Nelson v. Scala

United States Court of Appeals

For the First Circuit

No. 99-1152

ROBERT E. NELSON,

Plaintiff, Appellant,

v.

JOSEPH SCALA, SR.,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MAINE

[Hon. Gene Carter, U.S. District Judge]

Before

Torruella, Chief Judge,

Hill, Senior Circuit Judge,

and Boudin, Circuit Judge.

Daniel L. Cummings and Norman, Hanson & DeTroy, LLC on brief

for appellant.

Ray R. Pallas and Law Office of Ray R. Pallas on brief for

appellee.

October 1, 1999

BOUDIN, Circuit Judge. On June 15, 1997, Robert Nelson,

the appellant in this court, petitioned for bankruptcy protection

under chapter 7 of the Bankruptcy Code, 11 U.S.C. 701 et seq.

The petition was filed jointly with his wife Donata Nelson. Among

the assets of the estate is the Nelsons' interest in their

Portland, Maine residence, of which each is a 50-percent owner.

The bankruptcy court has valued the residence--around which this

appeal centers--at $185,000. (In giving figures throughout, we

disregard pennies and round out to the nearest dollar.)

Section 522(b) of the Bankruptcy Code, 11 U.S.C.

522(b), allows a debtor to exempt from his estate property exempt

under state or local law. Maine, in which the Nelsons are

apparently domiciled, exempts the debtor's interest in his

residence but only up to the amount of $12,500. 14 M.R.S.A.

4422. Even this modest amount is not automatically secure because

the exemption, standing alone, merely protects the assets from

distribution to the general creditors; the exemption itself is not

deemed to nullify liens that give secured creditors a security

interest in property. Dewsnup v. Timm, 502 U.S. 410, 418 (1992);

Owen v. Owen, 500 U.S. 305, 308 (1991).

However, in 1978, Congress separately provided that the

debtor may "avoid" certain liens under certain circumstances where

the lien would "impair an exemption," Bankruptcy Reform Act of

1978, Pub. L. No. 95-598, 522(f), 92 Stat. 2549, 2589 (1978)

(codified as amended at 11 U.S.C. 522(f)); and it later adopted

a definition of this impairment concept. Bankruptcy Reform Act of

1994, Pub. L. No. 103-394, 303, 108 Stat. 4106, 4132 (1994)

(codified at 11 U.S.C. 522(f)(2)(A)). Ordinary real property

mortgages are not avoidable but among liens that may be avoided are

most (although not all) "judicial liens," such as those imposed to

secure an ordinary civil judgment. 11 U.S.C. 522(f)(1)(A).

On August 11, 1997, Robert Nelson invoked this avoidance

provision by requesting the bankruptcy court to avoid in their

entirety two existing judicial liens held by Joseph Scala in the

amount of $24,000 against Robert Nelson's interest in the

residence; this amount was owed to Scala by Robert Nelson alone and

Donata Nelson's interest in the property was not subject to the

Scala liens. No challenge was made to four other mortgages upon,

and a tax lien against, the property, totaling $134,626 and

representing joint obligations of both Nelsons. Thus, apart from

the Scala liens, the Nelsons' net equity in the residence was only

$50,374 ($185,000-$134,626).

In due course, the bankruptcy court ruled that Robert

Nelson was entitled to avoid the Scala liens only to the extent

necessary to preserve $12,500 for Robert Nelson out of his half of

the couple's net equity; since his share of the couple's net equity

was $25,187 (50% of $50,374), the court ordered the Scala liens

avoided in the amount of $11,313, leaving $12,687 encumbered for

Scala and $12,500 for Robert Nelson. The district court affirmed,

Nelson v. Scala, 229 B.R. 262 (D. Me. (1998)), and Robert Nelson

now seeks review in this court, urging that he is entitled to have

the Scala liens set aside in their entirety.

At first blush, Robert Nelson's claim appears to be

overreaching because the evident purpose of the avoidance provision

was to permit him to keep free of judicial liens only his exempt

property and Robert Nelson's exemption as to his residence is only

$12,500. While the Scala liens must be avoided in part to allow

Nelson this amount (otherwise they would capture $24,000 of Robert

Nelson's $25,187 equity), avoiding the liens in full would appear

either to give Robert Nelson a windfall or enrich the general

creditors at the expense of Scala as a secured creditor. One would

expect that the differential would go to the general creditors (see

discussion below) although Robert Nelson may be litigating this

case on the basis of a contrary assumption.

Nevertheless, Robert Nelson's claim to full avoidance of

the Scala liens rests on statutory language, presenting a legal

issue subject to de novo review in this court. Strickland v.

Commissioner, Me. Dep't of Human Servs., 96 F.3d 542, 545 (1st Cir.

1996). This claim is based on the peculiar language that Congress

adopted in defining the concept of "impairment" of an exemption for

purposes of section 522(f). Section 522(f)(2)(A) provides:

For the purposes of this subsection, a lien

shall be considered to impair an exemption to

the extent that the sum of--

(i) the lien;

(ii) all other liens on the property;

and

(iii) the amount of the

exemption that the debtor could

claim if there were no liens on

the property;

exceeds the value that the debtor's interest

in the property would have in the absence of

any liens.

