Opinion ID: 6333808
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Heading Rank: 2

Heading: Lien Deﬁnitions in the Bankruptcy Code

Text: The classiﬁcation of a lien under the Bankruptcy Code is a question of law that we review de novo. In re Willett, 544 F.3d 787, 790 (7th Cir. 2008). The Code sorts liens into three mutually exclusive categories—statutory liens, judicial liens, and security interests. In re Financial Oversight & Management Board for Puerto Rico, 899 F.3d 1, 10 (1st Cir. 2018); In re Wigfall, 606 B.R. 784, 786–87 (Bankr. N.D. Ill. 2019); see also S. Rep. No. 95989, at 25 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5811 (“Those three categories are mutually exclusive and are [exhaustive] except for certain common law liens.”). Only the ﬁrst two are relevant here. The parties agree that Mance 2 These figures come from Mance’s Chapter 7 bankruptcy petition, i.e., Form 106. We accept Mance’s declarations for the purposes of this appeal. 3 Mance’s case was consolidated with that of another debtor (Cupree Howard) in the district court and initially on appeal. We dismissed Howard’s appeal as moot before oral argument. 6 No. 21-1355 satisﬁes all the requirements for discharge under 11 U.S.C. § 522(f) if her lien is considered judicial, so the classiﬁcation is decisive.
We begin our analysis with the statutory text. The Bankruptcy Code deﬁnes judicial and statutory liens in 11 U.S.C. § 101. Here is each deﬁnition in full: (36) The term “judicial lien” means lien ob- tained by judgment, levy, sequestration, or other legal or equitable process or proceeding. … (53) The term “statutory lien” means lien arising solely by force of a statute on speciﬁed circum- stances or conditions, or lien of distress for 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 depend- ent on a statute and whether or not such interest or lien is made fully eﬀective by statute. § 101(36), (53). Both deﬁnitions focus on the events (or the lack thereof) that precede creation of the lien. The two deﬁnitions use distinct language to describe how the two diﬀerent types of liens arise. We see this in the use of “arising solely” for statutory liens versus “obtained by” for judicial liens. “Solely” seems clear enough and signals that prior legal proceedings leading to a lien would exclude the lien from the category of statutory liens. The deﬁnition of a judicial lien—“obtained by judgment, levy, sequestration, or other legal or equitable process No. 21-1355 7 or proceeding,” § 101(36)—has an “element of causation inherent in the phrase ‘obtained by.’” See Field v. Mans, 516 U.S. 59, 66 (1995) (interpreting § 523(a)(2), which prohibits discharge of certain debts “obtained by … false pretenses, a false representation, or actual fraud”). The statutory deﬁnition of a judicial lien indicates that the term applies when the lien is caused by or results from the broad categories of process identiﬁed in the latter part of the deﬁnition. These textual differences are noted in the history of the Bankruptcy Reform Act of 1978. The House and Senate reports on the Act explained: “A statutory lien is only one that arises automatically, and is not based on an agreement to give a lien or on judicial action.” H.R. Rep. No. 95-595, at 314 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6271; S. Rep. No. 95-989, at 27, as reprinted in 1978 U.S.C.C.A.N. at 5811; see also 5 Collier on Bankruptcy ¶ 545.01 (16th ed. 2021). Under these deﬁnitions, classiﬁcation of a lien depends on the events, if any, that must occur before the lien attaches. In re Schick, 418 F.3d 321, 324 (3d Cir. 2005) (“The relevant inquiry is to determine the nature of the [] lien, i.e., whether it arises solely by force of statute, or whether it results from some type of judicial process or proceeding.”); see also 2 Collier on Bankruptcy ¶ 101.53 (“[A] judicial lien arises only by virtue of judicial proceedings in the absence of which there would not be such a lien. The statutory lien by deﬁnition arises without any judicial proceeding.” (footnote omitted)).
Common examples of statutory and judicial liens are generally consistent with this focus on the prior events needed for the lien to arise and attach to property. Take mechanics’ liens ﬁrst, often cited as an example of a statutory lien. See, e.g., 8 No. 21-1355 Schick, 418 F.3d at 324; In re Cunningham, 478 B.R. 346, 350 (Bankr. N.D. Ind. 2012) (“Case law throughout the country has routinely determined that a mechanic’s lien, or similar liens arising by means of a state’s statutory enactment, are at their base statutory liens.”); see also id. at 351 (collecting cases); H.R. Rep. No. 95-595, at 314, as reprinted in 1978 U.S.C.C.A.N. at 6271 (listing mechanics’ liens in the examples of statutory liens, as well as materialmen’s liens, warehousemen’s liens, and tax liens). In simple terms, a statute provides a mechanic a lien on improved property as soon as payment for the mechanic’s work on the property is due and goes unpaid. The mechanic need not go to a judge to secure a lien; rather, the lien arises solely by statute once the condition—a lack of payment—occurs. A mechanic’s lien may be perfected by ﬁling the lien with a county clerk or similar oﬃcial, but that ﬁling is not considered a “legal or equitable process or proceeding” within the deﬁnition of a judicial lien. 11 U.S.C. § 101(36); see Schick, 418 F.3d at 326, citing In re Fennelly, 212 B.R. 61, 65 (D.N.J. 1997) (“The mere ministerial act of recording the lien does not create the requisite legal process or proceeding required to be a judicial lien.”). The critical point is that a mechanic’s lien attaches to the property automatically when the debtor fails to make a payment for the services due. Accord, Wigfall, 606 B.R. at 787. No judicial or similar process is needed. 4 4 Perfection is necessary for the statutory lien’s continued effectiveness and protection against other creditors. It also has implications under 11 U.S.C. § 545, which allows a bankruptcy trustee to avoid certain statutory liens. But the fact that a lien must be perfected does not transform it into a judicial lien. See 2 Collier on Bankruptcy ¶ 101.53 (“[M]erely because [statutory liens] require some form of judicial filing for their perfection against other creditors or continued effectiveness, they are not No. 21-1355 9 Contrast this example of a statutory lien with the textbook judicial lien: a court-ordered money judgment. There are several ways a dispute could make its way into a court and result in a money judgment. But before the lien can arise at all, a court must enter judgment for the winning creditor. That party then records it as a lien on the losing party’s property. Because the lien is “obtained by” a court proceeding, it is considered judicial. 2 Collier on Bankruptcy ¶ 101.36; see also Schick, 418 F.3d at 328 (“[F]or a lien to be judicial, there must be some judicial or administrative process or proceeding that ultimately results in the obtaining of the lien.”). As we will see next, Chicago’s impoundment lien in this case lies somewhere in between these easy illustrations. We ﬁnd decisive the substantial quasi-judicial proceedings needed for the City to obtain an impoundment lien. The City’s possessory lien thus did not arise “solely” by statute.