Keith A. Railing and Rhonda K. Railing

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US. GOVERNMENT J

UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF OHIO

In Re: )
) JUDGE RICHARD L. SPEER
Keith and Rhonda Railing )
) Case No. 10-37540
Debtor(s) )
)
DECISION AND ORDER

This cause comes before the Court on the Motion of the Debtors to Avoid Judicial Liens held
by Kimberlea Chandler. (Doc. No. 40). Kimberlea Chandler, a creditor in this case, filed a response
to the Debtors’ Motion, objecting to the relief sought by the Debtors. (Doc. No. 48). Two separate
hearings were held by the Court on this matter. At the conclusion of the second hearing, the Court
afforded the Debtors the opportunity to submit updated information in support of their Motion to
Avoid Judicial Liens. (Doc. No. 63). The Debtors have since submitted such information which this
Court has now had the opportuni , to dxamine. Based upon this examination, as well as a review of
all the arguments submitted by the Parties, the Court, for the reasons set forth herein, finds that the
Debtors’ Motion to Avoid Judicial Liens should be Granted.

BACKGROUND

On November 9, 2010, the Debtors, Keith and Rhonda Railing, filed a petition in this Court
for relief under Chapter 7 of the United States Bankruptcy Code. (Doc. No. 1). In the schedules they
filed with their bankruptcy petition, the Debtors disclosed an interest in three parcels of real property.
Two of these parcels are the subject of the Debtors’ Motion to Avoid Lien: (1) the Debtors’

residence; and (2) a rental property located on Gibson Street in Defiance, Ohio.

At the time they filed their petition for relief, the Debtors estimated the value of each of these
properties to be $65,000.00. The Debtors also disclosed that the properties were encumbered by

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various liens, both consensual and nonconsensual. First, as to the consensual interests, the Debtors
set forth that both properties were encumbered by first mortgages. For their residence, the value of
the first mortgage was set forth as $38,030.24; for the Debtors’ rental property on Gibson Street, the
value of the first mortgage was represented to be $47,372.63. Both of these properties were also
represented to be pledged as collateral for a business loan in the amount of $97,493.58. It was then
represented that, junior to these encumbrances, Kimberlea Chandler held a judgment lien against

both properties in the amount of $68,634.50.

When they filed for bankruptcy relief, the Debtors, as permitted by 11 U.S.C. § 522(b) and
§ 2329.66(A)(1), claimed an exemptible interest of $25,500.00 in their residence. No exemptible
interest, however, was initially claimed by the Debtors in their Gibson Street rental property. Later,
however, citing to Ohio’s wild card exemption, O.R.C.§ 2329.66(A)(18), the Debtors amended their
bankruptcy schedules so as to claim an exemptible interest in their Gibson Street rental property in
the amount of $950.00. (Doc. No. 64). At this time, the Debtors also revised downward to
$48,000.00 their estimated value of the rental property. Jd. As support for this valuation, the Debtors
submitted to the Court a certified appraisal conducted of the property, dated May 31, 2011. (Doc.
No. 62).

On February 22, 2011, the Debtors filed the Motion now before the Court to avoid the
Judicial Liens of Kimberlea Chandler. In addition to objecting to this Motion, Ms. Chandler, alleging
fraud, brought an action in the Debtors’ bankruptcy case, seeking a determination that her claim
against the Debtors was a nondischargeable debt. This action, however, was later dismissed pursuant
to a Motion filed by Ms. Chandler, leaving only the issue regarding the avoidability of Ms.
Chandler’s liens before the Court.

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In re: Keith and Rhonda Railing
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DISCUSSION

‘Before this Court is the Motion of the Debtors to Avoid Judicial Liens held by Kimberlea
Chandler. This type of Motion, involving a determination as to “validity, extent, or priority of liens,”
is deemed by bankruptcy law to be a “core proceeding.” 28 U.S.C. § 157(b)(2)(K). Accordingly, this
Court has been conferred with the jurisdictional authority to enter final orders and judgments in this

matter. 28 U.S.C. § 157(b)(1).

It is a basic facet of bankruptcy law that liens will normally pass through bankruptcy, with
the bankruptcy discharge having no effect on the lien. As the United Supreme Court has stated: “a
bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an action against
the debtor in personam—while leaving intact another—namely, an action against the debtor in rem.”
Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 2154, 115 L.Ed.2d 66 (1991). It is
also well-settled that valid liens obtained prior to a debtor seeking bankruptcy relief may be enforced
on exempt property, a tenet now codified in § 522(c)(2). Farrey v. Sanderfoot, 500 U.S. 291, 297,
111 S.Ct. 1825, 1829, 114 L.Ed.2d 337 (1991).

