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Docket Number

No. 238, Docket 83-5035.

Attorney(S)

Smith, Sovik, Kendrick, Schwarzer Sugnet, P.C. (James A. O'Shea), Syracuse, N.Y., of counsel, for plaintiff-appellee. Harold F. Simons, Hamilton, N.Y., for defendant-appellant.

Judges

Amalya Lyle Kearse

Acts

Bankruptcy — General Provisions — Definitions

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Smart Summary

Case Summary — Barbara Bex Brown v. Virginia M. Dellinger (Second Circuit, May 9, 1984)

Factual and Procedural Background

The dispute arose after a state-court foreclosure sale of debtors Robert N. Brown and Barbara Bex Brown's residence in Onondaga County. First Federal Savings and Loan Association of Rochester foreclosed on the mortgage and sold the residence in February 1980, producing a surplus of $8,667.02 after satisfying the mortgage. By operation of New York law, a preexisting judgment lien held by defendant-appellant Virginia M. Dellinger (obtained in September 1978 for $1,710.15) attached to any real property and was transferred to the surplus funds.

The surplus was deposited with the Onondaga County Commissioner of Finance (the Commissioner) pursuant to New York statutes governing foreclosure surplus funds, and Brown filed a notice of claim to the surplus asserting a state homestead exemption. Brown and her husband filed a joint Chapter 7 bankruptcy petition on April 3, 1980, listing the surplus funds among her assets and claiming exemptions. The New York Supreme Court initially ordered distribution of most of the surplus to Brown (after satisfying an IRS claim), but the Appellate Division reversed with respect to the state homestead exemption (First Federal I), and later the Appellate Division (First Federal II) ruled that the bankruptcy estate included only a debtor's equity in property that had been the subject of foreclosure and that the estate's interest did not ripen until surplus proceedings were completed.

In the bankruptcy court Brown obtained permission to amend her schedules to claim federal exemptions under Bankruptcy Code § 522(d) and the bankruptcy court held that Brown had an equitable interest in the surplus funds under § 541(a)(1), that she could claim the funds as exempt under § 522(d)(5), and that she could avoid the fixing of Dellinger's judicial lien under § 522(f)(1). The district court affirmed. Dellinger appealed to this Court contesting (1) Brown's right to include the surplus funds in her bankruptcy estate, (2) Brown's entitlement to an exemption for those funds, and (3) whether any exemption could defeat Dellinger's judicial lien. The Second Circuit affirmed the district court order.

Legal Issues Presented

Whether the surplus funds from the foreclosure sale became "property of the estate" under Bankruptcy Code § 541 such that Brown could include them in her bankruptcy estate, despite (a) deposit of the funds with the state Commissioner and (b) prebankruptcy docketing of Dellinger's judgment lien.
Whether Brown was entitled to exempt the surplus funds under federal exemption provisions of the Bankruptcy Code (§ 522(d)), given the Appellate Division's state-law ruling that the state homestead exemption did not apply to foreclosure proceeds.
Whether Dellinger's prebankruptcy judicial lien survived Brown's claimed exemption and, if so, whether § 522(f)(1) permitted Brown to avoid the fixing of that judicial lien to the extent it impaired an exemption.

Arguments of the Parties

Defendant-Appellant (Dellinger)

Argued that the surplus funds did not become part of Brown's bankruptcy estate because (a) the funds had been deposited with the state court Commissioner for distribution to claimants and (b) the prebankruptcy docketing of her judicial lien deprived Brown of any further legal or equitable interest in the surplus funds.
Maintained that even if Brown had an interest in the surplus, she was not entitled to exempt those funds (relying on the Appellate Division's ruling that state homestead exemption did not apply to proceeds).
Contended that because the judicial lien preceded Brown's bankruptcy, under § 522(c)(2)(A) the lien survived Brown's exemption and discharge, and thus Dellinger's lien could not be avoided.

Plaintiff-Appellee (Brown)

