TEC Products Company, Inc. v. Crystal

A-1596-96T2 (N.J. Super. App. Div. 1997) (Unpublished)
  • Opinion Date: October 14, 1997

BANKRUPTCY; LIENS—Is a lien on abandoned property that a bankrupt debtor does not request be discharged still a valid lien? It depends on whether the trustee could have avoided the judgment lien by asserting priority over it.

In 1992, a company obtained a Superior Court judgment against an individual. This judgment became a lien against real property owned by the individual and his wife. In 1995, the husband and wife filed a petition for bankruptcy, but failed to list the company as an unsecured, non-priority creditor. The bankruptcy trustee filed a Notice of Proposed Abandonment of the property on the grounds that it was of inconsequential value to the estate, and the property was subsequently deemed abandoned. The husband and wife moved to discharge the company’s lien. The motion judge held that in a Chapter 7 bankruptcy case, even the debt of an unlisted creditor is discharged. The company appealed, claiming that abandoned property reverts back to the debtor and that a lien is not affected by a judgment of bankruptcy if it is not discharged in those bankruptcy proceedings.

The Appellate Division began by stating that neither the motion judge nor the company were exactly right. The Court found that the company’s lien was not discharged in the bankruptcy proceeding, since under Bankruptcy Code section 524 (a) a discharge voids a judgment only “to the extent that such judgment is a determination of the personal liability of the debtor with respect to the underlying debt.” The Court then stated that abandonment of the property by the trustee resulted in reversion of the property to the debtor as if no bankruptcy petition had been filed. In other words, the property ceases to be part of the bankrupt estate and any party holding a lien on it may proceed to enforce the lien. However, the Appellate Court stated the real issue to be whether the company’s lien was subject to discharge or release under the Bankruptcy Code. If a levy was made before the petition was filed, the trustee cannot assert priority and the lien could not be discharged in the bankruptcy proceeding. However, if the levy was made after the petition was filed, the lien is subject to discharge. The Court found that the record lacked sufficient facts to decide the issue and reversed and remanded the case for further proceedings. The Court also stated that further inquiry was required to determine whether the company’s lien would impair the exemption rights of the husband and wife. Specifically, a debtor can avoid a pre-bankruptcy lien to the extent it can be shown that the lien impairs an exemption right, regardless of whether or not the creditor has sought enforcement of, or collection on, the lien.