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CHAPTER 7 OF BANKRUPTCY CODE & STATUS OF JUDICIAL LIENS ON REAL PROPERTY POST-DISCHARGE

In Christakis v. D'Arc, 471 Mass. 365 (2015), the SJC addressed the interplay between Chapter 7 of the Bankruptcy Code, judicial liens on real property, and the interplay between state and federal law. Specifically, the issue on appeal was "whether judicial liens on real property remain valid after the owner of the property receives a discharge under Chapter 7 of the Bankruptcy Code."

Here are the essential facts and procedure of the case:

  • Plaintiff had unpaid credit card bills outstanding with three creditors.
  • Each of the creditors sued Plaintiff to collect their unpaid debt, obtained final judgments against Plaintiff, writs of execution were issued, and levies of execution were made on Plaintiff's real property.
  • Each of the liens was perfected sometime between August 2008 and December 2009.
  • Plaintiff filed a bankruptcy petition (Ch. 13) in July 2010. It was converted into a Chapter 7 case in April 2011. (This means that all liens were perfected more than 90 days from the filing of the bankruptcy petition.)
  • The plaintiff did not seek or obtain a ruling from the Bankruptcy Court avoiding any of the defendants' liens. See 11 U.S.C. § 522(f)(1) (2012) (debtor may avoid judicial lien on debtor's interest in property to extent that lien "impairs an exemption").
  • The plaintiff received a discharge in bankruptcy in August 2011.
  • Plaintiff filed a complaint in Land Court to remove the judicial liens that had attached to her real property. Only one of the creditors answered (a credit union); the other two failed to respond.
  • Plaintiff moved for entry of judgment by default against the two non-responsive defendants, and moved for summary judgment against the credit union. The credit union cross-moved for summary judgment.
  • The Land Court denied all of Plaintiff's motions, and allowed the credit union's motion, holding that "[t]he defendants' liens remain, subject to potential review by the [B]ankruptcy [C]ourt to determine if they impair exempt property." The judge then entered judgment in favor of all the defendants, including the defaulting defendants.
  • Plaintiff appealed. SJC took the case on its own motion and affirmed the Land Court, concluding that "the judicial liens survive the discharge where, as here, the Bankruptcy Court judge did not avoid the m."

In its discussion of the case, the SJC highlighted several points about the status of liens and discharges in bankruptcy within the context of federal law (the case is worth scanning for the string of relevant citations). And while Plaintiff conceded that under federal law, the judicial liens remained valid in this instance, she argued that they were now invalid under Massachusetts law.

The SJC went so far as to note that,

We agree with the plaintiff that "[t]he existence and nature of the lien that survives is determined by State law." First Colonial Bank for Sav. v. Bergeron, 38 Mass.App.Ct. 136, 137, 646 N.E.2d 758 (1995). See Cohen v. Wasserman, 238 F.2d 683, 686 (1st Cir.1956) (validity of lien after attached property is taken by eminent domain "depends wholly upon the local law"). But we do not agree that Massachusetts law should differ from Federal law in this regard.

Massachusetts case law has long provided that liens perfected well before the filing of a bankruptcy petition remain valid after a discharge. In Casavant v. Boreka, 298 Mass. 528, 529, 11 N.E.2d 595 (1937), we stated that "a valid lien securing [a] debt may be enforced," notwithstanding a discharge, provided the lien had attached more than the period prescribed by statute before the filing of the bankruptcy petition. (emphasis added)

The SJC went further by looking at their prior treatment of special judgments to levy an execution after a discharge, and how they differ depending on the nature of the action:

Our treatment of special judgments demonstrates that, under State law, we distinguish between in personam and in rem actions after a discharge, and permit the latter but not the former." (citation omitted)

...

We are not persuaded that we should alter the long-standing balance of interests between debtors and creditors, reflected in Federal law and our common law, by extinguishing both actions in personam and actions in rem against the discharged debtor. The plaintiff contends that "a court must vacate a void judgment" pursuant to Mass. R. Civ. P. 60 (citation omitted) and where a judgment is vacated, the liens resting on that judgment must be vacated as well. (citations omitted) But a discharge merely voids a judgment 'to the extent that such judgment is a determination of the personal liability of the debtor.' 11 U.S.C. § 524(a)(1). Under rule 60, '[a] judgment is void if the court from which it issues lacked jurisdiction over the parties, lacked jurisdiction over the subject matter, or failed to provide due process of law. (citations omitted) A discharge does not indicate that a judgment was a nullity from the start, nor does a discharge arise from a lack of jurisdiction or a failure to provide due process. The debt itself is not extinguished and would not be void as to personal liability but for the bankruptcy filing. Therefore, where a discharge only voids a judgment as to actions in personam, the liens resting on that judgment need not be invalidated, because the judgment is not void as to actions in rem. Consequently, the judge did not err in granting summary judgment to the credit union. (emphasis added)

Similarly, and after a brief analysis of why the motions to dismiss failed, the SJC found that the two defaulting defendants' liens also survived in this instance.

These kinds of cases, where creditors' and debtors' rights and obligations intersect with state and federal law, highlight the need for careful counsel on either side. For debtors, it may very well be that they are not off the hook for outstanding liens despite bankruptcy proceedings, and it is an oversight that could easily result in negative and unanticipated consequences. For creditors, the opportunity to be made whole might be neglected if they are not aware of those rights that survive despite a discharge in bankruptcy.

Written by Kristen M. Ploetz, Esq., of Green Lodestar Communications & Consulting, LLC, on behalf of Jeffrey T. Angley, P.C. Edited by Jeffrey T. Angley, Esq.

Copyright (c) 2011-2015 by Jeffrey T. Angley, P.C. All rights reserved.

Disclaimer: The information contained in this post is general in nature and for educational purposes only. No personal legal advice is being provided. If you have an actual legal issue that needs to be addressed, you should seek the advice of competent legal counsel. This post does not create an attorney-client relationship between the reader and Jeffrey T. Angley, P.C., Phillips & Angley or their attorneys.

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