These fundamental aspects of bankruptcy law, however, are not absolute and, under certain
circumstances, an exemptible interest held by a debtor in property will allow the debtor to avoid a
preexisting lien interest in the property. Relevant here, is Bankruptcy Code § 522(f)(1)(A) which the
Debtors cite as the statutory basis for their Motion to avoid the judgment liens of Kimberlea

Chandler. This provision provides:

(f)(1) Notwithstanding any waiver of exemptions but subject to paragraph (3),
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--

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In re: Keith and Rhonda Railing
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(A) a judicial lien, other than a judicial lien that secures a debt of a
kind that is specified in section 523(a)(5).

The Creditor, Kimberlea Chandler, has objected to the Debtors’ utilization of this provision

to avoid her liens. At first, Ms. Chandler’s objection extended to both of the liens she maintains

against the Debtors’ real property — that is, the lien she holds against the Debtors’ residence and the
lien she holds against the Debtors’ Gibson Street rental property. However, Ms. Chandler later
limited her objection to solely the Debtors’ request to avoid her lien on the Gibson Street rental
property. (Doc. No. 58). Accordingly, the Debtors’ Motion to Avoid the Lien on their residence will
be Granted without further discussion, with the following analysis limited to the application of

§ 522(£)(1) to the Debtors’ Gibson Street property.

A creditor’s judicial lien may only be avoided under § 522(f)(1) if it impairs a debtor’s

exemption. Impairment is defined in the statute according to the following formula:

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). When applying this formula, it is the debtor’s burden to establish the
avoidability of the judicial lien. In re Brasslett, 233 B.R. 177, 189 (Bankr. D.Me. 1999),

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In re: Keith and Rhonda Railing
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Based upon the information provided by the Debtors, the formulation of § 522(f)(2)(A) yields

this calculation:

$214,450.71 Sum of all Liens and Exemption
$68,634.50 — the lien of Kimberlea Chandler

$144,866.21 — all other liens, representing the first mortgage of
$47,372.63 and the collateralized business loan of
$97,493.58.

$950.00 — the amount of the Debtors’ claimed exemption in the
Gibson Street property.

$48,000.00 Value of Debtors’ interest in the property absent liens

Taking then the Debtors’ interest in their property, $48,000.00, and subtracting that amount from the
sum of all the liens and exemptions claimed against their property, $214,450.71, an impairment of
$166,450.71 results. Furthermore, this impairment, being greater than $68,634.50, representing the
value of Ms. Chandler’s lien, subjects her lien to complete avoidance under § 522(f)(1). Holland v.

Star Bank, N.A. (In re Holland), 151 F.3d 547, 549-50 (6" Cir.1998).

In objecting to the avoidance of her lien on the Debtors’ Gibson Street rental property, Ms.
Chandler raised a number of different arguments. The first of these arguments attacks the above
§ 522(f)(2)(A) impairment calculation, holding that it is incorrect because it understates the value
of the Debtors’ rental property and it overstates the value of the business lien encumbering the
property. On the former assertion, Ms. Chandler bases her position on the Auditor’s website which
she maintains shows that the value of the Debtors’ Gibson Street rental property is $72,000.00.
Regarding the collateralized business loan, Ms. Chandler maintains that the value placed on the loan
is overstated because the loan is secured against other assets which would have to be first liquidated

before the Debtors’ rental property could be used as collateral.

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In re: Keith and Rhonda Railing
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Where a controversy exists regarding the values to assign in the § 522(f)(2)(A) formulation,
the Court, as the trier of fact, must assess which of the controverted values is supported by the
greater weight of the evidence. In re Armenakis, 406 B.R. 589, 604 (Bankr.S.D.N.Y.2009)
(preponderance of evidence standard applies to lien avoidance). In considering the points raised by
Ms. Chandler, the Court is not persuaded that any modification should be made to the Court’s
§ 522(f)(2)(A) calculation above.

First, the Debtors’ assessment, that their rental property has a current value of $48,000.00,
is corroborated by a certified appraisal — an appraisal which involved a thorough examination of the
property, including an inspection of the interior of the premises. Ms. Chandler did not attack the facts
or conclusions set forth in the report. Instead, the only evidence contradicting the appraisal is Ms.
Chandler’s representation that an auditor’s report shows the property to be worth $72,000.00. The

auditor’s report, however, was not offered into evidence.

Under these circumstances, where the Court is asked to weigh a recent and uncontroverted
certified appraisal against hearsay evidence offered from an auditor’s report, the Court ascribes more
evidentiary weight, and hence accuracy, to the recent appraisal. See In re Falvo, 227 B.R. 662, 664
(6" Cir. B.A.P. (Ohio) 1998); (“where neither party presented a certified appraisal on the property,
it was entirely reasonable for the court to accept the broker’s opinion over the creditor’s personal
opinion and calculations.”); In re Petrella, 230 B.R. 829, 834 (Bankr. N.D.Ohio 1999) (appraisal

report used over other evidence to establish property’s market value).

