In re:

LELLA RENEE HARRIS,

Debtor.

Case No. A01-00909-DMD

Chapter 7

A hearing on the debtor’s motion to avoid lien was held on August 22, 2002. Chris Johansen appeared for the debtor; Dick Shaffer appeared telephonically for Northern Credit Services. Having reviewed the motion and opposition, taken judicial notice of the other papers and pleadings on file in this case, and considered the arguments of counsel presented at the hearing,

IT IS ORDERED that the motion to avoid judicial lien, filed on July 1, 2002, is granted. Northern Credit Service’s lien in the debtor’s 2001 Alaska PFD is avoided pursuant to 11 U.S.C. § 522(f), and NCS must refund the sum of $1,480.23 to the debtor, in care of her attorney, Chris Johansen.

Northern Credit Services, Inc. (“NCS”), obtained a state court judgment against debtor Lella Renee Harris in June of 2001. NCS levied on Ms. Harris’s 2001 Alaska permanent fund dividend (“PFD”) in early July, 2001. Ms. Harris filed a pro se chapter 7 petition on August 31, 2001. She listed an interest in her 2001 PFD on Schedule B, and claimed the PFD exempt on Schedule C. She also listed NCS’s debt on her

7 ABR 315 schedules, but treated NCS as a general unsecured creditor rather than a secured creditor.

NCS received notice of Ms. Harris’s bankruptcy case, and ceased all collection activity. However, neither the state court nor the Alaska Department of Revenue were aware of the bankruptcy filing. The Alaska Department of Revenue sent Ms. Harris a letter dated October 12, 2001, which advised her that her PFD had been garnished and remitted to the state court. The letter informed her, “If your dividend was seized under a writ of execution and a mistake was made, you have 30 days from the date of this notice to file a written objection with the court or the government agency listed. Your objection must include the case number and the amount seized.” Ms. Harris did not respond to this notice. ¹

On November 30, 2001, the state court released the PFD funds to NCS. NCS deposited the funds into its client trust fund account. No later than December 31, 2001, the PFD funds were “cleared” from NCS’s client trust fund, meaning that NCS took a share of the funds for its collection services and sent the balance to its client. NCS apparently took no action to check to see if the debtor’s bankruptcy case was still pending at this point in time. The debtor’s discharge was entered on January 8, 2002, and the case was closed January 24, 2002.

Seventeen days later, on February 10, 2002, the debtor sent a letter to the state court and NCS’s attorney asking that her PFD be returned to her. NCS’s counsel responded by letter dated February 19, 2002. The letter advised Ms. Harris that the PFD had been executed upon before she filed her petition. It also stated, “These funds may be recoverable, but recovery is not automatic. Therefore, I suggest that you consult an attorney who practices in the bankruptcy area.”

Ms. Harris did retain an attorney, and moved to reopen her bankruptcy case on June 27, 2002. She also filed a motion to avoid NCS’s judicial lien in her PFD the same day. NCS opposes the motion on the grounds that the debtor has delayed in seeking to avoid the lien and the funds have already been disbursed by NCS to its client. NCS contends that to permit the debtor to avoid the lien now would “impose an impossible burden on creditors who have no choice but to rely upon the debtor’s inaction.” ²

A lien avoidance action may be brought at any time, unless a creditor has been “sufficiently prejudiced so that it would be inequitable to allow avoidance of the lien.” ³

Motions to avoid judicial liens in bankruptcy debtors’ PFDs under 11 U.S.C. § 522(f) are commonly filed in this district, and are routinely granted, even in instances where the debtors’ cases must first be reopened.

7 ABR 317 Here, NCS says it has been prejudiced because the debtor delayed in bringing the lien avoidance action until it had already disbursed her PFD to its client. NCS overlooks one critical factor which distinguishes its situation from those of other creditors who have successfully defeated lien avoidance actions on the grounds of prejudicial delay. ⁴

The very act which NCS claims has caused it prejudice occurred before the debtor’s bankruptcy case was closed. While the stay was still in effect, and with knowledge of the debtor’s bankruptcy, NCS disbursed the PFD to its client. Although NCS had a judicial lien on these funds, the PFD was nonetheless property of the estate at this time. ⁵

NCS was not free to enforce its lien by disbursing these funds without first seeking relief from stay. ⁶

Acts taken in violation of the stay are void. ⁷

NCS seeks to gloss over its error in judgment by attempting to lay the blame for its disbursal of the PFD on the debtor’s delay in seeking lien avoidance. But NCS is a sophisticated creditor.

Such a creditor knows what types of property can be claimed as exempt under the local law. He knows the nature of his lien and the property upon which it is impressed. With this information he knows whether or not the lien is avoidable by the debtor under Section 522(f). These facts will not and do not change with time and delay. ⁸

Such a creditor “is required to exercise good faith and reasonable reliance on the debtor’s failure to avoid the lien.” ⁹

No reasonable reliance exists where a creditor has “jumped the gun” and enforced its lien before the bankruptcy case has closed.

Further, under the facts present here, I find that the debtor’s conduct has in no way prejudiced NCS. Less than three weeks after the closing of her case, Ms. Harris contacted NCS to ask for the return of her PFD. NCS had already disbursed the funds to its client, but informed Ms. Harris that recovery of the PFD was not automatic, and suggested that she contact an attorney. The debtor did so, and initiated this action. There was no undue delay by the debtor, nor has NCS taken any postpetition actions which have sufficiently prejudiced it so that it would be inequitable to avoid the lien. The debtor’s motion will, therefore, be granted. NCS’s lien in the debtor’s 2001 Alaska PFD will be avoided, and NCS must refund the sum of $1,480.23 to the debtor, in care of her attorney, Chris Johansen.

1. NCS did not receive a copy of this notice and cannot claim any prejudice on the basis of Ms. Harris’s failure to respond within the 30-day time period stated in the notice. Further, since the letter was sent during the pendency of Ms. Harris’s bankruptcy, the state court action was stayed pursuant to 11 U.S.C. § 362(a).

2. See NCS’s Obj. to Mot. to Reopen Case to Avoid Judicial Lien, filed Jul. 16, 2002 [Docket No. 23] at p. 4.

3. ITT Fin. Serv. v. Ricks (In re Ricks), 89 B.R. 73, 75-76 (B.A.P. 9th Cir. 1988) [emphasis in original]; see also Yazzie v. Postal Fin. Co. (In re Yazzie), 24 B.R. 576 (B.A.P. 9th Cir. 1982); Tarrant v. Spenard Builders Supply, Inc. (In re Tarrant), 19 B.R. 360, 363-64 (Bankr. D. Alaska 1982).

4. See, e.g., Matter of Bianucci, 4 F.3d 526 (7th Cir. 1993) [court would not permit reopening of case to avoid lien where debtors’ motion to reopen was filed more than 2 years after case was closed, and creditor had incurred expenses in reviving a judgment to enforce its lien.]; Hawkins v. Landmark Fin. Co., 727 F.2d 324 (4th Cir. 1984) [8 month delay in seeking to reopen case, coupled with fact that creditor had initiated state court foreclosure proceedings postpetition, constituted prejudice which precluded reopening of case]; but see Ricks, 89 B.R. at 77 [no prejudicial delay where a creditor who had initiated lien foreclosure proceeding postpetition was sufficiently sophisticated that it should have known its lien was subject to avoidance and its reliance on the debtor’s failure to avoid the lien before the case was closed was unreasonable].

5. In re Jousma, 4 A.B.R. 510, 512 (Bankr. D. Alaska 1997), aff’d 5 A.B.R. 423 (D. Alaska 1998).

7. Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571-72 (9th Cir. 1992).