Court Opinion

ID: 6496531
Source: CourtListenerOpinion
Date Created: 2022-06-29 20:12:51.872659+00
Date Added: 2024-06-11T09:07:57.488459
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE
              APPROVAL OF THE APPELLATE DIVISION

                                   SUPERIOR COURT OF NEW JERSEY
                                   APPELLATE DIVISION
                                   DOCKET NO. A-0476-21

VADIM CHEPOVETSKY and
SVETLANA NASHTATIK,
                                           APPROVED FOR PUBLICATION
     Plaintiffs-Respondents,
                                                     June 16, 2022
v.                                               APPELLATE DIVISION

LOUIS CIVELLO, JR.,

     Defendant-Appellant.
__________________________

           Argued June 2, 2022 – Decided June 16, 2022

           Before Judges Hoffman, Geiger and Susswein.

           On appeal from an interlocutory order of the Superior
           Court of New Jersey, Chancery Division, Middlesex
           County, Docket No. C-000008-19.

           Jeffrey S. Mandel argued the cause for appellant.

           Kenneth L. Winters argued the cause for respondents
           (Jardim, Meisner & Susser, PC, attorneys; Kenneth L.
           Winters, on the briefs).

     The opinion of the court was delivered by

GEIGER, J.A.D.
      Defendant Louis Civello, Jr. appeals from a September 3, 2021 Chancery

Division order vacating a June 24, 2021 judgment entered against plaintiffs

Vadim Chepovetsky and Svetlana Nashtatik pursuant to Rule 4:50-1(d) and

reinstating plaintiffs complaint to quiet title. We affirm in part, as modified,

vacate in part, and remand.

      The Loan Transaction, Mortgage, Guaranty, and Default

      Civello owned Bayview Auto and Truck, Inc. (Bayview), an automobile

dealership in South Amboy. In January 2007, Civello agreed to sell Bayview

and its inventory of nineteen vehicles to Artem Boguslavskiy for $196,500.

Under their arrangement, Boguslavskiy would operate Bayview immediately,

pending approval of the transaction by the New Jersey Motor Vehicle

Commission (MVC), at which time the transaction would close.                   If

Boguslavskiy failed to obtain the requisite approval from the MVC, the

agreement would be rescinded.      Boguslavskiy was required to provide an

accounting of all vehicle sales and turn over the proceeds from the sale of the

inventory to Civello.

      Boguslavskiy paid Civello $12,500 upon execution of the agreement and

gave defendant a promissory note for $184,000, with interest thereon at 2.5

percent, payable in sixty equal monthly installments followed by a balloon

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                                       2
payment due on February 22, 2012. The note also provided for late charges

and counsel fees in the event of nonpayment.

        Boguslavskiy is related to Chepovetsky.      The promissory note was

secured by a mortgage on plaintiffs' residence in Old Bridge and

Chepovetsky's personal guaranty.

        After remitting four monthly installments, Boguslavskiy defaulted and

made no subsequent payments. Civello alleged that Boguslavskiy sold cars

without charging sales tax, kept the proceeds for the cars that were sold

without reimbursing defendant, and abandoned Bayview.            The transaction

never closed, and Civello ultimately sold Bayview to someone else.

        The 2008 Litigation

        On July 18, 2008, Civello and Bayview filed suit against Boguslavskiy,

Chepovetsky, and others in the Chancery Division (Docket No. C-28-08).1

Civello's amended complaint alleged breach of contract, breach of the

covenant of good faith and fair dealing, unjust enrichment, interference with

business relationships, breach of fiduciary duty, conversion, fraud, false

representation,    duty   to   indemnify,   unconditional    guarantee   (as    to

Chepovetsky), and forgery (as to Chepovetsky). Civello sought compensatory

and consequential damages, punitive damages, interest, an injunction, an

1
    Nashtatik was not named as a defendant in the 2008 litigation.

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accounting, attorney's fees, and costs. The complaint did not mention or seek

to foreclose the mortgage. That action was consolidated into a Law Division

action (Docket No. L-707-09) involving a separate suit by E-LOAN Inc.

against Boguslavskiy, Bayview, and others. 2 The outcome of the 2008 action

is unclear, but it apparently did not result in a judgment.

        Plaintiffs' 2011 Bankruptcy

        In 2011, plaintiffs filed a joint voluntary Chapter Seven bankruptcy in

the United States Bankruptcy Court for the District of New Jersey (Bankruptcy

Court) (Case No. 11-18319-MBK).           The bankruptcy schedules they filed

included reference to Civello's civil suit but did not specifically reference the

note, guaranty, or mortgage as obligations from which plaintiffs sought

discharge. Civello was listed as an unsecured nonpriority creditor relating to

his civil suit and acknowledges he received notice of the bankruptcy.

