Issue 5

Fall 1998

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

BANKRUPTCY - LIEN AVOIDANCE UNDER 11 U.S.C. SEC. 522[f)

In a title examination, a bankruptcy proceeding will, on occasion, be found. See 11 U.S.C. .Sec. 549(c).

11 U.S.C. Sec. 522(f) is the operative Bankruptcy Code provision allowing avoidance of certain judicial liens.

Sec. 522(f) allows the debtor to avoid the fixing of a lien on the interest of the debtor in property to the extent such lien impairs an exemption to which the debtor would have been entitled.

A judicial lien is defined in 11 U.S.C. Sec. 101 as a lien obtained by judgment, levy, sequestration, or other process. Statutory lien is defined in 11 U.S.C. Sec. 101 to mean a lien arising solely by force of a statute, whether or not it is made fully effective by statute, but does not include a security interest or a judicial lien. Therefore, "statutory lien" has been interpreted to include a mechanics' lien upon the improved real property and a federal tax lien. 4 Collier on Bankruptcy, Paragraph 522.11[1] (15th Rev. Ed.). A "judicial lien" includes a docketed judgment, including to the extent a mechanics' lien judgment constitutes a general judgment lien (as opposed to a relation-back lien under G.S. 44A-13(b) and G.S. 44A-10) on real property.        

Certain judicial liens are excepted from 11 U.S.C. Sec. 522(f)'s application. For instance, a judicial lien securing a debt to a spouse, former spouse or child for alimony or support, in connection with a separation agreement or court decree, is not affected by 11 U.S.C. Sec. 522(f) in most cases. 11 U.S.C. Sec. 522(f)(1)(A).      

Since the Bankruptcy Reform Act of 1994, 11 U.S.C.Sec. 522(f)(2)(A) and (B) provide that a lien shall impair an exemption to the extent that the sum of (1) the lien, (2) all other liens on the property (other than a lien that has already been avoided) and (3) the amount of the exemption that the debtor could claim if there were no liens on the property, exceeds the value that the debtor's interest in the property would have in the absence of any liens.     

Several examples of 11 U.S.C. Sec. 522(f)(2)(A)'s application are discussed in the Comment to the 1994 amendments to the section. (1) For example, if the unavoidable encumbrance (for example, a deed of trust) is $40,000, the judicial lien subordinate thereto is $20,000, the value of the property is $40,000, and the exemption is $15,000, the $20,000 judicial lien is completely avoidable, notwithstanding limitations in G.S. 1 C-1604(a) on the duration of the state exemption. The lien cannot reattach to post-avoidance increase in the debtor's equity. See, collectively, In Re Opperman, 943 F.2d 441 (4th Cir. 1991); Owen v. Owen, 59 U.S.L.W. 4486, 24 C.B.C. 2d 850 (U.S. Supreme Court 1991); M. Howard, Avoiding Powers and the 1994 Amendments to the Bankruptcy Code, 69 The American Bankruptcy Law Journal 259, at 268-271 (Summer 1995); and E. Urban, North Carolina Real Property Mechanics' Liens, Future Advances and Equity Lines, Sec. 6-20 (Harrison Co. 1998). (2) For example, if the unavoidable encumbrance is $40,000, the judicial lien subordinate thereto is $20,000, the property is worth $50,000 and the exemption is $15,000, the entire $20,000 lien will be completely and forever avoidable. See the authorities cited above. (3) It has been stated that if the property value exceeds the total of the judicial lien to be avoided, all other liens on the property and the maximum exemption amount, then the judicial lien is not impairing the exemption and cannot be avoided. 4 Collier on Bankruptcy, Paragraph 522.11[3]; 11 U.S.C. Sec. 522(f)(2)(A).

The U.S. Supreme Court has held that 11 U.S.C. Sec. 522(f) does not apply unless the debtor possessed the encumbered interest in the property prior to the attachment of the lien, Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825, 114 L.Ed2d 337 (1991).

If the debtor moves to have a lien avoided under 11 U.S.C. Sec. 522(f) in a situation where complete and permanent lien avoidance is permitted, the order of lien avoidance should so state. The procedure is a Bankruptcy Rule "Contested Matter." Bankruptcy Rules 4003(d), 9014 and 7054. A docket is kept for bankruptcy proceedings. Orders are noted thereon. Bankruptcy Rule 5003. However, if the order merely states that the lien is avoided "to the extent it impairs the exemption" of the debtor instead, of the lien being more definitively disposed of as suggested above, it would seem that the order would have the same effect if the facts and law warranted complete and permanent lien avoidance. However, please call us in such a case.

We will want to have the approved attorney's view regarding the avoidance procedure and we may need to see the proceeding documents.     

It is noted that in North Carolina, exemptions are claimed pursuant to G.S. lC-1601, et seq. or Article X of the Constitution of North Carolina.

