           United States Bankruptcy Appellate Panel
                       FOR THE EIGHTH CIRCUIT

                                  ________

                                 01-6041WM
                                  ________

In re:                                  *
                                        *
Dean Allen Kolich and                   *
Michelle Kolich,                        *
                                        *
       Debtors.                         *
                                        *
Dean Allen Kolich and                   *
Michelle Kolich,                        *      Appeal from the United States
                                        *      Bankruptcy Court for the
       Appellants,                      *      Western District of Missouri
                                        *
            v.                          *
                                        *
Antioch Laurel Veterinary Hospital,     *
Inc., P.C.,                             *
                                        *
       Appellee.                        *
                                    ________

                         Submitted: January 25, 2002
                          Filed: February 22, 2002
                                  ________

Before KRESSEL, SCHERMER and DREHER, Bankruptcy Judges.
                            ________

DREHER, Bankruptcy Judge.
       This is an appeal from an order of the bankruptcy court which avoided a
judgment creditor's lien only in part. For the reasons that follow, we reverse and hold
that the lien should have been avoided in its entirety.

                                       FACTS

      In 1992, Dean Kolich purchased a veterinary practice from Antioch Laurel
Veterinary Hospital, Inc., P.C. ("Antioch"). Dean and Michelle Kolich ("Debtors")
guaranteed payment of the purchase price. In 1998, Debtors purchased a home ("the
property"). World Savings Bank financed the purchase and recorded a first Deed of
Trust on the property which it promptly perfected. The balance due on the loan was
$219,018.60 as of April 2, 2001.

       Debtors fell behind in making payments to Antioch and Antioch filed suit.
Antioch prevailed in this litigation. On September 13, 2000, it recorded its judgment
against Debtors in the amount of $133,875.00. The judgment lien was a second
priority lien on the property.

       On December 5, 2000, Debtors borrowed $80,000 from Norbank and gave
Norbank a second Deed of Trust on the property. By error, Norbank had failed to
discover Antioch's judgment lien before it made the loan. Thus, Norbank's lien on
the property was in third position of priority. Michelle Kolich took the $80,000 loan
proceeds to Las Vegas in a "last ditch" effort to gamble the couple out of debt.1
Unfortunately, she failed.

      1
       Antioch asserts that Michelle fraudulently induced Norbank to lend money
without disclosing her intentions for use of the loan proceeds and that her story
that she stuffed $80,000 in cash in a purse and gambled the money away in Las
Vegas is unbelievable. These allegations were part of a separate adversary
proceeding Antioch commenced against the Debtors seeking denial of discharge
under § 727 of the Bankruptcy Code. That case was tried to conclusion and
judgment entered in favor of Debtors while this appeal was pending.
                                          -2-
       On April 13, 2001, Debtors filed a Chapter 7 petition. In their bankruptcy
schedules they valued the property at $275,000.00, which is an agreed-upon valuation
for purposes of these proceedings. Shortly after filing the petition, Debtors filed a
motion under § 522(f) of the Bankruptcy Code to avoid Antioch's judgment lien.
Antioch objected, claiming that since the two Deeds of Trust would absorb the full
value of the property, its judicial lien did not impair the Debtors' exemption or, in the
alternative, that the lien is avoidable only to the extent of the $8,000.00 exemption
allowed under Missouri law.

       The bankruptcy court held that Debtors were entitled to avoid Antioch's lien
even though the consensual liens on the property exceeded its value and the Debtors
had no equity. The court further held that Antioch’s lien impaired the exemption to
the extent Antioch's judgment lien exceeded the amount reached by deducting from
the value of the property the amount owed to World Bank and the $8,000.00
exemption, but not the amount owed to Norbank. After subtracting the World Bank
debt ($219,018.60) plus the exemption amount ($8,000.00) from the fair market value
of the property ($275,000.00), $47,981.40 remained. The bankruptcy court allowed
Antioch to retain its judgment lien in this amount and avoided the remainder of the
judgment lien ($85,893.60).

