Cite as: 137 B.R. 297
re Mark L. Wink and Sharon J. Wink, Debtors
Bankruptcy Case No. 91-00120-7
United States Bankruptcy Court
W.D. Wisconsin, Eau Claire Division
January 15, 1992
L. R. Reinstra, New Richmond, WI, for debtors.
Thomas R. Schumacher, Baldwin, WI, for First National Bank of Baldwin.
Thomas S. Utschig, United States Bankruptcy Judge.
MEMORANDUM OPINION, FINDINGS OF FACT,
AND CONCLUSIONS OF LAW
This matter comes before the Court on a motion of the debtors to avoid certain liens of
the First National Bank of Baldwin pursuant to 11 U.S.C. § 522(f). The bank has objected
to the debtors' motion. The debtors are Mark L. and Sharon J. Wink and they are
represented by L. R. Reinstra. First National Bank of Baldwin (Bank) is represented by
Thomas R. Schumacher.
The debtors and the Bank have been in a debtor-creditor relationship since September of
1984. At that time the Bank approved a $45,000 line of credit for Mark Wink to enable him
to purchase machinery and a dairy herd. Over the course of the next six years the Bank
made numerous other loans to the debtors to purchase cows and various items of machinery.
There were also numerous renewals and consolidations of the various loans; the last one
occurred on February 17, 1990, and was in the amount of $55,567.92.
The debtors filed their petition for relief under Chapter 7 of the Bankruptcy Code on
January 16, 1991. The parties stipulated to an auction of the machinery conducted by the
Bank and further agreed that the debtors would preserve their right to file a
lien-avoidance motion pursuant to 11 U.S.C. § 522(f) for property claimed exempt by the
debtors. The auction was held on March 13, 1991, and the net proceeds from the sale of the
debtors' collateral were $24,581.62.
The debtors filed the present motion on May 20, 1991, claiming the first $15,000 in
proceeds from their equipment and inventory as exempt under Wisconsin law. In an objection
filed May 30, 1991, the Bank asserted that the debtors were not entitled to any exemption
in the proceeds under Wisconsin law. In its original brief filed on August 1, 1991, the
Bank also asserted that it had held a purchase money security interest in the auctioned
machinery and that the debtors were therefore not entitled to lien avoidance under §
522(f)(2). The Bank further alleged that the debtors were no longer engaged in the
business of farming and that they were thus not entitled to any exemption on that basis as
In their responsive brief filed on September 5, 1991, the debtors denied that the Bank
retained a purchase money security interest and refuted its allegation that they were no
The parties subsequently stipulated, however, to dismissal of the Bank's objections
based on the debtors' occupational status and on the alleged purchase-money nature of its
security interest. Pursuant to this stipulation, these objections were dismissed by order
of the Court dated October 17, 1991. The only remaining objection, therefore, is the one
based on Wisconsin's exemption law and its interplay with § 522(f) of the Bankruptcy
Turning to the statutes relevant to this matter, the debtors' motion is made pursuant
to 11 U.S.C. § 522(f), which provides:
(f) 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--
(1) a judicial lien; or
(2) a nonpossessory, nonpurchase-money
security interest in any--
(A) household furnishings, household goods,
wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that
are held primarily for the personal, family, or household use of the debtor or a dependent
of the debtor;
(B) implements, professional books, or tools,
of the trade of the debtor or the trade of a dependent of the debtor; or
(C) professionally prescribed health aids for
the debtor or a dependent of the debtor.
11 U.S.C. § 522(f) (West 1991). There is no dispute that the proceeds
at issue here are from the sale of the debtors' farm machinery and that the machinery
constituted "[i]mplements, . . . or tools, of the trade of the debtor . . . ."
