5 ABR 466 UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

In re:

TERESA LINDA POVEY-MARTINEZ,

Debtor.

Case No. A98-00033-DMD
Chapter 7

ORDER DENYING MOTION TO AVOID LIEN

          The debtor's motion to avoid the judgment lien of Mark W. Henry duly came before the court for hearing on July 8, 1998. Eric Kueffner appeared telephonically for Mark W. Henry. Dan Bruce appeared telephonically for the debtor. After hearing the arguments of counsel and reviewing their pleadings, IT IS ORDERED:

          The motion to avoid lien submitted by Teresa Linda Povey-Martinez is denied.

Discussion

          The debtor and Mark Henry (Henry) were married and lived in Oregon. They divorced in 1984. Under their divorce decree, the debtor received real property located in Clackamas County, Oregon. If she were to sell the property, the proceeds were to be pro-rated between the debtor and Henry following receipt of at least $80,000.00 by the debtor. After her divorce, the debtor married Roger Povey-Martinez, a physician.

          The debtor and her husband purchased a home in Haines, Alaska for $94,000.00 in May of 1994, prior to selling the Oregon property. They used a $50,000.00 loan from Portland Teacher's Credit Union to fund a down payment of $30,000.00. They encumbered the debtor's Oregon property as security for the loan. 5 ABR 467

   It was paid in full at the Oregon closing on February 28, 1995. The debtor received $290,000.00 for the Oregon property, the bulk of which went to pay a first mortgage of $173,000.00 and Portland Teacher's Credit Union's second mortgage. On March 1, 1995 the debtor utilized the remaining funds from closing, $43,706.14, to pay miscellaneous bills and make a $20,000.00 payment to First National Bank of Anchorage. This payment reduced First National's mortgage on her Alaska residence and in turn increased her equity in the property. The debtor did not list Henry as a creditor on her loan application.

          Henry attempted to obtain his share of the proceeds. He demanded payment prior to the closing. The debtor ignored him. On March 8, 1995 Henry sought an order to show cause in Oregon state court. He obtained a judgment in Oregon for his share of the proceeds on April 17, 1995 in the sum of $25,217.98. He recorded the judgment in the Haines Recording District on May 22, 1995.

          The debtor filed for Chapter 7 relief on January 14, 1998. Her statement of intentions, filed with her petition, indicated that she would move to avoid the judgment lien of Mark Henry against her homestead. Her motion to avoid Henry's lien was filed June 9, 1998.

          Henry contends that the motion to avoid lien is untimely under 11 U.S.C. § 521(2)(B). Section 521(A) requires the debtor to file a statement of intentions. Section 521(2)(B) requires the debtor to perform her intentions within forty-five days of filing the statement. Here the debtor took more than forty-five days to file her motion to avoid lien. While the debtor has been tardy, her delay does not alter her right to utilize § 522(f) to invalidate liens. As noted in 11 U.S.C. § 521(2)(C): "nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor's . . . 5 ABR 468

rights with regard to such property under this title . . . ." Collier states:

This section was inserted to make clear that the primary purpose of section 521(2) is one of notice, to remedy creditors' complaints to Congress that they could not reach debtors' attorneys and were not permitted to contact pro se debtors at all. It was not intended to in any way limit the options available to debtors in dealing with secured debts . . . Thus it is clear that a failure to take the action stated in the debtor's statement of intention, or to file a statement at all, does not affect the debtor's rights in the property . . . (footnotes omitted).

4 Collier on Bankruptcy, ś 521.10[ 5] (15th Ed. 1998). The debtor retains her right to lien avoidance under 11 U.S.C. § 522(f) despite her delay in asserting that right. Absent a showing of prejudice, a motion to avoid a judicial lien can be brought at any time. In re Dodge, 138 B.R. 602 (Bankr. E.D. Ca. 1992).