       Debtors assert that the bankruptcy court failed to properly apply the
mathematical formula set forth in § 522(f)(2)(A) of the Bankruptcy Code when it
failed to include the amount owed to Norbank in making the calculation. Debtors
contend that a literal reading of the mathematical formula set forth in § 522(f)(2)(A)
requires the entire judicial lien be avoided.

                                      DECISION

       This appeal raises legal, not factual, issues. Thus, we review the bankruptcy
court's decision de novo. Blackwell v. Lurie (In re Popkin & Stern), 223 F.3d 764,

                                           -3-
765 (8th Cir. 2000); Hatcher v. United States Trustee (In re Hatcher), 218 B.R. 441,
445-46 (B.A.P. 8th Cir. 1998).

       The bankruptcy court was correct when it determined that Debtors were
entitled to lien avoidance even though they had no equity in the property. See In re
Freeman, 259 B.R. 104, 110 (Bankr. D. S.C. 2001). It erred as a matter of law,
however, in not allowing Debtors to avoid Antioch's lien in its entirety.

      Section 522(f)(1) of the Bankruptcy Code permits a debtor to avoid a
nonconsensual lien which prevents a debtor from taking full advantage of an
otherwise valid exemption:

      (f)(1) Notwithstanding any waiver of exemptions but subject to
      paragraph (3), 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–
             (A) a judicial lien.

11 U.S.C. § 522(f)(1)(A). "Almost from the beginning of the Code’s enactment,
courts seemed to have [had] difficulty applying § 522(f), especially when multiple
liens encumbered real estate." Margaret Howard, "Avoiding Powers and the 1994
Amendments to the Bankruptcy Code," 69 AM. BANKR. L.J. 259, 269 (1995); see also
David G. Epstein, Steve H. Nickles & James J. White, BANKRUPTCY § 8-28, at 560
(West 1992)(describing various approaches).

       In the 1994 Amendments to the Bankruptcy Code Congress attempted to rectify
this problem by setting forth the mathematical formula to be used to determine
whether a judicial lien impairs an exemption:

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

                                         -4-
              (i)  the lien,
              (ii) all other liens on the property; and
              (iii)the amount of an 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.

11 U.S.C. § 522(f)(2)(A). Section 522(f)(2)(A) "provides a simple arithmetic test to
determine the extent to which a lien impairs an exemption of specific property. The
exemption is impaired to the extent the total of all liens on the property plus the
exemption exceed the fair market value of the property." In re Gostian, 215 B.R. 237,
238 (Bankr. M.D. Ala. 1997)(footnotes omitted); see also In re Diegel, 206 B.R. 194,
196 (Bankr. D. N.D. 1997); F.D.I.C. v. Finn (In re Finn), 211 B.R. 780, 782-84
(B.A.P. 1st Cir. 1997); In re Duvall, 218 B.R. 1008, 1014 (Bankr. W.D. Tex. 1998).
According to Debtors, application of that simple arithmetic test results in the
following calculation and supports their claim that Antioch's lien must be avoided in
its entirety:

      (i)     "the lien"
              Antioch's judicial lien                     $133,875.00
      (ii)    "all other liens on the property"
              World Bank first Deed of Trust              $219,018.60
              Norbank second Deed of Trust                $ 80,000.00
      (iii)   "the amount of any exemption that
              the debtor could claim if there were
              no liens on the property"
              Homestead exemption2                        $ 8,000.00


      Debtors claim Missouri's homestead exemption of $8,000.00. The
      2

Missouri homestead exemption statute provides, in part:

      The homestead of every person, consisting of a dwelling house and
      appurtenances, and the land used in connection therewith, not
      exceeding the value of eight thousand dollars, which is or shall be
                                         -5-
                                                               $440,893.60
              “the value that the debtor's interest in the
              property would have in the absence of
              any liens"                                       -$275,000.00

              Extent of impairment                              $165,893.60

Debtors argue that, since the total liens plus the amount of the exemption exceed the
value of the property by $165,893.00, they should be entitled to avoid any judicial
liens up to that amount, which would include the full amount of Antioch's $133,875
lien.