Nor, as noted, is there a dispute as to the nonpurchase-money status of the Bank's
security interest. The precise issue before the Court is whether a lien can be avoided
under § 522 when the applicable state law purports to define lien-encumbered property as
non-exempt. The applicable state exemption provision is § 815.18(3)(b) of the Wisconsin
statutes. It states:
(3) Exempt property. The debtor's interest in
or right to receive the following property is exempt, except as specifically provided in
this section and ss. 70.20(2), 71.91(5m) and (6), 74.55(2) and 102.28(5):
. . .
(b) Business and farm property.
Equipment, inventory, farm products and professional books used in the business of the
debtor or the business of a dependent of the debtor, not to exceed $7,500 in aggregate
WIS. STAT. ANN. § 815.18(3)(b) (West Supp. 1991).(1) "Aggregate value" is defined as
"[t]he sum total of the debtor's equity in the property claimed exempt." See
WIS. STAT. ANN. § 815.18(2)(a) (West Supp. 1991). "Equity" is in turn defined
as "[t]he fair market value of the debtor's interest in property, less the valid
liens on that property." See WIS. STAT. ANN. § 815(2)(g) (West Supp. 1991).
"Exempt" is defined as "[f]ree from any lien obtained by judicial
proceedings and is not liable to seizure or sale on execution or on any provisional or
final process issued from any court, or any proceedings in aid of court process." See
WIS. STAT. ANN. § 815.18(2)(h) (West 1991). One other subsection is relevant here --
subsection 12, titled "[l]imitations on exemptions." It states that
[n]o property otherwise exempt may be claimed
as exempt in any proceeding brought by any person to recover the whole or part of the
purchase price of the property or against the claim or interest of a holder of a security
interest, land contract, condominium or homeowners association assessment or maintenance
lien or both, mortgage or any consensual or statutory lien.
See WIS. STAT. ANN. § 815.18(12) (West Supp. 1991).
The Bank cited all of these provisions in its brief and argues that, since the debtors
had no equity in the farm machinery (and therefore none in the proceeds as well), the
debtors are not entitled to any exemption in those proceeds under Wisconsin law. Since the
proceeds are not exempt under Wisconsin law, the argument continues, the Bank's lien does
not "[i]mpair an exemption to which the debtor would have been entitled . .
." pursuant to § 522(f). The Bank emphasized in its reply brief that
[its] argument . . . is not, if the
debtor has no equity in the property then lien avoidance under 11 U.S.C. § 522(f)(2)(B)
is not possible. The argument made by the creditor is that the interest of the debtor in
property is only exempt to the extent that the interest meets the definition of exemption
contained in the statute. Second, a debtor may only avoid the fixing of the lien on
property to the extent it impairs such exemption.
See Reply Brief in Opposition to Debtors' Motion to Avoid
Liens Under 11 U.S.C. § 522(f) at 1.
Elsewhere the Bank argues that the Wisconsin definition of its "exemptions"
does not prohibit lien avoidance, since Wisconsin has not "opted out" of the
federal exemptions in 11 U.S.C. § 522(d) and the debtors therefore have the alternative
of choosing the federal exemptions. A Wisconsin debtor choosing these exemptions, the
argument concludes, could thus lien avoid pursuant to § 522(f).
Reduced to its essentials, then, the Bank asserts that it is permissible for a state to
define its exemptions in such a way so as to preclude lien avoidance under § 522(f) as to
liens on property in which the debtor has no equity, so long as the state has not
"opted out" of the federal exemptions -- where lien avoidance on such property
would be permitted.
As support for its argument, the Bank cites two recent Supreme Court cases -- Owen
v. Owen, __ U.S. __, 111 S. Ct. 1833, 114 L. Ed. 2d 350 (1991) and Farrey v.
Sanderfoot, __ U.S. __, 111 S. Ct. 1825, 114 L. Ed. 2d 337 (1991).
