In re Kenney, pre-petition lien regarding discharged debt does not attach to property acquired post-discharge.

The following is a recent case update:

SUMMARY

In re: Larissa Anatolia Kenney, Case No. 1:10-bk-11635-GM (Bankr. C.D. Cal. November 16, 2018), the United States Bankruptcy Court for the Central District of California denied a debtor’s motion to avoid a creditor’s lien under 11 U.S.C. § 522(f) because, among other reasons, there was no valid lien to avoid where a lien did not attach to property the debtor acquired after discharge of her debt in a Chapter 7 bankruptcy case. The opinion can be found here.

FACTS

On September 9, 2009, American Express Bank, FRB (“AMEX”) recorded an abstract of judgment against a debtor, Larissa Anatolia Kenney (“Debtor”). On February 15, 2010, Debtor filed for bankruptcy relief under chapter 7 of the bankruptcy code. On June 7, 2010, a discharge order was entered and the case was subsequently closed on June 15, 2010.

On September 14, 2018, Debtor filed a motion to reopen the chapter 7 case to file a lien avoidance motion against AMEX. On October 1, 2018, Debtor’s motion to reopen was granted and Debtor filed a motion to avoid lien under 11 U.S.C. § 522(f) (“Motion”). Pre-discharge, Debtor did not own any property to which the abstract of judgment could attach but, post-discharge, she was seeking financing to purchase a home.

The issue before the court was whether a pre-petition, recorded abstract of judgment could become a valid lien on any property acquired after the debt is discharged in bankruptcy. The court found that it could not because no valid lien exists unless both property and an obligation exist at the same time. Since the Debtor did not own any real property at the time AMEX recorded the abstract of judgment (or through the petition date), AMEX’s recordation of the abstract did not create or perfect a lien. Because there was no valid lien to avoid the court denied the Motion.

REASONING Under 11 U.S.C. § 522(f)(1)(A) provides that

…the debtor may avoid the fixing of a [judicial] lien on an interest of the debtor in property to the extent such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section…

A debtor may avoid a lien under Section 522(f) if: “(1) there was a fixing of a lien on an interest of the debtor in property; (2) such lien impairs an exemption to which the debtor would have been entitled; and (3) such lien is a judicial lien. In re Pederson, 230 B.R. 158, 160 (9th Cir. B.A.P. 1999).

When examining this issue, the court analyzed whether the Debtor had a valid lien that could be avoided under Section 522(f). The court noted that this issue had previously been raised by a bankruptcy court in the Eastern District of California in facts very similar to the facts in this case. In re Thomas, 102 B.R. 199 (Bankr. E.D. Cal. 1989).

In Thomas, the creditors filed an abstract of judgment against debtors in Sutter County. Id. at 200. Even though the debtors did not own any property in Sutter County prior to the bankruptcy, debtors purchased a home in Sutter County post-bankruptcy. Id. The creditor argued that it had a valid lien on debtors’ after acquired property which had neither been discharged nor avoided under the bankruptcy code, and that it was not required to release the debtors from the lien absent a court order. Id. at 200-201. The Thomas court, however, rejected creditor’s argument because it was “based upon the false premise that a ‘lien’ actually exists.” Id. at 201. The Thomas court noted that California courts have long recognized that a lien cannot survive (much less be created in the first place) absent the existence of an enforceable underlying obligation. Id. (citations omitted). Moreover, a lien cannot exist in the absence of an underlying attachable “res.” Id.

Here, the court agreed with the Thomas court’s position that a valid lien requires that both the property and the obligation must exist at the same time. Since the Debtor did not own any real property at the time AMEX recorded the abstract of judgment, AMEX’s recordation of the abstract did not create or perfect a lien. Since a lien cannot survive bankruptcy unless it first exists, the court found that AMEX did not have a valid lien and denied the Motion.

AUTHOR’S COMMENTARY

The court’s decision seems to be clear and logical. When a creditor files an abstract of judgment—that never attaches to any property—the lien cannot survive a Chapter 7 bankruptcy because it never existed in the first place. Since a creditor does not have a valid lien, a debtor does not have a basis by which to avoid a lien under Section 522(f) because the statute requires the fixing of a lien on an interest of the debtor in property.

These materials were prepared by ILC member Maggie Bordeaux, Supervising Senior Staff Attorney at the Consumer Law Project in Los Angeles, California (mbordeaux@publiccounsel.org), with editorial contributions from ILC co-chair and member Marcus O. Colabianchi of Duane Morris LLP in San Francisco, California (mcolabianchi@duanemorris.com).