After discharge, a creditor may not revivify a judicial lien that was avoided as an impairment of an exemption under Section 522(f), for reasons explained by Circuit Judge Frank H. Easterbrook, writing for the Seventh Circuit.
The result might have been different had the appellant alluded to the Rooker-Feldman doctrine.
The Avoided Lien
The creditor obtained a judgment in state court for $500,000 against the debtor before bankruptcy. The state court also awarded the creditor a lien on the debtor’s interest in an LLC. In bankruptcy, the debtor scheduled the LLC interest as being worth zero dollars. The trustee did not object to the exemption claim, and it was allowed.
In bankruptcy, the creditor objected to the dischargeability of the debt, citing Section 523(a)(4) and alleging that the debt had been acquired by fraud. The bankruptcy judge ruled in favor of the debtor and held that the debt was dischargeable.
The debtor persuaded the bankruptcy court to avoid the judgment lien as an impairment of an exemption under Section 522(f), utilizing a state exemption for certain types of personal property worth less than $15,000. The creditor did not object to the debtor’s general discharge nor to the avoidance of the judgment lien.
After discharge, the debtor moved in state court to have the judgment lien removed of record. The creditor objected, contending that state law only allowed the avoidance of liens on real estate. The state court agreed, ruling that the judgment lien subsisted.
The debtor then moved to reopen the bankruptcy case and prevailed on the judge to rule that neither the debt nor the lien existed after discharge. The district court affirmed, and the creditor appealed to the circuit.
The Lien Was Extinguished
On the merits, Judge Easterbrook began by saying, “Security interests and other liens often pass through bankruptcy unaffected,” citing Supreme Court authority. But “there are exceptions,” he said, including “assets exempt from execution.”
Therefore, Judge Easterbrook said that the effect of an exemption “is a matter of federal rather than state law.”
In the case at hand, Judge Easterbrook recited how the trustee agreed with the debtor’s low valuation on the LLC interest and abandoned the asset as worthless. The creditor “did not argue otherwise before the discharge was entered,” Judge Easterbrook said.
Quoting Section 522(f), Judge Easterbrook said that a trustee may avoid a judicial lien that impairs an exemption. Avoiding the lien was “straightforward,” he said.
The creditor argued in the circuit that it was error for the bankruptcy judge to have reopened the case. Judge Easterbrook found “cause” for the bankruptcy judge to have reopened the case by exercising discretion under Section 350(b).
Finally, the creditor contended that the bankruptcy judge committed error by not permitting the creditor to prove that the LLC interest was really worth more than $15,000. Judge Easterbrook rejected the argument by citing Rule 4003(b)(1), which requires objections to discharge within 30 days following the meeting of creditors.
Judge Easterbrook pointed out, though, that Rule 4003(d), dealing with proceedings to avoid judgment liens under Section 522(f), “does not have a separate time limit.” As a result, he said, “it leaves timing to the discretion of the bankruptcy judge.”
Judge Easterbrook saw no abuse of discretion in refusing to reopen the objection to avoidance of the judgment lien. He cited the record to show how the debtor’s schedules contained information that would have alerted the creditor to the possibility that the LLC interest was undervalued. Instead, the creditor only pursued dischargeability and never challenged the debtor’s assertion that the LLC interest was worthless.
Because the creditor “put all of his eggs in one basket,” Judge Easterbrook upheld the order of the bankruptcy court avoiding the judicial lien.
Observations
In the appeal to the circuit, the creditor did not allude to the Rooker-Feldman doctrine, which stands for the proposition that lower federal courts lack subject matter jurisdiction to sit in appellate review of state court judgments. The creditor could have argued that Rooker-Feldman barred the bankruptcy judge from ruling contrary to the state court’s decision that the lien subsisted.
Failing to argue Rooker-Feldman in the district court would not have prevented the creditor from raising the defense in the circuit court, because subject matter jurisdiction may be raised at any stage of a proceeding.
Because the circuit’s opinion does not include a thorough analysis of the state court judgment and the procedural posture, it’s possible that Rooker-Feldman would not have been applicable. Nevertheless, it is well to remember that state courts and bankruptcy courts have concurrent jurisdiction after discharge to determine whether a particular debt was discharged.
After discharge, a creditor may not revivify a judicial lien that was avoided as an impairment of an exemption under Section 522(f), for reasons explained by Circuit Judge Frank H. Easterbrook, writing for the Seventh Circuit.
The result might have been different had the appellant alluded to the Rooker-Feldman doctrine.