The debtor listed her home as exempt property in her schedules. Henry did not object to the debtor's schedules. While exemptions are allowed absent a timely objection under Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), the exemption may be challenged anew by a judicial lien holder defending an action to avoid its lien. In re Morgan, 149 B.R. 147, 151 (9th Cir. BAP 1993). The debtor's exemption is again at issue.

To prevail in an action to avoid a lien the debtor must first establish her entitlement to an exemption under 11 U.S.C. § 522(b) and appropriate state law. In re Morgan, 149 B.R. at 151. Here the debtor has claimed a homestead exemption of $53,000.00 against her Haines property. She values the property at $90,000.00. First National Bank has a mortgage of $37,867.00 against the property. Given her interest as tenant in the entirety with her current husband, the debtor falls within the homestead exemption amount of $54,000.00 set forth in A.S. 09.38.010(a) and appears otherwise qualified for the exemption. When a debtor utilizes misappropriated 5 ABR 469

   proceeds to create a homestead, however, simple compliance with the dollar amounts set forth in the statute may not suffice.

          Courts in other jurisdictions have long recognized the impropriety of utilizing misappropriated funds to create exempt homestead property. Kemp v. Enemark, 194 Cal. 748, 230 P. 441 (Cal. 1924) (Money procured by fraud from bank invested in home not subject to homestead exemption claim by innocent spouse); Jones v. Carpenter, 90 Fla. 407, 106 So. 127, 43 A.L.R. 1409 (Florida 1925)(Improvements to home resulting from embezzled funds results in denial of homestead exemption); Warsco v. Oshkosh Savings and Trust Co., 190 Wis. 87, 208 N.W. 886, 47 A.L.R. 366 (Wisconsin 1926) ($2,000.00 of embezzled trust funds placed in homestead resulted in denial of homestead exemption); American Railway Express Co. v. Houle, 169 Minn. 209, 210 N.W. 889, 48 A.L.R. 1266 (Minnesota 1926) (Embezzlement of $8,756.53 used to purchase and improve real estate not subject to wife's homestead claim); Webster v. Rodrick, 64 Wash. 2d 814, 394 P.2d 689 (Washington 1964) (Embezzled funds used to establish homestead by employee of physician make exemption invalid); Stoner v. Walsh, 24 Cal. App. 3d 938, 101 Cal. Rptr. 485 (Cal. 1972)($10,690.00 fraudulently obtained by debtor and used to establish homestead in apartments not subject to homestead exemption); LaBelle v. LaBelle, 624 So. 2d 741 (Florida 1993) (Homestead protection is inapplicable to property fraudulently obtained). Alaska has no case law directly on point.

          Here Teresa Linda Povey-Martinez wrongfully appropriated sales proceeds to her new home in Haines. Her divorce decree with Henry provided in part that:

When this real property is sold, the Marshall Contract Balance shall be paid, the obligation of the parties to Mary Povey shall be paid in the amount of $9,000.00, all realty fees and outstanding property taxes shall be paid. 5 ABR 470 The respondent shall receive $80,000.00 from the proceeds. Any additional proceeds shall be pro-rated between the parties based upon the following formula:

The Petitioner (Henry) shall receive that proportion of those profits, if any, represented by the number of years for which he made payments on the house, which is three, over the number of years subsequent to the Decree, prior to the sale of the property.

Henry's Exhibit One, pages 2-3, paragraph 5. The debtor knew of her obligation to pay a share of the proceeds to Henry. She wilfully took his rightful share of the proceeds, co-mingled it with funds legitimately belonging to her, and paid obligations that either directly (through First National Bank) or indirectly (through Portland Teacher's Credit Union) increased her equity in the Haines home by $50,000.00. These actions led to Henry's judgment lien of $25,217.68. Her actions do not differ significantly from other cases where parties have embezzled funds and claimed a homestead exemption. There is a substantial connection between the misappropriated proceeds and her equity in the Haines property. Because of that connection, the property is not exempt and the debtor's motion to avoid lien must be denied.

DATED: July 28, 1998.

BY THE COURT

DONALD MacDONALD IV

United States Bankruptcy Judge