Written by attorney Jeremy Judson Cobb

Part II: Treatment of Minnesota State-Court Judgments Following Bankruptcy of the Judgment Debtor

You Might Not Know When You’re Impaired

Ideally a debtor would know a priori when a lien “impairs an exemption to which the debtor would have been entitled under subsection (b)," [1] but counsel must carefully read the Code’s definition in section 522(f)(2). Thus, a lien impairs an exemption to the extent that the sum of (1) the lien, (2) all other liens on the property that have not 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. [2]

This gives rise to three possible scenarios. In the first scenario, the “value that the debtor’s interest in the property would have in the absence of any liens" exceeds all other liens not previously avoided. The debtor may apply the entire exemption to the debtor’s equity in the property without any impairment, and thus cannot avoid any portion of the lien.

In the second scenario, the value of the debtor’s interest in the property is such that the debtor cannot apply the maximum available exemption to the debtor’s equity in the property because the lien is diminishing the debtor’s equity. Thus, to the extent that the debtor’s access to the maximum available exemption has been impaired, the lien may be avoided.

In the final scenario, the debtor’s has no equity in the property to which to apply any available exemption. The lien may be avoided in its entirety.

I Don’t Always Choose Minnesota Exemptions, But When I Do, I Prefer to Avoid Liens

Now, what if we could change some numbers in the foregoing examples to be more favorable to us—thereby changing the results? Well, it turns out that we can, at least here in Minnesota. If we elect the Minnesota exemptions, we have to be consistent and apply them to all assets of the debtor, so there is some calculus here—there may be tradeoffs between what may gained and what may be lost. But the debtor can unquestionably elect to use the Minnesota homestead exemption—currently $390,000 for non-agricultural land [3]—to make the exemption number much large and avoid almost any judicial lien as described supra. [4]

What If I Have Avoidance Issues?

If a debtor having statutory authorization to avoid the fixing of a lien, nonetheless fails to take the proper steps to do so, then the lien is not avoided. [5] Lien avoidance is properly done by motion of the debtor seeking a court order avoiding the lien. [6]

Minnesota Law

When A State-Court Judgment Becomes a Lien Against Real Property of the Judgment Debtor

Minnesota law provides that, except for certain judgments relating to domestic support obligations, which are not subject to avoidance under bankruptcy law in any event, “[e]very judgment requiring the payment of money shall be entered by the court administrator when ordered by the court and will be docketed by the court administrator upon the filing of" the judgment creditor’s affidavit “stating the full name, occupation, place of residence, and post office address of the judgment debtor." [7] Taxing authorities are exempt from the affidavit requirement. [8] “From the time of docketing the judgment is a lien, in the amount unpaid, upon all real property in the county then or thereafter owned by the judgment debtor, but it is not a lien upon [Torrens] land [9] unless it is also recorded . . . . The judgment survives, and the lien continues, for ten years after its entry." [10]

Thus, a judgment lien is created by operation of law upon all real property of the debtor in the county where docketed, including after-acquired real property in such county, except that Torrens—rather than “abstract"—land is subject to a recordation requirement. Since most real property in Minnesota is under the abstract system, this means that most money judgments give rise to a judgment lien by operation of law upon all current or after-acquired real property in which the debtor has an interest. Additionally, the judgment lien survives for ten years after entry; when the judgment expires, the associated judgment lien also expires.

[1] Id. § 522(f)(1).

[2] Id. § 522(f)(2). Please note that courts have adopted two approaches when interpreting this statute. Most courts, including those in Minnesota at the time of this article (see, e.g., Kolich v. Antioch Laurel Veterinary Hospital, 328 F.3d 406 (8th Cir. 2003)), follow the “full avoidance" approach, herein described. Other courts, however, follow the “entire lien avoidance" approach and hold that the lien may not be partially avoided. If it would otherwise be partially avoided under the full avoidance approach, courts adhering to the entire lien avoidance approach hold that the lien is avoided in its entirety. See generally, Mary-Alice Brady, Balancing the Rights of Debtors and Creditors: § 522(f)(1) of the Bankruptcy Code, 39 B.C. L. Rev. 1215 (1998).

[3] Minn. Stat. § 510.02, subd. 1 (2012). See for current figures; the next adjustment is scheduled to take effect July 1, 2014. Unlike the federal exemptions, for joint petitioners, this exemption applies only once. It is not additive.

[4] Please note that the limitation of 11 U.S.C. § 522(f)(3) does not generally apply under current Minnesota law.

[5] Arruda v. Sears, Roebuck & Co., 310 F.3d 13, 21 (1st Cir. 2002).

[6]Fed. R. Bankr. P. 9013 (“[a] request for an order shall be by written motion").

[7]Minn. Stat. § 548.09 (2012).

[8] Id.

[9]Minn. Stat. §§ 508.01 (2012), 508A.01 (2012); Minn. Gen. R. Prac. 201-222 (2012). Torrens land in Minnesota is less common than abstract land.

[10]Minn. Stat. § 548.09 (emphasis added).

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