       Antioch urges, and it did so successfully in the bankruptcy court, that a literal
application of the mathematical formula in § 522(f)(2)(A) produces an unfair result.
This is because such an application allows the Debtors to upset the state law priority
position of a judicial lien creditor simply by increasing the indebtedness on the
property by granting a new junior lender a consensual lien. In this case, Antioch
points out, literal application of the mathematical formula allows the Debtors to use
the debt to Norbank, a creditor with a wholly unsecured claim in bankruptcy, to erase
a prior judicial lien (see 11 U.S.C. § 506(a)).

        We begin “where all such inquiries must begin: with the language of the statute
itself . . . . In this case it is also where the inquiry should end, for where, as here, the
statute’s language is plain, 'the sole function of the courts is to enforce it according
to its terms.'” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989
(internal citations omitted)); see also Arkansas AFL-CIO v. F.C.C., 11 F.3d 1430,


       used by such person as a homestead, shall, . . . be exempt from
       attachment or execution. The exemption allowed under this section
       shall not be allowed for more than one owner of any homestead . . .

MO. REV. STAT. § 513.475.1 (Supp. 2001).
                                            -6-
1440 (8th Cir. 1993)(opinion on rehearing); In re Young, 269 B.R. 816, 822 (Bankr.
W.D. Mo. 2001). Section 522(f)(2)(A)(ii) refers to “all other liens on the property”
and requires their inclusion in the calculation. The Bankruptcy Code defines a lien
as a “charge against or interest in property to secure payment of a debt or performance
of an obligation.” 11 U.S.C. § 101(37). Norbank’s second Deed of Trust falls within
that definitional language and accordingly should have been included in the
calculation. The lien avoidance formula and the statutory definition, read together,
plainly so require.

        The bankruptcy court apparently found this language ambiguous and seems to
have concluded that an unsecured claim such as that held by Norbank is not a lien
within the meaning of § 522(f)(2)(A)(ii).3 This confuses the definition of a secured
claim under Section 506(b) of the Bankruptcy Code with "lien" as defined in Section
101(37). Section 522(f)(2)(A)(ii) refers to "all other liens" and does not distinguish
between liens that are supported by collateral value and those that are not. There is
no suggestion in the language of the statute or in any legislative history that Congress
intended to exclude under or unsecured consensual liens in the calculation. However
unsecured or undersecured the claim of Norbank may be under section 506(b), it is
still clearly a lien as defined in section 109(37).

      The section by section analysis which accompanied the 1994 Amendments
supports this conclusion. The House Report states that the amendment was designed
to provide a simple arithmetic test to determine whether a lien impairs an exemption



      3
          "But 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. Thus, in applying the
section 522(f)(2) formula, the court should only consider those liens which are
secured by value. Such a reading is consistent with the language of both section
522(f)(2) and 506(a)." In re Kolich, 264 B.R. 544, 550 n. 28 (Bankr. W.D. Mo.
2001).
                                            -7-
by adopting the formula used in In re Brantz, 106 B.R. 62 (Bankr. E.D. Pa. 1989).4
H.R. REP. NO. 835, 103d Cong., 2d Sess. 52-54 (1994), reprinted in 1994
U.S.C.C.A.N. 3340, 3361-63.

