Addressing Judgment Liens Post-Bankruptcy: Three Takeaways for Debtor’s Counsel

In re Horvath[1] provides a cautionary tale for debtors who seek to address judgment liens post-discharge, whether strategically or due to pre-filing negligence.

If the debtor has been sued before she files bankruptcy and a money judgment is entered, then a properly indexed lien attaches to real estate as a matter of law.[2] This lien then clouds title and makes certain future actions — like a sale or refinancing — all but impossible. A bankruptcy discharge will not affect the lien without a properly noticed — and timely — avoidance action.

In Horvath, the debtors reopened their bankruptcy case 10-plus years after discharge for the express purpose of avoiding a judgment lien resulting from a 2009 state court judgment. Judge Russ Kendig ultimately denied the attempt. The decision should be reviewed cautiously for those who may seek to avoid such liens after the case is closed, particularly if they have strategically chosen to delay. Judge Kendig provided helpful points of guidance for three questions: what must be done to avoid liens, what can happen if the debtor delays, and whether debtors’ counsel can plead ignorance.

Lien Avoidance Is an Affirmative Action and Must Be Properly Noticed

It is not enough for debtors to list the lawsuit plaintiff on the creditor matrix and reference the cause of action in the Statement of Financial Affairs. These actions, both done by the Horvaths, were only sufficient to relieve the debtors of their personal liability once the bankruptcy court granted a discharge. The judgment lien remained attached to their residence, impairing their homestead exemption.

To properly avoid the lien, the debtor must take affirmative action and file an avoidance action under 11 U.S.C. § 522(f). This motion must be properly noticed, which, for depository institutions, requires certified mail.

Debtors’ Delay Can Result in a Successful Laches Defense for Creditors

Some debtors’ counsel may strategically refuse to file motions to avoid, under the assumption that if an issue arises down the road, they can negotiate a Satisfaction of Judgment by threatening to reopen the bankruptcy case. Or, failing in that approach, they can follow through with their threat and succeed in properly avoiding the lien.

Even though Rule 5010 does not establish a time limit for a debtor to reopen a case in order to avoid a lien,[3] the Horvath result outlines the risk associated with an extensive delay. Debtors may technically avoid the lien years after discharge either by agreement or through an avoidance action, but a downside risk lurks below. A savvy creditor will argue that laches applies and that the debtors’ delay was unreasonable and unfair to the parties adversely affected.

The creditor in Horvath argued just that, and Judge Kendig agreed: “In the period between the bankruptcy case and the present motion, First Ohio has incurred additional costs to maintain the lien, renewing it twice. It has spent resources maintaining records of the loan and accruing interest for the past decade. It responded to two inquiries following title searches in 2017 and 2019 and is defending itself now.”[4] As such, Judge Kendig found that laches applied, and denied the debtors a delayed opportunity to avoid the lien.

Ignorance of the Lien Is No Excuse and May Be Malpractice

Counsel to the debtor must conduct a reasonable investigation into the information on the debtor’s petition. As Judge Kendig stated, “The failure to conduct a simple lien search, especially in light of knowledge of a lawsuit against a debtor who owns real estate, does not satisfy the ‘reasonable investigation’ requirement.”[5] While not using the “m-word” explicitly, Judge Kendig does not mince words: “The importance of an attorney’s pre-petition due diligence, including lien searches, cannot be understated.”^[6] Therefore, an attorney can strategically delay avoidance and risk laches, but should not plead ignorance of the lien.

By far the easiest, and best, time to avoid a judgment lien is during the pendency of the bankruptcy case. Yes, it is cumbersome tracking down the legal description, preparing the motion, providing proper notice and watching for the signed order, but one should not risk the result in Horvath through unnecessary delay.