Bulletin: NJ000066

Dear Associates:

The above case was decided on August 20, 2002, by the Appellate Division. The debtor in the case filed for protection under Chapter 7 of the Bankruptcy Code. He was a joint tenant as to a condominium unit. The trustee elected to abandon the debtor's interest, as it appeared there was no equity in the unit. The debtor later sought an order in the state court under N.J.S.A. 2A:16-49.1 "canceling and discharging" Chemical's judgment and thus removing the lien from the condominium unit. The trial court denied the debtor's application. The Appellate Court reversed and ruled that:

1. where real property has been abandoned in a bankruptcy proceeding; and
   
   
2. where there has been no execution or levy against real property by the judgment creditor, either prior to his filing for bankruptcy protection or within a year after the real property has been abandoned by the bankruptcy trustee,
   
   
3. and the "lien" was "subject to be discharged or released under the provisions of the Bankruptcy Act", the debtor may successfully move to have the judgment canceled and discharged of record in state court.

This case seeks to clarify the use of N.J.S.A. 2A:16-49.1 by a debtor, after the close of the bankruptcy case. The statute permits a debtor to apply for a state court order "canceling and discharging" a judgment one year after the debtor has been discharge in the bankruptcy court. Prior cases seemed to have limited the state court orders under the statute to judgment liens which had been, or were eligible, to be have been discharged by the bankruptcy court. This case appears to hold that the mere fact a trustee could have discharged the lien, had the facts in the bankruptcy case been different, and there been equity in the property which the trustee would have sought to administer for the benefit of the creditors, was sufficient basis to permit the state court to cancel the lien.

Although limited by its facts, the case may permit greater reliance on state court orders issued under the statute when underwriting similar factual situations. However, you should continue to request approval from our underwriting counsel prior to relying on such orders for the purpose of omitting judgment liens on debtors who have been discharged in bankruptcy.