Lien Creditors Ability to Oppose or Object to a Debtor’s Motion to Avoid Judicial Lien Despite Not Previously Objecting to a Debtor’s Claim Exemption

Posted in Blog, Real Estate by on May 31st, 2016

By: Attorney Raymond C. Pelote | Partner

Massachusetts-Attorney-Lawyer-Dog-Bite-LawWhen debtors file Chapter 7 or Chapter 13 bankruptcy petitions, many lien creditors don’t pay attention to the filing, despite receiving notice, until such time as the creditor’s liens are in jeopardy. Debtors, in filing their bankruptcy petitions, designate certain property they seek to exempt. Typically, debtors seek to exempt their largest asset which is their real estate. The debtors, in Massachusetts and Rhode Island, have two (2) options. One, the debtor can claim their respective state exemption, which in Massachusetts and Rhode Island is currently $500,000.00. Two, the debtors can elect the federal exemption which is around $22,975.00. More often than not, debtors declare the state homestead exemption as it provides more of a protection for the debtor’s equity in the real estate.

When reviewing a debtor’s bankruptcy petition, it is important to thoroughly review all of the debtor’s schedules and other related documents filed by the debtor. Particularly, lien creditors should look at Schedule C which will display the debtor’s claimed exemptions. On this schedule, the debtor will list his or her real estate, among other properties owned by the debtor, and declare whether the debtor will select the state or federal exemptions. As I said before, more often than not, a debtor will elect his or her state exemptions in an effort to protect their real estate. If a lien creditor, after reviewing a debtor’s Schedule C, discovers that a debtor has elected his or her state homestead exemption, then it is important for the lien creditor to determine whether the creditor’s lien impairs the debtor’s claimed exemption. Typically, a creditor who holds a mortgage lien on a debtor’s real estate will not be affected by the debtor claiming a homestead exemption in his or her real estate. Typically, in a mortgage, there is a “waiver of homestead exemption” provision that protects a creditor who holds a mortgage interest in a debtor’s real estate.

The creditor who is mostly affected is the judicial lien creditor. This creditor obtained a judgment against a debtor in state court and recorded an execution against the debtor’s real estate. Unfortunately, a judicial lien does not contain a “waiver of homestead exemption” provision that is contained in a mortgage. As such, in almost all cases, a judicial lien will impair a debtor’s claimed homestead exemption on his or her real estate. In that regard, lien creditors should file an objection to a debtor’s claimed homestead exemption to protect its judicial lien. Before filing an objection, it is important to assess whether a lien creditor has a basis to object to a debtor’s claimed homestead exemption. For example, if the judicial lien is on the debtor’s residence and the residence is a one-to-four family residence, then the lien creditor may not have a sufficient basis to object to the debtor’s claimed homestead exemption. However, if the debtor resides in a mixed-use property which is predominately commercial, the lien creditor may be in a better position to object to the debtor’s claimed homestead exemption in the real estate. It is important to remember that the homestead exemption statute in Massachusetts and Rhode Island protects a debtor’s principal residence. However, the homestead statute is not designed to protect a debtor’s interest in commercial property. In light of same, a lien creditor may have a valid objection to a debtor’s claimed homestead exemption in mixed-use property where the property is predominately commercial.

Federal Rule of Bankruptcy Procedure 4003(b) provides that “a party in interest may file an objection to the list of property claimed as exempt within thirty (30) days after the meeting of creditors is held under Section 341(a) is concluded or within thirty (30) days after any amendment to the list or supplemental schedules is filed, whichever is later.” This means that a lien creditor must pay close attention to a debtor’s bankruptcy almost immediately as the notice that the court sends to all creditors provides information on the Section 341 meeting or the creditors’ meeting. Once the court schedules the Section 341 or creditor’s meeting, the deadline to object to claimed exemptions is established and creditors should object within that thirty (30) day period after the Section 341 or creditors’ meeting is completed.

However, if for some reason a creditor has not been paying close attention to a debtor’s chapter 7 or 13 bankruptcy case and the debtor seeks to avoid the creditor’s judicial lien, a creditor still has the ability to object or oppose the debtor’s motion to avoid lien. Again, the creditor must have a basis to object to a debtor’s motion. One basis, as discussed earlier, is that the debtor owns mixed-use property which is predominately commercial. So, the failure to file an objection as provided in Rule 4003(b) does not foreclose the possibility of objecting or opposing a motion to avoid a creditor’s judicial lien. Federal Rule of Bankruptcy Procedure 4003(d) provides that a “debtor [may] avoid a lien [ ] under Section 522(f) of the [bankruptcy] code [ ] by motion in accordance with Rule 9014.” Rule 4003(d) further provides that “[n]otwithinstanding the provisions of subdivision (b), a creditor may object to a motion filed under Section 522(f) by challenging the validity of the exemption asserted to be impaired by the lien.” As such , a Section 522(f) motion, otherwise known as a motion to avoid lien, may face an objection or opposition from a lien creditor despite the lien creditor not previously filing an objection to a debtor’s claimed exemption as indicated in Rule 4003(b). The key phrase of “notwithstanding the provisions of subdivision (b)” is controlling and limits the scope of Rule 4003(b) to apply only to unsecured creditors leaving the ability of a lien creditor to challenge the validity of the debtor’s claimed homestead exemption.

