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In re Blease

decided: August 23, 1979.



Before Aldisert and Weis, Circuit Judges, and Diamond, District Judge.*fn*

Author: Per Curiam


This appeal requires us to decide whether the district court erred in sustaining a bankruptcy court's determination that liens asserted by the State of New Jersey against a bankrupt's real property were invalid against a Chapter XII trustee in his status as a hypothetical, ideal judicial lien creditor under § 70(c) of the Bankruptcy Act, 11 U.S.C. § 110(c).*fn1 The state has appealed. We affirm for the reasons stated by the late Chief Judge George Barlow in an unreported opinion. In re Blease, No. B-77-1907 (D.N.J. Sept. 28, 1978).

The debtor is a veterinarian, farmer and race horse owner who also dabbled in real estate. He filed Chapter XII proceedings in June 1977. The Federal Land Bank, holder of mortgages on two parcels of land, filed for relief from the automatic stay provisions of Bankruptcy Rule 12-43. The trustee answered and also filed a third-party complaint against all persons claiming an interest in the debtor's real estate. In his third-party complaint, the trustee sought a determination of the validity of all liens and included New Jersey as a named defendant. The state had claimed a lien for unpaid taxes on all real property of the bankrupt as the result of certificates of debt docketed with the clerk of the superior court, but had failed to levy prior to the petition in bankruptcy.

The bankruptcy judge accepted the trustee's argument that, although the state was a judgment creditor, the trustee took priority over the state because § 70(c) granted the trustee rights equivalent to those of a judgment creditor who had levied. The bankruptcy judge reasoned that under New Jersey law a judgment creditor with a levy has priority over a non-levying judgment creditor and that the trustee possesses the status of a judgment creditor with a levy. After the bankruptcy judge granted the trustee's motion for summary judgment, the state unsuccessfully appealed to the district court.

The docketing of a judgment in the Superior Court of New Jersey creates a lien upon the judgment debtor's real estate from the date the judgment is docketed. N.J.S.A. § 2A:16-1. In re Fornabai, 227 F. Supp. 928, 930 (D.N.J.1964). A writ of execution is the procedural tool for enforcing a judgment; it does not create the lien.*fn2 Id.; In re Ved Elva, Inc., 260 F. Supp. 978, 982 (D.N.J.1966). This case, however, presents the question of the priority among judgment creditors, each of whom has a lien on the debtor's real estate. The general priority rule in New Jersey is that a junior judgment creditor who levies first takes priority over a senior judgment creditor who has not levied. Burg v. Edmondson, 111 N.J.Super. 82, 267 A.2d 545 (1970); Silver v. Williams, 72 N.J.Super. 564, 567, 178 A.2d 649 (1962); In re Fornabai, 227 F. Supp. at 931-32. The purpose of this rule is to aid the diligent creditor.

A levy relates back to the date the writ of execution is delivered to the sheriff. McAdams v. Mundy, 79 N.J.L. 480, 76 A. 1031 (1910); Fredd v. Darnell, 107 N.J.Eq. 249, 252, 152 A. 236 (1930). This rule is based upon a construction of statutes requiring the sheriff to endorse on the writ of execution the date and time of receipt and to execute first the writ first delivered. See N.J.S.A. §§ 2A:17-10, 2A:17-11 and 2A:17-12. See also Home Insurance Co. v. Gigi Fashions, Inc., 267 F. Supp. 958, 962 (D.N.J.1967).

The state does not claim a status higher than that of an ordinary judgment creditor. Thus if the dispute were between the state and a subsequent judgment creditor who had actually levied, the state concedes that its lien would not take priority. The state contends, however, that the trustee's § 70(c) position does not give him the status of a judgment creditor with a levy. The bankruptcy judge and the district court refused to accept the state's contention. Chief Judge Barlow reasoned:

"(T)he sole question before this Court is whether § 70(c) grants the trustee the rights of a judgment creditor who has both docketed his judgment and levied upon the debtor's real property, as the trustee argues, or whether § 70(c) grants the trustee merely the right of a judgment creditor who has docketed but not levied, as is argued by the appellant.

"It has been the past practice of the bankruptcy courts in New Jersey to accord the trustee the rights of a levying judgment creditor under § 70(c). See the unreported decisions of In re Currie, two bankruptcy court decisions, 712 (Bankruptcy Court New Jersey 1976); In re Carnavale, (B-1107-70 1972). This interpretation is designed to enhance the trustee's ability to provide for the equal distribution of assets among the bankrupt's creditors, which is one of the primary purposes of the Bankruptcy Act in general and of § 70 in particular. See Straton v. New, 283 U.S. 318, 320-21 (51 S. Ct. 465, 75 L. Ed. 1060) (1931); 4A Collier on Bankruptcy, P 70.46 at 558 (14th Ed.)."

"The trustee under § 70(c) is considered the ideal hypothetical lien creditor as of the date of the filing of the petition in bankruptcy. See Sequoia Machinery, Inc. v. Jarrett, 410 F.2d 1116 (9th Cir. 1969). In fact, some commentators have stated that in adopting § 70(c) Congress implemented the theory that bankruptcy proceedings are in effect a legal levy upon the property of the bankrupt. See Mac Lachan on Bankruptcy at page 187.

"Most instructive in the resolution of this issue, however, is the case of Sampsell v. Straub, 194 F.2d 228 (9th Cir. 1951), Cert. denied, 343 U.S. 927 (72 S. Ct. 761, 96 L. Ed. 1338) (1952), a decision written by the late Judge Hastie while sitting by designation in the Ninth Circuit. Sampsell involved a bankrupt who recorded his homestead exemption as required by state law for protection against subsequent judgment lien-holders, but only after his petition in bankruptcy had been filed. State law also required a judgment to be recorded before a lien was created. The Ninth Circuit rejected the bankrupt's argument that § 70(c) gave the trustee only the rights of a judgment creditor who had ...

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