he could have stood firm and

suffered whatever enforcement options were available to Naqvi

under the then existing final decree. For reasons entirely

satisfactory to him, he chose to negotiate an agreement that

included granting Naqvi a lien to which she was otherwise not

entitled. The $125,000 lien is, therefore, a consensual lien or

security interest under the Code, and it is not avoidable under

(f) .

Because the $125,000 lien qualifies as an unavoidable

security interest, the question of the extent to which the lien

impairs Fisher's homestead exemption under New Hampshire law, and

the accompanying question of which homestead exemption amount

($5,000 or $30,000) applies, are both moot. Because Fisher had

no equitable interest in the Chadwick Hill home, and could not

create an equitable interest by avoiding Naqvi's consensual lien,

he had no equitable interest to exempt from his bankruptcy

estate. Fisher could, of course, exempt his bare legal title to

the home; but such an exemption is useless to him because the

property would remain subject to Naqvi's unavoidable $125,000

consensual lien. Therefore, Naqvi is entitled to the remaining

15 $30,000 in sale proceeds that has been placed in escrow pending

the outcome of this appeal.

IV. CONCLUSION

For the reasons discussed, the decision of thebankruptcy

court is reversed, and Naqvi is awarded $30,000 of

the proceeds from the sale of the Chadwick Hill home held in

escrow. Judgment shall be entered accordingly.

SO ORDERED.

Steven J. McAuliffe United States District Judge

December 29, 1995

cc: Arthur W. Perkins, Esq. R. Peter Shapiro, Esq. United States Trustee George Vannah Lawrence P. Sumski, Esq. Geraldine B. Karonis, Esq. Richard B. Erricola

16