Morton, In re, 1434

• Decision Date: 24 January 1989
• Docket Number: No. 1434,D,1434
• Citation: 866 F.2d 561
• Parties: 20 Collier Bankr.Cas.2d 465, 19 Bankr.Ct.Dec. 85, Bankr. L. Rep. P 72,648 In re Joan MORTON, Debtor. Joan MORTON, Plaintiff-Appellant, v. NATIONAL BANK OF NEW YORK CITY, Defendant-Appellee. ocket 88-5009.
• Court: U.S. Court of Appeals — Second Circuit

Page 561

866 F.2d 561

20 Collier Bankr.Cas.2d 465, 19 Bankr.Ct.Dec. 85,

Bankr. L. Rep. P 72,648

In re Joan MORTON, Debtor Joan MORTON, Plaintiff-Appellant, v. NATIONAL BANK OF NEW YORK CITY, Defendant-Appellee.

No. 1434, Docket 88-5009.

United States Court of Appeals Second Circuit.

Argued Aug. 29, 1988.

Decided Jan. 24, 1989.

Julian Kaplan, Garden City, N.Y. (J. Stanley Shaw, Jeffrey M. Zalkin, Shaw, Licitra, Eisenberg, Esernio & Schwartz, Garden City, N.Y., of counsel), for plaintiff-appellant Joan Morton.

Richard L. Koral, Brooklyn, N.Y. (Rosenberg, Rosenberg & Koral, Brooklyn, N.Y., of counsel), for defendant-appellee Nat. Bank of New York City.

Before FEINBERG, Chief Judge, and CARDAMONE and PRATT, Circuit Judges.

GEORGE C. PRATT, Circuit Judge:

This appeal presents a question we first answered over fifty years ago, but which, because of our subsequent holdings and congress's amendment of the bankruptcy code, requires further attention today: Does a judgment lien, normally valid under New York law for a period of ten years, remain enforceable after expiration of the ten-year period when during that period the property subject to the lien becomes part of a bankrupt estate protected by the automatic stay imposed by 11 U.S.C. Sec. 362(a)?

The bankruptcy and district courts, although adopting different rationales, held that the judgment lien remained valid despite the expiration of the ten-year period fixed by state law. While agreeing, we write to emphasize the particular statutory provision that requires the result reached below. We hold that 11 U.S.C. Sec. 108(c) tolls New York's ten-year period limiting judgment liens on real property until the automatic stay is terminated. Accordingly, we affirm.

BACKGROUND

The debtor, Joan Morton, filed a petition for relief under Chapter 13 of the bankruptcy code on October 26, 1982. At that time, the National Bank of New York City ("the bank") held a judgment lien on Morton's residential property, docketed on December 10, 1975, in the amount of $216,104.80. State law provides that a judgment lien on real property expires after ten years, see N.Y.Civ.Prac.L. & R. Sec. 5203(a) (McKinney 1978), unless it is extended by the lienholder upon motion to a state court, with proper notice to the judgment debtor. Id. Sec. 5203(b).

For purposes of this appeal the parties agree that the lien was valid both at the time Morton's bankruptcy petition was filed on October 26, 1982, and at the time her plan was confirmed on March 22, 1983. Apparently, because two prior mortgages and the bank's judgment lien made Morton's residential property fully encumbered, it was not considered to be an available asset when the bankruptcy court approved a plan to satisfy the claims of Morton's unsecured creditors--a plan which requires Morton to pay $125.00 per month "until further order" of the bankruptcy court. Significantly, moreover, the plan approved by the court made no specific provision for any payment to the bank against the debt owed by Morton; instead, it simply allowed the bank to "retain the lien securing [its] claim", presumably so that if Morton did not make payment the bank could eventually execute on her residential property pursuant to state law.

In late 1985--at or near the time the lien was due to expire under state law--the bank filed for extension of its judgment lien in New York State Supreme Court pursuant to Sec. 5203(b). Thereafter, on February 25, 1986, that court issued an order extending the lien "for as long as plaintiff is stayed by defendant Joan Morton's filing of a petition in Bankruptcy, plus three months after the lifting of such stay". Flushing National Bank v. Trident Construction Corp., No. 24949, Motion No. 15,076 (N.Y.Sup.Ct. February 25, 1986) (emphasis in original). The validity of this order is subject to dispute, however, because it is unclear whether Morton was given proper notice of the extension proceedings. See N.Y.Civ.Prac.L. & R. Sec. 5203(b) (McKinney 1978) (before court may order extension, notice to the judgment debtor must be "served personally or by registered or certified mail").

On June 6, 1986, Morton moved in the bankruptcy court contending that the ten-year period applicable to judgment liens on real property had lapsed, and that the bank had failed to properly extend its lien pursuant to Sec. 5203(b). Based on this alleged lapse, Morton asked the bankruptcy court for an order (1) avoiding the bank's judgment lien, (2) reclassifying the bank's claim as unsecured, and (3) amending the bankruptcy plan to include the previously encumbered property.

