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Enforcement
of Liens after Bankruptcy Discharge: The Party Parrot v. Birthdays & Holidays
That alien may survive
a debtors discharge from the underlying indebtedness is a well-settled
principle of law. Yet the application of this concept, although reaffirmed
every few years by our courts, continues to elude many practitioners.
In fact, possibly the single greatest misconception among lawyers today
is the idea that a personal discharge in bankruptcy serves to discharge
liens. A few years ago, "Title Talk" No. 23 (Spring, 1993) published an
article entitled 'The Status of Liens Following a Debtors Discharge in
Bankruptcy", which discussed Judge Gindin's decision in In re Arevalo,
142 B.R. 111 (Bkrptcy., D.N.J. 1992), another in a series of cases along
the same lines. And now, a recent Appellate Division opinion, Party Parrot
V. Birthdays & Holidays, 289 N.J. Super. 167 (App. Div. 1996), has yet
again reinforced this idea. As suggested above, the discharge of the debtor
(or bankrupt) serves merely to discharge his or her personal obligation
to pay the debt which the judgment or other lien secures; it does not
aff act the lien itself. See 11 U.S.C. 5 727(b); Dewsnupp v. Timm, 502
U.S. 410,116 L. Ed. 2d 903,112 S. Of. 773 (1992). This is because the
bankruptcy proceeding, ex proprio vigore, does not aff Oct the nature
and quality of the title of the debtor's real estate. So 9 the debtor's
realty is burdened by certain liens or encumbrances at the time he files
a bankruptcy petition, and no aff affirmative action is taken to remove
those liens or encumbrances during the course of the bankruptcy proceeding,
the liens and encumbrances will still exist at the time the case is concluded.
As the authors of one noted treatise have stated: Property is not washed
of liens simply by passing to the bankruptcy estate. Rather, the estate
honors the principle of derivative title and takes property subject to
all liens Epstein at al., Bankruptcy, ¤3-18 (1992). It may be true that
the lienholder may not enforce the lien by execution against the debtor's
property, so long as the debtor owns it, because the creditor is prohibited
by the terms of the discharge from attempting to collect the debt from
the discharged debtor. 11 U.S.C.¤524(a)(2). However, when the debtor sel
Is property encumbered by the lien, the lienholder may be able to enforce
the lien against the purchaser. In re Vitullo, 60 B.R. 822 (U.S. Dist.
Of. D.N.J. 1986). Accordingly, the mere fact that seller in a given transaction
has gone through a bankruptcy proceeding is an insufficient basis for
counsel representing the purchaser to ignore such liens. Furthermore,
title insurers will generally require that such liens be disposed of before
agreeing to insure without exception. See Handbook of N.J. Title Practice,
¤¤ 2911 at seq. The analysis set forth above is abundantly supported by
case law. See, e.g., Purnival Machinery co. v. King, 142 N.J. Super. 251
(App. Div. 1976); Trend Mills v. Socher, 4 13.R. 465 (U.S. Dist. Ct.,
D. N.J. 1980); In re Vitullo, supra; In re Arevalo, supra. Yet, as suggested
above, many practitioners seem to remain ignor ant of same, and continue
to insist that the debtor's bankruptcy disc large is all that is required
to dispose of such liens. It is noteworthy that Section 524 of the Bankruptcy
Cod e was amended in 1984 so as to remove any confusion on this point.
Thus, 11 U.S.C. 5524(a)(1) "voids any judgment... to the extent that such
judgment is a determination of the personal liability of the debtor...11;
and 11 U.S.C. ¤524(a)(2) states that a discharge operates as an injunction
to prevent the recovery of a disch arged debt as a personal liability
of the debtor. The key words have been emphasized: "personal liability".
