Insolvency Law Committee E-Bulletin: In re Dolfi (Bankr. W.D. Pa.) – Avoidability, and priority, of judgment liens which attach to real property acquired by the judgment debtor after the judgment was entered.

The following is a case update written by Dean T. Kirby, Jr., a member of the ad hoc group of the California Lawyers Association’s (CLA) Business Law Section, analyzing a recent decision of interest:

SUMMARY:

In re Dolfi, 2019 WL 4888587 (Bankr. W.D. Pa. Oct. 3, 2019) provides food for thought on the avoidability, and priority, of judgment liens which attach to real property which the judgment debtor acquired after the judgment was entered. To read the opinion, click here.

Facts: Brian Dolfi sued his former daughter-in-law Candace Dolfi and obtained a $24,000 default judgment entered on March 2, 2015 in the Court of Common Pleas in Fayette County, Pennsylvania. Approximately two weeks later, Candace purchased a home in Fayette County, financing the purchase with a loan from PNC, National Association. Candace filed a chapter 13 petition on November 20, 2017. Candace moved to avoid Brian’s claimed judicial lien under Bankruptcy Code section 522(f), which provides in part that “the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled . . . if such lien is . . . a judicial lien . . . .”

Based on a property valuation of $170,000 and the PNC mortgage balance of $150,000, Candace claimed that she was entitled to a homestead exemption “in excess of $20,000” and could therefore avoid Brian’s lien in its entirety.

Brian opposed the motion by asserting that his judgment lien was senior in priority even as to the PNC mortgage and, for that reason, it was not subject to avoidance. He also argued that even if Candace were entitled to avoid his lien, it should only be partially avoided, because Candace had only claimed a $15,000 homestead exemption in her schedules.

The Bankruptcy Court granted the motion to avoid Brian’s lien in the full amount, provided that Candace amended her schedules to claim a homestead of at least $19,192.04, which she was apparently entitled to do.

Reasoning: The Court explained why Brian appeared to have no judgment lien in the first place, but did not expressly so hold. Such a holding was unnecessary in any case to the ultimate result based on the Court’s conclusion that the requirements of section 522(f) were satisfied and any claimed lien could be avoided.

Under Pennsylvania common law, a money judgment entered in the judgment index becomes a lien on real property owned by the judgment debtor at that time, but property acquired by the debtor after entry of the judgment is not subject to the lien. In order to impose a lien on after-acquired property it is necessary to obtain a writ of revival of the judgment, as required under Pennsylvania Rule of Civil Procedure 3027(b)(2). Brian apparently did not do this and was forced to base his claim of lien on a misinterpretation of the official comment to the Rule.

The Court then held that even if Brian held a first priority judicial lien, senior to the PNC loan, that lien would be avoidable under section 522(f). Its ruling was based on the plain language of that section, which omits any reference to the priority of a lien as a condition to avoidance.

Finally, the Court made short shrift of Brian’s argument that it was too late for Candace to file an amended exemption claim in an increased amount. Brian in effect challenged only the timing of any amendment, and the Court found that no prejudice had resulted from the delay.

Author’s Comment: This case is not remarkable for its holding that a judicial lien may be avoided even though it is senior in priority to a mortgage lien. See, In re Charnock, 318 B.R. 720, 722 (B.A.P. 9th Cir. 2004). Legislative history expressly indicates that a Third Circuit decision to the contrary, In re Simonson, 758 F.2d 103 (3d Cir. 1985), was overruled by amendments to section 522(f) which were part of the Bankruptcy Reform Act of 1994. See, In re Abramson, 2019 WL 2251830, at *5 fn 3 (Bankr. E.D. Cal. May 24, 2019).

More interesting are the questions of priority which arise from the attachment of judgment liens on real property acquired by the debtor after the judgment is entered. Pennsylvania law does not subject after acquired property to a pre-existing judgment lien unless and until a special writ is issued continuing or reviving the judgment. See generally, In re Zampatti, 300 B.R. 415, 418 (Bankr. W.D. Pa. 2003). In contrast, under New York law, a judgment lien arises upon the docketing of a judgment and automatically attaches to after-acquired property. See, In re Scarpino, 113 F.3d 338 (2d Cir. 1997). California law requires the recording of an abstract of judgment, which creates a judicial lien on all existing and after-acquired property. Calif. Code Civ. Proc. § 677.340(b); SBAM Partners, LLC v. Cheng Miin Wang, 164 Cal. App. 4th 903, 907, 79 Cal. Rptr. 3d 752, 754 (2008).

Where judgment liens automatically attach to newly acquired property it is rare that the result is a priority dispute between the judgment lien creditor and a mortgagee, in the context of lien avoidance in bankruptcy. This is for several reasons. The first is a practical one. In a title insured transaction, the judgment lien is likely to be discovered and in that case the mortgage loan will likely never be made in the first place unless the lien is paid off.

Also, purchase money mortgages (including vendor mortgages and mortgages securing loans used to purchase property) are generally accorded priority over pre-existing judicial liens anyway. See, 42 Pa. Stat. and Cons. Stat. Ann. § 8141; N.Y. C.P.L.R. §5203; and Calif. Civ. Code §2898.

Finally, in a sometimes overlooked, counterintuitive and much criticized decision, the U.S. Supreme Court ruled that a judicial lien which automatically attached upon the acquisition of property by the debtor under a divorce decree cannot be avoided in the first place. Farrey v. Sanderfoot, 500 U.S. 291, 291, 111 S. Ct. 1825, 1826, 114 L. Ed. 2d 337 (1991). The Court reached this result by reasoning that the language of section 522(f) requires that the debtor “possessed an interest to which a lien attached, before it attached.” 500 U.S. at 301. Farrey v. Sanderfoot has been extended by most courts to prohibit avoidance of judgment liens which automatically attach to after-acquired property. See, In re Scarpino, 113 F.3d 338, 339 (2d Cir. 1997); In re Pederson, 230 B.R. 158, 163 (Bankr. App. 9th Cir. 1999). Some courts have refused to extend the holding in Farrey v. Sanderfoot that far. See, In re Anderson, 496 B.R. 812 (Bankr. E.D. La. 2013).

These materials were written by members of the California Lawyers Association Business Law Section for the Commercial Finance Newsletter, published weekly on Westlaw. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further distributed without the consent of Thomson Reuters.