        The bankruptcy trustee abandoned his interest in plaintiffs' residence

rather than attempting to liquidate it for the benefit of creditors. 3 The debt

2
    Nashtatik was not named as a defendant in the 2009 litigation.
3
  The asset schedules filed by plaintiffs listed the value of their residence in
Old Bridge at $579,500. The debt schedules listed three mortgages with a
combined balance of $806,700.04 encumbering their residence. Boguslavskiy
was listed as a codebtor on defendant's claim. In their Statement of Financial
Affairs, plaintiffs listed defendant's civil suit. Trustee abandonment is a
procedure in bankruptcy, on notice to creditors, whereby the trustee abandons

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                                         4
owed by Chepovetsky on the personal guaranty was not declared non-

dischargeable by the Bankruptcy Court. On September 29, 2011, plaintiffs

were granted a discharge in bankruptcy, which included Chepovetsky's

obligation under the personal guaranty. Notice of the discharge was mailed by

the Bankruptcy Court to Civello.

      Plaintiffs' Quiet Title Action and Civello's Counterclaim

      On January 10, 2019, plaintiffs filed this action against Civello, seeking

to quiet title on their residence, injunctive relief, and a declaratory judgment

barring Civello from pursuing claims under the mortgage, promissory note, or

guaranty. They alleged that the applicable six-year statute of limitations on

enforcement of the mortgage had expired since the maturity date of the note

and mortgage was February 22, 2012. Plaintiffs did not plead that Civello was

barred by the bankruptcy discharge from seeking a money judgment against

them, nor did they rely upon the bankruptcy discharge as a basis to quiet title.

      Civello filed an answer generally denying the allegations of the

complaint, asserting numerous affirmative defenses, and a counterclaim for

breach of contract, unjust enrichment, quantum meruit, and breach of the

his or her interest in property of the estate "that is burdensome to the estate or
that is of inconsequential value and benefit to the estate," 11 U.S.C. § 554(a),
typically because its liquidation would not benefit creditors, considering the
debtors' exemptions, the property's fair market value, the mortgages and
unpaid realty taxes encumbering the property, and the estimated costs of sale.

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                                        5
covenant of good faith and fair dealing. Civello alleged that Chepovetsky

breached the guaranty, Nashtatik was a third-party beneficiary of the guaranty,

and plaintiffs owed the outstanding balance on the loan. He asked the court to

"maintain[] the mortgage" and for a judgment on the guaranty.

      On June 12, 2019, plaintiffs filed an answer to the counterclaim that

denied the substantive allegations but asserted no affirmative defenses.

Significantly, plaintiffs did not assert their bankruptcy discharge as an

affirmative defense to the counterclaim.

      Plaintiffs did not provide requested discovery and did not comply with

two orders compelling them to provide discovery. On January 10, 2020, the

court dismissed plaintiffs' complaint with prejudice due to their violation of

the two discovery orders and the court's subsequent instructions.

      On February 7, 2020, the court conducted a one-day bench trial on

Civello's counterclaim. Plaintiffs did not attend the trial or participate in the

pretrial information exchange. Counsel for Chepovetsky attended the trial and

cross-examined Civello's witnesses.        Counsel indicated Chepovetsky was

unavailable to attend because he was out of the country.

      Civello testified on his own behalf.       He described the transaction

consistent with the documentation in the record.           Civello testified that

Boguslavskiy sold vehicles from Bayview's inventory and paid the proceeds to

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                                       6
himself and plaintiffs before abandoning the dealership in the summer of 2007.

During encounters in 2012 and April 2013, Chepovetsky assured Civello that

he would pay the balance owed.        Paul Tortora, who observed the 2013

encounter, testified that Chepovetsky told Civello that he would pay the debt

owed. The note, mortgage, guaranty, stock purchase agreement, and copies of

checks were admitted into evidence. Plaintiffs did not produce any witnesses.

      Plaintiffs' counsel did not mention plaintiffs' bankruptcy discharge

during the trial.    He did ask questions regarding Boguslavskiy's own

bankruptcy.

      On June 24, 2021, the court issued a written opinion finding that Civello

proved his counterclaims of breach of contract, unjust enrichment, and breach

of the covenant of good faith and fair dealing. The court found that plaintiffs

waived and were "estopped from asserting" the affirmative defenses of the

statute of limitations, the entire controversy doctrine, and "any other

affirmative defense that could have been pled in the [a]nswer to the

[c]ounterclaim."