Asserted that she retained a sufficient equitable interest in the surplus funds such that the funds became property of the bankruptcy estate under § 541(a)(1), even though title had been transferred to the Commissioner and a judgment lien existed.
Claimed a federal exemption under Bankruptcy Code § 522(d)(5) (after state exemption proved unavailable) and obtained permission to amend her schedules to assert that exemption.
Invoked Bankruptcy Code § 522(f)(1) to avoid the fixing of Dellinger's judicial lien to the extent it impaired her claimed exemption.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Federal Land Bank of Springfield v. United States, 21 A.D.2d 936, 250 N.Y.S.2d 999 (3d Dep't 1964)	Illustrates that a judgment lien is transferred by operation of law to surplus funds generated by a foreclosure sale.	Used to explain how Dellinger's lien attached to the surplus after foreclosure.
First Federal Savings and Loan Association of Rochester v. Brown, 78 A.D.2d 119, 434 N.Y.S.2d 306 (4th Dep't 1980) ("First Federal I")	State Appellate Division ruling that the state homestead exemption did not apply to proceeds of a foreclosure sale of a homestead.	Cited as the state-court ruling that the state exemption was unavailable to Brown; the court noted the state court also said this should not foreclose rights under the Bankruptcy Code.
First Federal Savings Loan Association of Rochester v. Brown, 86 A.D.2d 963, 448 N.Y.S.2d 302 (4th Dep't 1982) ("First Federal II")	Appellate Division construed "property of the estate" under § 541 to include only the debtor's equity in property subject to foreclosure and held the estate's interest does not ripen until surplus proceedings are completed.	The bankruptcy and district courts disagreed with this narrower construction; the federal courts concluded Brown had a sufficient equitable interest under § 541 and that state court actions intruded on the bankruptcy court's exclusive jurisdiction.
Coffey v. Roe, 52 Misc.2d 1003, 277 N.Y.S.2d 743 (Sup. Ct. Delaware Co. 1967) (dictum)	Suggests that the owner of the equity of redemption would be entitled to surplus funds returned to her.	Used to support the proposition that Brown, as owner of the equity of redemption, would presumptively be entitled to the surplus absent other claims.
In re Chesanow, 25 B.R. 228 (Bkrtcy. D. Conn. 1982)	Holds that under § 541 a debtor has an "equitable interest" in property even if liens exceed market value (i.e., absence of equity does not preclude an equitable interest).	Relied upon as part of the authority for broad interpretation of "equitable interest" under § 541(a)(1).
In re Cole, 15 B.R. 322 (Bkrtcy. W.D. Mo. 1981)	Same principle that a debtor may have an equitable interest despite lack of monetary equity.	Included among the authorities supporting a broad view of "legal or equitable interests" under § 541.
In re Lovett, 11 B.R. 123 (D.C. W.D. Mo. 1981), vacated on other grounds, 23 B.R. 760 (D.C. W.D. Mo. 1982)	Noted that the debtor's equity is an "interest" but not necessarily the only interest; supports broad construction of debtor's interests.	Quoted and relied upon for the proposition that a debtor's interest in property is not limited to mere equity.
In re Kursh, 9 B.R. 801 (Bkrtcy. W.D. Mo. 1981)	Collects cases recognizing broad application of "equitable interest" under § 541.	Used as additional authority supporting the broad interpretation of § 541.
In re Curry, 5 B.R. 282 (Bkrtcy. N.D. Ohio 1980), aff'd 11 B.R. 716 (D.C. N.D. Ohio 1981), rev'd on other grounds, 698 F.2d 298 (6th Cir. 1983)	Another decision holding that equitable interest exists even if liens exceed value; applied in lien-avoidance analysis.	Cited among authorities establishing that contingent or diminished interests can nevertheless constitute property of the estate.
In re Miller, 8 B.R. 43 (Bkrtcy. W.D. Mo. 1980)	Contrary view that "interest" in property is confined to equity in property.	Cited as a contrary authority; the court adopted the majority approach rather than Miller's narrower view.
Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966)	Under prior Bankruptcy Act precedent, debtor's contingent interest in tax refunds constituted property of the debtor; used as an example of contingent claims being property.	Invoked and endorsed in the legislative history of the Code and used to support the proposition that contingent interests are property of the estate under § 541.
In re State of Missouri, 7 B.R. 974 (D.C. E.D. Ark. 1980), aff'd, 647 F.2d 768 (8th Cir. 1981)	Authority supporting the bankruptcy court's exclusive jurisdiction over property of the estate and that state-court proceedings intrude on that jurisdiction.	Relied upon to justify refusing to give effect to state court orders appointing a referee for distribution of the surplus.
Kalb v. Feuerstein, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370 (1940)	Supreme Court authority addressing federal bankruptcy jurisdiction over property of the estate.	Cited to support the principle that state court actions intruding on bankruptcy court jurisdiction may be disregarded.
In re Hill, 4 B.R. 310 (Bkrtcy. N.D. Ohio 1980)	Discusses legislative history and interpretation of § 522(f) regarding avoidance of liens to protect exemptions.	Cited in support of the court's reading of § 522(f)(1) and congressional intent to protect exemptions.
United States v. Security Industrial Bank, 459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982)	Supreme Court held that § 522(f)(2) should not authorize avoidance of certain pre-Code nonpossessory, nonpurchase-money security interests acquired before November 6, 1978, because of potential Fifth Amendment takings implications.	Discussed in a footnote as limiting lien-avoidance in some retroactivity contexts; the panel noted Dellinger did not raise applicability of Security Industrial Bank and expressed no view on that issue.
In re Lattimore, 12 B.R. 111 (Bkrtcy. W.D.N.Y. 1981)	Bankruptcy court opinion in this Circuit concluding Security Industrial Bank reasoning may not apply to a New York judicial lien when foreclosure occurred after November 6, 1978.	Noted in footnote; the Second Circuit declined to decide the point because appellant did not raise it.

