If the underlying debt was excepted from discharge, the creditor does not violate the discharge injunction by collecting the underlying debt from nonexempt property, even when the judicial lien securing the debt had been avoided, for reasons explained by the First Circuit Bankruptcy Appellate Panel in an opinion by Bankruptcy Judge Bruce A. Harwood.
Vastly simplified, a municipality had a judgment from state court directing the debtor to convey a unit in a subsidized housing project to the city in return for some $180,000 to be paid by the city. The state court judgment permitted the city to deduct attorneys’ fees of about $70,000 from the purchase price. The $70,000 represented expenses incurred by the city in obtaining the judgment requiring specific performance.
The debtor subsequently filed a chapter 7 petition and obtained a general discharge, but the city won a declaration that the $70,000 debt was excepted from discharge on account of the debtor’s misrepresentations. The bankruptcy court also ruled that the judgment requiring conveyance of the property was not a “claim.” Instead, the order for specific performance was an equitable remedy not subject to discharge.
In a previous appeal, the BAP had upheld the exception to discharge and the declaration that the judgment requiring conveyance was not discharged.
However, the debtor persuaded Bankruptcy Judge Frank J. Bailey to avoid the judicial lien for the $70,000, because the lien impaired her homestead exemption.
The previous litigations resolved, the city wrote to the debtor telling her to prepare for closing the conveyance of the unit, with the sale price reduced by the city’s attorneys’ fees. The debtor responded by alleging that the city had violated the discharge injunction and the order avoiding the judicial lien.
Judge Bailey ruled in favor of the city, finding no contempt because both specific performance and the offset for attorneys’ fees were not discharged.
The debtor appealed to the BAP and lost in Judge Harwood’s May 27 opinion.
First, of course, Judge Harwood said that attempting to collect a debt excepted from discharge does not violate the discharge injunction in Section 524(a)(1).
But what about the avoided judicial lien? Didn’t the city violate the order avoiding the judicial lien by attempting to collect the $70,000?
Judge Harwood explained how the debtor “misapprehend[ed] . . . the effect of lien avoidance.” Lien avoidance, he said, does not “destroy” the underlying debt but changes the status to that of an unsecured claim. In other words, “Lien avoidance and dischargeability of debts are not dependent on each other.”
“Thus, a creditor whose judgment lien has been avoided under § 522(f), but whose claim is nondischargeable, may seek to recover from non-exempt property after the debtor’s discharge,” Judge Harwood said.
The claim for $70,000, now unsecured, had been declared nondischargeable, and the judgment for specific performance was likewise not subject to the discharge injunction.
Judge Harwood found no violation of the lien-avoidance order because the city was collecting the $70,000 as an offset against the purchase price, a nonexempt asset. Likewise, enforcing specific performance did not violate the discharge injunction, as the BAP had held in the prior appeal.
If the underlying debt was excepted from discharge, the creditor does not violate the discharge injunction by collecting the underlying debt from nonexempt property, even when the judicial lien securing the debt had been avoided, for reasons explained by the First Circuit Bankruptcy Appellate Panel in an opinion by Bankruptcy Judge Bruce A. Harwood.
Vastly simplified, a municipality had a judgment from state court directing the debtor to convey a unit in a subsidized housing project to the city in return for some $180,000 to be paid by the city. The state court judgment permitted the city to deduct attorneys’ fees of about $70,000 from the purchase price. The $70,000 represented expenses incurred by the city in obtaining the judgment requiring specific performance.
The debtor subsequently filed a chapter 7 petition and obtained a general discharge, but the city won a declaration that the $70,000 debt was excepted from discharge on account of the debtor’s misrepresentations. The bankruptcy court also ruled that the judgment requiring conveyance of the property was not a “claim.” Instead, the order for specific performance was an equitable remedy not subject to discharge.
In a previous appeal, the BAP had upheld the exception to discharge and the declaration that the judgment requiring conveyance was not discharged.
However, the debtor persuaded Bankruptcy Judge Frank J. Bailey to avoid the judicial lien for the $70,000, because the lien impaired her homestead exemption.