Having considered the arguments of the Bank and the debtors' response, the Court notes
initially that the Bank's arguments are not without at least partial support in the case
law. Several courts have held that states may define their exemptions in such a way so as
to effectively "opt out" of the lien avoidance provisions of § 522(f). See,
e.g., Giles v. Credithrift of Am., Inc. (In re Pine), 717 F.2d 281 (6th
Cir. 1983); McManus v. AVCO Fin. Services (In re McManus), 681 F.2d 353 (5th
Cir. 1982); Alu v. State of New York Dep't of Taxation & Fin., 41 B.R. 955
(E.D.N.Y. 1984). A majority of courts have held, however, that a state may not effectively
"opt out" of the lien avoidance provision merely by limiting state-law
exemptions to unencumbered property. See, e.g., Owen v. Owen, __ U.S. __,
111 S. Ct. 1833, 114 L. Ed. 2d 350 (1991); Snow v. Green (In re Snow), 899
F.2d 337 (4th Cir. 1990), cert. denied, Green v. Snow, __ U.S. __, 111 S.
Ct. 2256, 114 L. Ed. 2d 709 (1991); AETNA Fin. Co. v. Leonard (In re Leonard),
866 F.2d 335 (10th Cir. 1989); Brown v. Dellinger (In re Brown), 734 F.2d
119 (2nd Cir. 1984); Maddox v. Southern Discount Co. (In re Maddox), 713
F.2d 1526 (11th Cir. 1983); Heights Fin. Corp. v. Vaughn (In re Vaughn), 67
B.R. 140 (Bankr. C.D. Ill. 1986).
The Court has considered the aforementioned judicial authority as well as the policy
considerations at issue here and decides to join the majority view. The Court holds that a
state may not, in effect, "opt out" of the right to lien avoidance pursuant to
11 U.S.C. § 522(f) by defining its state-law exemptions to include only unencumbered
property. The Court reaches this result for several reasons.
First, the Court interprets the recent Supreme Court case of Owen v. Owen as
being dispositive of this issue. That case involved a Florida debtor's attempt to avoid a
judgment lien of his ex-wife on his homestead in his Chapter 7 bankruptcy case. The
Florida homestead exemption statute at issue had been amended in 1985 in such a way so as
to qualify the debtor's condominium as a homestead. The ex-wife's lien had attached prior
to that amendment, however, and the exemption statute had been interpreted to exclude from
its protection property encumbered by liens that existed before the property acquired
homestead status. The debtor-husband successfully claimed the homestead exemption, but the
bankruptcy court refused to void the ex-wife's lien, citing interpretations of the state
constitution holding the exemption inapplicable to pre-existing liens. This decision was
affirmed by the district court, Owen v. Owen (In re Owen), 86 B.R. 691 (M.D.
Fla. 1988); and the court of appeals, 877 F.2d 44 (11th Cir. 1989). The Supreme Court
reversed and remanded and stated unequivocally that § 522(f) is to be interpreted to
allow the avoidance of any lien that impairs an exemption to which the debtor would have
been entitled if the lien had not existed. Owen, __ U.S. at __, 111 S. Ct. at 1837,
114 L. Ed. 2d at 358-59. The Supreme Court stated that
[t]he baseline, against which impairment is to be measured, [is] not
an exemption to which the debtor "is entitled" but one to which he "would
have been entitled." . . . "Would have been" but for what? The
answer given . . . has been but for the lien at issue, and that seems to us
correct. . . . We have no doubt, then, that the lower courts' unanimously agreed-upon
manner of applying § 522(f) to federal exemptions -- ask first whether avoiding the lien
would entitle the debtor to an exemption, and if it would, then avoid and recover the lien
-- is correct.
Id. at __, 111 S. Ct. at 1837, 114 L. Ed. 2d at 359-60 (emphasis
in original). The Supreme Court went on to state that the same interpretation of § 522(f)
should be adopted for the state exemptions, noting that "[n]othing in the text of §
522(f) remotely justifies treating the [federal and state] exemptions differently." Id.
at __, 111 S. Ct. at 1838, 114 L. Ed. 2d at 360.
