In an opinion dealing with a belated attempt at avoiding a judgment lien that impaired a homestead exemption, Bankruptcy Judge Russ Kendig of Canton, Ohio, all but said that failure to conduct a lien search is legal malpractice.
A creditor sued the husband and wife in 2009. The creditor obtained a judgment and filed a judgment lien in late 2009. The couple evidently were aware of the judgment but claimed ignorance of the judgment lien.
The couple filed a chapter 7 petition in early 2010 and scheduled the creditor as holding an unsecured debt. They did not list the judgment lien. The couple received their discharges in their no-asset case.
The couple refinanced their home in 2017 but claimed they remained unaware of the judgment lien, which the lender had renewed in 2014. The couple said they became aware of the judgment lien in 2019 when aiming to refinance a second time.
The couple reopened their bankruptcy case in September 2020 and filed a motion to avoid the judgment lien as an impairment of their homestead exemption under Section 522(f). The creditor opposed, raising a laches defense.
Bankruptcy Rule 5010 does not set a time limit for reopening a case to avoid a lien, Judge Kendig said. Laches kicks in under precedent from the Sixth Circuit Bankruptcy Appellate Panel when delay is accompanied by prejudice to the creditor resulting from the debtor’s conduct. The passage of time by itself is not enough. The creditor “must also show Debtors’ delay was prejudicial to stop their attempt to avoid the lien,” the judge said.
Judge Kendig ruled in favor of the creditor in a February 2 opinion, where he cited cases for the proposition that “[c]ourts acknowledge the importance of lien searches.”
Citing Bankruptcy Rule 9011 and Sections 707(b)(4)(C)(i) and (D), Judge Kendig said that the “importance of an attorney’s prepetition due diligence, including lien searches, cannot be understated.” Because the debtors knew the creditor had a judgment, he said that “a lien check should have been perfunctory.”
With knowledge of the lawsuit, the “failure to conduct a simple lien search . . . does not satisfy the ‘reasonable investigation’ requirement,” Judge Kendig said. He cited caselaw which “amply supports a higher investigative obligation when an attorney has special knowledge of a fact or issue.”
Even if the debtors themselves were not aware of the judgment, “the fault rests with their attorney [and] they are bound by his act or omission,” Judge Kendig said, citing Supreme Court authority.
Consequently, Judge Kendig decided that the debtors “are fully responsible for the failure to locate and list the lien in their schedules when they filed their case in 2010. Attempting to avoid it over ten years later because of the original failure to conduct a reasonable investigation of the lawsuit identified in their schedules is prejudicial to [the judgment creditor].” It was “surprising,” he said, that the debtors didn’t become aware of the lien as part of the 2017 mortgage refinancing.
Costs incurred by the creditor represented prejudice to the creditor resulting from the delay, according to Judge Kendig. Having demonstrated prejudice and “unacceptable delay,” he said that the creditor had satisfied its burden of proof to bar lien avoidance “by laches.”
In an opinion dealing with a belated attempt at avoiding a judgment lien that impaired a homestead exemption, Bankruptcy Judge Russ Kendig of Canton, Ohio, all but said that failure to conduct a lien search is legal malpractice.
A creditor sued the husband and wife in 2009. The creditor obtained a judgment and filed a judgment lien in late 2009. The couple evidently were aware of the judgment but claimed ignorance of the judgment lien.
The couple filed a chapter 7 petition in early 2010 and scheduled the creditor as holding an unsecured debt. They did not list the judgment lien. The couple received their discharges in their no-asset case.
The couple refinanced their home in 2017 but claimed they remained unaware of the judgment lien, which the lender had renewed in 2014. The couple said they became aware of the judgment lien in 2019 when aiming to refinance a second time.
The couple reopened their bankruptcy case in September 2020 and filed a motion to avoid the judgment lien as an impairment of their homestead exemption under Section 522(f). The creditor opposed, raising a laches defense.
Bankruptcy Rule 5010 does not set a time limit for reopening a case to avoid a lien, Judge Kendig said. Laches kicks in under precedent from the Sixth Circuit Bankruptcy Appellate Panel when delay is accompanied by prejudice to the creditor resulting from the debtor’s conduct. The passage of time by itself is not enough. The creditor “must also show Debtors’ delay was prejudicial to stop their attempt to avoid the lien,” the judge said.