Court's Reasoning and Analysis

The opinion's analysis proceeds in three parts corresponding to the principal disputes raised on appeal: (A) whether the surplus funds were "property of the estate" under § 541, (B) whether Brown was entitled to the claimed exemption, and (C) whether Brown's claimed exemption could defeat Dellinger's judicial lien under § 522(f)(1).

A. The Surplus Funds as "Property of the Estate"

The court rejected Dellinger's contention that the surplus funds were not part of Brown's bankruptcy estate because of the state-court deposit with the Commissioner or because of Dellinger's prebankruptcy judgment lien. The court began by noting the broad language of § 541(a)(1) — "all legal or equitable interests of the debtor in property as of the commencement of the case" — and relied on authorities that interpret "equitable interest" broadly, including contingent interests and interests existing even where liens exceed market value.

Applying that broad reading and the legislative history of § 541 (including endorsement of Segal v. Rochelle's treatment of contingent tax refunds), the court concluded that Brown retained a contingent equitable interest in the surplus funds at the time she filed her petition. Specifically, because no other creditors had filed claims with the Commissioner when Brown filed bankruptcy, Brown's contingent interest in the entire surplus was sufficiently real to be part of the bankruptcy estate.

The court further addressed the fact that title to the funds had passed to the Commissioner. It held that the Commissioner qualified as a "custodian" under § 101(10) because the Commissioner held the funds "for the benefit of interested parties" under New York law; therefore, § 541(a)(3) brought into the estate property of the debtor recovered from a custodian. On that basis the funds held by the Commissioner were property of the bankruptcy estate.

Because the funds were part of the estate, the court held that state-court orders appointing a referee to distribute the surplus intruded upon the bankruptcy court's exclusive jurisdiction and thus could be denied effect.

B. The Exemption

The court rejected Dellinger's argument that Brown could not claim an exemption because the state Appellate Division had held the state homestead exemption unavailable to proceeds of a foreclosure sale (First Federal I). The court explained that Brown had been permitted to amend her bankruptcy schedules to claim federal exemptions under § 522(d), and Dellinger had not challenged the order allowing the amendment. Consequently, the state-law ruling as to the state homestead exemption was moot with respect to Brown's asserted federal exemption.

C. Effect of the Exemption on the Judicial Lien

The court recognized the general proposition that a bankruptcy estate acquires no greater interest than the debtor held at the time of filing and that prebankruptcy liens frequently survive inclusion and exemption under § 522(c)(2)(A). However, it turned to § 522(f)(1), which authorizes the debtor to avoid the fixing of a judicial lien to the extent that the lien impairs an exemption to which the debtor would otherwise be entitled.

The court observed that most authorities construe § 522(f)(1) literally, allowing avoidance of a judicial lien even where the debtor lacks equity, so long as avoidance is necessary to permit the debtor to enjoy the exemption. The legislative history likewise evidences congressional intent to permit avoidance of judicial liens "to the extent that the property could have been exempted in the absence of the lien." Applying § 522(f)(1), the court concluded that because Dellinger's lien was a judicial lien and because, absent her lien, Brown could have exempted the surplus funds, Brown was empowered to avoid the fixing of Dellinger's lien on the funds. The court therefore held that Dellinger's lien did not survive the exemption.

The court noted (in a footnote) that the Supreme Court's decision in United States v. Security Industrial Bank limited retroactive avoidance of certain pre-Code security interests under § 522(f)(2) for takings concerns, and that some bankruptcy courts in this Circuit had applied that reasoning to New York judicial liens in limited contexts. Because Dellinger had not raised this issue below or on appeal, the panel did not address whether Security Industrial Bank restricted the application of § 522(f)(1) to this case.

Holding and Implications

Affirmed.

