Wednesday, May 26, 2010

United States Bankruptcy Court Reclassifies Secured Claim as Unsecured Based Upon the Date the Creditor Filed the Judgment Lien Certificate Under Florida Law

A recent ruling by the United States Bankruptcy Court for the Southern District of Florida highlights the need for creditors and their counsel to perfect judgment lien interests under Florida law at the earliest possible opportunity. The case, In re Broward Kitchens & Baths, Inc., ___ B.R. ____ (Bankr. S. D. Fla. 2010) (decided May 21, 2009), is available on Westlaw at 2010 WL 2016533. It stands for the proposition that a judgment entered by a Florida court entitles the judgment creditor to a secured claim in a Bankruptcy proceeding only to the extent that the Judgment Lien Certificate has been filed in accordance with Fla. Stat. § 55.203.

The facts of the case are fairly straightforward, and in our experience commonplace. The creditor obtained a judgment in excess of $45,000 against the debtor in Florida state court on February 6, 2006. On May 19, 2006, the judgment creditor filed the Judgment Lien Certificate. Subsequently, in September 2006, the debtor filed its voluntary petition for Bankruptcy under Chapter 7. The judgment creditor then filed its claim with the Bankruptcy Court in December 2006. At some point during the Bankruptcy case, the Trustee brought an adversary proceeding under §§ 548 and 550 of the Bankruptcy Code, alleging that in December 2005 the debtor transferred a substantial portion of its assets to third parties, in exchange for payment in the amount of $215,000, in anticipation of and in order to avoid the impending judgment. These claims were eventually settled for a reduced amount. However, given that the property that would have secured the creditor's claim resided not in the hands of the debtor or of the estate, but in the hands of third parties (as a result of the fraudulent transfer), the Trustee objected to the nature of the creditor's claim. The Trustee's argument, which was adopted by the court, was that the judgment lien never attached to the fraudulently transferred property because the Judgment Lien Certificate was filed after the transfer.

The court reasoned that despite the well settled Florida law that legal title to property cannot pass to a fraudulent transferee of that property, a fraudulent transfer is not per se void, but merely voidable by the Trustee. In this case, the Trustee settled the adversary proceeding before there was an official determination that the transfer was in fact fraudulent, which means that the transfer was never actually voided. As such, the fraudulently transferred assets could not be considered part of the Bankruptcy estate. In fact, the only property comprising the Bankruptcy estate at the time the Judgment Lien Certificate was filed, which is when under Fla. Stat. § 55.202(2) the creditor became a secured creditor, was the remainder of the $215,000 paid in exchange for the fraudulent transfer; and since Fla. Stat. § 55.202(2) provides that a judgment lien does not attach to money, the creditor's claim must therefore be treated as an unsecured claim.

As a result, instead of being paid directly from the sale of collateral, the creditor's claim will be payable only to the extent funds remain available after the payment of all claims with a higher priority under § 507 of the Bankruptcy Code. Obviously this is not good for the creditor- there may in fact be no funds remaining to pay this claim. And while that outcome may have been unavoidable for this creditor, the lesson to be learned by creditors and attorneys from this case is that timely action must be taken after the entry of judgment in order to protect the creditor's interests.