February 27, 2019, South Carolina – Debtor Michael T. Shiver was the owner of a real property located at Mount Pleasant, SC. (“Property”). Michael T. Shiver and James Russell Shiver were also owners and co-partners of another company named, Permacoat of Charleston, SC. Permacoat filed a state court action to foreclose a mechanic’s lien against the Defendant Anthony Whitfield in the state court. The Defendant counterclaimed against Permacoat in the state court litigation and obtained a judgment in June 2014. The Defendant subsequently commenced supplemental proceedings against Permacoat.
A few years later, the defendant filed a lis pendens against the Property. The Master in Equity for Charleston County issued a decree of foreclosure and order of sale, stating that the Property be sold to satisfy the judgment lien obtained by the Defendant against Permacoat. The foreclosure decree stated that Debtor was personally liable for the June 2014 judgment in favor of the Defendant under S.C. Code § 15-35-170. Although the foreclosure decree mentioned that the Debtor was personally liable for the 2014 Judgment, no judgment was recorded and indexed against the Debtor personally before the filing of the bankruptcy case.
The Debtor filed his chapter 7 bankruptcy case on October 26, 2017. The plaintiff commenced this adversary proceeding on March 30, 2018. The plaintiff’s initial complaint asserted causes of action for the avoidance of the foreclosure decree according to 11 U.S.C. § 547 and preservation of the avoided transfer under 11 U.S.C. § 551.
The plaintiff argued that she is entitled to avoid the lis pendens because it constituted a preferential transfer under § 547. The Defendant argued that the lis pendens was not a preferential transfer avoidable by the plaintiff because it did not constitute a transfer of an interest in the property. The Defendant argued that under South Carolina law a lis pendens merely provides notice of pending litigation and does not actually affect a debtor’s ability to convey title.
The Court concluded that because the Defendant obtained an interest in the property superior to that of a bona fide purchaser when it filed the lis pendens, the lis pendens constituted a transfer under § 547. The Court further held that the state court judgment was avoidable under 11 U.S.C.S. § 544 because it was not recorded in the name of the Debtor before the commencement of the bankruptcy case. Thus, the trustee had no notice of the judgment and was entitled to avoid it using her status as a bona fide purchaser under 11 U.S.C.S. § 544(a)(3).
The Court next ruled that the foreclosure decree also constituted an avoidable transfer according to §547 because according to foreclosure decree, the Debtor was personally liable for the 2014 judgment. It created a lien and therefore was a “transfer” under § 101(54) and can be avoided under § 547. The Court thus ruled that the Chapter 7 trustee was entitled to avoid a lis pendens and foreclosure decree against the property of the bankruptcy estate.