Summary
concluding that statute's use of the word "judgment" to characterize the lien imposed was belied by the lack of judicial process necessary to effectuate lien
Summary of this case from In re SchickOpinion
No. 95-2817
November 21, 1995
Opinion
MEMORANDUM
This is an appeal from the bankruptcy court's determination that certain liens held by appellant, the Commonwealth of Pennsylvania, Department of Environmental Resources ("DER"), against the property of appellee, Joseph Zukowfsky, are judicial liens and not statutory liens and are thus subject to avoidance under 11 U.S.C. § 522(f)(1)(A). For the following reasons, I will reverse the ruling of the bankruptcy court and remand the case for further action consistent with this memorandum.
FACTUAL BACKGROUND
The parties have stipulated to the relevant facts. (Document No. 5). DER entered certain judgments against the debtor for penalties assessed pursuant to the Surface Mining Conservation and Reclamation Act, PA. STAT. ANN. tit. 52, § 1396.18d ("Surface Mining Act"). The judgments were filed with the Prothonotary of Schuylkill County; the total of the DER judgments filed against the debtor is $75,000.00.
Document numbers refer to items identified in the index of record on appeal.
On November 25, 1994, debtor filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code. (Document No. 11). Debtor subsequently moved to avoid the liens held by DER to the extent that the liens were judicial and that they impaired debtor's homestead exemption under 11 U.S.C. § 522(f)(2)(A). Id. DER objected to debtor's motion to avoid its liens, on the ground that the liens were statutory and not judicial and thus not subject to avoidance under 11 U.S.C. § 522(f)(1)(A). (Document No. 8). On February 16, 1995, the bankruptcy court held a hearing on debtor's motion to avoid the liens with DER. On April 6, 1995, the court issued an order granting debtor's motion to avoid the liens.
The parties have stipulated that the debtor's residence has a fair market value of $25,000.00 and that the debtor's residence has incumberances senior to those of DER, namely a mortgage in the amount of $15,888.00 and a judgment of $2.887.10. (Document No. 5).
The bankruptcy court held that the liens entered by DER against the debtor were judicial and not statutory. (Document No. 4). The court first noted that the language used in the Surface Mining Act characterized the DER liens as judgments. The court further opined that the liens did not arise solely by force of the statute but rather "arise from a judgment which is provided by or dependent upon . . . or is made fully effective by the Surface Mining Act, 11 U.S.C. § 101 (53)." (Document No. 4). Lastly, the court noted that the Surface Mining Act provides for an administrative hearing and possible judicial review, and it requires that the DER judgments be entered and docketed by the Prothonotary in order to be effective. The court, therefore, concluded that the DER liens were obtained "by judgment or other legal or equitable process or proceeding" and thus fell within the definition of judicial lien provided by 11 U.S.C. § 101 (36).
DISCUSSION
In reviewing bankruptcy court orders, the district court sits as an appellate court having jurisdiction to hear appeals from final judgments, orders and decrees of bankruptcy judges. 28 U.S.C. § 158(a). The bankruptcy court's legal conclusions are subject to plenary review. Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988).
Appellant DER assessed certain penalties against debtor pursuant to the Surface Mining Act which provides in relevant part:
The amount assessed after administrative hearing or after waiver of administrative hearing shall be payable to the Commonwealth of Pennsylvania and shall be collectible in any manner provided at law for the collection of debts. If any person liable to pay any such penalty neglects or refuses to pay the same after demand, the amount, together with interest and any costs that may accrue, shall constitute a judgment in favor of the Commonwealth upon the property, or such person from the date it has been entered and docketed of record by the prothonotary of the county where such is situated. . . .
Pa. Stat. Ann. tit. 52, § 1396.18d.
The Bankruptcy Code defines a judicial lien as one which is obtained "by judgment, levy, sequestration, or other legal or equitable process or proceeding. . . ." 11 U.S.C. § 101 (36). In contrast, a statutory lien is defined as a lien "arising solely by force of statute on specified circumstances or conditions . . . but does not include . . . judicial lien, whether or not such . . . lien is made fully effective by statute. . . ." 11 U.S.C. § 101 (53). A debtor engaged in Chapter 7 bankruptcy may avoid the fixing of a lien on an interest of the debtor in property to the extent that the lien impairs an exemption to which the debtor would have been entitled, but the lien must be judicial and not statutory in nature. 11 U.S.C. § 522(f)(1)(A).
The legislative history behind the Bankruptcy Reform Act of 1978 evidences the legislature's intent to protect the overburdened debtor from the aggressive and sometimes harsh collection practices of private creditors. H.R. Rep. No. 595, 95th Cong., 1st Sess. 116 (1978). Section 522(f)(1)(A) allows the debtor to avoid a judicial lien if it impairs an exemption to which the debtor would be entitled. This right allows the debtor to undo the actions of private creditors who brought legal action against the debtor shortly before the bankruptcy proceedings. H.R. Rep. No. 595, 95th Cong., 1st Sess. 126 (1978). Consequently, even if a private creditor beats the debtor to court and obtains a judgment against the debtor's property, the debtor will still be able to avoid the judgment in so far as it impairs his exemptions. Id. at 126-27.
