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Cape Savings Bank, SLA v. Fadael

A-2484-98T5 (N.J. Super. App. Div. 2000) (Unpublished)

BANKRUPTCY; LIENS—Even if a debt is discharged in bankruptcy and the associated lien is discharged one year later under state law, the surplus proceeds from a foreclosure belong to lien creditors if the sale took place before the discharge.

A property owner filed for personal bankruptcy at a time when its property was encumbered by two mortgages and at least one lien. Just prior to the bankruptcy, a final judgment of foreclosure was entered in favor of the first mortgagee. The trustee in bankruptcy, however, “abandoned” the property because it was “of inconsequential value to the estate.” Thereafter, the property was sold at a Sheriff’s sale, resulting in excess funds after satisfaction of the first two mortgages. Those funds were deposited with the Clerk’s office. The judgment creditor applied to the lower court to obtain the excess funds and the property owner opposed that application. The property owner’s theory was that the bankruptcy had discharged the obligation. The lower court, with the affirmance of the Appellate Division, disagreed. Even though the debt was canceled, the lien entered as a result of the judgment remained. Therefore, when the surplus money was generated as a result of the Sheriff’s sale, the holder of the lien was still entitled to apply for the surplus money. The lower court, however, applied N.J.S. 2A:16-49.1 which allows a debtor, one year after a bankruptcy, to apply for discharge of prior liens. The lower court discharged the lien, but because the sale had taken place before the discharge, the money that was previously obtained from the Sheriff’s sale still belonged to the judgment creditor.


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