United States: Automatic Stay Prevents Attachment Of After-Acquired Judgment Lien

On Sept. 23, 2013, in Rodriguez v. Gelman (In re Local Service), 503 B.R. 136 (Bankr. D. Colo. 2013), the U.S. Bankruptcy Court for the District of Colorado addressed an issue of first impression in that district; namely, whether, by virtue of the automatic stay, 11 U.S.C. Section 362, the filing of a bankruptcy petition prevents the attachment of what would otherwise be a valid judgment lien on real property recovered by the debtor after the commencement of the bankruptcy case. On cross-motions for summary judgment filed by a debtor's Chapter 7 trustee and a creditor bank, the court "reluctantly" determined that—contrary to the court's understanding of the principles of statutory construction—the automatic stay did apply to prevent the attachment of the creditor's judgment lien to property acquired by the debtor's estate after the petition date.

Facts

This case stems from two bankruptcy cases: one filed by John Watson, a real estate developer who conducted business through numerous entities that he controlled; and the second filed by one of Watson's companies, Local Service Corp. (LSC). Before filing for bankruptcy protection, Watson developed a project called Breckenridge Mountain Estates (BME) through certain of his companies, including LSC. In the summer of 2006, both Watson and LSC conveyed their interests in certain lots of the BME project to another of Watson's companies, Skyline Estates LLC, through the recording of quitclaim deeds. After the conveyances to Skyline of Watson's and LSC's interests in the BME lots, in February 2007, Alpine Bank obtained a default judgment against Watson and LSC in the amount of approximately $2.2 million.

In September 2007, Watson filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code, and listed as one of his assets a 100 percent ownership interest in LSC. After Watson's bankruptcy was converted to a Chapter 7 case and a U.S. trustee was appointed pursuant to Section 701 of the Bankruptcy Code, the trustee caused LSC to file its own voluntary Chapter 11 petition. At the time of these bankruptcy filings, Skyline continued to hold title to the BME lots.

In June 2008, LSC filed an adversary proceeding seeking to recover assets, including the BME lots, which were alleged to have been fraudulently transferred to Skyline by LSC. In that proceeding, LSC (through its trustee) sought to pierce Skyline's corporate veil. The bankruptcy court ultimately entered a default judgment against Skyline that provided, in part, that Skyline and LSC were alter egos of one another, and that Skyline was a corporate fiction designed to shield LSC's assets from creditors. Accordingly, Skyline's interest in the BME lots was awarded to LSC's estate.

LSC's bankruptcy case was subsequently converted to a case under Chapter 7 of the Bankruptcy Code and Simon E. Rodriguez was appointed as trustee in LSC's case. Rodriguez obtained court approval to sell the BME lots free and clear of liens, and then filed an adversary proceeding to determine the validity, extent and priority of liens asserted against the proceeds of the sale of the BME lots, including a lien asserted by the bank.

Positions of the Parties

The bank asserted that it had a lien on the proceeds of the sale of the BME lots due to the unsatisfied judgment lien it had obtained against Watson and LSC in February 2007.

The bank relied upon Colorado's transcript of judgment statute, which provides as follows: "The judgment shall become a lien upon all the real estate, not exempt from execution in the county where such transcript of judgment is recorded, owned by such judgment debtor or which such judgment debtor may afterwards acquire in such county, until such lien expires."

The bank argued that this provision provides for the automatic application of a lien to "after-acquired" real property of a judgment debtor. Therefore, according to the bank, once the BME lots became property of LSC's estate, the bank's judgment lien validly attached to the proceeds of the BME lots post-petition, through operation of the statute.

Rodriguez disagreed, arguing that the automatic stay of 11 U.S.C. Section 362 prevented Colorado's lien statute from taking effect. Both Rodriguez and the bank moved for summary judgment in this adversary proceeding.

The Court's Analysis

The court undertook an in-depth analysis of certain Bankruptcy Code provisions to parse out whether prepetition judgment liens, such as the one asserted by the bank, could attach to property acquired by a bankruptcy estate. The court first examined 11 U.S.C. Section 552(a), which specifically cuts off the operation of after-acquired property clauses, but only in the context of consensual liens, such as those in a security agreement entered into by a debtor. The court noted that because Section 552(a) does not apply to involuntary liens, the rule of statutory construction known as expressio unius est exclusio alterius—where a statute expressly includes certain items, omitted items should be understood to be excluded—provides that because involuntary liens were not included in Section 552(a), there was an inference that this omission should be understood as an exclusion from the statute.

The court went on, however, to a broader analysis and considered the overarching principles of the Bankruptcy Code, which include maintaining the status quo between all of a debtor's creditors, and preventing any creditors from improving their individual positions to the detriment of other creditors. The court considered the automatic stay, which has the dual purpose of both allowing the debtor some breathing room, and also preventing a "race to the courthouse" by creditors seeking to pillage a debtor's assets. The court identified two enumerated exceptions to the automatic stay for the perfection of certain tax liens (11 U.S.C. Sections 362(b)(9) and (18)). According to the court, these exceptions to the automatic stay would be rendered superfluous, in violation of another rule of statutory construction, were the court to hold that automatic stay allowed for the attachment of a prepetition judgment lien to property acquired by the debtor post-petition. The court further supported its position with reference back to an overarching principle of the Code: that of achieving parity among a debtor's creditors. The court noted that if the bank's lien were allowed to attach to the proceeds of the BME lots, the bank would have improved its position vis-à-vis LSC's other creditors. Accordingly, the court held that the automatic stay prevented the attachment of the bank's prepetition judgment lien to the proceeds of the sale of the BME lots, despite the Colorado statute upon which the bank relied.

The court did note that it came to its conclusion "reluctantly" because this was a rare situation where, when following the rules of statutory construction, "there is no credible way to harmonize" the various provisions of the Code. Ultimately, the court assumed that the omission of involuntary liens from the language of Section 552(a) of the Code was likely an oversight. In the absence of binding legal precedent holding otherwise, the court felt compelled to rely on the legislative intent of the Bankruptcy Code to freeze creditors' positions as they existed on the date that the bankruptcy case was filed.

Protect Rights to Any Property of Judgment Debtor

The bank's argument in this case had some appeal, because the real property in question was originally owned by LSC and, but for LSC's fraudulent transfer, the realty would have been property of LSC's estate. However, despite this logical appeal, the bankruptcy court for the District of Colorado has now joined several other jurisdictions in holding that the automatic stay of 11 U.S.C. Section 362 does prevent the attachment of a creditor's prepetition judgment lien to property acquired by a debtor's estate after the petition date. While this had always been the rule for consensual liens, the Colorado bankruptcy court has concluded that judgment liens are also subject to the operation of the automatic stay where property that would otherwise be subject to the judgment lien becomes part of the debtor's Chapter 7 estate. Consequently, judgment lien creditors in all jurisdictions should do what they reasonably can to promptly protect and enforce their rights to any property of a judgment debtor before any bankruptcy filing, including seeking to execute on such judgment or, if appropriate, seeking a lis pendens recordation against the realty. While there can be no guarantee of success, quick action will increase a creditor's likelihood of success.

This article originally appeared in The Legal Intelligencer and is republished here with permission from law.com.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions