In re Galbraith

• Decision Date: 24 November 1981
• Docket Number: Bankruptcy No. 80-00659G.
• Citation: 15 BR 549
• Parties: In re Frank GALBRAITH and Maria Galbraith, His Wife, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

15 B.R. 549 (1981)

In re Frank GALBRAITH and Maria Galbraith, His Wife, Debtors.

Bankruptcy No. 80-00659G.

United States Bankruptcy Court, E.D. Pennsylvania.

November 24, 1981.

Dana Breslin, Michael Donahue, Delaware County, Legal Assistance Ass'n, Chester, Pa., for debtors, Frank Galbraith and Maria Galbraith, his wife.

Jason W. Manne, Asst. Atty. Gen., Legal Counsel, Harrisburg, Pa., for Commonwealth of Pennsylvania.

Jonathan H. Ganz, Philadelphia, Pa., Trustee.

OPINION

EMIL F. GOLDHABER, Bankruptcy Judge:

The issue confronting us is whether the liens acquired by the Commonwealth of Pennsylvania Department of Public Welfare ("DPW") in the real property of the debtors as welfare recipients may be avoided by them pursuant to § 522(f)(1) of the Bankruptcy Code ("the Code"). We conclude that the DPW liens are judicial liens which impair an exemption of the debtors and thus fall within the scope of § 522(f)(1). We conclude further that the Tenth Amendment to the United States Constitution and considerations of federalism do not preclude the application of § 522(f)(1) to avoid the said liens.

The facts of the case at bench are as follows:¹ On April 2, 1980, Frank and Maria Galbraith ("the debtors") filed a voluntary petition for relief under chapter 7 of the Code. Prior to that time, the debtors had received public welfare assistance from the DPW. In order to receive that assistance, the debtors were required to periodically sign a "PA-9 form" which authorized the DPW to confess judgment against the debtors. Four separate D.S.B.² judgments were thus obtained by the DPW against the debtors in the Court of Common Pleas of Delaware County, Pennsylvania, thereby creating liens on the debtors' residence located at 753 Windsor Circle, Folcroft, Pennsylvania.

After filing their petition for relief under the Code, the debtors filed the instant application to avoid the liens of the DPW pursuant to § 522(f)(1).³ The DPW filed a motion to dismiss that application on several grounds. Firstly, the DPW asserts that its liens are not judicial liens but, rather, are either security interests or statutory liens which are not avoidable under § 522(f)(1). Secondly, the DPW argues that, even if its liens are determined to be judicial in nature, those liens are still not avoidable because they do not impair an exemption of the debtors. Thirdly, the DPW contends that to apply § 522(f)(1) to its liens would be an intrusion upon the Commonwealth's sovereignty and would, thus, contravene the mandates of the Tenth Amendment to the United States Constitution and considerations of federalism. For the following reasons, we conclude that the DPW's arguments are without merit.

I. The Nature of the DPW's Interest in the Debtors' Real Property.

To determine whether the DPW lien is a judicial lien, a security interest or a statutory lien, we must first look to the definitions of those terms given by the Code. The Code defines a judicial lien as a "lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding." 11 U.S.C. § 101(27). A security interest is defined in the Code as a "lien created by agreement." 11 U.S.C. § 101(37). A statutory lien is defined as a "lien arising solely by force of a statute on specified circumstances or conditions." 11 U.S.C. § 101(38). The legislative history of the Code makes it crystal clear that the above definitions are mutually exclusive, that is, a given lien may not fall within more than one of the above three categories.⁴

Pursuant to those definitions, we find that the DPW lien fits within the interpretation of a judicial lien as given by the Code. We so conclude because the DPW lien is a "judgment" by confession and clearly arises through a legal process or proceeding, that is, it arises by the action of the DPW in filing the confession of judgment and by the action of the prothonotary in issuing and docketing the D.S.B. judgment. This clearly makes that lien a "judicial lien."⁵

The DPW argues nonetheless that the legal incidents which flow from its lien are so unlike those of a judicial lien that it would be inconsistent with congressional intent to characterize the DPW's lien as a judicial lien. The DPW asserts that the usual judicial lien is a part of the debt collection process and it is that lien which Congress intended to be avoidable by a debtor. Thus, the DPW contends, its lien which is taken contemporaneously with the giving of value and which is not part of a debt collection process should not be avoidable. We disagree. Firstly, many judgments (notably confessed judgments) are taken contemporaneously with the giving of value and, therefore, the DPW's lien is not unique in that respect. Secondly, by the clear language used by Congress in § 522(f)(1), it is evident that Congress intended to allow debtors to avoid all judicial liens, not just judicial liens which arise as part of a debt collection process.