While the legislative history evidences an obvious intent to shelter the debtor from his private creditors, the same intent is not apparent when it is a government agency seeking payment for penalties imposed. The history behind section 522(f)(1)(A) speaks of young families who have overburdened themselves with debt and of the consumer credit industry which has extended them credit with little regard for how they will pay it back. H.R. Rep. No. 595, 95th Cong., 1st Sess. 116 (1978). There is no similar discussion with regard to a government agency's efforts to collect monies from penalties imposed for violations of its statutes. The reasonable inference to be drawn is that the legislature did not contemplate a lien obtained by a government agency for penalties imposed when it created section 522(f)(1)(A). The section was simply not enacted with that situation in mind but rather was promulgated so that the debtor could avoid judgments obtained by private creditors who have beaten him to court.
Beyond the legislative history, the statute itself makes clear that the liens held by DER are statutory and not judicial. Although the statute uses the word judgment to characterize the lien imposed, the bankruptcy court erred in the weight that it placed on the word's use. The proper analysis is to look beyond the word used to ascertain whether the lien was "obtained by judgment, levy, sequestration or other legal or equitable process or proceeding," 11 U.S.C. § 101 (36), or whether it arose solely by force of the statute, 11 U.S.C. § 101 (53).
In Graffen v. City of Philadelphia, the Court of Appeals for the Third Circuit held that a water lien held by the City against the debtors was statutory and not judicial. 984 F.2d 91 (3d Cir. 1992). The court noted that the lien was obtained without legal process or proceeding; the City itself had determined the amount of the lien. Id. at 96. The Court did not consider docketing of the lien by the prothonotary to be a sufficient legal proceeding so as to classify the lien as judicial. Id. at 97.
The process in which DER engaged to obtain its liens against debtor here was similar to that employed by the City in Graffen. According to the Surface Mining Act, DER determines the amount of the penalty to be imposed. PA. STAT. ANN. tit. 52, § 1396.18d. If the person liable neglects or refuses to pay the penalty, the amount of the penalty, together with interest and costs, constitutes a judgment in favor of the Commonwealth. Id. As in Graffen, the prothonotary for the county must simply docket the judgment. Id. No judicial process or even similar administrative proceeding is necessary to effectuate the judgment. On the contrary, the lien "arises automatically." See H.R. Rep. No. 595, 95th Cong., 1st Sess. 314 (1978).
Furthermore, the bankruptcy court erred in concluding that DER's lien was judicial simply because the statute provides for administrative review of DER's penalty assessment. Section 1396.18d makes clear that it is DER who determines the amount of the penalty: "In determining the amount of the civil penalty the department shall consider [various factors]. . . . When the department proposes to assess a civil penalty, the secretary shall inform the person . . . of the proposed amount of said penalty." PA. STAT. ANN. tit. 52, § 1396.18d. An administrative hearing takes place only if the person liable contests the amount of the penalty or the fact of the violation. Even if that person requests such hearing, the government agency is presumed to be correct in its assessment of the penalty as evidenced by the requirement that the person contesting the penalty or the fact of the violation must either "forward the proposed amount to the secretary for placement in an escrow account with the State Treasurer or any Pennsylvania bank, or post an appeal bond in the amount of the proposed penalty. . . ." Id. If the penalty is found to be valid, the person liable may then seek further review by the Commonwealth Court. Id. If the reviewing court also finds the penalty to be valid, the contester is liable to pay the amount assessed. Id.
If, however, the person liable for the penalty fails to post an appeal bond or to forward the money for placement in an escrow account, he has waived his right to administrative review of the penalty, and he is liable to pay the full amount of the penalty. Id. In either case, "[i]f any person liable to pay any such penalty neglects or refuses to pay the same after demand, the amount . . . shall constitute a judgment in favor of the Commonwealth. . . ." Id. A fair reading of the statutory scheme reveals that a lien arises solely by force of the statute upon the condition that the person liable neglects or refuses to pay the imposed penalty. See Graffen, 984 F.2d at 96.
Accordingly, I conclude that the liens held by DER are statutory and not judicial. The use of the word judgment is belied by the lack of judicial process necessary to effectuate these liens. The liens arose when debtor failed to pay the penalties assessed against him by DER for violations of its laws. The only "process" necessary to the liens' realization was the docketing by the Prothonotary which is clearly not adequate judicial process to classify the lien as judicial. See Graffen, 984 F.2d at 96-97. The order of the bankruptcy court will therefore be reversed, and this matter will be remanded for action consistent with this memorandum.
An appropriate Order follows.
ORDER
AND NOW, this 21st day of November, 1995, upon consideration of the brief of appellant Commonwealth of Pennsylvania, Department of Environmental Resources (Document No. 3), the brief of appellee Joseph Zukowfsky in response thereto (Document No. 4), as well as the entire record, for the reasons stated in the attached memorandum, it is hereby ORDERED that the order of the bankruptcy court dated April 6, 1995 is REVERSED and the matter is REMANDED to the bankruptcy court for further action consistent with the attached memorandum.