A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA
- 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 (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
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; 11 U.S.C. Sec.
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
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.
Of TRUST MODIFICATIONS, JOINDER AND OTHER ISSUES - A SUMMARY
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
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.
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).
ENCOUNTERED LIENS AND PERIODS
Below, in outline form, we will set out the period of
limitations applicable to certain liens and the conditions affecting the
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,
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,
* 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
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.
the rest of this article will be continued in our next issue.)
HOMES, MANUFACTURED HOUSING UNITS AND MODULAR HOMES - UPDATE ON BRIGGS V.
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.
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