                     United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT
                                    ___________

                                    No. 02-1829
                                    ___________

In re: Dean Allen Kolich;                        *
Michelle Rene Kolich,                            *
                                                 *
               Debtors.                          *
------------------------------------------------ *
Dean Allen Kolich; Michelle Rene                 * Appeal from the United States
Kolich,                                          * Bankruptcy Appellate Panel
                                                 * for the Eighth Circuit.
               Appellees,                        *
                                                 *
        v.                                       *
                                                 *
Antioch Laurel Veterinary Hospital,              *
                                                 *
               Appellant.                        *
                                          ___________

                              Submitted: January 14, 2003

                                   Filed: May 2, 2003
                                    ___________

Before LOKEN,* BYE, and RILEY, Circuit Judges.
                            ___________

LOKEN, Chief Judge.




      *
       The Honorable James B. Loken became Chief Judge of the United States
Court of Appeals for the Eighth Circuit on April 1, 2003.
      Section 522(f)(1) of the Bankruptcy Code provides that the debtor may avoid
most judicial liens “to the extent that such lien impairs an exemption to which the
debtor would have been entitled.” 11 U.S.C. § 522(f)(1). In this case, Chapter 7
debtors Dean and Michelle Kolich moved to avoid a judicial lien on their homestead
held by Antioch Laurel Veterinary Hospital (“Antioch”). Applying the formula for
determining when a lien impairs an exemption in § 522(f)(2)(A), the Eighth Circuit
Bankruptcy Appellate Panel (“BAP”) concluded that the homestead exemption was
impaired and avoided Antioch’s lien in its entirety. In re Kolich, 273 B.R. 199 (8th
Cir. B.A.P. 2002), rev’g 264 B.R. 544 (Bankr. W.D. Mo. 2001). Antioch appeals,
arguing that the BAP’s “mechanical application” of the statutory formula produces
an absurd result and an unjust windfall to a junior secured creditor and the bankruptcy
debtors. Like the BAP, we review the bankruptcy court’s interpretation of the statute
de novo. In re Vote, 276 F.3d 1024, 1026 (8th Cir. 2002). We affirm.

       Section 522(f) was enacted when Congress rewrote the Code’s exemption
provisions in the Bankruptcy Reform Act of 1978. Recognizing that exemptions are
critical to providing the bankruptcy debtor a “fresh start” and that state exemption
laws were often inadequate for this purpose, Congress created alternative federal
exemptions in § 522(b) and (d) and then added § 522(f) to permit the debtor to avoid
judicial liens that impair exempt property. This avoidance power “allows the debtor
to undo the actions of creditors that bring legal action against the debtor shortly
before bankruptcy.” H.R. Rep. No. 95-595, at 126 (1978), reprinted in 1978
U.S.C.C.A.N. 5963, 6087. Initially, § 522(f) did not define when a judicial lien
impairs an exemption, which led to a variety of inconsistent judicial interpretations.
In 1994, Congress added the formula in § 522(f)(2)(A), intending to bring order out
of the prior chaos. Unfortunately, as this case illustrates, the formula has itself
generated inconsistent judicial interpretations.

     The relevant facts are undisputed and may be quickly summarized. (For
convenience, we round all values to the nearest $1,000.) The Kolichs purchased their

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homestead in 1998, borrowing much of the purchase price and giving the World
Savings Bank (“WSB”) a first mortgage on the home as security for its loan. In the
fall of 2000, Antioch obtained a $134,000 judgment against the Kolichs and recorded
the judgment as a judicial lien against their homestead. In December 2000, the
Kolichs borrowed $80,000 from Norbank, giving Norbank a second mortgage on their
homestead to secure its loan. Under state law, as between these secured creditors,
WSB had the first priority interest in the homestead, Antioch’s judicial lien had the
second priority interest, and Norbank’s junior lien had the third priority interest.1
When Antioch began proceedings to collect its judicial lien in the spring of 2001, the
Kolichs commenced this Chapter 7 proceeding. At that time, the homestead’s fair
market value was $275,000, the WSB loan had an outstanding balance of $219,000,
and both Antioch’s judgment and the Norbank loan were unpaid. Missouri allows a
homestead exemption of $8,000. See Mo. Rev. Stat. § 513.475(1).