The question of whether a particu lar lien has been "scheduled" (i.e.,
listed in the schedules which accompany the bankruptcy petition) is therefore
largely irrelevant for conveyancing or title insurance purposes. See Handbook
of N.J. Title Practice, ¤2912. The rule of the Furnival Machinery case
was relaxed somewhat by the Appellate Division's opinion in Associates
commercial Corp. v. Langston, 236 N.J. Super. 236 (App. Div. 1989), certif.
den. 118 N.J. 229 (1989), which held that a [former] debtor may apply
to the Superior Court for a discharge of a judgment lien entered against
property owned by the debtor prior to the time of filing of the bankruptcy
petition. The earlier Purnival Machinery case held that the statutory
mechanism for discharge, N.J.S.A. 2A:16-49.1, was available only with
respect to property acquired after discharge from bankruptcy. As a result
of this decision, it may be possible to eliminate certain lions, based
on a successful application to the Superior Court under state law, or
to the Bankruptcy Court, under Federal law, as discussed below. Before
an application can be made under State law, one (1) year must have elapsed
since the bankrupt was discharged. Furthermore, the underlying debt must
have been discharged through the bankruptcy. This means that: (a) the
debt or lien was scheduled; and (b) the debt was a dischargeable one.
Although most debts are dischargeable in bankruptcy, some are not. Non-dischargeabledebts
include, but are not limited to: intentional torts (e.g., fraud): taxes;
etc. See 11 U.S.C. ¤523. In order for an application under N.J.S.A. 2A:16-49.1
to be successful, the following conditions must generally be met: 1) one
(1) year has elapsed since the discharge of the bankrupt; and 2) the debt
or lien was scheduled in the bankruptcy petition; and 3) the debt is dischargeable.
Many attorneys regard proceedings under this statute as a pointless formality.
Since they do not understand that a lien can still be viable despite a
discharge in bankruptcy, they certainly do not see the necessity for an
application of this nature. Nevertheless, it is a relatively simple and
inexpensive means of clearing the record. As suggested above, an alternative
to a proceeding in Superior Court is an application to the Bankruptcy
Court. The Court's ability to grant such relief is somewhat broader than
that of the Superior Court under State law. Since the trustee Is given
extensive powers under the Code to avoid certain liens or interests which
affect the property of the estate, these powerful weapons may be used
to avoid judgments or other liens which encumber the debtor's property.
For example, the trustee may avoid, Inter alia: o certain "Preferences",
including liens entered within ninety (90) days (or, under certain circumstances,
within one (1) year) of the filing of the bankruptcy petition. 11 U.S.C.
¤547. o so-called "fraudulent transfers" made within one (1) year of the
filing of the petition. 11 U.S.C. ¤548. o liens which impair the debtor's
[$15,000.00] exemption. 11 U.S.C. ¤522(f)(1). o certain liens through
the use of his status as a hypothetical lien creditor whose execution
has been returned unsatisfied, or his status as a bona fide purchaser
for value. 11 U.S.C. ¤544; cf. [former] Bankruptcy Act, ¤¤67 & 70. o certain
liens which secure disallowed secured claims. 11 U.S.C.¤506(d). Unfortunately,
trustees in "residential" cases rarely exercise their avoidance powers.
This may create problems in the future for the [former] debtor who seeks
to convey, lease or mortgage his or her realty. The recent decision of
the Appellate Division in Party Parrot has confirmed these basic principles.
Furthermore, the case suggests that it may be possible for a judgment
creditor to execute against the realty owned by the former debtor, notwithstanding
his discharge in bankruptcy. In that case, The Party Parrot, Inc. [hereinafter
"plaintiff" or "creditor"] recovered a judgment on December 5, 1991 against
Birthdays & Holidays, Inc. [hereinafter "defendant" or "debtor"] for approximately
$117,000. The next day, the creditor obtained and delivered to the sheriff
a writ of execution. On August 14,1992, the debtor filed a Chapter 7 petition,
and was granted a discharge on December 7, 1992. In March of 1993, the
bankruptcy trustee abandoned the debtor's real estate. 11 U.S.C. ¤554.
Thereafter, in July of 1992, creditor applied to the Law Division for
an order permitting a sale of the debtor's realty, which debtor opposed.
