JOINT TENANCY IRRELEVANT TO JUDICIAL LIEN AVOIDANCE OF RESIDENCE IN BANKRUPTCY

Finding it difficult to understand the title of this article? Imagine a situation where debtor filed a bankruptcy after a judicial lien has attached to debtor’s residence pursuant to a judgment against debtor. Title to the residence is held by debtor and another person as joint tenants. Debtor seeks to cancel the judicial lien in bankruptcy. Creditor objects on the ground that debtor cannot avoid judicial lien against himself alone, excluding the joint tenant, because title is held by debtor and another person as joint tenants. Who is correct?

 This is exactly what happened in Premier Capital, Inc. v. Pagnini (1st Circuit, 2010). The debtor and her former boyfriend owned her home as joint tenants until 2003, when title was conveyed to debtor alone. In 2004, debtor transferred title to herself and her daughter as joint tenants. Thereafter, creditor brought a collection action against debtor and obtained a judgment lien against her home. Creditor had a judgment lien for $63,667 which was more than the entire equity of the house. In 2009, debtor recorded a homestead declaration on the property. She filed for Chapter 7 relief shortly thereafter and asked the court to avoid or cancel the lien of $63,000 that had attached to her residence. The creditor objected to her motion to avoid lien on the grounds that the homestead exemption did not extend to the daughter’s interest in the property. The Bankruptcy Court found that the creditor’s lien impaired the debtor’s homestead exemption and ruled that she could avoid or cancel it. Creditor appealed. The 1st Circuit Bankruptcy appeals panel affirmed. Because the appellant’s judgment was against debtor alone, the Court of Appeals said the appellant’s arguments regarding the daughter’s interest in the property were irrelevant. Focusing only on debtor’s interest, the Court of Appeals agreed that the appellant’s lien impaired her exemption in her interest in the property. “Here, the property was worth $275,000 and was encumbered by two mortgages totaling $226,000. Therefore, there was $49,000 of equity, and the debtor’s half interest in it was $24,500. The amount of the appellant’s lien was $63,667.38. The amount of the exemption the debtor could claim if there were no liens on the property was $500,000. The sum of the liens and the amount of the exemption the debtor could claim if there were no liens exceeded the value of the debtor’s interest in the property in the absence of liens. See 11 U.S.C. SS 522(f)(s)(A). The Bankruptcy Court, therefore, did not err in concluding that the debtor may avoid the appellant’s lien in its entirety,” said the Court of Appeals.

If this case had been filed in California, the outcome would have been the same even if the homestead exemptions here are a lot less than $500,000. Here in California, the applicable homestead exemption for debtor is 704.730, which provides an exemption of $100,000 for head of household. Thus, debtor would still be able to exempt her share of the equity in the house of $24,500. Bankruptcy courts here would still rule against creditor and find that debtor can avoid or cancel the judgment lien of $63,667.38.

 Why even bother to cancel the judicial lien if the bankruptcy wipes out the judgment of $63,667.38? Because while it is true that bankruptcy discharges the judgment of $63,667.38, the discharge order alone does not avoid or cancel the judicial lien that attached to residence before the bankruptcy was filed. If the bankruptcy was filed before the lien was issued, then the lien would never attach because of the automatic stay even if judgment was issued pre-filing. But if the lien attached to the residence pre-filing, a separate bankruptcy court order must be obtained during the bankruptcy specifically ordering the cancellation of the lien. Otherwise, the lien would still exist and is still attached to the residence despite the discharge. Judicial lien avoidance is done by motion. This motion should be filed as soon as possible after the bankruptcy case has started. Creditor may object.

 Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.