       After filing their Chapter 7 petition, the Kolichs moved to avoid Antioch’s
judicial lien under § 522(f)(1), arguing that the lien impairs their homestead
exemption. That motion turns on the proper application of the formula defining an
impairment set forth in § 522(f)(2)(A):

         (2)(A) For the purposes of this subsection, a lien shall be considered
      to impair an exemption to the extent that the sum of --

               (i) the [judicial] lien;
               (ii) all other liens on the property; and
               (iii) the amount of the exemption that the debtor could claim if
                     there were no liens on the property;

      exceeds the value that the debtor’s interest in the property would have
      in the absence of any liens.



      1
          Norbank failed to discover Antioch’s judicial lien before making its loan.

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       Applying the formula to this case, if the term “all other liens” in subsection
(2)(A)(ii) is construed literally, as the BAP concluded, then Antioch’s entire judicial
lien must be avoided because the impairment exceeds the value of its lien. That is,
the sum of the judicial lien ($134,000), the two mortgage liens ($299,000), and the
homestead exemption ($8,000) is $441,000, which exceeds the Kolichs’ $275,000
interest in the property in the absence of any liens by $166,000, more than the total
value of the judicial lien. On the other hand, the bankruptcy court concluded that
Norbank’s lien should be excluded in applying the formula because it is junior to
Antioch’s lien under state law. Excluding the Norbank lien reduces the impairment
from $166,000 to $86,000, which means that only $86,000 of Antioch’s judicial lien
is avoided, while the remaining $48,000 remains an unavoided lien on the Kolichs’
homestead.2 On appeal, Antioch urges us to adopt the bankruptcy court’s
interpretation of § 522(f)(2)(A) rather than the BAP’s.

       As this is a statutory formula, we begin, as we must, with the language of the
statute. Antioch concedes that the BAP’s ruling is consistent with a literal application
of the statutory formula. We agree with Antioch’s reading of the statute’s plain
meaning.3 But the concession leaves Antioch with a decidedly uphill battle. “The
plain meaning of legislation should be conclusive, except in the rare cases in which

      2
       Under § 522(f), only the portion of a judicial lien that impairs the exemption
may be avoided by the debtor. Thus, to the extent the debtor has equity in the exempt
property that exceeds the allowed bankruptcy exemption, the judicial lien may not be
avoided. See In re Silveira, 141 F.3d 34, 36-38 (1st Cir. 1998).
      3
        The bankruptcy court reasoned that the word “liens” in § 522(f)(2)(A)(ii)
should not include junior liens on over-encumbered property that are wholly “under
water” because, “in bankruptcy parlance, a lien which is secured by no value at all is
considered to be an unsecured claim, and not a lien at all.” 264 B.R. at 550 n.28. But
that parlance is not reflected in the Code’s definition of a lien: “‘lien’ means charge
against or interest in property to secure payment of a debt or performance of an
obligation.” 11 U.S.C. § 101(37). We find no indication that Congress intended a
different definition of “liens” in § 522(f)(2)(A)(ii).

                                          -4-
the literal application of a statute will produce a result demonstrably at odds with the
intentions of its drafters.” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242
(1989) (quotation omitted).