Holding (core ruling): The Second Circuit affirmed the district court's order affirming the bankruptcy court. The court held that (1) the $7,543.38 surplus funds were property of Brown's bankruptcy estate under § 541 — Brown retained a sufficient equitable interest and the Commissioner qualified as a "custodian" under § 101(10); (2) Brown was permitted to amend her schedules to claim a federal exemption (§ 522(d)(5)) and the state-court ruling on the state homestead exemption was moot as to that federal exemption; and (3) Brown could avoid the fixing of Dellinger's judicial lien under § 522(f)(1) because the lien impaired an exemption she would otherwise have been entitled to — therefore Dellinger's lien did not survive.

Implications: The direct consequence is that Brown was allowed to include the foreclosure surplus in her bankruptcy estate, to claim a federal exemption for those funds, and to avoid Dellinger's judicial lien to the extent it impaired that exemption; the lien thus did not survive. The opinion rests on statutory interpretation of §§ 541, 522 and related definitions (§ 101(10)), contemporaneous legislative history cited in the opinion, and prior case authority. The court expressly declined to rule on potential Fifth Amendment or Security Industrial Bank limitations because the appellant did not raise those issues. The opinion does not announce any broad new rule beyond its application of existing statutory text, legislative history, and precedent to the facts at hand; its immediate effect is to uphold the bankruptcy and district courts' disposition in favor of Brown.

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IN RE ROBERT N. BROWN AND BARBARA BEX BROWN, DEBTORS. BARBARA BEX BROWN, PLAINTIFF-APPELLEE, v. VIRGINIA M. DELLINGER INDIVIDUALLY AND D/B/A DELLINGER ART ANTIQUES, DEFENDANT-APPELLANT.

KEARSE, Circuit Judge:

Defendant Virginia M. Dellinger, a state court judgment creditor of plaintiff Barbara Bex Brown, appeals from an order of the United States District Court for the Northern District of New York, 39 B.R. 83, Howard G. Munson, Chief Judge, affirming an order of the bankruptcy court which, pursuant to the Bankruptcy Reform Act of 1978, 11 U.S.C. §§ 101-1330 (Supp. IV 1980) ("Bankruptcy Code" or "Code"), allowed Brown to (a) include in her bankruptcy estate $7,543.38 in surplus funds generated by a prebankruptcy foreclosure sale of certain real estate owned by Brown, (b) claim an exemption under Bankruptcy Code § 522(b) for those funds, and (c) invoke Bankruptcy Code § 522(f)(1) to avoid the fixing of Dellinger's judicial lien on the funds. On appeal, Dellinger contends that Brown had no right to include the funds in her bankruptcy estate, no right to an exemption, and, in any event, no exemption that could defeat Dellinger's lien. We disagree, and we affirm the order of the district court.

BACKGROUND

The relevant details of this controversy, though somewhat complex, are apparently undisputed. On September 19, 1978, Dellinger obtained a judgment for $1,710.15 against Brown. The judgment was docketed by Dellinger in the Onondaga County Clerk's Office and, under New York law, became a lien on any real property of Brown in that county. In an unrelated series of events, the First Federal Savings and Loan Association of Rochester ("First Federal"), as mortgagee of Brown's residence in Onondaga County, instituted a mortgage foreclosure proceeding in September 1979 which resulted in the February 1980 sale of Brown's residence. First Federal's foreclosure judgment was satisfied out of the proceeds of the sale, leaving a $8,667.02 surplus. By operation of law, upon the sale of Brown's residence, Dellinger's lien was transferred automatically to the surplus funds. See, e.g., Federal Land Bank of Springfield v. United States, 21 A.D.2d 936, 937, 250 N.Y.S.2d 999, 1000 (3d Dep't 1964). Pursuant to N.Y.Real Prop.Acts. Law § 1441 (McKinney 1979), the surplus was deposited with the Onondaga County Commissioner of Finance ("Commissioner") as the representative of the New York Supreme Court, whereupon title to the funds passed to the Commissioner "for the benefit of interested parties." N.Y.Civ.Prac.Law § 2601(c) (McKinney 1974).

Section 1441 of N.Y.Real Prop.Acts. Law provided as follows:

An attorney or other person who receives any money, arising upon a sale made as prescribed in this article, must, within ten days after he receives it, pay into the supreme court the surplus, exceeding the sum due and to become due upon the mortgage and the costs and expenses of the foreclosure, in like manner and with like effect as if the proceedings to foreclose the mortgage were taken in an action brought in the supreme court and triable in the county where the sale took place.

