Lien Avoidance in Individual Cases – Part 3: Other Issues Associated with Liens
This post assumes familiarity with my last two posts (Part 1 and Part 2) of this multi-part series. Thus, while you can certainly read this post without reading those previous ones, you’ll get more out of it if you read those posts first.
V. Some Other Issues Associated With Liens
A. Is The Lien Perfected?
Suppose the debtor and all the debt’s assets are in Los Angeles County at the time the creditor records a lien in Orange County against the debtor’s principal residence in Los Angeles. Is the creditor’s claim secured? No. The lien must be recorded in the county where the asset is. Therefore, if the lien is recorded in the wrong county, the creditor’s is not a perfected security interest. See, e.g., Cal. Civ. Code § 1169 (“Instruments entitled to be recorded must be recorded by the County Recorder of the county in which the real property affected thereby is situated.”).
B. Is The Lien To Be Stripped Really A Junior Lien?
Sometimes a debtor will buy a house with what is called an 80/20 loan because the debtor can’t come up with the 20% down payment. If the 20% loan is recorded first, then the junior is the 80% loan, which has a much bigger value. Given the relatively small size of the 20% loan, the junior lien may not be wholly unsecured.
C. If The Debtor’s In Personam Liability Was Discharged In A Prior Chapter 7, Does The Wholly Unsecured Lienholder Have A Claim In A Future Chapter 13?
The answer is no because of In re Washington, 602 B.R. 710 (B.A.P. 9th Cir. 2019), which was argued by our own Jenny L. Doling.
In Washington, the debtor discharged the in personam claim associated with a junior lienholder in a Chapter 7. Five years later the debtor filed a Chapter 13, and then filed a motion to value the secured status of the lienholder at zero. The Court granted the motion, so the debtor treated the claim as a general unsecured claim with a zero balance. The creditor filed an unsecured claim for the entire balance on the loan. The Court allowed the claim and debtor appealed to the BAP.
The BAP concluded that the value of the lien was zero, and the unsecured claim had been discharged in the prior Chapter7. Therefore, the creditor did not have a valid allowable claim.
D. Has There Been A Fraudulent Transfer?
Suppose a creditor records a lien that has a greatly inflated dollar amount[1]. What can be done. First ask the creditor to correct the filing. If it refuses, then initiate an adversary proceeding to avoid the transfer.[2]
In my case I argued that the entire transfer should be avoided rather than just the excess above the $300,000. I based the argument on Moore v. Bay, 284 U.S. 4 (1931) (“The trustee in bankruptcy gets the title to all property which has been transferred by the bankrupt in fraud of creditors, or which prior to the petition he could by any means have transferred, or which might have been levied upon and sold under judicial process against him. … The rights of the trustee by subrogation are to be enforced for the benefit of the estate.”) (emphasis added), and Stalnaker v. DLC, Ltd., 376 F. 3d 819, 823 (8th Cir. 2004) (“If the trustee identifies such a creditor with an allowable claim and a valid right to avoid the transfer, the trustee may avoid the claim and recover the entirety of the property or value of the property ‘for the benefit of the estate.’ 11 U.S.C. § 550(a). The trustee’s recovery is not limited to the value of the claim of the unsecured creditor(s) he identifies.”) (emphasis added). Unfortunately, the judge only removed the excess. However, in a different context a judge might be willing to avoid the entire transfer.
E. What If The Debtor Made A Very Large Mortgage Payment Prepetition?
If the payment was made during the preference period of § 547(b)(4), then the Chapter 11 debtor (or Chapter 7 Trustee) can avoid the transfer. The argument parallels the discussion in part D, and its footnotes, immediately above.
F. Is There Any Relief For A Usurious Loan?
The California Constitution, article XV, section 1, prohibits usurious loans — i.e., loans where the interest rate exceeds the amounts provided for in that section; there are three separate rates depending on the context.
Unfortunately, it is difficult to prove usury because there are exceptions. “[T]he usury law is complex and is riddled with so many exceptions that the law’s application itself seems to be the exception rather than the rule.” Ghirardo v. Antonioli, 8 Cal. 4th 791, 807 (1994). According to the California Supreme Court:
(1) The essential elements of usury are: (1) The transaction must be a loan or forbearance; (2) the interest to be paid must exceed the statutory maximum; (3) the loan and interest must be absolutely repayable by the borrower; and (4) the lender must have a willful intent to enter into a usurious transaction.
Id. at 798.
If the loan really is usurious, then the debtor could recover the excess interest already paid. However, it is unlikely that the debtor would be able to avoid the lien based on usury.
[1] This is not just a disembodied hypothetical. I had a case in which the creditor obtained a judgment for $300,000 and then recorded a judgment lien stating that the judgment was for $630,000. I argued that in so doing the creditor fraudulently transferred $330,000 of the equity to itself for no consideration. Note that § 548(a) includes an involuntary transfer made by the debtor within its ambit.
[2] This assumes that the debtor is in a Chapter 11, and therefore has the powers of a trustee per § 1107(a). If the case is under Chapter 7, then the debtor lacks standing to avoid the transfer because it is an asset of the estate. However, the Chapter 7 Trustee can mount the avoidance action. In Chapter 13 the debtor can have standing under § 548 if the debtor can show that § 522(h) applies. However, one § 522(h) requirement is that the transfer must have been involuntary.
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