Pub. 13 2022 I Issue 1 Spring 25 West Virginia Banker The effect of Section 524(a) of the Bankruptcy Code is to provide the debtor with a discharge from personal liability for most pre-petition debts under the applicable provisions of the bankruptcy code, including debts evidenced by a prebankruptcy judgment. It further protects the debtor from any court action to collect, recover, or offset any discharged debt as a personal liability of the debtor. Because of the language in Section 524(a)(1) stating that the discharge “voids any judgment,” a title examiner with limited knowledge of the Bankruptcy Code may assume that the effect of a discharge is also to void the judgment lien against the real property of the debtor when the judgment was obtained prior to the debtor’s bankruptcy case. Accordingly, the title examiner may fail to report the existence of a pre-bankruptcy judgment lien on the title report or opinion, which would be a serious error. The United States Supreme Court has held that a creditor’s right to foreclose on a lien survives the bankruptcy proceedings notwithstanding the discharge of personal liability of the debtor pursuant to 11 U.S.C. Section 524(a). (See Johnson v. Homestate Bank, 501 U.S. 78, 82-83, 111 S. Ct. 2150, 2153, 115 L. Ed. 2d 66, 73-74 (1991).) Thus, the mere fact that a property owner has obtained a discharge of a prepetition indebtedness, which was reduced to judgment prior to bankruptcy, does not mean that the bankruptcy has wiped out the pre-bankruptcy judgment lien against the owner’s property. Instead, to avoid the bankruptcy trap, a knowledgeable title examiner must investigate further to determine if other action has been taken during the debtor’s bankruptcy proceedings to expunge the judgment lien from the debtor’s property. Other actions that may occur during a bankruptcy proceeding that would have the effect of removing the lien as a lien against the real property owned by the debtor include a sale of the debtor’s real property during the pendency of the bankruptcy proceeding “free and clear of liens” pursuant to an applicable court order under 11 U.S.C. Section 363(f); avoidance of the judgment lien pursuant to the avoidance powers of the trustee; “stripping” of the lien pursuant to a confirmed bankruptcy plan; and avoidance of the judgment lien by the debtor pursuant to 11 U.S.C. Section 522(f). However, even if the diligent title examiner discovers any of these events in the course of the debtor’s bankruptcy proceedings, further questions must be asked, or the unwary title examiner may fall into another bankruptcy trap. It would seem logical to assume that the entry by a bankruptcy court of an order allowing a piece of real property to be sold free and clear of liens pursuant to 11 U.S.C. Section 363(f), and a subsequent sale of that property by the trustee or the debtor, would be sufficient to remove a pre-bankruptcy judgment as a lien on the real property conveyed; however, the order has that effect only if the sale, which occurred, was conducted in accordance with the specific terms regarding the manner of sale, sale price, and identity of purchasers in the court order authorizing the sale. For example, if the order authorizes a sale of the property free and clear of liens to John Smith for $250,000.00, and the property is sold to John Smith or another for a lesser price, the sale may be ineffective to remove the judgment liens and voidable. In addition, if the order authorizes a sale by auction, further bankruptcy orders may be required to confirm the sale after auction. Accordingly, once a title examiner discovers a sale of a property during bankruptcy “free and clear of liens,” an effort should be made to obtain as much information as possible regarding the terms of the order authorizing the sale and the circumstances of the actual sale, and that information should be forwarded to a knowledgeable bankruptcy attorney or the title insurer for a determination of whether the sale was sufficiently in compliance with the terms of the court’s order to remove the pre-bankruptcy judgment liens. If the title examiner discovers that the property was conveyed by the debtor or trustee during the pendency of the bankruptcy and the property examiner cannot obtain any evidence of a court order allowing the sale “free and clear of liens,” the conveyance will be invalid to convey the property free and clear of judgment liens, unless the sale was made by the trustee or the bankruptcy debtor in the ordinary course of the business of the bankruptcy debtor and the requirements of Section 363(f) of the Bankruptcy Code are met. The title examiner should not rely upon statements of the debtor or the trustee to determine whether or not a sale of real property allegedly “in the ordinary course of business” of the debtor is sufficient to remove the attached judgment liens from the property. Instead, the title examiner should convey all information known to a knowledgeable bankruptcy attorney or the title insurer to make such a determination. In any event, the matter should be reported to the title insurer, who will often require a court order clarifying that the sale Instead, to avoid the bankruptcy trap, a knowledgeable title examiner must investigate further to determine if other action has been taken during the debtor’s bankruptcy proceedings to expunge the judgment lien from the debtor’s property. Continued on page 26
RkJQdWJsaXNoZXIy MTIyNDg2OA==