      The court found Civello could proceed to enforce the note against

Boguslavskiy and the guaranty against Chepovetsky, but rejected Civello's

liability claims against Nashtatik, noting she was "a mortgagor and not a

guarantor." The court found "the mortgage is simply a security agreement and

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                                      7
not a guaranty of payment." The court entered judgment against Chepovetsky

on the guaranty, in the amount of $410,800 (comprised of $184,000 principal,

$216,000 interest through the maturity date, and late fees of $10,800), plus

additional interest from February 12, 2012 to the date of the judgment, and

counsel fees in an amount to be determined. The court did not enter judgment

against Nashtatik. The judgment did not grant any relief under the mortgage.

      Plaintiffs' Motion to Vacate the Judgment and the Order Dismissing
      the Quiet Title Action

      On July 29, 2021, plaintiffs filed a motion to: (1) vacate the judgment

alleging it was void due to their 2011 bankruptcy discharge; and (2) vacate the

dismissal of their complaint to quiet title.4    The motion papers included

plaintiffs' bankruptcy filings, which demonstrated that the claims related to

Chepovetsky's guaranty and defendant's 2008 civil action were discharged in

bankruptcy.

      The court heard oral argument on August 27, 2021.              Plaintiffs

emphasized that the judgment was void due to their 2011 bankruptcy

discharge. They argued that any challenge to the discharge in bankruptcy of

the debt owed on the guaranty must be brought in Bankruptcy Court rather

than Superior Court, and the time to do so had expired. Plaintiffs emphasized

4
 The motion papers did not cite a particular court rule but used language from
Rule 4:50-1.

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                                      8
that the Civello's claim was for personal liability under the guaranty and not a

suit on the mortgage, as there was no prayer for foreclosure.

      Regarding their action to quiet title, plaintiffs argued that New Jersey

does not permit clouds on title arising from a discharged debt, citing N.J.S.A.

2A:16-49.1. They further argued that the maturity date of the mortgage was in

February 2012 and an action to foreclose the mortgage was subject to the six-

year statute of limitations imposed by N.J.S.A. 2A:50-56.1, rendering the

mortgage lien unenforceable. Therefore, their action to quiet title should be

allowed to proceed. Plaintiffs also contended that the order dismissing their

action for failure to provide discovery was void because they were not required

to respond to defendant's discovery demands related to a debt discharged in

bankruptcy, citing 11 U.S.C. § 524.

      Defendant opposed the motion, relying on equitable principles, including

unclean hands, and asserting that plaintiffs failed to prove that Chepovetsky's

liability on the guaranty was included in their discharge in bankruptcy.

      On September 3, 2021, the court issued an order and written opinion

vacating the June 24, 2021 judgment and the January 10, 2020 order that

dismissed the quiet title action.     The court found the judgment was void

because Chepovetsky's "personal debt" to defendant was discharged in

bankruptcy pursuant to 11 U.S.C. § 524. The court noted that the debt was

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                                        9
listed in the bankruptcy schedules, which included reference to the 2008

lawsuit, and that Civello was given notice of the bankruptcy proceedings. The

court stated it was unaware of the discharge in bankruptcy when the judgment

was entered against Chepovetsky personally.

      The court noted that pursuant to N.J.S.A. 2A:16-49.1, a judgment must

be vacated "if it is a year after the debtor obtained a bankruptcy discharge of

the debt upon which the judgment is based." Because Chepovetsky's 2011

discharge "included the debt upon which this action" and the prior action

brought by Civello are based, the court determined that the judgment based on

the guaranty of the note was void ab initio. The court held that the effect of a

discharge in bankruptcy is not waived by the failure to plead it as a defense.

Accordingly, the court concluded that the judgment was based on a debt

discharged in bankruptcy, the judgment itself was void, consistent with ----
                                                                        Rule

4:50-1(d).

      As to Chepovetsky's application to vacate the order dismissing his action

to quiet title, the court found that the order was "improvidently entered" and

the complaint should be reinstated. The court found that the mortgage held by

Civello was due in full on February 22, 2012, and that N.J.S.A. 2A:50-56.1

imposed a six-year statute of limitations on enforcing the mortgage. Civello

thus failed to institute a timely action on the mortgage and its enforcement was

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                                      10
barred, such that the mortgage "presents a cloud on the title" and an action to

quiet title was appropriate.

      The court also reasoned that the purported discovery failures which

served as the basis for the dismissal arose from defendant's counterclaim on

the discharged debt.    The court wrote that, pursuant to 11 U.S.C. § 524,

plaintiffs were "not obligated to do anything" as to these claims and were

"entitled to disregard any such discovery that was part of an attempt to collect

[] a discharged 'debt.'" This appeal followed.

      Chepovetsky's Bankruptcy Court Motion

      While this appeal was pending, Chepovetsky moved in Bankruptcy

Court to reopen the bankruptcy case under 11 U.S.C. § 350 and to hold Civello

and his attorney in contempt for violating the discharge injunction imposed

pursuant to 11 U.S.C. § 524 by attempting to enforce the judgment on the

counterclaim through the prosecution of this appeal. The Bankruptcy Judge

issued an oral decision and order denying the motion.

