Young, a chapter 13 debtor, sought to avoid a condominium association lien for assessments because his chapter 13 plan was feasible only if a large portion of the lien could be avoided. If the lien was classified a security interest it could not be avoided (based on the anti-modification provisions applicable in a chapter 13 case); while if it was statutory lien, the debtor was hoping that he would be able to avoid the lien at least in part.
As background (emphasis added):
The Bankruptcy Code identifies and recognizes three types of liens: judicial liens, security interests and statutory liens. A judicial lien is defined as a “lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” 11 USC §101(36). A “security interest” is defined as a “lien created by an agreement.” 11 USC §101(51). Finally, the Bankruptcy Code defines a “statutory lien” as a lien that arises “solely by force of a statute on specified circumstances or conditions, [or lien of distress or rent, whether or not statutory, but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent upon a statute and whether or not such interest or lien is made fully effective by statute.]” 11 USC §101(53).
The district court turned to the legislative history of the Bankruptcy Code for guidance on whether the three types of liens were mutually exclusive or if a lien could be both a security interest and a statutory lien, and found that legislative history explicitly states that the “three categories are mutually exclusive and are exhaustive except for certain common law liens.’”
Turning to the condominium lien that was at issue in this case: under the Uniform Condominium Act as adopted in Pennsylvania, a lien automatically arises when a condo assessment becomes due, and the lien may be foreclosed in a manner similar to a mortgage.
After noting that courts are split on whether condo liens are statutory liens, the court began with the plain language of the Bankruptcy Code. In considering whether the lien arose “solely by force of statute,” it noted that the lien arose automatically under the statue upon failure to pay an assessment. In excluding a security interest or judicial lien from the statutory lien category notwithstanding that it is “provided by” or “dependent on” or “made fully effective by” a statute, the court concluded that this meant only that liens did not become statutory liens merely because a provision allows the parties to agree to a particular lien.
The court rejected an argument that a lien becomes a judicial lien if it is judicially enforced. As the court noted, this would make the statutory lien category illusory since a creditor would not be able to recover by obtaining a judgment to execute on the statutory lien.
Accordingly, the court concluded that classification of a lien should be determined based on how it first arose. Here the lien arose in the first instance “solely by the force of the statute” notwithstanding that subsequent events gave it the appearance of either a security interest (e.g. as incorporated in the condominium documents) or a judicial lien (e.g. upon enforcement). So, the court overruled the bankruptcy court and held that the condominium lien was a statutory lien.
In reaching its decision the Young court acknowledged that there was a split within the bankruptcy courts of the local district and at least seven bankruptcy courts outside the circuit on the classification of condo liens. This is one of those issues where you can probably find a case to support almost any position you wish to take.
Vicki R. Harding, Esq.