IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
|DO NOT PUBLISH
This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
GEORGE HENRY HEINTZ, No. 92-12299
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
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. 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.
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
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.
U.S. Bankruptcy Judge
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