Memorandum of Decision Re: Exemptions

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Decisions
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re GEORGE HENRY HEINTZ,                                                   No. 92-12299        Debtor. ___________________________/
Memorandum of Decision
     When the debtor filed his Chapter 11 petition in 1992, he made patently improper claims of exemption to various items of construction equipment. He claimed the equipment exempt in the amount of almost $100,000.00, even though the maximum allowable exemption was only $7,900.00. The exemptions became final while the case was still in Chapter 11 and long before a trustee was appointed.1      The construction equipment was subject to a judgment lien in favor of the debtor's brother. As debtor in possession, while the case was in Chapter 11, the debtor brought suit to avoid the judgment lien. His complaint, among other things, prayed that the lien be preserved for the benefit of the bankruptcy estate.      When the case was converted to Chapter 7, the Chapter 7 trustee took over the avoidance action and obtained a judgment avoiding the brother's lien and preserving it for the benefit of the estate. The trustee, with the debtor's cooperation, proceeded to sell the equipment and netted about $40,000.00. Now before the court is the debtor's motion to compel the trustee to pay over all of this money to him. The debtor claims that his exemptions, even
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     1. Contrary to the debtor's position, the time to object to exemptions did not recommence when the case was converted. See 8 Collier on Bankruptcy, section 4003.04[1]. though patently improper, became final. He further claims that since he claimed the equipment as exempt it was not property of the estate and therefore the avoided lien was not subject to preservation for the estate notwithstanding the express provision of the judgment.      The debtor is correct in his position that his claims of exemption became final and are not, as a general rule, subject to attack at this late date even though patently improper. Taylor v. Freeland & Kronz, 118 L.Ed.2d 280 (1992).2 However, he has misinterpreted the meaning of section 551 of the Bankruptcy Code. That section provides, in pertinent part:            Any transfer avoided under section . . . 547 . . ., is            preserved for the benefit of the estate but only with re-            spect to property of the estate.      The debtor reads the last nine words as meaning that liens on exempt property, when avoided, may not preserved for the benefit of the estate. This is not the meaning Congress intended. "Property of the estate" is defined in section 541 of the Code, and exempt property is not excluded. When a debtor files a bankruptcy petition, all of his property becomes property of a bankruptcy estate; exemption is a means of preventing liquidation and distribution. Taylor v Freeland & Kronz, supra, at 118 L.Ed.2d 286. The reference to property of the estate in section 551 was meant to exclude property outside the definition of section 541, such as property acquired by the debtor after commencement of the case. See 4 Collier on Bankruptcy (15th Ed.), section 551.01.
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           2. Even under Taylor, however, the exemptions are so patently            meritless as to be subject to a good faith attack. 118 L.Ed. 2d at 288.
     In addition, section 551 is not the exclusive method of preserving a lien for the benefit of the estate; that section provides for automatic preservation, so that the lien is automatically preserved when it is avoided. It is not necessary to refer to section 551 at all in this case because the court's judgment expressly provides that the lien is preserved for the benefit of the estate. As the holder of a valid lien, the debtor's brother was entitled to sell or transfer his rights without the debtor's consent regardless of whether or not the debtor had claimed the property exempt.      The trustee has come into possession of the proceeds of the sale of the construction equipment by virtue of stepping into the shoes of a judgment lien creditor. While the debtor might have rights under section 522(f) to avoid such a lien, at least in part, he has not as yet taken any steps to do so.3 Until and unless he avoids the judgment lien, he has no rights to the proceeds. If he seeks to avoid the lien, the trustee will have the right to question the validity of the exemptions. In re Morgan, 149 B.R. 147 (9th Cir.BAP 1993).      For the foregoing reasons, the debtor's motion will be denied. Counsel for the trustee shall submit an appropriate form of order.
Dated:                                                                                                                 _______________________                                                                                                                                 Alan Jaroslovsky                                                                                                                                  U.S. Bankruptcy Judge
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     3. The action brought by the debtor against his brother while the debtor was a debtor in possession sought to avoid the lien as a preference, not as an impairment of an exemption. As previously noted, it expressly sought to preserve the lien for the e