Marine Midland Bank v. Scallen, 73 N.Y.2d 1044 (1989)

A discharge in bankruptcy does not automatically invalidate a pre-existing judgment lien on real property; the debtor must take affirmative steps in the bankruptcy proceeding to avoid the lien.

Summary

This case addresses whether a discharge in bankruptcy automatically removes a judgment lien from real property. The plaintiff, discharged from personal liability for pre-existing debts in bankruptcy court, sought an unqualified discharge of a judgment against him held by the defendant bank. The bank cross-moved for a qualified discharge, arguing the judgment was a lien on the plaintiff’s real property. The New York Court of Appeals held that a discharge in bankruptcy only releases the debtor from personal liability; it does not automatically invalidate pre-existing liens. The debtor bears the burden of proving the lien was invalidated during bankruptcy proceedings. Because the debtor failed to demonstrate the lien was avoided, he was only entitled to a qualified discharge, which acknowledges the potential continued existence of the lien.

Facts

• Marine Midland Bank held a judgment against Scallen, which constituted a lien on Scallen’s real property.
• Scallen obtained a discharge in bankruptcy, releasing him from personal liability for pre-existing debts.
• Scallen then sought an unqualified discharge of the judgment held by Marine Midland Bank under New York Debtor and Creditor Law § 150.
• Marine Midland Bank opposed the unqualified discharge, arguing that the judgment was a lien on Scallen’s real property and that the lien survived the bankruptcy discharge.

Procedural History

• Scallen commenced an action in Supreme Court for an order directing that a discharge be marked on the docket of the judgment.
• Marine Midland Bank cross-moved to dismiss the cause of action or, alternatively, to grant Scallen only a qualified discharge.
• The Supreme Court granted Scallen an unqualified discharge.
• The Appellate Division affirmed the Supreme Court’s order.
• The New York Court of Appeals modified the Appellate Division’s order, directing a qualified discharge instead of an unqualified discharge.

Issue(s)

1. Whether a discharge in bankruptcy automatically invalidates a pre-existing judgment lien on real property.
2. Whether the debtor bears the burden of proving that a pre-existing judgment lien was invalidated during the bankruptcy proceedings to obtain an unqualified discharge.

Holding

1. No, because liens and other similar secured interests ordinarily survive bankruptcy.
2. Yes, because Debtor and Creditor Law § 150 (4)(h) requires the debtor to establish to the court’s satisfaction that the lien was invalidated or surrendered in the bankruptcy proceedings.

Court’s Reasoning

The Court of Appeals reasoned that a discharge in bankruptcy only releases the debtor from personal liability for debts; it does not automatically extinguish valid liens. The Court relied on established bankruptcy law principles, citing Farrey v. Sanderfoot and Long v. Bullard, which affirm the survival of liens through bankruptcy. The Court emphasized that under Debtor and Creditor Law § 150 (4) (h), the debtor seeking an unqualified discharge bears the burden of proving that the lien was invalidated or surrendered during the bankruptcy proceedings. The Court noted that the debtor’s reliance on the bankruptcy discharge itself and the homestead exemption was insufficient to meet this burden. The homestead exemption, while protecting a certain amount of equity, does not automatically extinguish liens. The court stated, “[I]n the absence of a timely objection from defendant or some other interested third party, plaintiff’s claim for an exemption would be deemed valid without more… However, plaintiff’s successful invocation of the homestead exemption did not automatically extinguish defendant’s lien against the property.” To avoid a lien on exempt property, the debtor must take affirmative steps under section 522(f)(1) of the Bankruptcy Code, which Scallen failed to do. Because Scallen did not demonstrate that the lien was invalidated during the bankruptcy proceedings, he was only entitled to a qualified discharge, serving as notice that the property might still be subject to the lien.