       In his oral decision, the judge assumed that Civello had proper notice of

the bankruptcy filing and the debtor's discharge. The judge noted that notice

was mailed to Civello's business and home address and served upon his

attorney.   The judge indicated that the motion presented two issues:        (1)

"whether or not pursuit of the counterclaim against the debtor in state court

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                                      11
constituted a violation of the discharge injunction"; and (2) "if there was a

violation of the discharge injunction whether a finding of contempt is

appropriate along with damages given the circumstances."

      The judge noted "that after Civello filed his counterclaim, the debtor did

not identify, reference or mention the bankruptcy discharge." Nor did he raise

it as an affirmative defense or advise the state court of the bankruptcy

discharge "at any point during discovery, motion practice or trial." The debtor

first raised the bankruptcy discharge in state court after judgment was issued in

favor of Civello. The judge recognized that "outside of bankruptcy this would

give rise to an assertion that there's been a waiver of the discharge as an

affirmative defense," citing Rule 4:5-4. After discussing cases pertaining to

waiver of an affirmative defense and estoppel from relying on an affirmative

defense, the judge explained "that the Bankruptcy Code overrides state court

rules and, indeed, the state court case law on this issue [is] that 11 U.S.C. [§]

524(a)(2) provides that the discharge is essentially self-executing and is not

waivable."

      The judge noted that In re Hamilton, 286 B.R. 291 (Bankr. D.N.J. 2002)

and In re Hensler, 248 B.R. 488 (Bankr. D.N.J. 2000) "stand for the

proposition that Section 524 of the Bankruptcy Code operates as an automatic

injunction against attempts to collect any discharged debts." "[B]oth courts

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                                       12
concluded that Section 524 obviates the need for a debtor to actively assert the

discharge to render any subsequent actions in violation of the discharge and

that [this] line of cases suggest[s] that the debtor in this case was under no

obligation to assert his bankruptcy discharge as an affirmative defense in the

state court action."

      The judge was not convinced that "the debtors' decision to remain quiet

about the discharge and sit on his hands" throughout the pretrial practice and

trial of the counterclaim was irrelevant.        The debtor "clearly [had] an

opportunity to mitigate any harm" by raising the defense "to avoid the time,

effort and money expended in pursuing the counterclaim."

      The judge nevertheless found it was clear "that pursuing the

counterclaim without more constituted a violation of the discharge injunction."

The judge also recognized that a creditor has a right to pursue in rem relief

under the mortgage, "which survives any bankruptcy discharge, and that it is

necessary to fix the liability in order to effectively enforce the mortgage."

      The judge then analyzed whether Civello's violation of the discharge

injunction gave rise to a proper claim for a finding of contempt under 11

U.S.C. § 105(a). As we have noted, the judge declined to impose contempt

sanctions. The judge was mindful of the Supreme Court's decision in Taggart

v. Lorenzen, which permits the imposition of sanctions only where there is no

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                                        13
objectively reasonable basis for concluding that the creditor's conduct might be

lawful under the discharge order. ___ U.S. ___, 139 S. Ct. 1795 (2019). The

judge found that under the court rules and case law, there was "an objectively

reasonable basis" for concluding that Civello's conduct "might be lawful[,]"

even though "Civello's initial assertion of the counterclaim against the debtor

individually was certainly a violation of the discharge injunction . . . ."

Therefore, contempt sanctions were deemed "inappropriate."            The judge

further noted that to the extent the relief granted to Civello is "limited [to] in

rem relief," it is "not violative of the discharge injunction."        Therefore,

"pursuit of litigation against the debtor to fix liability as a step towards

bringing . . . in rem claims . . . such as . . . foreclosure do not violate the

discharge injunction." The judge also denied the debtor's application to reopen

the bankruptcy, finding there was "no impact" on the bankruptcy estate or any

distributions to creditors. We granted Civello leave to appeal.

      Defendant raises the following points for our consideration.

            POINT I

            WHEN A COURT RULE IS "NON-RELAXABLE,
            EVEN IN EXTENUATING CIRCUMSTANCES"
            AND THE SUPREME COURT SAYS "R. 4:50-1
            CANNOT BE USED TO CIRCUMVENT THE TIME
            LIMITATIONS OF R. 4:49," IT IS REVERSIBLE
            ERROR TO VACATE A JUDGEMENT UNDER
            RULE 4:50 AFTER THE TIME UNDER RULE 4:49
            EXPIRES AND WHEN BASED ON THE SAME

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                                       14
            FACTS AVAILABLE PRIOR TO THE EXPIRATION
            OF TIME TO FILE UNDER RULE 4:49.