The Owen case thus stands for the proposition that judicial liens can be avoided
under § 522(f) in spite of the fact that a state has defined exempt property so as to
exclude lien-encumbered property. The Bank in the present case seeks to distinguish Owen
on the grounds that it addressed judicial liens, while a nonpurchase money security
interest is at issue here. The Court finds this distinction meaningless as to the
applicability of Owen to the present facts. Nothing in the language of § 522(f)
indicates any basis whatsoever for distinguishing subsection (1) -- judicial liens, from
subsection (2) -- non-possessory, nonpurchase money security interests. The two
subsections are separated by the conjunction "or" indicating that both types of
liens can be avoided. See 11 U.S.C. § 522(f) (West 1991). Other courts have also
interpreted Owen as applying to the nonpurchase money-security-interest alternative
of § 522(f)(2). See, e.g., In re Kelly, 133 B.R. 811, 813 (Bankr. N.D. Tex.
1991); In re Sullins, 135 B.R. 288, 290 (Bankr. S.D. Ohio 1991).
Second, the Court believes the statutory language of § 522(f) clearly mandates this
result. As already noted in the quoted citations from Owen, that provision states
that the debtor may avoid a lien which impairs an exemption "[t]o which the debtor would
have been entitled under subsection (b) of this section . . . ." See 11
U.S.C. § 522(f) (West 1991) (emphasis added). This Court fully agrees with the majority
view as espoused by Owen -- that the proper inquiry under that provision is whether
a debtor would be entitled to an exemption but for the existence of the lien. If
so, then that lien can be avoided. See Owen, __ U.S. at __, 111 S. Ct. at
1838, 114 L. Ed. 2d at 360; In re Leonard, 866 F.2d 335, 336-37 (10th Cir. 1989).(2)
Third, this interpretation of § 522(f) is supported by the legislative history of that
Subsection (f) [of § 522] protects the
debtor's exemptions, his discharge, and thus his fresh start by permitting him to avoid
certain liens on exempt property. The debtor may avoid a judicial lien on any property to
the extent that the property could have been exempted in the absence of the lien,
and may similarly avoid a nonpurchase-money security interest in certain household and
personal goods . . . .
H.Rep. No. 595, 95th Cong., 1st Sess. 362, reprinted in 1978
U.S.C.C.A.N. 5787, 6318 (emphasis added); S. Rep. No. 989, 95th Cong., 2d Sess. 76, reprinted
in 1978 U.S.C.C.A.N. 5787, 5862. See also In re Leonard 866 F.2d 335,
337 (10th Cir. 1989).
Fourth, policy concerns further support the result the Court reaches. Adequate
exemptions play a vital role in providing the individual debtor with a fresh start -- one
of the fundamental policies behind the entire Bankruptcy Code. The right to lien avoid has
been likened to a "super-exemption" which was intended to protect the debtor
from security interests that would otherwise make the exemption worthless because there is
no equity in the property. See Clark, The Law of Secured Transactions Under the
Uniform Commercial Code para. 12.05[a] at 12-72 (2nd ed. 1988). Allowing states to
effectively circumvent a debtor's rights to this "super exemption" through
restrictive state-law exemption definitions would thwart an important federal policy --
the fresh start of the rehabilitated debtor.
Fifth, the Bank's argument that Wisconsin debtors have the option of choosing the
federal exemptions and can still lien avoid on that basis is equally unavailing. This
argument, while creative, finds absolutely no support in the Bankruptcy Code nor the
relevant case law. As already noted, the Supreme Court in Owen established
unequivocally a debtor's right to lien avoid in cases involving either federal or
state-law exemptions. __ U.S. at __, 111 S. Ct. at 1838, 114 L. Ed. 2d at 360. The Bank in
its brief correctly notes that Florida [the state involved in Owen] had "opted
out" of the federal exemptions. The Supreme Court made no reference to this fact,
however, when it recognized a debtor's right to lien avoid under either federal or state
exemptions. See Owen, __ U.S. __, 111 S. Ct. 1833, 114 L. Ed. 2d 350 (1991).