The court denied the relief sought by plaintiff, and granted defendant's
cross-application for an order striking the judgment as lien against its
realty under N.J.S.A. 2A:16-49.1 (discussed above). Plaintiff appealed
to the Appellate Division. In construing the statute, the panel pointed
out that: This statute "was enacted as an ancillary remedy for discharge
of judgments, within the state court system, to assure that judgments
intended to be discharged under federal bankruptcy law would not continue
to remain on record, thereby requiring payment at some time in the future"
[citing Arevalo, supra, and Associates Commercial Credit, supral]. But,
as plaintiff's judgment was also a lien on defendant's property, the controlling
issue is whether or not the lien was "subject to be discharged or released"
under the provisions of the Bankruptcy Code, as provided by N.J.S.A. 2A:1
6-49.1. The statute clears the record as a housekeeping measure unless
the judgment was not subject to discharge. plaintiff's lien, whether or
not enforced by a levy, was not subject to discharge in the bankruptcy
proceeding under ¤524 of the Bankruptcy Code, which discharged the remaining
debt, not the lien. 289 N.J. Super. at 173 [emphasis added]. The Appellate
Division then goes on to state: While a discharge in bankruptcy generally
prohibits further In personam actions against the discharged debtor, it
does not prohibit creditors from proceeding In rem against the debtor's
property. Id. at 174. Thus, this tribunal asserts that a judgment creditor
may levy upon the debtor's real estate in order to enforce its lien, notwithstanding
the debtor's personal discharge in bankruptcy, and the injunction against
post-discharge enforcement proceedings 'imposed by 11 U.S.C. ¤524(a)(2).
The panel's analysis of N.J.S.A. 2A:16-49.1 led it to conclude that the
debtor was entitled to relief under this statute only if it could show
that the creditor's lion was subject to avoidance by the bankruptcy trustee.
In other words, for an application under N.J.S.A. 2A:16-49.1 to be successful,
it is insufficient that the debt underlying the judgment was discharged
in bankruptcy. The debtor must also show that the judgment lien could
have been avoided in the bankruptcy proceeding. 289 N.J. Super. at 173-174.
Presumably, this test must only be met where the debtor seeks to discharge
a lien which encumbered the realty prior to the filing of the bankruptcy
petition, as was the case in Associates commercial Credit, supra. The
court therefore proceeded to analyze the various avoidance powers of the
trustee under 11 U.S.C. ¤¤544; 547; 548; 506; and 522, in order to determine
whether the bankruptcy trustee could have successfully avoided the judgment.
It concluded that most were inapplicable, with the possible exception
of ¤544(a)(2) and ¤522. The former section permits the trustee to use
his status as a hypothetical lien creditor, whose execution has been returned
unsatisfied, to avoid other liens. Since, under New Jersey law, the first
judgment creditor to levy gains priority over other creditors, the trustee
could only have used this power if plaintiff had not levied at the time
the bankruptcy petition was filed. The answer to this question did not
appear in the record. 289 N.J. Super. at 174-175. The latter section permits
the avoidance of liens which impair the debtor's homestead exemption.
At that time, the exemption was limited to $7,500.00. After analyzing
several cases interpreting ¤522, and taking into account the effect of
a 1994 amendment thereto, the court concluded that debtor could avoid
only that part of the creditor's lien which impaired his exemption. Id.
at 177-179. The Appellate Division concluded by remanding the matter to
the trial court to determine it a levy had been outstanding at the time
the petition was filed. 0 not, the lien could have been avoided under
11 U.S.C. ¤544, and thus could be struck under N.J.S.A. 2A:1 6-49.1. But
if a levy did exist, the extent to which plaintiff's lien could be avoided
under 11 U.S.C.¤522 would have to be determined by fixing the value of
the realty and other liens and encumbrances thereon.
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Ethics
Opinion No. 682 Affirmed
The New Jersey Supreme
Court has unanimously aff irmed opinIon No. 682 of the Advisory Committee
on Professional Ethics ["ACPE"] . That Opinion, issued in 1996, determined
that the proposed scheme of operations of the Now Jersey Attorneys Title
Corporation ["NATC"] would be violative of prior ethics opinions, which
held that an attorney may not (in general) cause his or her clients' title
insurance policies to be written through a title insurance company or
agency in which he or she had a financial interest. See Ethics Ops. Nos.
495 (1982); 513 (1983); 612 (1988); and 639 (1990). NATO sought reversal
or modification of these opinions in order to allow it to operate in New
Jersey. Under 'its plan, its attorneyshareholders would act as title insurance
agents and be eligible to receive a portion of the premiums, in addition
to fees earned for representing purchasers or borrowers in real estate
transactions. However, ACPE in its Op. No. 682, held that the plan would
create a conflict of interest which could not be cured through disclosure.
On appeal, the New Jersey Supreme Court affirmed ACPE. In re Ethics 0p.