In March 1980, Brown filed in the Onondaga County Clerk's Office, pursuant to N.Y.Real Prop.Acts Law § 1442 (McKinney 1979), a notice of claim to the surplus funds. Her notice stated that the surplus funds were not subject to the liens of creditors because she exempted the funds from such liens pursuant to a state law homestead exemption, N.Y.Civ.Prac.Law § 5206(a) (McKinney 1978). In May 1980, Dellinger filed notice of her claim to $1,710.15 of the surplus funds.

Section 1442 of N.Y.Real Prop.Acts. Law provided as follows:

A person who had, at the time of the sale, an interest in or lien upon the property sold, or a part thereof, may, at any time before an order is made as prescribed in section 1444, file in the office of the clerk of the county where the sale took place a petition stating the nature and extent of his claim, and praying for an order directing the payment to him of the surplus money, or a part thereof.

Section 1444 of N.Y.Real Prop.Acts. Law provided that after the filing of petitions and the determinations of the amount due each petitioner and the priorities of the petitions, the court shall make an order "for the distribution of the surplus money, as justice requires."

Section 5206(a) of N.Y.Civ.Prac.Law provided as follows:

Exemption of homestead. Property of one of the following types, not exceeding ten thousand dollars in value above liens and encumbrances, owned and occupied as a principal residence, is exempt from application to the satisfaction of a money judgment, unless the judgment was recovered wholly for the purchase price thereof:

1. a lot of land with a dwelling thereon,

2. shares of stock in a cooperative apartment corporation, or

3. units of a condominium apartment.

But no exempt homestead shall be exempt from taxation or from sale for non-payment of taxes or assessments.

In the meantime, on April 3, 1980, Brown and her husband had filed a joint petition in bankruptcy under Chapter 7 of the Bankruptcy Code, listing the surplus funds among Brown's assets. Brown also listed the surplus funds on her bankruptcy exemption schedules as property exempt under New York law, and thereby exempt under the Code, see Bankruptcy Code § 522(b)(2)(A), from her estate.

On the premise that the surplus funds were exempt property, Brown then moved in New York Supreme Court to have the Commissioner transfer the surplus funds to her. Dellinger opposed this motion, claiming that she possessed a superior right to the surplus funds because of her 1978 judgment lien. The New York Supreme Court granted Brown's motion, and ordered the Commissioner to release to her the surplus funds, minus $1,123.64 to satisfy an uncontested claim of the Internal Revenue Service. Pursuant to this order, the Commissioner paid Brown $7,543.38, which she apparently has retained until the present. On appeal by Dellinger, however, the Appellate Division reversed, ruling that N.Y.Civ.Prac.Law § 5206 did not allow the exemption of the proceeds of a foreclosure sale of a homestead. See First Federal Savings and Loan Association of Rochester v. Brown, 78 A.D.2d 119, 122-23, 434 N.Y.S.2d 306, 309-10 (4th Dep't 1980) ( "First Federal I"). The court stated, however, that its decision "should not be construed as foreclosing any right . . . [Brown] may possess within the purview of the [B]ankruptcy [C]ode." Id. at 124, 434 N.Y.S.2d at 310.

Upon learning that the state homestead exemption was unavailable, Brown sought and obtained permission in the bankruptcy court to amend her exemption schedules to claim the surplus funds as exempt under the federal homestead exemption provided in Bankruptcy Code § 522(d)(1). Eventually, the bankruptcy court, doubting whether funds — as contrasted with the real estate whose sale generated the funds — properly qualified for the homestead exemption provided by § 522(d)(1), allowed Brown to reamend her exemption schedules to claim the $7900 "catchall" exemption provided in § 522(d)(5).

Pursuant to § 522(b)(1) of the Code, the New York state legislature has denied its residents who file a petition in bankruptcy on or after September 1, 1982, the option of employing the federal property exemptions provided in § 522(d) of the Code. See N.Y.Debt. Cred. Law § 284 (McKinney Supp. 1982). Since Brown filed her petition before September 1, 1982, she was able to employ the federal exemptions.

In the meantime, despite the bankruptcy court's order granting Brown a federal exemption, Dellinger returned to the New York Supreme Court in June 1981, and, pursuant to N.Y.Real Prop.Acts Law § 1361(2), successfully moved for the appointment of a referee to decide the proper distribution of the surplus funds. Brown appealed, contending that the appointment of a referee violated both the bankruptcy court's exclusive jurisdiction over the property of her estate and the automatic stay provision of Bankruptcy Code § 362(a). The Appellate Division affirmed. It construed the term "property of the estate," as used in § 541 of the Bankruptcy Code, to "include only the debtor's equity in property which has been the subject of foreclosure proceedings." First Federal Savings Loan Association of Rochester v. Brown, 86 A.D.2d 963, 963, 448 N.Y.S.2d 302, 303 (4th Dep't 1982) ( "First Federal II"). The court ruled as follows:

Brown's bankruptcy estate includes an interest in the surplus money only to the extent that there is a balance remaining after the liens on such surplus money have been ascertained and paid. The interest of the bankrupt's estate in the surplus money, if any, does not ripen until the surplus money proceedings have been completed.

