text: Insurance Proceeds Don't Enter Exemption Impairment Calculation – National Consumer Bankruptcy Rights Center
  Insurance Proceeds Don't Enter Exemption Impairment Calculation
  Posted by NCBRC - July 8, 2021
  Insurance proceeds for the repair of the debtor's fire-destroyed house are not considered when calculating impairment to the debtor's homestead exemption where the debtor had not made any repairs on the house prior to filing for bankruptcy. Waltrip v. Sawyers, No. 20-1130 (8th Cir. July 2, 2021).
  While the debtor was engaged in litigation with her creditor, Waltrip, her home was damaged in a fire. She received $132,392.99 in insurance proceeds for the sole purpose of repairing the home. Waltrip then won a $234,123.31 judgment secured by a lien against the debtor's home. Approximately one month later, the debtor filed for chapter 7 bankruptcy. At that time, she had not made any repairs to the home and it was valued at between $3,000 and $6,000. She claimed her $15,000 homestead exemption but did not move to avoid Waltrip's lien. After she obtained her bankruptcy discharge, Waltrip initiated a sheriff's sale of her home. The debtor moved to reopen her bankruptcy to avoid the judgment lien under section 522(f). The bankruptcy court granted her motion to avoid the lien, and the BAP for the Eighth Circuit affirmed.
  Waltrip appealed to the circuit court.
  Section 522(f) provides that a debtor may avoid a judicial lien that impairs an exemption. The parties agreed that the judicial lien in this case fixed to the debtor's exemptible property and the only issue on appeal was to what extent the lien impaired her homestead exemption. Waltrip argued that the calculation of impairment should be based on the amount of the insurance proceeds the debtor received to repair the home rather than the home's pre-repair market value.
  Citing BFP v. Resolution Tr. Corp., 511 U.S. 531, 537 (1994), the circuit court found that the homestead should be valued according to its fair market value at the petition date. Calculation of the fair market value may include such considerations as "location of the real estate, condition of the real estate and unique fixtures and attributes of the real estate." The court rejected Waltrip's argument that the insurance proceeds should be included in the home's value, finding the case Waltrip relied on, In re Burns, 482 B.R. 164 (Bankr. E.D. La. 2012), to be distinguishable both on its facts and its jurisdiction. Missouri law specifically holds that any post-petition increase in the value of property benefits the debtor.
  The court also rejected Waltrip's argument, based on Matter of Swift, 129 F.3d 792, 801 (5th Cir. 1997), that insurance proceeds may be used as a substitute for fair market value of property. The court distinguished that case as dealing with a debtor's IRA rather than homestead and being based on Texas rather than Missouri exemption law. Courts in Missouri have held that debtors are entitled to retain the full amount of insurance proceeds attached to exempted property.
  The court found that the proper valuation of the property, therefore, was the value on the petition date of $3,000 to $6,000.
  Based on that valuation, the court turned to the issue of the extent to which Waltrip's lien impaired the debtor's $15,000 exemption. Under the formula set forth in section 522(f)(2)(A), the impairment equals the sum of the judicial lien and all other liens, plus the amount of the debtor's exemption, minus the value of the debtor's interest in the property. Applying this formula, the court found the extent of the impairment was $275,500.27–$272,500.27. Waltrip's lien was less than the lesser of amount of the impairment, therefore it could be avoided in its entirety.
  Finally, Waltrip sought to recover costs resulting from the debtor's failure to move to avoid the lien in the original bankruptcy proceeding, including the costs associated with the interim sheriff's sale, and the costs of proceeding in the reopened case.
  The court noted that while a bankruptcy court has discretion to reopen a case, it should take potential prejudice to creditors into account in making that decision. Upon reopening, a court may also recompense affected parties for their costs. Here, the court found Waltrip waived any argument of undue prejudice when he failed to object to reopening and failed to seek an award of fees and costs upon the bankruptcy court's invitation to do so. Moreover, the court found no precedent to support an award of costs related to the sheriff's sale.