       Antioch’s contention becomes more tenable when we take into account that a
number of courts have declined to apply the statutory formula literally in another
frequently litigated context. When a debtor has only a fifty percent interest in exempt
property -- usually, a homestead jointly owned with a spouse who did not join in the
bankruptcy petition -- but one or more of the outstanding liens apply to the entire
property, the statutory formula produces an unreasonably high impairment that has
the effect of creating additional equity for the debtor at the expense of the lienholder
whose lien is thereby avoided. Most courts faced with this situation have refused to
apply the formula literally, instead refashioning it to achieve a more realistic
computation of the impairment. As the First Circuit said after concluding that the
formula literally applied would produce an unintended measure of lien avoidance,
“[c]ourts are not required to follow literal language where it would produce an
outcome at odds with the purpose of Congress and where the result stems merely
from an unintended quirk in drafting.” Nelson v. Scala, 192 F.3d 32, 35 (1st Cir.
1999); accord In re Lehman, 205 F.3d 1255 (11th Cir. 2000); In re Ware 274 B.R.
206 (Bankr. D.S.C. 2001). But see In re Cozad, 208 B.R. 495 (10th Cir. B.A.P. 1997)
(applying formula literally even in this situation).

       On appeal, Antioch cites Nelson and Lehman and urges us to apply their
reasoning to this case. But the issues are dissimilar. Here, the problem is not created
by the formula’s mathematical progression, as it was in those cases. Rather, the issue
is whether “all other liens” in subsection 522(f)(2)(A)(ii) includes consensual liens
junior to the judicial lien at issue. Or, to state the issue more broadly, the question is
whether Congress intended that this statutory formula disrupt lien priorities created
by state law, for if Antioch’s second priority lien is avoided, the primary beneficiary
is Norbank, whose third priority consensual lien was junior to Antioch’s lien under

                                           -5-
state law but may not be avoided under § 522(f). This problem may not be dismissed
as a mere “quirk in drafting,” because it would have been relatively easy to draft
§ 522(f)(2)(A)(ii) to exclude such junior consensual liens from the phrase “all other
liens on the property.” To our knowledge, no circuit court has considered this issue.
The few bankruptcy courts to consider the issue have reached inconsistent decisions.

       Having carefully considered these conflicting precedents, we find no sufficient
basis for concluding that the statutory formula produces, in this situation, a result
“demonstrably at odds with the intentions of its drafters.” To be sure, the Bankruptcy
Code usually looks to state law to define the property rights and priorities of
creditors, including secured creditors. But § 522(f) is an exception to that policy. It
was enacted to permit the avoidance of judicial liens that can interfere with the
debtor’s post-petition fresh start. This selective avoidance gives an advantage under
federal law to secured creditors holding consensual liens, typically, residential
mortgage lenders. But Congress intended to treat consensual lienholders more
favorably, because their contractual relationships with the bankruptcy debtor typically
allow the debtor to acquire equity in the exempt property by making post-petition
mortgage payments. The 1994 amendment creating the statutory formula here at
issue was expressly aimed at overruling prior judicial decisions compromising that
intent. See H.R. Rep. No. 103-835, at 52-54 (1994), reprinted in 1994 U.S.C.C.A.N.
3340, 3361-63; In re Holland, 151 F.3d 547, 549-51 (6th Cir. 1998).

       We are not entirely comfortable with the equities of literally applying the
statutory formula in this situation. It may give a debtor contemplating bankruptcy the
ability to wipe out judicial liens by persuading a lender to take an otherwise junior
consensual lien that renders the exempt property over-encumbered and therefore ripe
for impairment. One would expect lenders to refuse to make such high-risk loans, but
there may be times when self-interest or hard-to-detect collusion will lead to an abuse
of § 522(f). On the other hand, refusing to apply the statutory formula as written may
result in denying deserving debtors the fresh-start advantage § 522(f) was enacted to

                                         -6-
provide -- for example, if a drop in market value has left exempt property over-
encumbered by a judicial lien and a junior consensual lien, and the judicial lienholder
insists upon foreclosure. With the competing equities both hard to weigh and finely
balanced, our task is simply to apply § 522(f)(2)(A) as Congress wrote it.

      Accordingly, the judgment of the BAP is affirmed.

      A true copy.

             Attest:

                CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.




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