Last week, we reported on a decision where Bankruptcy Judge Mina Nami Khorrami of Columbus, Ohio, decided that a consensual judgment results in a judicial lien that can be avoided as an encumbrance on an exemption under Section 522(f).

Today, we report on a variation on a theme: A deficiency judgment arising from mortgage foreclosure is also a judgment lien subject to avoidance and does not fall under the exception to the avoidance power of Section 522(f)(2)(C), so said Bankruptcy Judge Julie A. Manning of Bridgeport, Conn., in a decision on December 20, two days after the opinion by Judge Nami Khorrami.

The creditor held a stipulated deficiency judgment for almost $50,000 arising from a mortgage foreclosure. In chapter 7, the debtor moved under Section 522(f) to avoid the judgment lien as a judicial lien impairing the debtor’s homestead exemption. There was no equity to cover the deficiency judgment after taking the value of the home into account together with prior liens and mortgages.

Among other things, the creditor contended that the avoiding power under Section 522(f)(1)(A) did not apply as a result of the exception in Section 522(f)(2)(C), which says that the avoiding power “shall not apply with respect to a judgment arising out of a mortgage foreclosure.”

Judge Manning identified two issues: (1) Is a deficiency judgment a judicial lien subject to avoidance under Section 522(f)(1); and (2) is a stipulated deficiency judgment a consensual lien that cannot be avoided?

A Deficiency Doesn’t Arise from Mortgage Foreclosure

In the District of Connecticut, there was divided authority. One Connecticut bankruptcy judge held in 2000 and 2002 that mortgage deficiency judgments arise from foreclosure and are subject to the exception. However, Bankruptcy Judge Robert L. Krechevsky held in 2008 that mortgage deficiency judgments are avoidable as judicial liens.

Judge Manning cited the First Circuit, which held that a deficiency judgment, whether arising from a foreclosure action or a separate action, is a nonconsensual judicial lien subject to avoidance. In re Hart, 328 F.3d 45, 49 (1st Cir. 2003). She also cited the Sixth Circuit Bankruptcy Appellate Panel, which had said that the “overwhelming majority of courts” hold that deficiency liens do not arise from mortgage foreclosure and are therefore avoidable. The BAP cited the two Connecticut decisions as the only contrary authorities. In re Pace, 569 B.R. 264, 271 (B.A.P. 6th Cir. 2017).

In Connecticut, Judge Manning said that a deficiency judgment is a remedy at law on a note. Until 1833, a mortgage holder could not pursue a deficiency judgment in a foreclosure action.

Even without considering state law, Judge Manning held “that a deficiency judgment is not a judgment arising out of a mortgage foreclosure.” It is therefore “a judicial lien that can be avoided under section 522(f)(1) and does not fall within the exception to avoidance under section 522(f)(2)(C).”

A Deficiency Judgment Is a Judicial Lien

Judge Manning likewise decided that a “stipulated or consent judgment” is a judicial lien “because it was entered by a court.” She cited the Collier treatise for the idea that “courts have held that a consent judgment fits within the definition of a judicial lien.”

Similarly, Judge Manning cited the Third Circuit for holding “that a cognovit note . . .  as well as a consent judgment, are judicial liens under section 101(36) because the lien is created by the judgment.” In re Ashe, 669 F.2d 105, 108–110 (3d Cir. 1982) (remanded sub nom. Commonwealth Nat’l Bank v. Ashe, 459 U.S. 1082 (1982), reaff’d, 712 F.2d 864, 868 (3d Cir. 1983), cert. denied, 465 U.S. 1024 (1984).

Judge Manning was “persuaded” to hold “that the stipulated deficiency judgment is a judicial lien under section 101(36) because it was created by a judgment.” She granted the debtor’s motion to avoid the judicial lien.

Observation

At first blush, it seems absurd to believe that a deficiency judgment resulting from a foreclosure action is not “a judgment arising out of a mortgage foreclosure.”

However, the judgment lien to be avoided is not a lien on the property that was foreclosed. It’s a lien on property that was not subject to the prior foreclosure.

Holding contrary to Judge Manning spread a mortgage lien to other property and expanded Section 522(f)(2)(C) beyond the purpose of the exception.