Even when a debtor consents to the entry of judgment, the resulting judgment lien is a judicial lien subject to avoidance under Section 522(f), not a consensual lien that cannot be avoided as an impairment of an exemption, for reasons explained in an opinion by Bankruptcy Judge Mina Nami Khorrami of Columbus, Ohio.

Before bankruptcy, the individual debtor had given a bank his personal guarantees of corporate debt. In her December 18 opinion, Judge Nami Khorrami said that the debtor never gave the bank “any document evidencing or creating a security interest, lien, mortgage, or other form of transfer of an interest in property of the Debtor to secure the Debtor’s obligations under these guarantees.”

The Consensual Judgment

Also before bankruptcy, the bank sued the debtor based on the guarantees. In the complaint, the bank only sought a money judgment against the debtor. Judge Nami Khorrami said that the state court “entered an agreed judgment” in favor of the bank for more than $9 million.

Months later, the bank filed a certificate of judgment in the Ohio county where the debtor owned a home jointly with his wife. The wife was not a debtor, and the bank had no claim against the wife.

After the judgment was filed with the county clerk, the debtor filed a chapter 7 petition and moved to avoid the $9 million judgment lien as an impairment of his homestead exemption under Section 522(f)(1). In relevant part, the subsection allows the debtor to “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 under subsection (b) of this section, if such lien is — (A) a judicial lien . . . .”

The Definition of Judgment Lien

After deductions for the mortgage on the property and the homestead exemption, the bank conceded there was no equity in the property. Judge Nami Khorrami said that “the only issue left for the Court to decide is whether the . . . Judgment Lien is a judicial lien subject to avoidance pursuant to 11 U.S.C. § 522(f)(1).”

The bank took the position that the lien was a consensual lien, not a judgment lien, and was therefore not subject to avoidance under Section 522(f)(1), because it arose from a guarantee and a consensual judgment.

Judge Nami Khorrami identified three pertinent definitions in the Bankruptcy Code.

Section 101(37) defines a “lien” as a “charge against or interest in property to secure payment of a debt or performance of an obligation.”

Section 101(36) describes a “judgment lien” as a “lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding,” and Section 101(51) says that a “security interest” is a “lien created by an agreement.”

To differentiate between a judicial lien and a security interest, Judge Nami Khorrami said that “the Court must focus on the events that gave rise to the creation of the lien.” Citing the Seventh Circuit two years ago, she said that the words “obtained by” in the Section 101(36) definition of a judgment lien “contain[] an element of causation.”

Consequently, Judge Nami Khorrami said that the outcome of the avoidance action “thus turns upon the manner in which the . . . Judgment Lien was created” under Ohio law.

Ohio Law

Under the Ohio statute, Judge Nami Khorrami said that a “lien is immediately created” when “a certificate of judgment is filed.” Before that, there is no lien, she said.

Judge Nami Khorrami decided that the judgment lien “clearly fit[s] within the definition of judicial lien found in 11 U.S.C. § 101(36),” because it arose “from judgments and [was] the result of a legal process.” Citing decisions around the country, she said, “Courts have uniformly held that a lien arising out of a judgment is a judicial lien even if the underlying judgment was created by stipulation, confession, or consent.”

The bank nonetheless contended that the judgement lien was not subject to avoidance because it was entered on consent rather than from litigation. Judge Nami Khorrami responded by saying that the “narrow definition” of a security interest “indicates that the lien must be created by the agreement itself.” Here, she said, “there is no such agreement.”

Judge Nami Khorrami ruled that the judgment lien was a judicial lien to be “avoided in its entirety.”