DEEDS Of TRUST MODIFICATIONS, JOINDER AND OTHER ISSUES - A SUMMARY

1.     Joinder issues

A deed of trust is a conveyance to the trustee for the beneficiary-lender. North Carolina is a "title state." P . Hetrick arid J. McLaughlin, Webster's Real Estate Law In North Carolina, Secs. 13-2 and 13-3. Below, we have summarized several basics that prudent attorneys seem to be following.

If the modification agreement (or supplemental deed of trust, or whatever the modification document is called) adds land to the lien of the original deed of trust, but does nothing else, the owner must execute the modification conveying the land to the trustee with operative words of conveyance (and, if appropriate, warranty). However, neither the beneficiary nor the trustee need join in the execution.

If the modification agreement releases land originally encumbered by the deed of trust, the trustee should join in the execution of the modification, using operative words of conveyance, to convey to the owner the land, thereby releasing the land from the lien of the deed of trust. This is because the trustee was originally conveyed the title as noted above. The beneficiary- lender should also join in the execution, giving its approval to the trustee's act. The owner need not join, since the owner is the grantee.

If the modification changes only certain contractual provisions of the deed of trust (such as what constitutes an event of default), it would seem that only the owner and the beneficiary-lender need to join in the execution of the modification.

Certain modifications effect several changes, such as changing contractual provisions, releasing certain land and adding new land. In such a circumstance, the joinder of the owner, the trustee and the beneficiary-lender is appropriate.

2.     Title insurance considerations

Contact The Title Company for your title insurance questions regarding modifications. For example, we can let you know whether a title insurance loan policy endorsement can be issued which will (1) advance the Date of Policy forward to the date and time of the recording of the modification; (2) change the description of the land insured and add or delete certain exceptions; (3) increase the amount of coverage if the loan amount is increased; and (4) with respect to land originally insured, insure the priority of the deed of trust, as modified, over a lien having an effective date of priority after the recording of the deed of trust and before the recording of the modification. Of course, where the amount of the loan is increased, (4) will not be possible as to the increased amount.

In a subsequent article, we will discuss the contents of certain modifications and their effect on priority. However, as to priority, see T. Eatman and B. Herring, Loan Modifications and the Effect Upon Lien Priority (NCBA Real Prop. Sec. Newsletter. Vol. 12 No. 4. 1991). 

COMMONLY ENCOUNTERED LIENS AND PERIODS OF LIMITATION

Below, in outline form, we will set out the period of limitations applicable to certain liens and the conditions affecting the applicable period.

Judgment. State Court:

*       10 years from rendition - not docketing. G.S. 1-234

*        No extension - action on judgment becomes new lien with priority from docketing only. Springs v. Pharr, 131 N.C. 191, 

 42 S.E. 590 (1902)

*        Execution sale commenced within period may be enough to toll period. G.S. 1-339.48; compare McMullen v. Durham. 229 N.C. 418, 50 S.E.2d 511 (1948).

*        There can be no execution or enforcement until 10 days after judgment entry. G.S. 1-310, G.S. 1A-1, Rule 62(a).

*        A stay pending appeal can be entered on the judgment docket. G.S. 1-289.

*        Effective October 1, 1991, allocation of property as exempt can effect a suspension of the 10-year period if a copy of the order of designation is recorded in the register of deeds office where the property is located. G.S. lC-1604(a1). A one-year grace period to October 1, 1992 was allowed by session law. Prior to the enactment, it was thought that designation of the property as exempt under Chapter 1C not only stayed enforcement of liens but also suspended the 10-year period. This has caused certain 

authorities to counsel checking for judgments back to 1972. Even prior to G.S. lC-1604(a1), G.S. 1C-1603(f) required notation of exemption to be listed on the judgment docket opposite the judgment in question. A. M. Humphreys, Legislative Report., Real Property Law Section Newsletter, Vol. 13, No.1 (NCBA 1991).

A good faith purchaser or good faith mortgagee is protected against injunction or restraint against judgment enforcement. G.S. 1-234. This statute might protect such a party against a specific stay other than (1) those noted on the judgment docket or by virtue of G.S. 1C-1604(a1) or pursuant to GS 1-310 and G.S. 1A-1, Rule 62(a) and (2) facts resulting in suspension of the 10 year period known to such a party. See G.S. 1-21.

(Note:  the rest of this article will be continued in our next issue.)

MOBILE HOMES, MANUFACTURED HOUSING UNITS AND MODULAR HOMES - UPDATE ON BRIGGS V. RANKIN

In our Issue 4 (Summer 1998), we discussed the above titled topic, including Briggs v. Rankin, 491 S.E.2d 234 (N.C. App. 1997). The North Carolina Supreme Court has affirmed this decision in a per curiam opinion.  

LET US KNOW WHAT YOU WOULD LIKE TO READ ABOUT

Established nearly 16 years ago, The Title Company is dedicated to bringing you topics that can be useful to your practice, whether it be residential, commercial or both residential and commercial real estate. While we have several topics in mind for future articles, let us know what you would like to read about. We will make every effort to accommodate the request.

If you have any questions arising in your transactions, please do not hesitate to contact our staff not only for legal analysis, but also for creative and responsive underwriting. All of us at The Title Company thank you for your support.

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