The DPW also asserts that its lien is unique in another respect which mandates that it receive treatment different from other judicial lienholders; that is, the Pennsylvania Statute prevents it from executing on its lien during the lifetime of the debtors or their children.⁶ We disagree with the DPW's argument. Firstly, the restrictions on the DPW's ability to execute on its lien do not prevent it from enforcing that lien during the lifetime of the debtors if they should sell their home. At that point the DPW may enforce its lien as may any other lienholder. Secondly, the restrictions on the DPW do not make its lien so unique from other judicial liens as to cause us to ignore the plain language of Congress in § 522(f)(1) which permits the debtors to avoid all judicial liens.

The DPW argues, however, that even though its lien arises through a confession of judgment that lien resembles a security interest more than it does a judicial lien under the Bankruptcy Code, particularly in light of the broad definition of a security interest given by the Code. While we agree that the Code does give a broader definition of the term security interest than the Uniform Commercial Code ("U.C.C."),⁷ we conclude that we must still look to the U.C.C. and state law for the elements necessary for a security interest. The United States Court of Appeals for the Third Circuit, in In re Bollinger Corporation, 614 F.2d 924 (3d Cir. 1980), found the requisite elements of a security interest to be: (1) a writing, (2) signed by the debtor, (3) which contains a description of the collateral, and (4) which evidences an intent of the parties to create a security interest thereby.

The DPW concedes that the PA-9 form and D.S.B. judgment obtained by it do not meet the third criteria stated above because they do not contain a description of the collateral covered thereby. However, the DPW maintains that this is not fatal because its lien is secured by all of the real property owned by the welfare recipient. We find this argument to be without merit. In In re Smith, Bankr.No. X-XX-XXXXX (M.D.Pa. Dec. 10, 1980), the bankruptcy court found that a lien against "all real and personal property of every kind and description" contained an inadequate description of the real property collateral and, in and of itself, precluded a finding that the lien was a security interest.⁸

Moreover, we find that the DPW's lien does not fit within the category of a security interest because it also fails to meet the fourth criteria of such an interest, i.e., it fails to evidence an intent of the parties to create a security agreement.⁹ The DPW refers to the following clause contained in PA-9 (signed by the debtor) to support its contention that the requisite intent is present:

The purpose of this agreement is to give the Department of Public Welfare a lien on any real property owned wholly or in part by me while assistance was received as above.

However, the next paragraph of the PA-9 form clearly shows that the intent of the parties is that the secured status of the DPW is to be that of a judicial lien holder rather than the holder of a security interest. That paragraph provides in pertinent part:

In order to carry out the purpose of this agreement, I authorize the Prothonotary, or any Attorney, of any Court of Record of Pennsylvania, or elsewhere, to appear and to enter judgment against me for the sum of Two Thousand Dollars ($2,000.00), plus costs. This judgment shall be a lien upon my real property, and be collected as other judgments.

(Emphasis added.)

We conclude that the above language evinces an intent of the parties that the secured status of the DPW be achieved by judicial process (the confession of judgment) rather than simply by the agreement of the parties as in a security interest.

The DPW maintains, however, that its lien is a security interest which does not come into existence or attach until the occurrence of a future condition as provided in § 9-204 of the U.C.C.¹⁰ That future condition the DPW asserts, is the step taken by the DPW to confess judgment against welfare recipients. We find this argument to be without merit for two reasons. Firstly, a security interest does not arise by virtue of recordation.¹¹ Rather, recordation is relevant only in determining which of several creditors with an interest in the same collateral of the debtor has priority.¹² Consequently, recordation is not a substitute for the clear evidence of an intent to create a security interest in the debtors' property as reflected in the agreement signed by the parties.¹³ Secondly, the future event, which the DPW asserts triggers the existence of its lien, is the judicial process of confessing judgment against welfare recipients. Thus, the lien created thereby appears to be more a judicial lien than a security interest.

The DPW contends further, however, that under the Bankruptcy Code a security interest is any lien created by voluntary agreement of the parties while a judicial lien is only a lien created by...