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New Century Financial Services, Inc. v. Staples

379 N.J. Super. 489, 879 A.2d 1190 (App. Div. 2005)

JUDGMENTS; BANKRUPTCY—Once a Special Civil Part judgment is docketed, it becomes a lien against all real property of the debtor in New Jersey and if docketed before the debtor’s bankruptcy petition has been filed and there is more equity in the property than the debtor’s homestead exemption, the judgment lien is not dischargeable.

The assignee of defaulted credit card obligations obtained a default judgment against a couple. Based on the judgment, a sheriff levied on the couple’s home. Ten months later, the couple filed a Chapter 7 bankruptcy petition listing the creditor in their bankruptcy petition. A discharge in bankruptcy followed. Almost two years later, the couple “filed a motion in the Law Division seeking to void the judgment as a lien against their real property, pursuant to N.J.S.A. 2A:16-49.1, on the grounds that the judgment impaired their homestead exemption under 11 U.S.C.A. [section] 522(d)(1) of the Bankruptcy Code. In another words, [the couple] contended that although ‘the judgment was a lien on real property owned by the bankrupt[s] prior to the time [they] were adjudged ... bankrupt,’ ..., the judgment was ‘subject to be discharged or released under the provisions of the Bankruptcy Act,’ ..., thereby entitling them to ‘an order directing the judgment to be canceled and discharged of record.’” In particular, the couple contended that the balance they owed [on the first and second mortgages on] their property approximately equaled the fair market value of the property and they, thereby, had no equity value in the property.”

The lower court never reached the issue. Instead, it concluded that N.J.S.A. 2A:17-17 precluded the levying upon and sale of real property by an execution on judgments obtained in the Special Civil Part.” In a motion for reconsideration, the creditor “argued that once a Special Civil Part judgment is docketed, it becomes a Superior Court judgment and is not subject to the levying and sale prohibition contained in N.J.S.A. 2A:17-17.” In particular, it maintained that because it obtained a judgment and docketed and levied against it prior to filing the bankruptcy petition, N.J.S.A. 2A:16-49.1 precluded cancelling the judgment as a lien against [the couple’s] real property. That statute contains the following particular language: “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 not be enforced… .” In their reply, the couple contended that they would be entitled to relief pursuant to that particular statute “only if the judgment had been a lien on the real property owned by [them] prior to the time they were adjudged bankrupt, and was ‘not subject to be discharged or released under the provisions of the Bankruptcy Act.’” In essence, they argued that the creditor needed “to establish that [they] had surplus equity in their home after application of the homestead exemption.” The lower court again found that a creditor could not levy on or sell real property based on judgments obtained in the Special Civil Part.

The Appellate Division disagreed, pointing out that “[i]t is fundamental that a creditor who dockets a judgment against a debtor’s property has a lien on all real property held by that judgment debtor in [New Jersey]. ... It is also clear that, as a result of their discharge in bankruptcy, defendants were discharged of their personal obligation to plaintiff under the subject judgment.” On the other hand, it held as follows: “[h]owever, assuming that [the creditor’s] docketed Special Civil Part judgment constituted a lien on the subject property, [the couple’s] discharge in bankruptcy had no effect on [the creditor’s] judgment lien on [the couple’s] interest in that real property, unless it impaired an allowable exemption.” With respect to the effect of the Special Civil Part judgment, the Appellate Division “conclude[d] that the act of docketing, as here, the Special Civil Part judgment in the Superior Court makes it a judgment entitled to lien status against the real property of the judgment debtor. The trial court erred in concluding otherwise.” As to the bankruptcy question, the Court pointed out that the intent of New Jersey’s lien discharge statute is “to assure that judgment intended to be discharged under federal bankruptcy law will not continue to cloud the marketability of title to property owned by the debtor.” There was no question that the creditor had a perfected judgment lien prior to filing of the bankruptcy petition. Thus, the Court needed to determine whether the lien was subject to be discharged or released under the Bankruptcy Code. To the Court, the problem with the couple’s argument that they had no equity in the property was that their bankruptcy petition listed the “current market value of the subject property as $240,000. In their trial court papers, [the couple] claimed the amount of total mortgages on the property was $139,747.64.” Therefore, it did not appear to the Court that the judgment lien impaired the asserted homestead exemption of $34,850 “because the amount of equity in the property exceeded the amount of the exemption.” As a consequence, the judgment lien “was not ‘subject to be discharged or released under the provisions of the Bankruptcy Act,” and the lower court was ordered to deny the couple’s motion for discharge of the judgment lien.

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