Id.

Brown promptly returned to the bankruptcy court, seeking a declaration that the surplus funds were exempt property and were accordingly free of any right, title, or interest asserted by Dellinger. In an opinion reported as In re Brown, 22 B.R. 844 (Bkrtcy.N.D.N.Y. 1982), the bankruptcy court ruled that although the surplus funds had been deposited with the Commissioner and title to these funds had vested in the Commissioner "for the benefit of interested parties," N.Y.Civ.Prac.Law § 2601(c), Brown had a sufficient interest in the funds within the meaning of Bankruptcy Code § 541(a)(1) to entitle her to bring the funds into her bankruptcy estate. The bankruptcy court thus disagreed with the ruling of the Appellate Division in First Federal II and refused to give it effect. The bankruptcy court ruled further that Brown was entitled to exempt the surplus funds from her bankruptcy estate pursuant to § 522(d)(5), and to invoke § 522(f)(1) to avoid the fixing of Dellinger's judicial lien on the funds.

Dellinger appealed to the district court, which, agreeing with the reasoning of the bankruptcy judge, affirmed the bankruptcy court's order.

This appeal followed.

DISCUSSION

On appeal Dellinger's tersely stated positions (consisting of four brief headings, with a total of seven citations, and no argument) appear to be (1) that the surplus funds did not become property of Brown's bankruptcy estate — and thus could not be claimed by Brown as exempt property — because (a) the funds had been deposited with the state court's Commissioner for distribution to claimants, or (b) the prebankruptcy docketing of Dellinger's judicial lien deprived Brown of any further legal or equitable interest in the surplus funds; (2) that even if Brown had an interest in the funds she was not entitled to a state exemption; and (3) that even if Brown could claim the surplus funds as exempt property, Dellinger's judicial lien survived both the exemption and Brown's discharge in bankruptcy. We find no merit in any of these contentions.

A. The Surplus Funds as "Property of the Estate"

We reject Dellinger's contention that the surplus did not become a part of Brown's bankruptcy estate by reason of either Dellinger's judgment lien or the transfer of the funds to the Commissioner because we conclude that notwithstanding these events Brown retained a sufficient interest in the funds to constitute an "equitable interest" within the meaning of § 541(a)(1) of the Bankruptcy Code. Under § 541(a)(1), the filing of a petition in bankruptcy creates an estate consisting of "all legal or equitable interests of the debtor in property as of the commencement of the case." The phrase "all legal or equitable interests of the debtor in property" has been given the broadest possible interpretation, and the term "equitable interest" has generally not been interpreted as limited to a debtor's equity in property. Rather, the overwhelming weight of authority holds that even if liens on the property exceed the market value of the property, leaving the debtor with no equity in it, the debtor nonetheless has an "equitable interest" in the property. See, e.g., In re Chesanow, 25 B.R. 228, 230 (Bkrtcy.D.Conn. 1982); In re Cole, 15 B.R. 322, 323-25 (Bkrtcy.W.D.Mo. 1981); In re Lovett, 11 B.R. 123, 124-25 (D.C.W.D.Mo. 1981), vacated on other grounds, 23 B.R. 760 (D.C.W.D.Mo. 1982); In re Kursh, 9 B.R. 801, 802-04 (Bkrtcy.W.D.Mo. 1981) (collecting cases); In re Curry, 5 B.R. 282, 291-92 (Bkrtcy.N.D.Ohio 1980), aff'd, 11 B.R. 716 (D.C.N.D.Ohio 1981), rev'd on other grounds, 698 F.2d 298 (6th Cir. 1983). Contra In re Miller, 8 B.R. 43, 46-47 (Bkrtcy.W.D.Mo. 1980) ("interest" in property confined to equity in property). As the court in Lovett observed, "[w]hile the equity is thus an `interest,' it is not necessarily the only interest of the debtor in the property." 11 B.R. at 125.