            POINT II

            WHEN A PARTY PROPERLY SEEKS RELIEF
            PURSUANT TO RULE 4:50, IT IS A RULE OF
            EQUITY THAT REQUIRES THE COURT TO
            CONSIDER EQUITY PRIOR TO AFFORDING A
            PARTY RELIEF; FURTHER, THE COURT FAILED
            TO MAKE THE REQUIRED FINDINGS OF FACT
            AND CONCLUSIONS OF LAW.

            POINT III

            THE COURT BELOW ERRED WHEN IT FAILED
            TO DIFFERENTIATE BETWEEN UPHOLDING
            THE JUDGMENT FOR PURPOSES OF THE
            MORTGAGE LIEN, WHICH IS EXEMPT FROM
            DISCHARGE IN BANKRUPTCY, AND VACATING
            THE JUDGMENT WHEN USED FOR PERSONAL
            LIABILITY OF THE DEBTOR, WHICH IS A
            CLAIM WE CEASED PURSUING UPON BEING
            INFORMED OF THE BANKRUPTCY.

            POINT IV

            NEW JERSEY'S JUDICIARY IS PERMITTED TO
            IMPLEMENT PROCEDURAL RULES THAT
            AFFECT FEDERAL RIGHTS, INCLUDING THE
            REQUIREMENT THAT CERTAIN DEFENSES BE
            TIMELY   PLED   AND/OR   ACTED   UPON,
            PROVIDED THE PROCEDURAL RULES ARE, AS
            HERE, REASONABLE.

      This appeal involves the intersection of Rule 4:5-4, which requires

responsive pleadings to "set forth specifically and separately," the affirmative

defense of discharge in bankruptcy, and the federal statutory injunction against

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                                      15
prosecuting enforcement of a debt discharged in bankruptcy under 11 U.S.C. §

524. It also involves the issue of whether a creditor can bring a post -discharge

action to fix the amount due on a mortgage on the debtor's residence through a

judgment against the debtor who personally guaranteed payment of the loan.

      Civello contends plaintiffs waived the affirmative defense of discharge

in bankruptcy by failing to assert it in their answer to his counterclaim, during

discovery, and during the trial. Plaintiffs contend that they were not required

to plead discharge in bankruptcy as an affirmative defense to Civello's

counterclaim and that under the Supremacy Clause, the federal statutory

injunction against prosecuting discharged debts in state court trumps Rule 4:5-

4 and renders the judgment on the counterclaim void ab initio.

      Our analysis is informed by the case law interpreting Rule 4:5-4 and

longstanding bankruptcy law principles, which appear to be in conflict in

certain respects. We are also mindful of the Supremacy Clause of the United

States Constitution, which provides:

                   This Constitution, and the laws of the United
            States which shall be made in pursuance thereof; and
            all treaties made, or which shall be made, under the
            authority of the United States, shall be the supreme
            law of the land; and the judges in every state shall be
            bound thereby, anything in the Constitution or laws of
            any State to the contrary notwithstanding.

            [U.S. Const., art. VI, cl. 2.]

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                                        16
      Under the Supremacy Clause, "state laws that 'interfere with, or are

contrary to the laws of congress, made in pursuance of the constitution' are

invalid." Puglia v. Elk Pipeline, Inc., 226 N.J. 258, 274 (2016) (quoting Wis.

Pub. Intervenor v. Mortier, 501 U.S. 597, 604 (1991)). The Supremacy Clause

"unambiguously provides that if there is any conflict between federal and state

law, federal law shall prevail." Gonzales v. Raich, 545 U.S. 1, 29 (2005).

      We first address whether the failure to plead the affirmative defense of

discharge in bankruptcy results in a waiver of that defense under Rule 4:5-4.

"While the rule does not expressly so state, it is clear that ordinarily an

affirmative defense that is not pleaded or otherwise timely raised is deemed to

have been waived." Pressler & Verniero, Current N.J. Court Rules, cmt. 1.2.1

on R. 4:5-4 (2022). The requirement to plead "affirmative defenses may be

relaxed when its enforcement 'would be inconsistent with substantial justice.'"

Id., cmt. 1.2.3 on R. 4:5-4 (quoting Douglas v. Harris, 35 N.J. 270, 281

(1961)).   "[I]n certain factual situations, untimely raised defenses may be

asserted in 'the interests of justice' provided there is no 'surprise or prejudice.'"

Rivera v. Gerner, 89 N.J. 526, 538 (1982) (quoting O'Connor v. Altus, 67 N.J.