No. 682, -N.J. -(1997) (No. A- 32;Jan.27,1997). The Court, in a unanimous
opinion written by Justice Garibaldi, held that under RPC 1.7 a conflict
of interest was presented by NATC's proposal: Attorneys who represent
both purchasers and title-insurance companies in the same transactions
place themselves in the position of serving two masters with incompatible
interests. [Slip Op. at 10.] The Court concluded by suggesting that the
matter could be reconsidered 9 a bar-related title company were formed
under the auspices of the New Jersey State Bar Association which "...
eliminated substantially all of the concerns expressed [in its opinion]
and in Opinion 682 ... ". [Slip Op. at 17.)
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Op.
No. 26 Administrative Determinations Released by Supreme Court
The New Jersey Supreme
Court has published Administrative Determinations regarding certain issues
related to Unauthorized Practice Committee opinion No. 26 (1992). Readers
of "Title Talk" will recall that the Court issued an opinion, In re Unauth.
Prac. Comm. Op. No. 26, 139 N.J. 323 (1995), which modified the Committee's
Opinion in several important respects. [See "Title Talk" No. 29 (Spring,
1995).] In brief, the Court held that: "... a real estate broker may order
a title search and abstract; an attorney retained by a title company or
real estate broker may not prepare conveyance documents ... except at
the specific written request of the party on whose behalf the document
is to be prepared; a title company may not participate in the clearing
of certain legal objections to title, ...; and the practice of conducting
real estate closings or settlements without the presence of attorneys
shall not constitute the unauthorized practice of law". 139 N.J. at 332.
However, a number of issues remained unresolved by the Supreme Court's
decision, most of which had been raised by Special Master Edward S. Miller,
J.S.C. (rot.) in his report and recommendations to the Supreme Court.
These matters were referred to a special subcommittee of the Civil Practice
Committee for review [hereinafter the "Op. No. 26 Comm ittee" or the "Comm
ittee".] That body, under the chairmanship of Richard S. Cohen, J.A.D.
(ret.), conducted hearings and in turn forwarded interim and final reports
(dated July 10, 1995 and October 31, 1995, respectively) to the Court.
The Court's Administrative Determinations, 5 NJL 2332 (Oct. 28,1996),
were issued in response to the Subcommittee's reports. The issues addressed
in the Committee's [final] report of October 31, 1995 were discussed first,
beginning with the form of written notice to be given to the parties at
the time the contract is signed. Consistent with the Subcommittee's recommendation,
the Court adopted a revised form of notice, which must be signed and dated
by seller and purchaser, as well as by the selling broker. The notice
is now more concise and direct. Signing and dating it will prevent disputes
over whether a party actually received the notice in a timely fashion.
The Court agreed with the Committee that a written waiver of the right
to counsel was not necessary, and that brokers and title companies should
not be required to urge the parties to retain counsel. on the issue of
whether a public entity should supervise parties conducting real estate
closings, the Court once again followed the Committee's suggestion that
the matter be left to the Legislature. The Committee further recommended,
and the Court agreed, that brokers should not be required to carry liability
insurance. The Justices next turned to problems related to enforcement
and remedies, which were discussed in the Committee's [interim] report
of July 10, 1995. First, the Court determined that the existence of a
properly- executed notice is sufficient to permit the transaction to go
forward without the necessity of further inquiry into the broker's compliance
with the strictures imposed by the Court's opinion. What happens if an
attorney for one of the parties declines to go forward with the closing
because he or she believes that the broker has failed to comply? Is the
attorney liable for damages suff ered as a result of his or her decision?
The Justices declined to resolve this problem, stating that it would be
"premature" to do so. Can non-compliance be cured prior to closing? The
Court determined that non-compliance "can and should be cured between
the contract and the closing". It suggested that "written confirmation
of the cure" be obtained. The Court also stated: o An attorney is under
no duty to counsel an unrepresented party to the disadvantage of his or
her own client. -A notice which contains "diluting provisions" may not
be in compliance with the Court's opinion. o "Absence of the required
notice in a contract may or may not create an independent defect in the
contract which enables a pa arty to disavow it; the Court believed it
"would not be appropriate to address [this] issue in the abstract.
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"1099"
Reporting: Recent Developments
As a result of the
enactment of ¤1521 of the Tax Reform Act of 1986, which added 26 U.S.C.
