Blog
Mellinger Kartzman LLC Bankruptcy Blog
After working on a client’s matter, generating a large unpaid legal fee, and securing a favorable result for your client, you receive a notice in the mail that the client has filed for bankruptcy. This article will explain the steps you can take to perfect a lien prior to bankruptcy to ensure that your unpaid fees are protected as much as possible. As the Court stated in In re Roper & Twardowsky, LLC , 559 B.R. 375, 395 (Bankr. D.N.J. 2016) “a lienholder creditor is paid before other creditors.” In Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, P.C. v. Stanziale (In re Rabinowitz) , Nos. 10-12538 (DHS), 10-02435 (DHS), 2011 Bankr. LEXIS 5131, at *33-34 (Bankr. D.N.J. Dec. 21, 2011) the Court stated that “[c]ommon law has long provided attorneys with a charging lien to secure payment for services performed in connection with a suit or cause of action, whenever such action resulted in a judgment in the client's favor. See Visconti v. M.E.M. Machinery Corp. , 7 N.J. Super. 271, 275, 73 A.2d 74 (App. Div. 1950). New Jersey has codified and expanded the attorneys’ charging lien pursuant to N.J.S.A. 2A:13-5.” Our legislature has provided a means for attorneys in this State to secure the payment of legal fees. N.J.S.A. 2A:13-5 states, in relevant part: [a]fter the filing of a complaint or third-party complaint or the service of a pleading containing a counterclaim or cross-claim, the attorney or counselor at law, who shall appear in the cause for the party instituting the action or maintaining the third-party claim or counterclaim or cross-claim, shall have a lien for compensation, upon his client’s action, cause of action, claim or counterclaim or cross-claim, which shall contain and attach to a verdict, report, decision, award, judgment or final order in his client’s favor, and the proceeds thereof in whose hands they may come. The lien shall not be affected by any settlement between the parties before or after judgment or final order, nor by the entry of satisfaction or cancellation of a judgment on the record. The court in which the action or other proceeding is pending, upon the petition of the attorney or counselor at law, may determine and enforce the lien. The lien is a claim or right to ask for the intervention of the court for the attorney’s protection, by disabling clients from receiving the fruits of recoveries without paying for the valuable services by which the recoveries were obtained. “The attorney is considered an equitable assignee of the judgment to the extent of his debt. . . . And the enforcement of the right is within the equitable jurisdiction of the courts of law.” Norrell v. Chasan , 125 N.J. Eq. 230, 236 (1939) (internal citation omitted) ( see also Levine v. Levine , 381 N.J. Super. 1, 9 (App. Div. 2005) “The lien provided by this statute ‘is intended to protect attorneys who do not have actual possession of assets against clients who may not pay for services rendered.’ Martin v. Martin , 335 N.J. Super. 212, 222, 762 A.2d 246 (App.Div.2000).”). It is important to note that the charging lien found in N.J.S.A. 2A:13-5 is only applicable to legal actions brought by the attorney in a litigation matter. ( See Panarello v. Panarello , 245 N.J. Super. 318, 322 (Super. Ct. 1990) “N.J.S.A. 2A:13-5 was designed to protect an attorney's fee after commencement of a cause of action, counter-claim, cross-claim, third-party claim or other claim; the lien is to attach to the judgment, final order or decree in the client's favor.”). The Court in In re Rapid Freight Sys. , Nos. CHAPTER 7, 09-34047 (GMB), 2011 Bankr. LEXIS 1328, at *11 (Bankr. D.N.J. Mar. 31, 2011) explained that “[t]he statute was intended to codify the common-law or special charging lien and was also meant to expand the common law lien which had previously only attached to a judgment.” The procedure in New Jersey for determining and enforcing an attorney’s charging/statutory lien is as follows: [1.] The attorney should make application to the court, as a step in the proceeding of the main cause, by way of petition, which shall set forth the facts upon which he relies for the determination and enforcement of his alleged lien. [2.] The petition shall request the court to establish a schedule for further proceedings, which shall include time limitations for the filing of an answer by defendants, the completion of pretrial discovery proceedings, the holding of a pretrial conference, and the trial. [3.] The court shall, by order, set a short day upon which it will consider the application for the establishment of a schedule. [4.] A copy of such order, together with a copy of the petition, shall be served upon Plaintiff as directed by the court. [5.] The matter should thereafter proceed as a plenary suit and be tried either with or without a jury, in the Law Division, depending upon whether demand therefore has been made, or without a jury if the venue of the main cause is laid in the Chancery Division. [6.] In no event should the matter be tried as a summary proceeding. Levine , supra , 381 N.J. Super. at 9-10 ( citing H & H Ranch Homes, Inc. v. Smith , 54 N.J. Super 347 353-54 (App.Div.1959)). By perfecting the lien against the funds won by the client by way of judgment or settlement, an attorney is now protected, to the extent of the client’s entitlement to those funds. In the event of a bankruptcy filing before partial or full satisfaction of the charging lien, the bankruptcy estate must recognize the lien, and if the litigation funds are included in the bankruptcy estate, it must pay the attorney the amount of its lien from the litigation proceeds.