       In Brantz, the bankruptcy court applied a formula similar to that set forth in §
522(f)(2)(A) and one which ordinarily will reach the same result. Brantz, 106 B.R.
at 68. The Brantz court determined the value of the property, deducted the amount of
all liens which were not avoidable, and then deducted the debtor's allowable
exemption. Under the Brantz formula, if the result is a negative figure the lien is
avoided; if positive, the lien is not avoidable to that extent only. Applying the Brantz
formula to the facts in this case results in complete avoidance of the Antioch lien, just
as does use of the formula set forth in § 522(f)(2)(A).5

      The bankruptcy court correctly determined that the Debtors were entitled to
avoid Antioch's lien although they had no equity in the property. See Finn, 211 B.R.
at 782. The section by section analysis makes clear that the amendments were
intended to overrule several cases which had reached the opposite result. "The
decisions that would be overruled involve several scenarios. The first is where the
debtor has no equity in a property over and above a lien senior to the judicial lien the
debtor is attempting to avoid, as in the case, for example, of a debtor with a home
worth $40,000 and a $40,000 mortgage." H.R. REP. No. 835, 103d Cong., 2d Sess.
45 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3354. See also Freeman, 259 B.R.
at 109 (". . . the view that lack of equity in the property precluded avoidance of a



     Brantz was also cited favorably by the United States Supreme Court in
      4

Owen v. Owen, 500 U.S. 305, 311 n. 4 (1991).
      5
        From the value of the property ($275,000) deduct all liens which are not
avoidable ($299,080.60) and the Debtors' allowable exemption ($8,000). The
result is -$32,080.60. Since the result is a negative figure, the lien is avoided in its
entirety.
                                           -8-
judicial lien has been clearly overruled by the Bankruptcy Reform Act of 1994, in
which Congress clearly stated that it intended to overrule that prerequisite and
adopted instead the dissenting opinion in In re Simonson . . . ."

       However, the bankruptcy court incorrectly failed to apply a plain meaning to
the statutory language because the court felt such a reading would upset state court
priorities and produce an absurd result at odds with legislative intent. The bankruptcy
court's emphasis on preserving state created priorities for the benefit of a prior
nonconsensual judicial lien finds no support in the language of the amendment or in
the legislative history. Rather, the 1994 amendments have created a federal definition
of impairment which no longer looks to or depends upon state law. Holland v. Star
Bank, N.A., (In re Holland), 151 F.3d 547, 550 (6th Cir. 1998).

      Moreover, the section by section analysis plainly states that Congress intended
to overrule the majority and adopt the dissenting view in Simonson v. First Bank of
Greater Pittston (In re Simonson), 758 F.2d 103 (3rd Cir. 1985). H.R. REP. NO. 835,
103rd Cong., 2d Sess. 52-54 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3361-63.
The dissent in Simonson explicitly ignored state law priorities in allowing lien
avoidance. Simonson, 758 F.2d at 110 (Becker, J., dissenting).

       In Simonson, the debtors owned a house valued at $58,250.00. The house was
encumbered by a first mortgage in the amount of $25,145.95, two intervening judicial
liens in the amount of $14,411.33, and a second mortgage in the amount of
$41,314.84. Pennsylvania state law allowed that debtors a $15,000.00 homestead
exemption. Debtors moved to avoid the two judicial liens pursuant to § 522(f). In
his dissent Judge Becker not only disagreed with the majority and held that Debtors
should be allowed lien avoidance even though they had no equity. He also held that
the judicial liens were preserved in their priority position for the debtor’s benefit:




                                          -9-
      I conclude that the judicial liens are avoidable in this case because if
      they are not avoided, upon distribution of the proceeds from the sale of
      the property, the judicial lienors will benefit from the sale of the
      property, and the Simonsons’ exemption will not. This result, in my
      opinion, is contrary to the clear congressional intent that section 522(f)
      be available to benefit the debtor’s exemption and his “fresh start,” even
      at the expense of the interests of judicial lienors.

Simonson, 758 F.2d at 110-11 (Becker, J., dissenting). Under this dissenting view,
Antioch's lien is avoidable even though it is prior to Norbank's Deed of Trust and
Norbank has only an unsecured claim in the bankruptcy case.