¤6405(e) and amended 26 U.S.C. ¤3406(h), certain reporting requirements
were imposed with respect to real estate transactions which closed after
December 31, 1986. The "person responsible for closing the transaction"
(and I th us reporting it to the IRS) is normally the party listed as
the "settlement agent" on the HUD-1 (RESPA) form. In the North Jersey
practice, this is generally the attorney for the purchaser; in South Jersey,
it is usually the title company. Reporting is accomplished through the
preparation of a 1099-S form, which must include the following information:
the name, tax identification number, and address of the sailer; the date
of closing; the gross sales price; and the name, address and tax identification
number of the party reporting the transaction; and the name, address and
telephone number of the person the taxpayer may contact within the entity
reporting the transaction. The last requirement was modified as the result
of the recent enactment of the "Taxpayer Bill of Rights", P.L. 104-168,
to add the telephone number of the reporter. Although no separate charge
may be made by the reporting party for this work, the recent passage of
the "Small Business Protection Act of 1996", P.L. 104-188, amended 26
U.S.C. ¤6045 to permit the person charged with the duty of reporting to
include the cost of compliance in establishing its charge for same, provided
that no separate fee Is Imposed. The change is of little help to title
companies in New Jersey at the present time, because the Commissioner
of Banking and Insurance, pursuant to the Title Insurance Act, N.J.S.A.
17:4613-1 at seq., fixes the charges which may be imposed for settlement
services. However, an attorney may presumably take the cost of compliance
into account when determ ining his or her fee for legal services when
representing the purchaser in a real estate transaction.
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Condominium
Act Amended
The Condominium Act,
N.J.S.A. 46:8B-1 at seq., has been amended to permit the imposition of
fines and late fees against those who fail to observe the bylaws. P.L.
1996, c. 79, eff active July 25, 1996, amends N.J.S.A. 46:8B-1 3 at seq.
to permit the imposition of fines and late fees against unit owners for
activities which violate provisions of the master deed or bylaws. The
association's ability to impose these charges must be set forth in the
master deed or bylaws. A unit owner is entitled to notice of the assessment,
and an opportunity to participate in a "dispute resolution procedure",
pursuant to N.J.S.A. 46:8B-14(k). If he or she is dissatisfied with the
outcome, a judicial remedy maybe sought. Although a limitation on the
amount of the fine or assessment is not specifically set forth, it must
be "reasonable". Moreover, a fine imposed for a violation or continuing
violation of the master deed, bylaws, etc., may not exceed the monetary
penalties set forth in Section 19 of the Hotel and Multiple Dwelling Law.
This statute generally provides for penalties from $50.00 to $500.00 for
each "violation" and from $500.00 to $5,000.00 for each "continuing violation".
N.J.S.A. 55:13A-19. The act also permits the fines or other charges to
be included in a lien filed by the association. However, no lien shall
be filed solely for late fees. N.J.S.A. 46:8B-21, as amended. Finally,
assuming that plaintiff's lien was not subject to complete avoidance,
the Law Division was directed to determine if plaintiff would be permitted
to conduct an execution sale on the realty in light of the effect of such
a sale on the non-debtor, co-tenant spouse. Thus, the Party Parrot opinion
reaff irms the established principle that a personal discharge in bankruptcy
has no effect on liens. It is consistent with the holding in Associates
Commercial Credit, supra. But it emphasizes that the use of N.J.S.A. 2A:16-49.1
to avoid judgment liens against the realty so encumbered prior to the
filing of the petition is limited to instances where the lien itself could
have been avoided in the bankruptcy proceeding. Finally, it suggests that
it is at least theoretically possible for a judgment creditor to enforce
its lien by executing on the [former] debtors realty following its abandonment
by the trustee or the conclusion of the bankruptcy case.
"Title Talk" is published
periodically by the Chicago Title and TICOR Title Insurance Companies,
and is distributed free of charge to their customers and friends. Steven
G. Day, Esq., Area Manager, Publisher Lawrence J. Fineberg, Esq., State
Counsel, Editor Chicago Title Insurance Company TICOR Title Insurance
Company 111 Wood Avenue South Iselin (Woodbridge Twp.) New Jersey 08830
(908) 205-0055 o Fax: (908) 205-0330
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