Opinion
Bankruptcy Case No. 01-40005.
June 1, 2006
Franklin N. Smith, PIKE SMITH, Idaho Falls, Idaho, Attorney for Bank of Idaho.
R. Fred Cooper, Idaho Falls, Idaho, Attorney for Debtors.
MEMORANDUM OF DECISION
Background
Chapter 7 Debtors Terrel and Charlotte Transtrum protest the collection actions taken by one of their creditors, Bank of Idaho ("Creditor"), after their bankruptcy case was closed. Debtors contend that Creditor's actions to enforce a judgment lien against their real property violated the § 524(a) discharge injunction. Mot., Docket No. 55. Creditor disagrees, arguing that its judgment lien survived Debtors' bankruptcy discharge, and that it could seek payment of its debt through an in rem proceeding. Obj., Docket No. 60. After reopening the case by order entered on March 7, 2006, the Court conducted a hearing concerning Debtors' motion on April 11, 2006, at which the parties appeared, stipulated to the facts presented in their affidavits, and argued their respective positions. Docket Nos. 58, 59, and 61. At the hearing's conclusion, the Court took the issues under advisement. This Memorandum constitutes the Court's findings of fact, conclusions of law, and disposition of the issues. Fed.R.Bankr.P. 7052; 9014.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101- 1330, the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, and this Court's Local Bankruptcy Rules, Rules 1001.1-9034.1, as promulgated and enacted prior to the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. 109-8, 119 Stat. 23 (Apr. 20, 2005).
Debtors' motion actually alleges that Creditor's actions violate § 362(a), the automatic stay. However, Debtors clarified at the hearing that they intended to rely upon § 524(a), since at the time of Creditor's actions, they concede the automatic stay had terminated by operation of law under § 362(c).
Facts
Creditor made a loan to Debtors to finance a business which ultimately failed. When the loan was not repaid, Debtors and Creditor resolved a lawsuit commenced by Creditor against them to collect the loan by agreeing to the entry of a stipulated judgment in the state district court on November 1, 2000. Aff. of Smith, Ex. A, Docket No. 61; Aff. of Transtrum, ¶ 1, Docket No. 58. Creditor promptly recorded its judgment on November 3, 2000, in the Fremont County real property records. Aff. of Smith, ¶ 4, Ex. A, Docket No. 61.
Debtors filed a chapter 7 bankruptcy petition on January 2, 2001. In their schedules, they disclosed that they owned two parcels of real property, one of which was their residence, the other described as "3661 Loop Road" located in Fremont County, Idaho. Sched. A, Docket No. 1; Aff. of Smith, Ex. G, Docket No. 61; Aff. of Transtrum, ¶ 4, Docket No. 58. Debtors listed the market value of the Loop Road property as $119,368, and represented that the property was subject to a secured debt of $224,543. Id. Debtors claimed a homestead exemption on the Loop Road property, Sched. C, Docket No. 1, but the chapter 7 trustee objected to their exemption claim. The Court ultimately sustained the trustee's objection, resulting in the disallowance of Debtors' exemption. Docket No. 13; Aff. of Smith, Ex. E, Docket No. 61.
The Court entered a discharge in favor of Debtors on April 18, 2001. Docket No. 15. The bankruptcy case was closed on April 29, 2002, after trustee made a small distribution to unsecured creditors. Docket Nos. 50, 51. The Court's docket reveals that Debtors never sought to avoid Creditor's lien. See also Aff. of Smith ¶ 9, Docket No. 61.
On October 3, 2005, Creditor filed a motion in the state district court seeking to renew its judgment, which motion was ultimately granted. Aff. of Smith, ¶ 11, Exs. I, J, Docket No. 61. Debtors continue to own the Loop Road property, which has appreciated substantially over the years, in part because Debtors have made significant improvements to the property. They attempted to sell the property, but the sale fell through when Creditor sought to collect is judgment by attempting to attach the sale proceeds. Aff. of Transtrum ¶¶ 6-9, Docket No. 58.