      The bankruptcy court relied heavily on certain language contained in the
dissent in Simonson:

      While the formula, as stated in section 522(f)(2)(A), does not consider
      the priority position of the judicial liens, the dissent in Simonson is
      predicated on the priority position of the judicial liens. It is a maxim of
      statutory construction that statutes should be construed in a manner that
      does not lead to an absurd result. Since there is no other Code section
      that allows a court to ignore the relative priority pre-petition position of
      liens, I find it would be an absurd result to construe section 522(f)(2)(A)
      to allow a debtor to erase an otherwise unavoidable judicial lien by
      taking out a junior mortgage.

In re Kolich, 264 B.R. at 550 (internal citations omitted).

       The bankruptcy court was relying on the following language in Judge Becker's
dissent to support his position: "In my view, under the structure of the Bankruptcy
Code, the relative priority positions of the four encumbrances are critical."
Simonson, 758 F.2d at 107 (Becker, J., dissenting). This is a misreading of Judge
Becker's language. In his discussion of priorities, Judge Becker was merely saying
that a prior judicial lien, even if avoidable, has to be considered when determining


                                          -10-
whether a debtor has any interest in the property at all. Id. at 107 ("I believe that a
judicial lien 'impairs' an exemption with respect to overencumbered property to the
extent that the judicial lien, according to its amount and priority position, attaches to
a portion of the value of the property."). This does not go to preserving state court
priorities when actually applying the mathematical formula.

       The bankruptcy court relied on, and Antioch cites to, several opinions decided
since the 1994 amendment which have rejected a literal application of the statutory
language where such application could appear to be at odds with congressional intent.
See, e.g., Nelsen v. Scala, 192 F.3d 32, 35 (1st Cir. 1999); Lehman v. VisionSpan,
Inc. (In re Lehman), 205 F.3d 1255, 1257-58 (11th Cir. 2000). These cases represent
a minority view of cases which have dealt with the question of how to value the
debtor's interest in property when the debtor jointly owns the property with a non-
debtor spouse. In such a case, literal application of the statutory formula may result
in a windfall to the Debtor, allowing lien avoidance in excess of the statutory
exemption amount. See Freeman, 259 B.R. at 108-110 (for a compilation of cases in
the majority position). They have no application to the facts of the current appeal.
These cases do not go to the application of the formula, but only to how to calculate
the debtor's interest in the property. Permitting Debtors to avoid Antioch's lien in its
entirety will not result in the kind of windfall the Nelsen and Lehman decisions
sought to avoid. Rather, it furthers the expressed legislative purpose of bringing
clarity to the process of calculating the debtor's preserved exemption and protecting
a debtor's exemption rights against judicial liens. H.R. REP. NO. 835, 103d Cong., 2d
Sess. 52-54 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3362.

       Finally, we find no unfairness or absurdity in the result. As Judge Becker said
in his dissent in Simonson:

      I realize . . . that some may object to a result that allows a debtor to
      obtain his homestead exemption, to the detriment of judicial lienors,
      even though the debtor knowingly overencumbered a property with

                                          -11-
      consensual liens. In enacting section 522(f), however, Congress has
      chosen to protect the interests of debtors while singling out judicial
      lienors as disfavored creditors.

Simonson, 758 F.2d at 112-13 (Becker, J., dissenting).

       Section 522(f)(2)(A) is a congressionally mandated bright line formula for
determining how to calculate the extent to which a judicial lien impairs an exemption.
As with all bright line tests, at times it may seem a formulaic application brings unfair
results. Yet, under the facts of this case, the perceived unfairness of allowing a
Debtor to avoid a judicial lien which is prior to a junior consensual lien was
anticipated by Congress. Congress chose clarity over possible unfair results.

      Accordingly, we reverse the bankruptcy court's decision.



      A true copy.

             Attest:

                     CLERK, U.S. BANKRUPTCY APPELLATE PANEL,
                     EIGHTH CIRCUIT




                                          -12-
