Judgment Creditor's Perfection of Debtor's Stock in Personal Services Corporation Under NJ Law

One of my clients is currently involved in bitter litigation with a judgment creditor who is trying to wrestle away her ability to hold onto a small hair salon that she incorporated several years ago and which operates in Ridgewood, New Jersey.

In this particular instance, the judgment creditor claims to have perfected its judgment lien against my client's stock ownership in the hair salon by virtue of a levy made by the Bergen County Sheriff some several years before my client filed a Chapter 7 bankruptcy petition, and is objecting to a proposed settlement between my client and the Chapter 7 bankruptcy Trustee that would enable my client to purchase the Trustee's claims against the stock.   My client,  currently a debtor in a Chapter 7 bankruptcy case pending in the United States Bankruptcy Court for the District of New Jersey, disputes the judgment creditor's claim and maintains that the judgment creditor is, at most, an unsecured creditor who failed to perfect its judgment lien against the stock, and that consequently the lien is inferior to the Chapter 7 Trustee's lien.   The judgment creditor is attempting to submit its own bid for the stock, an obstructionist tactic intended to deprive my client of the ability to continue earning a living.  The issue is to be argued before the United States Bankruptcy Court on June 18, 2012.

NJ Debtor Creditor Law - Perfecting Judgment Creditor's Interest in Stock of Closely Held Business vs. Bankruptcy Trustee's Hypothetical Perfected Lienholder Status  Click the above link to download a copy of the brief that my law firm filed with the NJ Bankruptcy Court on June 11, 2012.

Rule 4:59-1 of the New Jersey Court Rules sets forth the procedure for judgment creditors to execute upon assets of a judgment debtor.   The process is done through a Writ of Execution entered by the Court.  The  Writ designates the local county sheriff as the agent for the judgment creditor with the authority to levy or seize assets of the judgment debtor located in that county.   The judgment creditor is required to provide specific instructions to the sheriff as to the assets that a levy should be made.   So for example, a sheriff could levy on a judgment debtor's bank account by going to the branch of the bank and serving the branch manager with the Writ of Execution.  In addition, a sheriff could seize or attach the judgment debtor's car or other personal property of the judgment debtor that the creditor becomes aware of.   But the judgment creditor must give the sheriff specific instructions on which assets to levy.   Once a levy is made, the sheriff must provide specific notice to the judgment debtor informing him or her of the assets levied.

In this regard, New Jersey is unique because it requires the sheriff to first attempt to levy on a judgment debtor's personal assets before attempting to levy on real estate.   Any attempt by a sheriff to levy on real estate without first attempting to levy on personal property will render the real estate levy void.  This order of priority of asset levies is discussed in N.J.S.A. 2A:17-1.

For a judgment creditor to perfect a levy against the stock held by a judgment debtor in a personal services corporation under New Jersey law, one of the following must occur:

(i) the sheriff must actually seize the actual stock certificates;

(ii) the judgment debtor must surrender the stock certificates; or

(iii) the creditor must apply for injunctive relief in the form of a court order restraining the judgment debtor from transferring the stock, or ordering such other emergent relief. 

The “actual seizure” requirement to perfect a judgment creditor’s levy on stock in a closely-held corporation is found in N.J.S.A. 12A:8-112, which reads as follows:

a. The interest of a debtor in a certificated security may be reached by a creditor only by actual seizure of the security certificate by the officer making the attachment or levy, except as otherwise provided in subsection d. of this section. However, a certificated security for which the certificate has been surrendered to the issuer may be reached by a creditor by legal process upon the issuer.

N.J.S.A. 12A:8-102(4) defines the term "certificated security" as “a security that is represented by a certificate.”

Subsection (e) of N.J.S.A. 12A:8-112 speaks to the injunctive relief remedies available to the judgment creditor to seek the Court's aid in perfecting a levy on a judgment debtor's stock interest in a closely-held business:

e. A creditor whose debtor is the owner of a certificated security, uncertificated security, or security entitlement is entitled to aid from a court of competent jurisdiction, by injunction or otherwise, in reaching the certificated security, uncertificated security, or security entitlement or in satisfying the claim by means allowed at law or in equity in regard to property that cannot readily be reached by other legal process.

In the context of a bankruptcy filing, a judgment creditor who fails to perfect a levy in the debtor's stock in closely-held corporation will be deemed an unsecured creditor whose lien is inferior to the Chapter 7 bankruptcy trustee's lien.  As stated in In The Matter of Samuel Braen, Jr., 72 B.R. 56, 60 (Bankr. D.N.J. 1987), “. . . it is a well settled principle that a bankruptcy trustee is considered a hypothetical lien creditor as of the date of the filing of the bankruptcy petition.” Id., citing Matter of Blease, 605 F.2d 97 (3rd Cir. 1979). This long-standing principle of law is codified in 11 U.S.C. § 544.

In my client's case, the Bergen County Sheriff served the Writ of Execution on the salon's receptionist.  There was no actual seizure of my client's stock certificates in the hair salon business as required by N.J.S.A. 12A:8-112(a), and the judgment creditor made no attempt to compel my client to surrender her stock certificates, nor did the judgment creditor petition the court for any injunctive relief as required under N.J.S.A. 12A:8-112(e).  

I will report the result of the Bankruptcy Court's decision, when issued, in a subsequent post.  In re Hadad, Chapter 7, Case No.: 11-29988 (RG).