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Kacarevic v. Mastropole

A-4071-97T5 (N.J. Super. App. Div. 1999) (Unpublished)

LIENS; BANKRUPTCY; DISCHARGE—A New Jersey statute allows a bankrupt to move to cancel judgments that had been entered in the Superior Court one year after receiving a discharge in bankruptcy.

A creditor obtained a default judgment for an unpaid note and recorded the judgment as a lien against the debtor’s real property. The debtor conveyed its interest in the real property to a co-tenant and the judgment creditor assigned its judgment to a title insurance company. Later, the debtor filed for bankruptcy and the debt owed to the noteholder was discharged. The debtor then moved in the Superior Court for an order canceling and discharging the judgment lien pursuant to N.J.S. 2A:16-49.1 and the motion was granted. The title company, as the assignee of the judgment lien, appealed the cancellation and discharge. The Appellate Division affirmed the lower court’s decision.

The title company argued that a judgment entered in the Superior Court is a subsisting, valid lien on all real property owned by the judgment debtor within the state of New Jersey. The lower court found that a valid judgment lien existed but that the underlying obligation which determines the “worth” of the lien was discharged pursuant to the bankruptcy proceedings. There was no argument that to obtain a lien against a judgment debtor’s real property, a creditor need only enter a judgment in the records of the Superior Court. Levy and execution on real property are not required. A discharge in bankruptcy, in and of itself, does not necessarily extinguish valid liens on the property of a debtor, although it voids and prospectively enjoins collection of a judgment as a personal liability of the debtor. However, after receiving a discharge of bankruptcy, a debtor may move pursuant to N.J.S. 2A:16-49.1 to cancel of record judgments entered in the Superior Court which were discharged as a result of a bankruptcy proceeding. “Where the judgment was a lien on real property owned by the bankrupt prior to the time he was adjudged a bankrupt, and not subject to be discharged or released under the provisions of the Bankruptcy Act, the lien thereof upon said real estate shall not be affected by said order and may be enforced, but in all other respects the judgment shall be of no force or validity, nor shall the same be a lien on real property acquired by him subsequent to his discharge in bankruptcy.” According to prior case law, this statute “was enacted as an ancillary remedy for discharge of judgments, within a state court system, to assure that judgments intended to be discharged under the federal bankruptcy law would not continue to remain on record, thereby requiring payment at some time in the future.” The Court recognized the statutory language was “perhaps arguably somewhat ambiguous in application to the present circumstances,” but in reviewing the legislative history, felt compelled to affirm the lower court. The “judgment” was, within the statutory language, “subject to be discharged or released under the provisions of the Bankruptcy Act.” Therefore, the court was concerned that the judgment debtor, having previously transferred its interest in the subject property through a warranty deed, could have been vulnerable to claims back through the chain of title, a result which could upset both the promised repose behind the federal policy of the Bankruptcy Act, and the declared legislative purpose of the statute. The assignee further argued that, unlike the facts in prior cases, the encumbered property was not part of the bankruptcy estate because it had been transferred by the bankrupt debtor prior to the bankruptcy filing. The lower court rejected this argument and the Appellate Division agreed with the lower court. Although a valid lien existed, the lien was only worth what was collectable as a result of the underlying obligation, the now-discharged judgment. In sum, the Court concluded that the factual situation was consistent with the plain language of New Jersey’s statute, the purpose expressed by the statute’s sponsors, and the spirt of the federal Bankruptcy Act. Though of no consolation to the assignee in this case, the Court opined that had it levied and executed on the property before the bankruptcy proceeding and discharge, or even before the proceeding to cancel the judgment, case law suggests that the result probably would have been different.


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