Further, the "legal or equitable interests" of a debtor have been held to encompass an interest that is strictly contingent. See, e.g., In re Greer Stump Plumbing, Inc., 9 B.R. 181, 183-85 (Bkrtcy.Ariz. 1981); cf. In re McConaghy, 15 B.R. 480, 481 (Bkrtcy.E.D.Va. 1981). See also Segal v. Rochelle, 382 U.S. 375, 379-81, 86 S.Ct. 511, 514-15, 15 L.Ed.2d 428 (1966) (ruling under § 70a of the Bankruptcy Act of 1898 that debtor's interest in tax refunds that might be generated through tax carry-backs constitutes property of debtor even though interest is contingent).

These broad interpretations of "equitable interest" find strong support in the legislative history of the Bankruptcy Code. In describing § 541, the reports of the Senate and House of Representatives Committees on the Judiciary observed that "[t]he scope of this paragraph is broad. It includes all kinds of property, including tangible or intangible property [and] causes of action . . . ." H.R.Rep. No. 595, 95th Cong., 1st Sess. 367 (1977), reprinted in 1978 U.S. Code Cong. Ad.News 5963, 6323; S.Rep. No. 989, 95th Cong., 2d Sess. 82 (1978), reprinted in 1978 U.S.Code Cong. Ad. News 5787, 5868. These reports went on to approve specifically the result reached in Segal v. Rochelle, supra, which held that the debtor had a cognizable interest in contingent claims for tax refunds. H.R.Rep. No. 595, 95th Cong., 1st Sess. 367 (1977), reprinted in 1978 U.S.Code Cong. Ad. News 5963, 6323; S.Rep. No. 989, 95th Cong., 2d Sess. 82 (1978), reprinted in 1978 U.S.Code Cong. Ad.News 5787, 5868.

In the present case, we agree with the district and bankruptcy courts that Brown had an equitable interest in the surplus funds within the meaning of § 541 of the Code. The funds were generated by the bank's foreclosure on her home. To the extent that no other creditors had an interest in the residence, Brown as the owner of the equity of redemption would presumably have been entitled to have the surplus funds returned to her. See Coffey v. Roe, 52 Misc.2d 1003, 1005-06, 277 N.Y.S.2d 743, 746 (Sup.Ct. Delaware Co. 1967) (dictum). Even if there were other creditors, if those creditors did not file claims with the Commissioner, Brown would have been able to reclaim so much of the surplus as was not claimed. So far as we are aware, when Brown filed her bankruptcy petition on April 3, 1980, no creditors had filed claims with the Commissioner. Thus, at the time the bankruptcy estate was created, Brown had a clear contingent interest in the entire $7,543.38 surplus. The properly broad reading of § 541 thus requires that we recognize that this interest became part of the bankruptcy estate.

A much closer question would be presented had Dellinger's claim been presented to the Commissioner before the bankruptcy estate had been created.

The fact that title to the funds had previously passed to the Commissioner did not prevent the funds from becoming part of Brown's bankruptcy estate upon the filing of her petition. Section 541(a)(3) of the Code includes within its definition of "property of the estate" any property of the debtor, or the proceeds thereof, recovered from a "custodian" of the debtor's property. A "custodian" is defined in § 101(10) as a "trustee, receiver, or agent under applicable law . . . that is appointed or authorized to take charge of property of the debtor for the purpose of . . . general administration of such property for the benefit of the debtor's creditors." Since in this case the Commissioner had received the funds and title to them "for the benefit of interested parties," N.Y.Civ.Prac.Law § 2601(c), we conclude that the Commissioner was a "custodian" of Brown's property within the meaning of § 101(10) of the Code. Hence, the surplus funds held by the Commissioner were the property of the bankruptcy estate. See also 4 Collier on Bankruptcy ¶ 543.01, at 543-2 (15th ed. 1983); H.R.Rep. No. 595, 95th Cong., 1st Sess. 370 (1977), reprinted in 1978 U.S. Code Cong. Ad.News 5963, 6326; S.Rep. No. 989, 95th Cong., 2d Sess. 84-85 (1978), reprinted in 1978 U.S.Code Cong. Ad. News 5787, 5870-71.

We thus agree with the bankruptcy court and district court that the orders of the state courts for the appointment of a referee to determine the appropriate distribution of the surplus funds, see First Federal II, intruded on the bankruptcy court's exclusive jurisdiction to resolve competing claims to the property of the estate. See, e.g., In re State of Missouri, 7 B.R. 974, 980 (D.C.E.D.Ark. 1980), aff'd, 647 F.2d 768 (8th Cir. 1981). The bankruptcy court was therefore justified in denying any effect to those orders. See Kalb v. Feuerstein, 308 U.S. 433, 439, 60 S.Ct. 343, 346, 84 L.Ed. 370 (1940).