The ability of a lien creditor to still challenge a debtor’s claimed exemption despite not previously objecting to a debtor’s claimed exemption under Rule 4003(b) is important especially where lien creditors do not always pay close attention to a debtor’s chapter 7 or 13 bankruptcy case. In light of same, it is important for lien creditors to become active in a debtor’s chapter 7 or 13 bankruptcy case as soon as they can. However, it is also important to understand that if a lien creditor misses the 4003(b) deadline to object to a debtor’s claimed exemption and a debtor files a motion to avoid lien, that a lien creditor’s ability to object to the debtor’s claimed exemption is revived under Rule 4003(d). Essentially, lien creditors under Rule 4003(d) will receive a second chance to oppose or object to a debtor’s motion to avoid lien, provided that a lien creditor has a basis to object or oppose said motion.

Navigating bankruptcy in Massachusetts and Rhode Island can be challenging. If you have questions or would like assistance from an experienced attorney, please call Wynn & Wynn, P.C. 1.800.852.5211 or request a free consultation.

Summary process actions and how bankruptcy affects a party’s right to challenge a foreclosure

Posted in Blog, Business Law, Real Estate by on June 15th, 2015

Melo v. Villarcon: Summary process actions and how bankruptcy affects a party’s right to challenge a foreclosure

Ryan-prophett-raynham-attorney-wynn-and-wynn On January 9, 2015, Attorney Ryan E. Prophett of Wynn & Wynn successfully represented a Plaintiff in a summary process action. Attorney Prophett argued to establish the Plaintiff’s right to a house in Randolph that he purchased at a foreclosure sale. The house was occupied by the Defendant. The Plaintiff also sought use and occupancy payments.

The court agreed with Attorney Prophett that the Defendant’s bankruptcy discharge precluded her challenge to the validity of foreclosure after she surrendered the property in bankruptcy in exchange for the discharge of debts. The new decision was published in a recent addition of Lawyers Weekly and contained excerpts of the opinion.

In 2006, the Defendant bought the house in question and defaulted on the mortgage in 2008. In January 2009, the Defendant filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code. The Defendant then filed an intention to surrender the house to the U.S. Bank and received a discharge in the bankruptcy action in April 2009.

In March 2010, Attorney Prophett commenced this summary process action on behalf of the Plaintiff to secure possession of the property and use and occupancy in the amount of $6,000. The Defendant counterclaimed on the theories of disability discrimination, breach of warranty of habitability, breach of the covenant of quiet enjoyment, and violation of G.L.c. 93A.

The court addressed each of the counterclaims:

First, no landlord-tenant relationship existed between the Plaintiff and the Defendant. The court cited Boudreau v. Ganter, 2010 Mass. App. Div. 174. “As Boudreau did not rent the subject house to Ganter there, the Plaintiff did not rent the house to the Defendant here, and made no warranties to her.”(Melo, 2015 Mass. App. Div. 32, 3) Therefore, since this landlord-tenant relationship did not exist, the counterclaims concerning habitability and quiet enjoyment were not available to the Defendant.

Second, there was no relationship between the parties that could trigger a claim for unfair or deceptive business practices under G.L.c.93A. A 93A claim prohibits unfair or deceptive acts or practices in the conduct of any trade or commerce. The policy is to ensure a relationship between consumers and persons engaged in business. The Plaintiff and Defendant’s relationship did not fall into this category; their transaction was “private in nature.” Therefore, the Defendant’s 93A claim did not hold up against the Plaintiff.

The Defendant’s argument focused on the deficiencies in the foreclosure process. She argued that the power of sale paragraph in her mortgage states that she must be provided notice before acceleration. This would have advised her of her right to bring a court action to assert the nonexistence of a default or any other defense to acceleration and sale she might have and that she did not receive any such notice.

Attorney Prophett argued that the Defendant’s challenge to any foreclosure deficiencies is foreclosed by her discharge in bankruptcy. The Appeal’s Court looked to the case of Souza v. Bank of Am., N.A., U.S. Dist. Ct. No 1:13-CV-10181-PBS (D. Mass. July 8, 2013). Plaintiff Souza defaulted on her mortgage in 2010 and commenced a voluntary bankruptcy in 2012. She then filed an intent indicating a surrender of her home to achieve discharge. Similarly to the Defendant, Souza alleged she was not provided “right to cure” notice. The court in Souza held that the bank, “logically argued that the requirement to issue a right to cure notice under Section 35A is inapplicable where the debtor is not in “default” on her mortgage because her personal debt was discharged in bankruptcy.” (Id.)

“The Defendant occupies exactly the position as Souza did in her case.”(Melo, 2015 Mass. App. Div. 32, 4) The Appeals Court agreed with Attorney Prophett and focused their holding on the illogical principle of allowing a discharged bankrupt to challenge the foreclosure of a house, interest in which she had surrendered.

The Appeals Court affirmed the District Court’s allowance of the Plaintiff’s motion for summary judgement for possession of the house and returned the money-damages aspect of the action to Quincy District Court.

This decision changes the way courts will look at summary process actions with Defendants that have willingly surrender their home to achieve discharge in bankruptcy.

It can be complicated to navigate a summary process action in Massachusetts. If you have any questions or would like assistance navigating through the steps of this process, please call the attorneys at Wynn & Wynn, P.C 1.800.852.5211 or request a free consultation.