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Litton Loan Servicing, L.P. v. Dennis Schubert

Summarizing by Amir Shachmurove

Clabaugh v. Grant (In re Grant)

No. WO-15-035 (10th Cir. B.A.P. Feb. 4, 2016).
Bankruptcy court correctly avoided judicial lien against debtor’s homestead despite debtor’s fraudulent and inequitable conduct that warranted denial of discharge under § 727. Affirmed.
Procedural context:
Grant filed a chapter 7 case, listing his long time residence as exempt. Clabaugh, who held a $1.25 million judgment against Grant for fraud and conversion, challenged the dischargeability of her debt under § 523(a)(6) and objected to Grant’s general discharge under § 727(a)(5). Grant filed a motion to avoid the judicial lien securing Clabaugh’s judgment. The bankruptcy court denied Grant’s discharge under § 727, but granted Grant’s motion to avoid the judicial lien as an encumbrance on his exempt homestead. Clabaugh appealed.
The litigants’ story is a strange one. In 2005, Clabaugh rented a safety deposit box in which she placed a number of heirlooms and jewelry, including rare coins kept in a bottle marked “Ar. Jones” for her deceased mother, Artibus Jones. In 2008, the bank lost its records and mistakenly identified a similarly-named bank client, now deceased, and contacted Grant, who was executor of her estate. After deceiving the bank as to his status, Grant took possession of the contents of Clabaugh’s safety deposit box. When the error was discovered, Grant claimed to have sold the contents for $500, when in fact they were worth between $1 and $2 million. Before Grant filed bankruptcy, Clabaugh won a $1.25 million judgment against Grant for conversion and fraud and recorded a judicial lien against Grant’s real estate holdings, including his homestead. Concluding that the judicial lien impaired Grant’s homestead exemption under Oklahoma law, the BAP affirmed the bankruptcy court’s order avoiding the judicial lien under § 522(f). Further, the BAP recognized that, consistent with the Supreme Court’s recent holding in Law v. Siegel, a bankruptcy court lacks authority to deny an exemption for any ground not specified in the Bankruptcy Code (such as Grant’s bad faith conduct). Thus, even where the underlying debt is nondischargeable, “neither the Bankruptcy Code in general, nor § 522(f) in particular, restricts or limits the debtor’s right to avoid a judicial lien emanating from that nondischargeable debt.”
Karlin, Cornish, and Michael.

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