106, 116 (1975)).     However, "absent an overriding demand of substantial

justice, an affirmative defense, once waived, is not subject to revival by post -

trial, post-judgment motions." Pressler & Verniero, cmt. 1.2.1 on R. 4:5-4; see

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                                         17
also Lahue v. Pio Costa, 263 N.J. Super. 575, 597-98 (App. Div. 1993) (noting

that an affirmative defense must be raised timely and attempting to raise it in a

motion for reconsideration was not timely).

      Section 524(a) of the Bankruptcy Code sets forth the effect of a

discharge in bankruptcy. It provides that a discharge under Title 11:

             (1) voids any judgment at any time obtained, to the
             extent that such judgment is a determination of the
             personal liability of the debtor with respect to any debt
             discharged under section 727, 944, 1141, 1192, 1228,
             or 1328 of this title, whether or not discharge of such
             debt is waived; [and]

             (2) operates as an injunction against the
             commencement or continuation of an action, the
             employment of process, or an act, to collect, recover
             or offset any such debt as a personal liability of the
             debtor, whether or not discharge of such debt is
             waived;

             [11 U.S.C. § 524(a).]

      The following facts are uncontroverted. Plaintiffs filed a joint Chapter

Seven bankruptcy. The bankruptcy trustee abandoned his interest in plaintiffs'

residence.   Plaintiffs received a discharge in bankruptcy.        The discharge

included Chepovetsky's personal liability on the guaranty of payment of the

loan that Boguslavskiy owed to Civello.

      Civello and his business received notice from the bankruptcy court t hat

plaintiffs filed the bankruptcy and received a discharge in bankruptcy. Despite

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                                        18
that notice, when plaintiffs filed this quiet title action, Civello filed a

counterclaim against plaintiffs and pursued that claim to judgment, in clear

violation of 11 U.S.C. § 524(a).      Although Civello now claims that the

judgment was merely to be used to fix the amount due in a subsequent

foreclosure action, in addition to seeking a declaratory judgment, each count of

Civello's counterclaim demanded judgment "for damages including but not

limited to compensatory damages, interest, attorney's fees and costs."

       On the other hand, despite the opportunity to do so, plaintiffs

inexplicably failed to plead the affirmative defense of discharge in bankruptcy

in their answer to the counterclaim.       They likewise failed to raise that

affirmative defense during discovery, pretrial motion practice, or the trial.

Instead, they first raised the defense in their post-judgment motion to vacate

the judgment entered against Chepovetsky and the order dismissing their quiet

title action.

       Under the Supremacy Clause, the nature, extent, and enforceability of a

discharge in bankruptcy is controlled by the Bankruptcy Code and

interpretative federal case law. "Section 524 of the Bankruptcy Code makes it

entirely unnecessary for a debtor to do anything at all in a post-discharge

collection action." Hensler, 248 B.R. at 491; accord Hamilton, 286 B.R. at 293

("Section 524(a)(1) operates automatically, obviating any need for the debtor

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                                      19
to assert the discharge to render any subsequent actions on the judgment

void."). "[T]he debtors were not required to assert the discharge or otherwise

object to the continued prosecution of the discharged claim in the subsequent

action." Hensler, 248 B.R. at 492. Consequently, the failure to plead the

discharge in bankruptcy as an affirmative defense did not waive that defense or

estop plaintiffs from asserting it. A state court judgment holding a debtor

personally liable on a discharged debt "is void ab initio as a matter of federal

statute." Ibid.

      Civello also argues that the bankruptcy discharge does not preclude him

from pursuing personal liability on the guaranty because the note, mortgage,

and guaranty were not referenced in the debt schedules filed by plaintiffs in

their bankruptcy. However, as we have noted, Civello was listed as a creditor

and received notice of the bankruptcy and the bankruptcy discharge.

      In addition, we take judicial notice, pursuant to N.J.R.E. 201(b)(4), that

plaintiffs' Chapter Seven bankruptcy was determined to be a no-asset, no-bar

date case. The trustee abandoned his interest in the debtor's residence because

there was no equity in the property allowing for costs of sale, secured

creditors, and exemptions, and filed a Chapter Seven Trustee's Report of No

Distribution. As a result, creditors were advised in the initial notice of the

bankruptcy filing to not file a proof of claim unless they received a notice to

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                                      20
do so.5 In a Chapter Seven, "no-asset, no-bar date case, dischargeability is

unaffected by scheduling." Judd v. Wolfe, 78 F.3d 110, 111 (3d Cir. 1996).