Arguments of the Parties
Debtors contend that Creditor can not collect its debt because it was discharged in their bankruptcy case. While they agree that Creditor's recorded judgment constituted a valid lien against the Loop Road property, Debtors assert that because they had no equity in the property to which the lien could attach at the time they filed for bankruptcy, Creditor's lien was effectively unsecured, and thus discharged. Debtors argue that Creditor is not entitled to assert its lien as to any equity Debtors may have acquired in the Loop Road property after the bankruptcy case as a result of market appreciation or the improvements they made to the property. Creditor disagrees, and asserts that it can foreclose its lien on the property and reach any equity Debtors currently hold.
Discussion and Disposition
Debtors' position lacks merit. Under these facts, it is clear that Creditor's lien rights were not discharged in Debtors' bankruptcy, and Creditor may now pursue collection of the judgment via an in rem action against Debtors' real property.
When a judgment is recorded, it becomes a lien against any real property owned or acquired by Debtors in the county in which the judgment is recorded. Idaho Code § 10-1110. In this case, at the time Creditor recorded its judgment in the Fremont County real property records on November 3, 2000, Debtors owned the Loop Road property. Upon recording, Creditor obtained a judgment lien on that property.
Debtor's bankruptcy filing in 2001 stayed any actions to collect the debt evidenced by the judgment via operation of the § 362(a) automatic stay. However, when Debtors received their discharge on April 18, 2001, and the case was closed on April 29, 2002, the automatic stay terminated and was replaced by the protections of the discharge injunction. 11 U.S.C. § 362(c)(1) and (c)(2)(A), (C); 11 U.S.C. § 524(a)(2). A discharge injunction operates to
(1) void any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727 . . . of this title, whether or not discharge of such debt is waived;
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived; . . .
11 U.S.C. § 524(a). These Code provisions prevent any actions by a creditor to enforce Debtors' personal liability for prebankruptcy debts. But the reference in § 524(a) to a debtor's personal liability "makes clear that an in rem judgment, based upon a prepetition lien and running solely against the debtor's property, would not be affected by the discharge." 4 Collier on Bankruptcy ¶ 524.02 at 524-14.8 (Alan N. Resnick Henry J. Sommer, eds., 15th ed. rev. 2005). In other words, the right of a creditor to foreclose a prepetition lien survives, or "passes through," bankruptcy unaffected by the debtor's discharge, so long as the lien has not been avoided. Dewsnup v. Timm, 502 U.S. 410, 417 (1992); In re Eakin, 153 B.R. 59, 60 (Bankr. D. Idaho 1993); 4 Collier on Bankruptcy ¶ 524.02 at 524-14.8.
In this case, Debtors could not avoid Creditor's judgment lien on the Loop Road property under the power granted by § 522(f)(1)(A) because their exemption in the property was disallowed based upon the trustee's objection. They also could not avoid the lien as chapter 7 debtors under § 506(d), even if the lien was effectively unsecured considering the value of the property and the amount owed on consensual liens. See Dewsnup, 502 U.S. at 417; Roberts v. Nat'l Mortg. Servs. ( In re Roberts), 98.4 I.B.C.R. 106, 107 (Bankr. D. Idaho 1998) ("A lien, not otherwise subject to avoidance . . . passes through [a chapter 7 bankruptcy case] unaffected, and § 506(d) does not vary that result."). Cf. Shook v. CBIC ( In re Shook), 278 B.R. 815, 822-23 (9th Cir. BAP 2002) (explaining that, in contrast, under a chapter 13 plan, § 506(a) and (d) may be used to strip liens that are wholly unsecured).
Because Creditor's lien was unaffected by Debtor's discharge, Creditor could proceed in rem against Debtors' property after bankruptcy. Creditor did not violate the discharge injunction when it sought to renew its judgment lien or to satisfy its claim from any proceeds realized from the sale of the Loop Road property.
Conclusion
Debtors' motion will be denied. Creditor's actions to enforce its judgment lien against Debtors' real property did not violate the discharge injunction under § 524(a). A separate order will be entered.