11 U.S.C. 522(f)(2)(A).

Robert Nelson points out that under this formula "the

lien" sought to be avoided is $24,000; "all other liens" on the

property total $134,626; and "the amount of the exemption" absent

any liens is $12,500. The "sum" of these three figures-- $171,126-

-exceeds "the debtor's interest in the property in the absence of

any liens"--here, $92,500 (50% of $185,000)--by almost $80,000.

Thus, says Robert Nelson, the courts must treat the Scala liens as

impairing the exemption "to the extent" of this differential, which

(at almost $80,000) greatly exceeds the Scala liens ($24,000) in

their entirety. If the statute were taken literally, this would

render the Scala liens liable to avoidance in full.

Such a result would need some explaining. Exemptions

serve the "fresh start" aim of the bankruptcy statute, as well as

other social ends, by preserving certain assets--like an interest

in the bankrupt residence or the debtor's work tools--against most

claims by general creditors. But, as already noted, under the Code

exemptions do not themselves defeat security interests in property.

An expressed purpose of Congress in enacting section 522(f)'s

avoidance provision was to prevent unsecured creditors from

bypassing exemptions simply by converting their claims into

judicial liens and obtaining security interests in otherwise exempt

property. H.R. Rep. No. 95-595, 126-27 (1977), reprinted in 1978

U.S.C.C.A.N. 5963, 6087-88.

This aim--to protect the debtor's exemption--is fully

achieved by allowing Robert Nelson to avoid the Scala liens in

part, as ordered by the district court, since this would free up

for Nelson his full $12,500 exempt interest. Yet, mechanically

applied, the formula in section 522(f)(2)(A) perversely seems to

call for avoidance of the Scala liens in full and to Scala's

disadvantage. Courts are not required to follow literal language

where it would produce an outcome at odds with the purpose of

Congress and where the result stems merely from an unintended quirk

in drafting. E.g., Sagansky v. United States, 358 F.2d 195, 201

(1st Cir.), cert. denied, 385 U.S. 816 (1966).

The legislative history of the amendment that added the

(2)(A) formula to subsection (f) is instructive. The House report

makes clear that Congress was dissatisfied with the results reached

by pre-amendment decisions in four cases interpreting section

522(f) and was adopting the new formula to alter the results. H.R.

Rep. No. 103-835, 52-54 (1994), reprinted in 1994 U.S.C.C.A.N.

3340, 3361-63. For each scenario, the report cites the case and

explains why Congress proposed to change the outcome for future

cases. Id. But in each of the scenarios, the court's result (to

be overruled by the amendment) in some fashion impaired an

exemption or an exempt interest in property to the disadvantage of

the debtor; and in none did the scenario resemble that presented by

Robert Nelson's case.

As already shown, the partial avoidance of the Scala

liens ordered by the district court leaves exactly $12,500 for

Robert Nelson as exempt property not subject to any lien. See note

3, above. Further, were the Scala liens to be avoided in full, the

Maine exemption would still entitle Robert Nelson to keep only

$12,500; the balance of his remaining equity (after the mortgages

and tax lien) seemingly would go to satisfy general creditors,

including among others the now unsecured Scala claim. It serves no

known purpose of the 1994 amendment merely to rearrange priorities

among creditors.

Where Congressional language diverges from apparent

purpose, no simple answer tells the court which path to follow in

interpreting the statute. More than one variable bears on the

choice--explicitness of language, clarity of purpose, explanation

for the discrepancy between them, the unfairness or anomaly worked

by the literal application--and each is a matter of degree. But

along with much else, judging involves making such judgments,

always difficult where Congress did not focus upon the precise

problem before the court. Here, a literal reading of the formula

produces a measure of lien avoidance that goes beyond the

protection that Congress sought to provide for the debtor and

simply distorts priorities as between creditors.

There is no circuit precedent directly in point. Scala

says that we rejected a "formalistic" (i.e., literal) reading of

the formula in In re Silveira, 141 F.3d 34, 36-38 (1st Cir. 1998).

But while Silveira stressed the same practical concerns that we do,

the opinion was also able to square its result with the formula's

language. See In re Silveira. That is harder to do in this case

where (unlike Silveira) a literal application of the formula

produces an outcome at odds with statutory purpose. This contrast

is apparent if one troubles to insert into the statutory formula

the figures from each case.

The reason why the statutory formula does not quite

"work" in our case has to do with the asymmetry of obligations as

between Robert Nelson and his wife (remember that both are

obligated on five of the debts but only Robert is liable on the

statutory liens). As the bankruptcy and district courts proved in

their respective opinions, it is possible to adjust for this

asymmetry--each judge used a different adjustment--to produce the

partial avoidance result that we affirm. But it is not clear that

either adjustment will work in every variant case; and neither

really avoids the charge that the court is departing from a literal

reading of the formula.

However, the result reached by the bankruptcy and

district courts achieves Congress's aim to protect in full (but

only in full) Robert Nelson's exempt interest in his residence. To

go beyond this would work an injustice to Scala, provide a windfall

to other creditors, and (so far as we can tell) fail to benefit

Robert Nelson at all, let alone benefit him in any way intended by

Congress. In these circumstances, we think that the departure from

literal language--always a step to be taken with hesitation--is

nevertheless well justified.

Affirmed.