New Jersey Appellate Court Clarifies How To Perfect A Money Judgment To Avoid Discharge By A Defendant’s Post-Litigation Bankruptcy Petition

January 12, 2024

By: Carl L. Engel

On Thursday, January 11, 2024, the Appellate Division of the Superior Court of New Jersey clarified the requirements for perfecting a judgment to avoid its discharge in bankruptcy. A construction-supply company had obtained a judgment against one of its customers, which was discharged after the customer had completed the bankruptcy process. When the customer then had the judgment discharged from the court dockets based on the bankruptcy proceeding, the supply company appealed, arguing that the customer did not own property that it could have collected, so there were no liens against property which could have been discharged in bankruptcy. The Appellate Division affirmed the discharge of the judgment, however, finding that the bankruptcy proceeding discharged all debts that result in liens, and was not limited to debts where a lien actually had attached to property. This case illustrates the importance of researching whether a judgment against a potential defendant would be collectable before deciding whether to file a lawsuit against them, rather than waiting until after the conclusion of protracted and expensive litigation to discover whether there is anything to be recovered.

In March 2008, Walter McCollum personally guaranteed payment to United Supply Company for all goods purchased by his company, McCollum Mechanical LLC. In November 2016, after Mr. McCollum and his company had failed to pay for supplies, United Supply filed a complaint against them for $13,357.08 plus interest and costs. In February 2017, the court clerk entered a default judgment against Mr. McCollum and McCollum Mechanical in the amount of $13,785.19. United Supply then filed a writ of execution, but the sheriff’s deputy in Ocean County, where the company was located, was unable to locate any property of Mr. McCollum or his company.

In October 2017, the court clerk docketed the judgment in the amount of $13,865.32, which included additional interest and costs. Under New Jersey Statute 2A:16-1, the docketed judgment automatically became a lien against all of Mr. McCollum’s real estate in New Jersey.

In early 2018, Mr. McCollum moved to Maine, and in October 2018, he filed a voluntary Chapter 7 bankruptcy petition in the District of Maine. In his petition, he disclosed that he did not own any real estate and identified United Supply as one of his unsecured creditors. In February 2019, the bankruptcy court discharged the judgment, notwithstanding United Supply’s objection.

In September 2022, Mr. McCollum moved to have the judgment discharged from the docket. United Supply argued in opposition that its lien had survived bankruptcy because no property had ever been found and, therefore, the lien could not have been removed from any property. Mr. McCollum argued that he was entitled to discharge the judgment because United Supply had failed to obtain an execution levy against any of his “hypothetical” property before the bankruptcy. The motion judge ordered the judgment discharged. United Supply appealed.

The Appellate Division observed that, under New Jersey Statute 2A:16-49.1, a debtor could apply to the court to have a judgment discharged from its docket after a year following the bankruptcy in which it was discharged as a debt. The court found that the statute applies whenever “the debtor could have obtained a discharge of the lien through the bankruptcy proceedings,” even if the lien had never actually attached to property. The court observed also that a judgment lien becomes non-dischargeable only if it is collected before the bankruptcy filing, because the purpose of bankruptcy is “to give the bankrupt a fresh start in life” and to allow judgments to remain on the docket would “negate the intended benefits of the bankruptcy proceedings.”

Applying these principles, the Appellate Division held that a lien against any real property owned by Mr. McCollum was created immediately upon docketing the judgment in October 2017, which was before his bankruptcy petition in October 2018. Therefore, because United Supply did not perfect its lien by levying property before the bankruptcy petition was filed, the judgment was discharged in the bankruptcy. That United Supply attempted to levy property but found none did not rescue its judgment.

As this case makes clear, to avoid discharge in bankruptcy, a judgment must have already been levied against real property via writ of execution.  If a judgment-debtor has no real property against which a lien can be levied, the judgment will not survive their bankruptcy.  Therefore, a potential plaintiff should consider whether their adversary owns real property to which a judgment lien could attach before deciding whether to bring a lawsuit against them. This case demonstrates how illusory a litigation “victory” can feel when there is nothing to collect at the end of it all.