This is not to say that the auditor’s report offered by Ms. Chandler is not probative evidence
as to the value of the Debtors’ rental property. To the contrary, an auditor’s report can be helpful
when assessing a property’s value. In this way, Ohio law (the situs of the Debtors’ rental property)
provides that an auditor’s report as to the value of a person’s property is to be derived from the “best

sources of information available” with “an arm’s length sale between a willing seller and a willing

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buyer within a reasonable length of time” being presumptively considered the “true value for taxation
purposes.” O.R.C. § 5713.03. Yet, in a bankruptcy proceeding, an auditor’s report will often only
serve as a Starting point given that certain attributes of the report can call into question its reliability.
For example, under Ohio law: (1) an auditor’s report only needs to be conducted once in a six-year
period,’ O.R.C. § 5713.01(B); (2) the value assessed by the auditor need not be based on an
inspection of the interior of property, O.A.C. 5703-25-12; and (3) the valuation set forth in the
auditor’s report does not necessarily operate as a final determination as to the property’s value.

O.R.C. § 5715.01(B).

As it applies to the formulation of § 522(f)(2)(A), the Court also declines to revise the
$97,493.58 value the Debtors ascribed to their collateralized business loan. To be sure, the creditor
holding this lien may, as Ms. Chandler argues, be required to marshal the lien by first looking to the
Debtors’ business assets to satisfy its claim. However, with no evidence before the Court on this
matter, it would be pure speculation to even attempt to assess the extent to which the creditor would
be required to marshal its lien. In any event, values, for purposes of § 522(f), are determined by
reference to when a bankruptcy case is commenced. Jn re Waldman, 81 B.R. 313, 318 (Bankr.
E.D.Pa.1987). And in this case, this much is certain: When they filed for bankruptcy relief, the
Debtors’ Gibson Street had been pledged as collateral for a business loan with an outstanding

balance of $97,493.58.

Yet, even assuming for the sake of argument that a revision to the value of the collateralized
business loan needs to made, such a revision would not change the ultimate outcome in this case.

Under § 522(f)(1), a judicial lien will remain intact to the extent that the debtor has equity in the

1

Ohio law requires the county auditor to value and assess property tax against the taxable
property in the county. O.R.C. 5713.01(B) and 5713.03. In this duty, the auditor must reappraise
property values once every six years and update the values at an interim three-year point. O.R.C.
5713.01(B), 5713.03, 5715.33, and 5715.24; O.A.C. 5703—25-16(B).

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exempt property which exceeds the value of the allowed bankruptcy exemption. Jn re Kolich, 328
F.3d 406, 409 fn. 2 (8" Cir. 2003). As a result, Ms. Chandler’s lien may only be preserved to the
extent it can be shown that the Debtors have equity in their rental property beyond their claimed
exemption of $950.00. Based upon the numbers before the Court, however, Ms. Chandler cannot

make this showing even if the business lien were reduced to a value of $0.00.

As set forth above, the calculation of § 522(f)(2)(A) resulted in an impairment of
$166,450.71; of this amount, $68,634.50 is derived from Ms. Chandler’s lien. Therefore, in order
for any of Ms. Chandler’s lien to be preserved, the impairment to the Debtors’ rental property will
have to be reduced by $97,816.21. This, however, is an impossibility considering that the value of
the business lien, $97,493.58, does not exceed this figure.

In seeking to preserve her lien against the Gibson Street property, Ms. Chandler next attacks
whether, as required by § 522(f)(1), her lien is actually a judicial lien. According to Ms. Chandler,
her lien should be not be categorized as a judicial lien, but should rather be considered as an interest

more akin to a mortgage. The Court disagrees.

The Bankruptcy Code recognizes three types of liens: judicial, statutory, and consensual. By
its express terms, only a lien qualifying as a judicial lien can be avoided under § 522(f)(1). The
Bankruptcy Code defines a judicial lien as one “obtained by judgment, levy, sequestration or other
legal or equitable process or proceeding.” 11 U.S.C. § 101(36). By comparison, a mortgage is not
subject to avoidance because it considered a consensual lien which the Code defines as a “lien
created by an agreement.” 11 U.S.C. § 101(51). See also In re Uhrich, 355 B.R. 783, 787 (Bankr.
D.Neb. 2006) (for purposes of § 522(f)(1), a mortgage is a consensual lien).

In this matter, Ms. Chandler does not allege that her lien with the Debtors arose by

agreement. Moreover, the information provided to the Court shows that, consistent with the

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definition of a judicial lien, Ms. Chandler’s lien arose as the result of the entry of a judgment in a

legal proceeding. Thus, as a purely factual matter, there is no reason to concluded that the lien held

by Ms. Chandler against the Debtors’ rental property does not qualify as a “judicial lien” for
purposes of § 522(f)(1), thereby subjecting the lien to avoidance. Notwithstanding, it is the position
of Ms. Chandler that her lien should be characterized as a consensual mortgage lien because the lien
has been “in place for an extended period of time prior to the filing of the bankruptcy and is a
perfected lien having the effect of a mortgage.” (Doc. No. 48).

