Michael Fred Nelson, Sr. and Algia Lynn Nelson

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
MICHAEL FRED NELSON, SR.
ALGIA LYNN NELSON
DEBTORS
CASE NO.
09-03593-8-SWH
ORDER ALLOWING MOTION TO AVOID LIEN AND DENYING OBJECTION TO
EXEMPTIONS
The matters before the court are the debtors' motion to avoid a judicial lien and the objection
of Ida Jo Allison to the debtors' amended claim of exemptions. On September 15, 2010, a hearing
took place in Raleigh, North Carolina. For the reasons set forth below, the motion to avoid the
judicial lien of Ida Jo Allison will be allowed and the objection to the debtors' amended claim of
exemptions will be denied.
Background
On October 28, 2008, Ida Jo Allison obtained a judgment against Michael Fred Nelson, Sr.
and Algia Lynn Nelson in Wake County in the amount of $144,563.63. 	On May 1, 2009, the
Nelsons filed a petition for relief under chapter 13 of the Bankruptcy Code. As of the petition date,
the Nelsons were married and living together at 2219 Creston Road in Raleigh, North Carolina (the
"Property"). On their initial schedules, the debtors claimed an exemption in the Property pursuant
SO ORDERED.
SIGNED this 01 day of October, 2010.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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1The debtors based the exemption amount on the statutory amount in effect at the time the
petition was filed. The current exemption amount is $70,000.00.
2 The sum of the judgment lien of $144,563.33, an ad valorem tax lien to Wake County of
$3,201.50, the first lien of Wells Fargo of $30,942.55, and the debtors' exemption of $37,000.00 is
$215,707.38. The difference between this sum and $157,000.00 is $58,707.38.
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to §522(b)(3)(B) as property held as tenants by the entirety. The debtors scheduled the value of the
Property at $300,000.00, subject to a first lien in the amount of $30,942.55 in favor of Wells Fargo
and Ms. Allison's judgment lien of $144,563.63. At some point thereafter, Mr. Nelson moved out
of the residence and lived elsewhere. In October of 2009, the debtors' case was converted to chapter
7, and on July 12, 2010, the trustee sold the Property at auction for $157,000.00. On August 5,
2010, the debtors amended their exemption in the Property to claim a $37,000.00 exemption
pursuant to N.C.G.S. § 1C-1601(a)(1).1 The debtors filed the present motion to avoid Ms. Allison's
judicial lien on August 12, 2010, and on August 13, 2010, Ms. Allison filed the present objection
to the claimed exemption.
Discussion
Although it would appear that the analysis should begin with the objection to the debtors'
amended exemptions, the primary and threshold issue is whether the debtors' motion to avoid the
judicial lien is appropriate under § 522(f), i.e., whether or not, the amended exemption if allowed,
is actually impaired by the judicial lien. That is an issue of valuation.
The debtors scheduled the value of the Property at $300,000.00 on June 25, 2009. Using that
value, the judicial lien does not impair the exemption. However, if the true value of the Property
as of the petition date is the sale price on July 12, 2010, $157,000.00, the judgment lien impairs the
exemption in the amount of $58,707.38.2
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Exemptions are determined based on values as of the petition date. See Fitzgerald v. Davis,
729 F.2d 306 (4th Cir. 1984). However, the court is not bound by the value scheduled and may look
beyond the schedules to determine value. For example, in Fitzgerald, where the price realized from
the sale of the debtors' property was greatly in excess of their original estimate of its value, the court
found that the sale price was the more reliable evidence of value, and that the debtors apparently
arrived at the original value in error. Id. The court noted that the Code simply defines "value" in
the context of exemptions as the fair market value on the petition date, and although estimates are
frequently relied upon as to fair market value, the court nevertheless concluded: "In the absence of
proof that the property has changed in value after the date of filing, a bankruptcy court should not
disregard the price obtained from a sale of the property during the pendency of the bankruptcy
proceedings." Id. at 308. In this case, the male debtor testified as to his belief that the Property was
worth much more than it brought upon sale, but that nothing had happened between the filing date
and the sale date that would have affected the value. As a result, it is the debtors' position that the
sale price must have been the value of the Property. Although Ms. Allison disputes this position,
no contrary evidence was introduced as to value. 	Therefore, the court finds the value as of the
petition date to be at or near the sale price of $157,000.00. 	Unless the amended exemption is
disallowed, avoidance of the judgment lien is appropriate.
Amendments to exemptions are liberally allowed unless they are made in bad faith or have
a prejudicial effect on creditors. In re Opfer, Case No. 07-03532-8-JRL (Bankr. E.D.N.C. Mar. 20,
2008); In re LoCurto, 239 B.R. 314 (Bankr. E.D.N.C. Sept. 22, 1999). The court finds no evidence
of bad faith in the debtors' amendment to their claim of exemptions. Mr. Nelson was forthcoming
in testifying that he believed his home was worth more at the time of filing, but that he was simply
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wrong. It appears that all parties had committed the same error. Thus, the debtors properly and
promptly reacted once they learned of the value of the Property upon its sale by modifying their
claim of exemptions.
Further, although Ms. Allison contends that the homestead exemption is not appropriate
because the male debtor does not currently live at the property claimed as exempt, the debtors'
entitlement to the homestead exemption is determined as of the date of the petition. Given that the
debtors were living in the same household at the time of filing, the fact that they separated some time
after filing has no bearing. 	Additionally, the debtors represent that the female debtor, who
continuously resided at the Property, is dependent on the male debtor's income and support. The
debtors therefore would have qualified for the homestead exemption even if the male debtor had not
lived at the Property on the petition date, because the female debtor appears to be a dependent
spouse using the Property as a residence. See In re Preston, 428 B.R. 340, 343 (Bankr. W.D.N.C.
Sept. 24, 2009) (Noting that for purposes of N.C.G.S. § 1C-1601(a)(1), the term "dependent,"
includes a 'dependent spouse', which North Carolina courts have defined as a spouse who is
substantially dependent on the other spouse for maintenance or support).
Finally, Ms. Allison contends that she has been prejudiced by the debtors' amendment to
their exemptions. She states that had she known the debtors would claim the homestead exemption,
rather than tenancy by the entirety, she would have bid in at the sale in order to obtain the property
and then sell it later to realize the value of the judgment. The court is not in a position to evaluate
this argument, however, because no evidence was introduced by Ms. Allison. The court cannot
assume Ms. Allison's intent or ability to bid at the sale, and therefore can find no prejudice as a
result of the amendment to exemption.
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Accordingly, the debtors' motion to avoid the judicial lien of Ida Jo Allison is ALLOWED
to the extent of $58,707.38, and Ms. Allison's objection to the debtors' claim of exemptions is
DENIED.
SO ORDERED.
END OF DOCUMENT
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