The bank opposed the motion on four separate grounds. First, the bank argued that the automatic stay--which came into effect on October 26, 1982--removed any obligation to extend the lien. Second, the bank asserted that, wholly apart from the automatic stay, the judgment lien remained enforceable simply because it was valid on the date Morton filed for bankruptcy, or alternatively, on the date her plan was confirmed. Third, the bank maintained that 11 U.S.C. Sec. 108(c) automatically preserves a statutory lien until the automatic stay is lifted. Finally, the bank claimed that it had obtained a valid order in state court extending the lien pursuant to N.Y.Civ.Prac.L. & R. Sec. 5203(b) (McKinney 1978).

On May 7, 1987, the bankruptcy court denied Morton's motion and held that the bank's judgment lien, as a valid secured claim, was not subject to reclassification. In so doing, the bankruptcy court found it unnecessary to reach three of the bank's arguments; instead, the court focused on what it termed the "threshold issue"--whether the bank "had a duty to renew its lien" while the automatic stay was in effect. It held that "the automatic stay in bankruptcy preserved the validity of [the bank's] lien from the date of the debtor's petition" and that the bank had no "duty to renew its lien until the debtor obtains [a] discharge."

Morton appealed to the United States District Court for the Eastern District of New York, which affirmed the bankruptcy court's order and dismissed the appeal, albeit with a different emphasis. Determining that it was unnecessary to decide what effect the automatic stay has on the life-span of a statutory lien, the court looked to the bank's second argument and held that "the critical time for determining the respective rights of a debtor and its creditors is the date of the filing of a petition in bankruptcy". Accordingly, the court concluded, if a lienholder's claim was valid "at the time of commencement of a bankruptcy proceeding"--as the bank's judgment lien was here--it is preserved without regard to whether at some later date it expired under state law.

This appeal followed.

DISCUSSION

Morton claims that the bank's lien is void because it expired on December 10, 1985, ten years after it was docketed. In response, the bank offers the same four arguments it did below: (1) the automatic stay eliminated the state-law extension requirement; (2) the provisions of Sec. 108(c) preserve the lien; (3) the lien remains valid because it was valid at the time Morton filed her petition and at the time her plan was confirmed; and (4) the bank obtained a valid extension from the state court.

1. Does 11 U.S.C. Sec. 362(a) Eliminate the State Requirement for Extension of the Statutory Lien?

Citing Lockhart v. Garden City Bank & Trust Co., 116 F.2d 658 (2d Cir.1940), the bank contends that the automatic stay provisions of 11 U.S.C. Sec. 362(a) remove any requirement under state law to obtain an extension of its lien. Just as this section freezes any action to execute on or enforce a statutory lien during the pendency of the bankruptcy proceedings, the bank argues, so too does it freeze any requirement, under state law or otherwise, that a lienholder affirmatively extend its lien. Consequently, the bank contends, the ten-year clock on its judgment lien ceased to run when the automatic stay took effect on October 26, 1982, and that stay relieves the bank of any requirement to extend its lien while the bankruptcy proceeding remains pending. We disagree.

At the outset, we recognize the general rule which guides our inquiry in this area. Rather than establishing uniform laws applicable throughout the United States, congress "has generally left the determination of property rights in the assets of a bankrupt's estate to state law." Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917, 59 L.Ed.2d 136 (1979). In light of this congressional policy choice, state property laws should be "suspended only to the extent of actual conflict with the system provided by the Bankruptcy Act of Congress." Butner, 440 U.S. at 54 n. 9, 99 S.Ct. at 918 n. 9 (emphasis added) (quoting Stellwagen v. Clum, 245 U.S. 605, 613, 38 S.Ct. 215, 217, 62 L.Ed. 507 (1918)); see also Ogden v. Saunders, 25 U.S. (12 Wheat.) 213, 6 L.Ed. 606 (1827); Sturges v. Crowninshield, 17 U.S. (4 Wheat.) 122, 4 L.Ed. 529 (1819).

Absent such an actual conflict, there is no reason to analyze the lienholder's interests any differently than would otherwise occur if bankruptcy proceedings were not in progress. Butner, 440 U.S. at 55, 99 S.Ct. at 918. This is because a "[u]niform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving 'a windfall merely by reason of the happenstance of bankruptcy.' " Id. (quoting Lewis v. Manufacturers National Bank, 364 U.S. 603, 609, 81 S.Ct. 347, 350, 5 L.Ed.2d 323 (1961)).

Thus, succinctly stated, unless we can find an actual conflict between New York law and the policies advanced by Sec. 362(a), we must direct the bankruptcy court to recognize New York's extension requirements in determining whether the bank possesses a valid judgment lien. In this case, we find no such conflict.

The automatic stay provision of the bankruptcy code, 11 U.S.C. Sec. 362(a),...