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MMU of New York v. Grieser

A-4441-00T1 (N.J. Super. App. Div. 2002) (Unpublished)

BANKRUPTCY; LIENS; DISCHARGE— A bankrupt debtor is not entitled to have a state court discharge a judgment lien when one year has passed from the date of discharge; discharge is discretionary and equitable principles will be applied.

A tenant entered into a ten year commercial lease for the operation of a health club. Although all rent was paid, the tenant filed a Chapter 7 bankruptcy petition. The petition did not list the tenant’s interest in the health club nor did it list the landlord as a creditor. Otherwise, this was a “no asset” case. The tenant received a discharge of bankruptcy. He also continued to occupy the leased property for about six months, although he made no rent payments after filing the bankruptcy petition. The landlord obtained a substantial default judgment against its tenant. About a month after the default petition was entered, the tenant filed a motion in the Bankruptcy Court “to amend his petition” and to add a number of additional creditors. Four years later, the tenant took title in his own name but the landlord still was not included and about three weeks later conveyed the property to a limited liability company that he owned. Less than a year later, the property was reconveyed to the individual tenant and on the same day conveyed to a trust. The trust fell behind in payment of property taxes and tax liens were eventually sold. The buyer of the tax liens discovered the earlier judgment and acquired that judgment by assignment. It then levied an execution on the property and scheduled a sheriff’s sale. A stay of the sale was issued, subject to certain conditions, but the tenant-debtor failed to comply with those conditions and the property was sold. The tenant-debtor then sought to have the judgment discharged pursuant to N.J.S.A. 2A:16-49.1, which permits the cancellation or discharge of a judgment lien after one year elapses since the bankrupt was discharged from his debts. Under the statute, if a debtor has been discharged from the payment of the debt underlying the judgment, the debtor is entitled to the ancillary remedy of having the judgment lien discharged. The lower court refused to grant that relief because it held that “the amount of rent due under the lease and the resultant judgment, was not discharged because it was post-petition debt.” Further, the Appellate Division agreed with the lower court that the debt was not discharged because it was not listed on the bankruptcy schedule. Lastly, the Appellate Division held that the tenant-debtor had “unclean hands on a matter closely related to its discharge of bankruptcy which under state law warrants denying the relief afforded by the statute.”

The tenant-debtor argued that under case law, in a “no asset, no bar date” case, the failure to list debts is not fatal to the discharge. The Court held that this was not necessarily a “no asset” case. Had the lease been disclosed to the trustee in bankruptcy, the trustee might have affirmed the lease because it was not self-evident that the lease had no value. In fact, there was some indication that the lease had value because the tenant continued operating on the premises for six months after having filed the bankruptcy petition. Consequently, the essential precedent to the doctrine that the failure to list debts is not fatal to discharge a “no asset” case was absent. The Court also was distressed that the tenant failed to disclose the lease and continued to occupy the premises following the petition; this amounted to unclean hands. A recent New Jersey Supreme Court case held that discharging a judgment lien was “discretionary on the part of the court,” and that an applicant must “come into court with clean hands and he must keep them clean after his entry and throughout the proceedings.”

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