This is because "[i]n a case where there are no assets to distribute . . . [a]n

omitted creditor who would not have received anything even if he had been

originally scheduled, has not been harmed by omission from the bankrupt's

schedules and the lack of notice to file a proof of claim." Id. at 115. Thus,

any purported lack of specificity in plaintiffs' debt schedules did not impair

their discharge from any personal liability on the guaranty. 6

      Independent of the Supremacy Clause, N.J.S.A. 2A:16-49.1 permits a

bankruptcy debtor who obtains a discharge in bankruptcy to apply "to the court

5
   In no-asset cases, creditors are advised by the Bankruptcy Court not to file
proofs of claim absent subsequent notice to do so because previously
undisclosed assets are discovered. See Bankruptcy Rule 2002(e) ("In a
Chapter [Seven] liquidation case, if it appears from the schedules that there are
no assets from which a dividend can be paid, the notice of the meeting of
creditors may include a statement to that effect; that it is unnecessary to file
claims; and that if sufficient assets become available for the payment of a
dividend, further notice will be given for the filing of claims.").
6
   In so ruling, we are mindful of our Supreme Court's decision in Gaskill v.
Citi Mortg, Inc., 221 N.J. 501 (2015). As noted by the Court, Gaskill is
distinguishable from Judd as Gaskill dealt with the failure to give notice of the
bankruptcy filing and discharge to a creditor holding a judgment lien that
impaired the creditor's ability to enforce its lien during the year following the
bankruptcy discharge under N.J.S.A. 2A:16-49.1. Gaskill, 221 N.J. at 506. In
contrast, we hold that lack of notice in a no-asset bankruptcy does not affect
the discharge of personal liability. We discuss post-discharge enforceability of
in rem liens infra.

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in which a judgment was rendered against him, . . . for an order directing the

judgment to be cancelled and discharged of record." N.J.S.A. 2A:16-49.1 is

"an ancillary remedy for discharge of judgments, within the state court system,

to assure that judgments intended to be discharged under federal bankruptcy

law would not continue to remain on record, thereby requiring payment at

some time in the future." Party Parrot, Inc. v. Birthdays & Holidays, Inc., 289

N.J. Super. 167, 173 (App. Div. 1996) (quoting In re Arevalo, 142 B.R. 111,

112 (Bankr. D.N.J. 1992)). The statute ensures that "judgments intended to be

discharged under the federal bankruptcy law [do] not continue to cloud the

marketability of title to property owned by the debtor." Assocs. Com. Corp. v.

Langston, 236 N.J. Super. 236, 241 (App. Div. 1989). Here, personal liability

on the guaranty was discharged in bankruptcy. Thus, plaintiffs we re entitled to

proceed under N.J.S.A. 2A:16-49.1 to cancel and discharge any judgment

imposing personal liability under the guaranty and can do so in the future. Id.

at 242 ("Neither the Bankruptcy Code nor N.J.S.A. 2A:16-49.1 impose any

time limit on a debtor's application to discharge a judgment lien."). Failure to

plead the affirmative defense of discharge in bankruptcy does not impact that

statutory remedy.

      More fundamentally, we conclude that enforcing the waiver of this

affirmative defense under Rule 4:5-4 "would be inconsistent with substantial

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justice."   Douglas, 35 N.J. at 281.     Here, Civello received notice of the

bankruptcy filing and discharge in bankruptcy; it was not a surprise.          See

Rivera, 89 N.J. at 538 (explaining that untimely defenses cannot be asserted if

they cause "surprise and prejudice").       He can hardly claim he suffered

prejudice by the delay when he should not have sought to impose personal

liability on the plaintiffs in the first place. Therefore, it was appropriate to

relax the requirement to plead discharge in bankruptcy. Achieving substantial

justice demands nothing less.

      Civello's reliance on the Rooker-Feldman7 doctrine is misplaced.

Although the doctrine provides that federal district courts will not sit in direct

review of the decisions of a state tribunal, it does not diminish, preclude, or

limit application of the Supremacy Clause. The supremacy of federal law on

the effect of a discharge in bankruptcy is clear and well-settled.

      We next consider the impact of the discharge on the mortgage lien. A

discharge in a Chapter Seven bankruptcy only discharges the personal liability

incurred by the debtors, and the accompanying lien remains enforceable

against the real property. Gaskill v. Citi Mortg., Inc., 428 N.J. Super. 234, 243

(App. Div. 2012), aff'd o.b., 221 N.J. 501 (2015); see also Foley, Inc. v. Fevco,

7
 Rooker v. Fid. Tr. Co., 263 U.S. 413 (1923); D.C. Ct. of Appeals v. Feldman,
460 U.S. 462 (1983).

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Inc., 379 N.J. Super. 574, 583 (App. Div. 2005) ("[A]lthough a discharge in

bankruptcy prohibits further in personam actions against the discharged debtor,

it does not prohibit proceeding in rem against the debtor's property."); New

Century Fin. Servs., Inc. v. Staples, 379 N.J. Super. 489, 494-97 (App. Div.

2005) (a discharge in bankruptcy has "no effect" on a lien on real property) .