A final money judgment was entered in your client’s matter. You obtained an exemplified copy and docketed it as a statewide judgment lien on all real property owned by the judgment-debtor in New Jersey. These actions may lead you to think that you have a perfected lien against the judgment-debtor’s real property in New Jersey, and that your client is secured if the judgment-debtor files for bankruptcy. However, if those are the only steps that were taken, the Bankruptcy Code allows your client’s lien to be avoided and classified as a general unsecured claim, not as a secured lien creditor. This article will discuss some ways to perfect the judgment so your client is treated as a secured creditor should the judgment-debtor file for bankruptcy. [1] N.J.S.A. 2A:16-1 states that “[n]o judgment of the superior court shall affect or bind any real estate, but from the time of the actual entry of such judgment on the minutes or records of the court.” In Aluminum Shapes, L.L.C. v. Direct Energy Bus., LLC (In re Aluminum Shapes, L.L.C.) , Nos. 21-16520 (JNP), 21-01467 (JNP), 2022 Bankr. LEXIS 1209, at *10-11 (Bankr. D.N.J. May 2, 2022) , the Court stated that: Under section 544(a) of the Bankruptcy Code, a trustee stands in the shoes of a hypothetical judgment lien creditor who may contest liens that are unperfected as of the date of the commencement of the case. 11 U.S.C. § 544(a)(1) and (2). Specifically, section 544(a)(1) provides: The trustee shall have . . . the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by . . . a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains . . . a judicialien [sic] on al [sic] property which a creditor on simple contract could have obtained such a judicial lien, whether or not such a creditor exists. This is typically referred to as the trustee’s “strong arm powers.” In re Bridge , 18 F.3d 195, 198 (3d Cir. 1994). The Aluminum Shapes Court continued by stating that: a recorded judgment becomes an unperfected lien against all real property owned or thereafter acquired by the debtor in the local vicinage; only after it is docketed by the Clerk of Court in Trenton does it become a statewide judgment lien. See N.J.S.A. 2A:16-1, 16-11; Brescher v. Gern, Dunetz, Davison & Weinstein, P.C., 245 N.J. Super. 365, 373, 585 A.2d 961 (App. Div. 1991). Further, to perfect a judgment lien, a creditor must levy upon the debtor's property. In re Flores, 2011 Bankr. LEXIS 69, 2011 WL 44910, at *2 (Bankr. D.N.J. Jan. 6, 2011) (citing In re Blease, 605 F.2d 97 (3d Cir.1979)). ( Id . at *11). The Court in In re Catalano , 643 B.R. 555, 561-62 (Bankr. D.N.J. 2022) , described the requirements under New Jersey law to perfect a judgment lien against the judgment-debtor: [i]n determining property rights in bankruptcy, courts look to applicable state law. See United States v. Butner , 440 U.S. 48, 99 S. Ct. 914, 59 L. Ed. 2d 136 (1979). Under New Jersey law, a recorded judgment becomes an unperfected lien against all real property owned or thereafter acquired by the debtor in the local vicinage; only after it is docketed by the Clerk of Court in Trenton does it become a statewide judgment lien. See N.J.S.A. 2A:16-1, 16-11; Brescher v. Gem, Dunetz, Davison & Weinstein, P.C. , 245 N.J. Super. 365, 373, 585 A.2d 961 (App. Div. 1991). Further, to perfect a judgment lien, a creditor must levy upon the debtor's property. In re Flores , 2011 Bankr. LEXIS 69, 2011 WL 44910, at *2 (Bankr. D.N.J. Jan. 6, 2011) (citing In re Blease , 605 F.2d 97 (3d Cir.1979)). N.J.S.A. 2A:17-1 dictates the sequence of execution, and states, in part, that “[i]n every writ of execution which shall be issued against real estate, the sheriff or other officer to whom such writ may be directed shall be commanded that he cause to be made, of the goods and chattels in his county of the party against whom such execution issues . . . .” Obtaining a Writ of Execution, and having the Sheriff levy on the bank account of the judgment-debtor will provide your client with a perfected lien against the bank account for the monies levied. This is the first way to perfect a lien against property of the judgment-debtor. If there is not enough money in the judgment-debtor’s bank account to satisfy the judgment, the next step is to levy against the judgment-debtor’s personalty. By levying against the personalty, the judgment now attaches to the personalty, which provides another secured claim for the judgment. Finally, if money is still due and owing from the judgment-debtor after exhausting the personalty, next you would levy against the real property of the judgment-debtor. ( see N.J.S.A. 2A:17-1 “if sufficient goods and chattels of such party cannot be found in his county, he cause the whole or the residue, . . . damages and costs or sum of money to be made of the real estate whereof such party was seized on the day when such real estate became liable to such debt . . . .”). [2] This would provide your client with a perfected lien against the judgment-debtor’s real estate. If the judgment-debtor later filed for bankruptcy (at least 90 days after delivery of the Writ to the Sheriff), and there was equity in the real estate that was levied upon, the lien would not ordinarily be avoidable should the Debtor (in a Chapter 13 or Chapter 11 case), or a trustee in a Ch. 7 case, sell the real estate your client’s secured claim would have to be paid, to the extent of adequate value, thus averting treatment as a general unsecured creditor subject to a pro rata distribution. Perfection of a lien prior to bankruptcy, thus changing its status in bankruptcy from a general unsecured claim to a secured claim, only occurs when the judgment attaches to something, whether that be a bank account, personalty, or real property of the debtor. Unless such actions are taken, the docketed judgment may be classified as a general unsecured claim subject to a pro rata distribution with other general unsecured claims filed in the bankruptcy case. Your client’s judgment could be paid pennies on the dollar, or even worse, not at all. Assuming the judgment-debtor has assets to some extent, with a little extra effort, you can help your client ensure that their judgment has the best chance of a recovery, in or out of bankruptcy. [1] This article will not discuss the possibility of the secured claim being avoided pursuant to 11 U.S.C. § 547, whether a perfected judgment lien can be stripped pursuant to 11 U.S.C. § 522(f), nor will this article discuss the priority of perfected judgment liens between judgment creditors, or other benefits of having a secured claim against a Debtor rather than a general unsecured claim. Levies against wages or other income are also not addressed. [2] Priority amongst perfected lien creditors, whether by mortgage, judgment, federal tax lien, etc., is fixed chronologically.