B. The Exemption

Dellinger next appears to argue that Brown was not entitled to exempt the surplus funds from her bankruptcy estate because the state court ruled in First Federal I that the state homestead exemption did not apply. Her argument must be rejected because Brown was permitted to amend her bankruptcy petition to claim an exemption under federal, rather than state, law. Dellinger has not challenged the order permitting this amendment, and her argument based on the unavailability of the state exemption is thus moot.

C. Effect of the Exemption on the Judicial Lien

Finally, Dellinger apparently suggests that since the judgment lien preceded Brown's bankruptcy, under Bankruptcy Code § 522(c)(2)(A) the lien survives both Brown's exemption of the funds and her discharge in bankruptcy. It is true of course that upon the filing of a petition in bankruptcy, the bankruptcy estate can have no greater interest in property included in it than the debtor had when the petition was filed. See, e.g., 4 Collier on Bankruptcy, supra, ¶ 541.01, at 541-6. It is also true that under § 522(c)(2)(A) many prebankruptcy liens will survive both the inclusion of the encumbered property in the estate and the debtor's claim of an exemption for the property. The section that governs this case, however, is § 522(f)(1).

Section 522(f)(1) provides, in pertinent part, that "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 . . ., if such a lien is . . . a judicial lien." Nearly all of the courts that have construed this section have concluded that it should be applied according to its terms. That is, the debtor is permitted, even if he lacks an equity interest in the property, to avoid the fixing of a judicial lien on the property if that avoidance would allow him to enjoy an exemption provided by § 522(b). See, e.g., In re Chesanow, supra, 25 B.R. at 230-31; In re Cole, supra, 15 B.R. at 325; In re Lovett, supra, 11 B.R. at 124-25; In re Kursh, supra, 9 B.R. at 802-04 (collecting cases); In re Curry, supra, 5 B.R. at 291-92 (same conclusion as to certain nonjudicial liens). Contra In re Miller, supra, 8 B.R. at 46-47 n. 2. This interpretation is supported by the legislative history of the Code. Congress plainly expressed its intent to protect a debtor's ability to exempt property under § 522(d) by providing that a debtor may avoid any judicial lien under § 522(f)(1) "to the extent that the property could have been exempted in the absence of the lien." H.R.Rep. No. 595, 95th Cong., 1st Sess. 362 (1977), reprinted in 1978 U.S.Code Cong. Ad.News 5963, 6318; S.Rep. No. 989, 95th Cong., 2d Sess. 76 (1978), reprinted in 1978 U.S.Code Cong. Ad.News 5787, 5862. See generally In re Kursh, supra, at 803-04; In re Hill, 4 B.R. 310, 315-16 (Bkrtcy.N.D.Ohio 1980).

Since Dellinger's lien was a judicial lien, and since in the absence of that lien Brown would have been able to exempt the surplus funds from her bankruptcy estate, we conclude that Brown was empowered by the terms of § 522(f)(1) to avoid the lien in order to enjoy the exemptions provided by § 522(b). Thus avoided, Dellinger's lien does not survive.

The Supreme Court has construed the lien avoidance provisions of Bankruptcy Code § 522(f)(2) as not authorizing avoidance of a creditor's "nonpossessory, nonpurchase-money security interest," id., acquired prior to November 6, 1978, the date of the enactment of the current Bankruptcy Code, because of the substantial possibility that the retroactive avoidance of creditors' liens might violate the Fifth Amendment's prohibition against the taking of private property without just compensation. See United States v. Security Industrial Bank, 459 U.S. 70, 74-82, 103 S.Ct. 407, 410-14, 74 L.Ed.2d 235 (1982). At least one bankruptcy court in this Circuit has concluded that this reasoning should not apply to a judicial lien under New York law when the foreclosure of the encumbered property did not occur before November 6, 1978. See In re Lattimore, 12 B.R. 111, 113-14 (Bkrtcy.W.D.N.Y. 1981) (concluding that the creditor's interest in the property does not vest until foreclosure). Dellinger's judicial lien attached before November 6, 1978, and First National's foreclosure took place after November 6, 1978. Dellinger has not raised below or on appeal the issue of whether § 522(f)(1) should be controlled by Security Industrial Bank. Accordingly, we express no view as to the correctness of In re Lattimore or as to the applicability of its analysis to a situation in which the encumbered property has been sold and the creditor's lien transferred to the surplus funds resulting from the sale.

CONCLUSION

The order of the district court is affirmed.

IN RE BROWN