Ms. Chandler, however, does not cite the Court to any authority, nor can the Court find any,
for the proposition that a judicial lien may be transformed into a consensual mortgage lien simply
by remaining in place for an extended period of time. To the contrary, insofar as it concerns
bankruptcy law, a lien’s type is fixed at the time it arises, with a judicial lien being defined by when
it was “obtained,” while a consensual lien is defined by when it was “created.” Hence, for
definitional purposes under the Bankruptcy Code, later events are simply not considered when

determining the lien’s type.’

The next position put forth by Ms. Chandler relies on the premise that the Debtors’
underlying claim of a $950.00 exemption in the Gibson Street rental property is improper, and thus
should be disallowed. Ergo, if the exemption is not allowed, her lien cannot be avoided as there is
no exemption to impair. According to Ms. Chandler, the Debtors’ claim of exemption is improper

‘because, having already utilized the exemption against other property, the Debtors “cannot use the

2

See, e.g., Inre Dircks, 329 B.R. 687, 692 (Bankr. C.D.IIl. 2005). (in determining which type of
lien may be present, we must look at the origin of the creditor’s interest rather than the means
of enforcement) (citation and quotation omitted); In re Concrete Structures, Inc., 261 B.R. 627,
635 (E.D.Va. 2001) (“the Bankruptcy Code categorizes a lien by the way it is established, not
by how it is preserved) (citation omitted).

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wild card exemption more than once.” (Doc. No. 58). The Court, however, cannot find any support

for this position.

First, so long as it is not done in bad faith, a debtor may amend their bankruptcy schedules
at any time to revise their claim of exemption. FED.R.BANKR.P. 1009(a); Lowe v. Sandoval (In re
Sandoval), 103 F.3d 20, 22 (5" Cir.1997). Second, Ohio’s wild card exemption, O.R.C.
§ 2329(a)(18), provides that an exemption may be claimed for “[t]he person’s aggregate interest in
any property, not to exceed one thousand seventy-five dollars .. . .” (emphasis added). Ohio’s wild
card exemption, thus, allows a debtor to allocate their exemption among multiple items of property,

so long as the total amount claimed as exempt does not exceed $1,075.00.

Ms. Chandler’s final argument against the Debtors’ Motion to avoid her lien is an equitable
one, holding that her lien should remain in place because she was defrauded by the Debtors. This

argument, however, also fails for two reasons. One, no judicial determination exists that the Debtors

committed fraud, with the action brought by Ms. Chandler to have her claim against the Debtors held
nondischargeable on the basis of fraud having been dismissed. Even so, matters of discharge and lien
avoidance are not dependent on the other. Jn re Vizard, 327 B.R. 515, 517-18 (Bankr. D.Mass.
2005). As result, the Debtors would be entitled to avoid Ms. Chandler’s lien, regardless of the
character of the underlying debt. Jn re Allen, 217 B.R. 945, 949-50 (Bankr. M.D.Fla. 1998).

For those reasons stated herein, the Debtors are, pursuant to 11 U.S.C. § 522(f)(1), entitled
to avoid the judicial liens held by Kimberlea Chandler in these two properties: (1) the Debtors’
residence; and (2) the Debtors’ rental property located on Gibson Street in Defiance, Ohio. In
reaching the conclusions found herein, the Court has considered all of the evidence, exhibits and

arguments of counsel, regardless of whether or not they are specifically referred to in this Decision.

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In re: Keith and Rhonda Railing
Case No. 10-37540

Accordingly, it is

ORDERED that the Motion of the Debtors, Keith and Rhonda Railing, to Avoid the Judicial
Liens of Kimberlea Chandler, be, and is hereby, GRANTED.

Dated: August 2, 2011

Zi

f
Richard L. Speer
United States
Bankruptcy Judge

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CERTIFICATE OF SERVICE

Copies were mailed this 2™ day of August 2011 to:

James E. Hitchcock
650 W. First St.
Defiance, OH 43512

Douglas A Dymarkowski
5431 Main Street
Sylvania, OH 43560

Amy M. Blythe
24755 Chagrin Blvd., #200
Cleveland, OH 44122

Jennifer L Fogle

Mahaffey & Associates, LLC
8527 Central Ave

Sylvania, Oh 43560

Rhonda K. Railing
108 W Arthur St
Hicksville, OH 43526

Keith A. Railing
108 W Arthur St
Hicksville, OH 43526

/s/Laura Doerfler
Deputy Clerk, U.S. Bankruptcy Court

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