On January 8, we reported on a decision where Chief Bankruptcy Judge Catherine J. Furay of Madison, Wis., held that a judgment creditor must docket the judgment to have a judgment lien on real property. Filing a UCC financing statement accomplishes nothing to perfect a judgment lien, Judge Furay said.

Today, we report on a variation on the theme: In some states, a judgment creditor must levy on the property to have a perfected judgment lien ahead of the trustee’s hypothetical, judicial lien.

Judge Furay’s decision is Hart v. Greenwich Business Capital LLC (In re Conway), 24-00034, 2024 BL 464925 (Bankr. W.D. Wis. Dec. 19, 2024). To read ABI’s report, click here.

No Levy of Execution

Before a couple filed their chapter 7 petition, a creditor obtained a judgment against them in state court. As Bankruptcy Judge Jerrold N. Poslusny, Jr., of Camden, N.J., said in his November 18 opinion, “The Judgment was recorded as a lien against the Property . . . , but the Sheriff never levied on the Property.”

The chapter 7 trustee filed an adversary proceeding against the judgment creditor to determine the validity and priority of liens against the property. The trustee took the position that the judgment lien was unperfected. The trustee sold the property, with the proceeds held in escrow pending the outcome of the adversary proceeding.

The trustee filed a motion for summary judgment under the strong arm powers of Section 544. Judge Poslusny said that the section allows the trustee to “step[] into the shoes of a hypothetical (1) judgment lien creditor, (2) an unsatisfied execution creditor, or (3) a bona fide purchaser for value with respect to real property.”

“In determining property rights in bankruptcy,” Judge Poslusny said, “courts look to applicable state law.” Under New Jersey law, he said that a recorded judgment becomes an “unperfected lien” against all real property owned or later acquired by the debtor.

To perfect the judgment lien, Judge Poslusny said that the creditor must levy on the debtor’s property. When there has been no levy, he said that the creditor with an unexecuted levy on real property has a lower priority that someone with a perfected lien.

In opposition to the trustee’s motion for summary judgment, the judgment creditor argued that a levy was not required to have a lien. Judge Poslusny said that the creditor “conflates the requirements to create a lien with the requirements to perfect a lien.” [Emphasis in original.]

Under New Jersey law, Judge Poslusny held that the creditor’s lien was unperfected. With the trustee standing in the shoes of a hypothetical execution creditor as of the filing date, he held that the trustee “sits at a higher priority than [the judgment creditor] and may avoid the lien.”

Because it was undisputed that the creditor had not levied on the property, Judge Poslusny granted the motion for summary judgment and declared that the trustee could avoid the unperfected judgment lien under Section 544(a).