Further, a valid pre-petition lien survives bankruptcy even if the obligation that

was the basis for the lien is a dischargeable obligation. In re Dillard, 118 B.R.

89, 91 (Bankr. N.D. Ill. 1990). A discharge extinguishes only the "'personal

liability of the debtor,' and the mortgage lien remains." In re Malone, 489 B.R.

275, 284 (Bankr. N.D. Ga. 2013).

      Thus, a debtor's "Chapter Seven discharge does not deprive a mortgagee

of its right to collect on its debt in rem." In re Scotto-DiClemente, 459 B.R.

558, 565 (Bankr. D.N.J. 2011).      Stated another way, while a discharge in

bankruptcy generally prohibits further in personam actions against the

discharged debtor, it does not prohibit secured creditors from proceeding in

rem against the debtor's property. Johnson v. Home State Bank, 501 U.S. 78,

82-83 (1991); Furnival Mach. Co. v. King, 142 N.J. Super. 251, 254 (App.

Div. 1976).

      For these reasons, the bankruptcy discharge did not preclude Civello

from seeking to foreclose the mortgage or obtaining a judgment fixing the

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amount of the mortgage lien for purposes of a future mortgage foreclosure

action so long as the judgment imposed no personal monetary liability. That

said, we express no opinion on whether a future action to foreclose the

mortgage would be time-barred by the applicable statute of limitations. We

vacate the trial court's ruling that foreclosure is time barred by the current

version of N.J.S.A. 2A:50-56.1.8 That issue shall be addressed by the trial

court on remand.

      Civello's remaining arguments lack sufficient merit to warrant discussion

in a written opinion. R. 2:11-3(e)(1)(E).

      In sum, we hold that despite the bankruptcy discharge, Civello was

entitled to a judgment on his counterclaim fixing the amount of the mortgage

8
    We note that plaintiffs executed the mortgage in 2007. The statute of
limitations in effect for residential mortgage foreclosures at that time was
twenty years. See Sec. Nat'l Partners Ltd. P'ship v. Mahler, 336 N.J. Super.
101, 105-108 (App. Div. 2000). In 2009, the Legislature enacted 2A:50-
56.1(a), L. 2009, c. 105, § 1, effective August 6, 2009, which codified Sec.
Nat'l Partners by declaring that a residential foreclosure action must be
commenced within six years of its maturity date, within thirty-six years of its
recordation, or within twenty years from the date of default, whichever is
earliest. Deutsche Bank Trust Co. as Trustee for Residential Accredit Loans,
Inc. v. Weiner, 456 N.J. Super. 546, 547 (App. Div. 2018). The maturity date
of the mortgage was February 22, 2012. The Legislature again amended
N.J.S.A. 2A:50-56.1, effective April 29, 2019, to require mortgagees to file
residential foreclosures within six years of the maturity date of the loan or the
date of default, whichever is earlier. L. 2019, c. 67 § 1. The parties can
litigate any alleged retroactivity of the amended version of N.J.S.A. 2A:50 -
56.1 on remand.

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lien on plaintiffs' residence. We further hold that the bankruptcy discharge

precluded Civello from obtaining a judgment of personal liability against

either plaintiff and that the failure to plead that affirmative defense did not

waive that defense or the injunction imposed by 11 U.S.C. § 524(a).

Accordingly, the judgment entered against Chepovetsky was properly vacated.

      We vacate the court's ruling that foreclosure was time-barred by the six-

year limitation period imposed by the 2019 amendment of N.J.S.A. 2A:50-56.1

and remand that issue for reconsideration.

      We also remand for the entry of a corrected judgment fixing the amount

of the mortgage lien at $410,800 as of February 12, 2012 (comprised of

principal of $184,000, interest through February 12, 2012 of $216,000, and

late charges of $10,800), that additional interest is due on the guaranty at the

maximum contractual interest rate permitted by law from February 12, 2012

through June 24, 2021, and that attorney's fees and costs are likewise due in an

amount to be determined by the court if Civello pursues same. The corrected

judgment shall further state that the claims against Nashtatik on the guaranty

are dismissed with prejudice as she was not a guarantor of the loan. Finally,

the corrected judgment shall state that any personal liability of Chepovetsky on

the guaranty was discharged in bankruptcy and no longer enforceable.

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      On remand, the court shall also readdress whether plaintiffs were

entitled to a judgment quieting title to their residence based on the applicable

statute of limitations for residential mortgage foreclosure actions, considering

our ruling today and the dismissal of their complaint with prejudice for failure

to provide discovery.

      Affirmed in part, as modified, vacated in part, and remanded. We do not

retain jurisdiction.
                               I hereby certify that the foregoing
                               is a true copy of the original on
                               file in m y office.   _\ \ ~

                                   CLERK OF THE AP~TE DIVISION

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