Kentopp v. D’Altrui

A-4318-98T5 (N.J. Super. App. Div. 2000) (Unpublished)
  • Opinion Date: March 27, 2000

LIENS; DISCHARGE; BANKRUPTCY—More than one year after a discharge in bankruptcy, a property owner can have a lien discharged so long as it could have been discharged in the bankruptcy, even if it was not, and even if the bankruptcy statute of limitations for discharge has expired.

A judgment was docketed against a party that owned real property in New Jersey. As a result, the creditor had a lien on all real property held by the judgment debtor in the state. Docketing functions as notice of the debtor/creditor relationship. “Thus, neither an execution of the lien nor a levy is required to establish the lien against a judgment debtor’s real property; however, the creditor who levies first, regardless of the date the judgment was docketed, has priority over all non-levying judgment creditors.” About seven months later, the property owner filed a bankruptcy petition and listed the lien on the bankruptcy petition. The bankruptcy court ordered a discharge of the property owner’s debts and any judgments against the property owner personally. A little more than two years later, the property owner moved for an order in state court discharging the judgment of lien against the real property. The motion was based upon N.J.S. 2A:16-49.1. That statute allows a party, more than one year after a discharge in bankruptcy, to apply to a state court for an order directing the judgment to be canceled and discharged of record. With respect to real property, the statute includes the following: “[w]here 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.” The lower court found the lien to be one subject to being discharged or released under the provisions of the Bankruptcy Act and thus it directed that the judgment be canceled and discharged of record. Basically, the lower court held that it was not necessary that the lien, in fact, be discharged in the federal bankruptcy proceeding, only that the debtor could have obtained such a discharge during the pendency of the bankruptcy proceedings. On appeal, the judgment-creditor argued that the state statute was inapplicable because the judgment debtor had failed to avoid the lien in the prior bankruptcy before the applicable federal statute of limitations expired. The Appellate Division, however, raised the issue as to whether the docketed lien was “subject to be discharged or released” under the provisions of the Bankruptcy Code. In that regard, it was satisfied that the property owner could maintain the action under New Jersey statutory law because the lien could have been discharged in the bankruptcy proceeding. Basically, the intent of the applicable New Jersey statute is to “provide a debtor with ancillary remedies within the state court system to assure that judgments intended to be discharged under the federal bankruptcy law would not to continue to cloud the marketability of title for the property owned by the debtor.” Although a judgment lien against the debtor’s real property is not discharged by filing for bankruptcy, there are provisions within the Bankruptcy Code to avoid the lien. One of those provisions (Section 544) gives a trustee the rights “of a creditor with a writ of execution against the property of the debtor unsatisfied as of the date of the petition.” Basically, a trustee becomes a “hypothetical executing judgment lien holder as of the time of the debtor’s bankruptcy filing, [and] can avoid certain liens over which [the trustee] has priority.” Had the judgment creditor in this case levied on its lien before the property owner filed for bankruptcy, the trustee would have been precluded from avoiding the lien and would not be able to evoke Section 544 of the Bankruptcy Code. However, in this case, the judgment creditor did not do so. Consequently, the lien was “subject to be discharged and released” in the bankruptcy proceeding. Therefore, the Appellate Division agreed with the lower court that the lien should be discharged. With respect to the argument that the Bankruptcy Code only allows the trustee a two-year time period in which to avoid liens under Section 544, the court pointed out that the lien did not have to be discharged in the bankruptcy; the only requirement was that it was capable of being discharged. The relief under the New Jersey statute is exclusive of the requirements of the Bankruptcy Code. The two year statute of limitation within the Bankruptcy Code does not apply to state court proceedings brought pursuant to N.J.S. 2A:16-49.1. Fundamentally, that statute enables the debtor to avoid the lien that could have been discharged, but was in fact, not discharged in the bankruptcy proceeding.