A thorough reading of Owen makes it clear that the fact that Florida is an
"opt out" state was completely irrelevant to the Supreme Court in reaching the
result it did. Other courts addressing the same issue in non-"opt out" states
like Wisconsin, moreover, have also held that a debtor can lien avoid on property which
would be exempt but for the lien, in spite of state-law restrictions limiting exemptions
to unencumbered property. See, e.g., In re Kelly, 133 B.R. 811 (Bankr. N.D.
For these reasons, then, the Court holds that Wisconsin may not effectively "opt
out" of the federal lien avoidance provision by limiting its state-law exemptions to
unencumbered property. Wisconsin has not expressly done so; it is the Bank's
interpretation of Wisconsin law which, if followed, would lead to this result for debtors
choosing state-law exemptions and seeking to lien avoid on them. The Court refuses to so
interpret Wisconsin law. Nor does the result reached herein necessitate invalidating any
of Wisconsin's exemption provisions. Those provisions can be reconciled with the
Bankruptcy Code. The state of Wisconsin is free to structure its exemption law as it sees
fit, even including defining exempt property as property unencumbered by any lien. See
WIS. STAT. ANN. § 815.18(2)(h) (West Supp. 1991). Many other states have similarly
limited their exemptions. See 7 Collier on Bankruptcy 859 (15th ed. 1991).
But in cases involving § 522(f) of the Bankruptcy Code, federal law directs a court to
ask whether a debtor would be entitled to a particular exemption under applicable state
law but for the existence of a lien. In doing this in the present case, there is no
question that, but for the Bank's security interest, the debtors would each be entitled to
an exemption of $7,500 in farm machinery, or $15,000 total, pursuant to WIS. STAT. ANN. §
815.18(3)(b), the exemption for business and farm property. See WIS. STAT. ANN. §
815.18(3)(b) (West Supp. 1991). In nonbankruptcy cases not involving such federal-law
mandates as § 522(f), a Wisconsin debtor would only be entitled to an exemption of $7,500
in equity in business or farm property. Other courts have reconciled state exemption laws
very similar to the Wisconsin provisions at issue here with the federal law of 11 U.S.C.
§ 522(f) in the same manner.(3) See, e.g.,
AETNA Fin. Co. v. Leonard, (In re Leonard), 866 F.2d 335, 338 (10th Cir.
1989); In re Weiss, 51 B.R. 224, 226-27 (D. Colo. 1985); Heights Fin. Corp. v.
Vaughn (In re Vaughn), 67 B.R. 140, 142-43 (Bankr. C.D. Ill. 1986).
For these reasons, then, the Bank's objection to the debtors' motion for lien avoidance
pursuant to 11 U.S.C. § 522(f) is denied. Accordingly, the debtors' motion to avoid the
Bank's liens to the extent of $15,000 in the proceeds from the auction of the farm
machinery is granted.
This decision shall constitute findings of fact and conclusions of law pursuant to
Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
1. The exceptions noted in the statute are inapplicable to the
2. The Leonard court noted further that
Any other reading of § 522(f) would make the
language meaningless and would lead to an absurd result. If § 522(f) were to be read as
allowing the debtor to avoid a lien only on the debtor's equity in the exempt property, to
which the lien would not ultimately attach under any circumstances, it would totally
disregard the lien avoidance language set forth in § 522(f). In other words, if
Appellant's construction of § 522(f) were to be adopted, then as long as a security
interest exists, the debtor would never be entitled to avoid the lien.
In re Leonard, 866 F.2d 335, 337 (10th Cir. 1989).
3. One such court reconciled a Colorado exemption statute
essentially the same as the Wisconsin statute at issue here by stating that
"[s]ection 522(f), in effect, creates equity equal to the amount that could be
exempted if the security interest did not exist." See Redin v. Fidelity
Fin. Services (In re Redin), 14 B.R. 727, 729 (Bankr. D. Colo. 1981) (emphasis