In re Schick

• Decision Date: 18 November 2003
• Docket Number: No. 02-19562/JHW.,02-19562/JHW.
• Citation: 301 B.R. 170
• Parties: In the matter of Tracey L. SCHICK, Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

301 B.R. 170

In the matter of Tracey L. SCHICK, Debtor.

No. 02-19562/JHW.

United States Bankruptcy Court, D. New Jersey.

November 18, 2003.

Eric J. Clayman, Esq., Jenkins & Clayman, Audubon, NJ, for Debtor.

Mary J. Goldschmidt, Esq., Deputy Attorney General, Department of Law & Public Safety, Division of Law, Trenton NJ, for New Jersey Motor Vehicle Commission.

Isabel C. Balboa, Esq., Cherry Hill, NJ, Chapter 13 Standing Trustee.

OPINION

JUDITH H. WIZMUR, Bankruptcy Judge.

To be resolved here is the debtor's motion to reclassify as unsecured the claim held by the New Jersey Motor Vehicle Commission ("NJ MVC") for unpaid surcharges and interest. The debtor, Tracey L. Schick, asserts that the lien held by the NJ MVC is a judicial lien, which impairs her entitlement to a homestead exemption, and which should be avoided by operation of 11 U.S.C. § 522(f). The NJ MVC contends that it holds a statutory lien that is not avoidable by the debtor. For the reasons expressed below, I conclude that the lien held by the NJ MVC is a judicial lien, as that term is defined under the Bankruptcy Code, which may be avoided to the extent that it impairs the debtor's homestead exemption.

The debtor filed a voluntary petition under Chapter 13 of the Bankruptcy Code on October 1, 2002. The debtor's residence was listed with a value of $100,000, against which a secured proof of claim in the amount of $91,660.85 was filed by the first mortgagee. The debtor scheduled the State of New Jersey/Department of Motor Vehicles¹ as an unsecured creditor.

The debtor's Chapter 13 plan, which provides for the curing of arrears on her mortgage and on a car loan, with no dividend to unsecured creditors, was confirmed on February 28, 2003. A modified plan was proposed by the debtor on March 12, 2003, extending the time for payment. On April 4, 2003, the NJ MVC filed a secured claim for $3,610.12, plus interest, based on motor vehicle surcharges assessed against the debtor. The debtor now moves to reclassify the NJ MVC's claim as an unsecured claim and to avoid its lien under 11 U.S.C. § 522(f) as impairing the debtor's section 522(d) exemption.²

Section 522(f) provides a mechanism for the debtor to "avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled ... if such lien is a judicial lien." 11 U.S.C. § 522(f)(1). A judicial lien is defined under the Bankruptcy Code as a "lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding." 11 U.S.C. § 101(36). A statutory lien is defined as a lien

arising solely by force of a statute on specified circumstances 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 dependent on a statute and whether or not such interest or lien is made fully effective by statute.

11 U.S.C. § 101(53).

The NJ MVC's secured proof of claim is based on certificates of debt issued to the Clerk of the Superior Court and docketed on April 3, 2001 and February 26, 2002. The certificates of debt were issued pursuant to the Commission's authority under N.J.S.A. 17:29A-35(b)(2) (the "state surcharge statute"), which provides in relevant part,

... As an additional remedy, the commission may issue a certificate to the Clerk of the Superior Court stating that the person identified in the certificate is indebted under this surcharge law in such amount as shall be stated in the certificate. The certificate shall reference the statute under which the indebtedness arises. Thereupon the clerk to whom such certificate shall have been issued shall immediately enter upon the record of docketed judgments the name of such person as debtor; the State as creditor; the address of such person, if shown in the certificate; the amount of the debt so certified; a reference to the statute under which the surcharge is assessed, and the date of making such entries. The docketing of the entries shall have the same force and effect as a civil judgment docketed in the Superior Court, and the commission shall have all the remedies and may take all of the proceedings for the collection thereof which may be had or taken upon the recovery of a judgment in an action, but without prejudice to any right of appeal.

N.J.S.A. 17:29A-35(b)(2).

To determine whether the lien held by the NJ MVC against the debtor's residence qualifies as a judicial lien, which may be avoided to the extent that it impairs the debtor's exemption, or a statutory lien, which may not be so avoided, our focus is drawn first to Graffen v. City of Philadelphia, 984 F.2d 91 (3d Cir.1992). In Graffen, the Third Circuit considered whether the lien authorized by Pa.Stat.Ann. tit. 53, § 7106(b) (the "municipal lien statute"),³ was a statutory lien or a judicial lien. Under the statute, a municipal claim for unpaid water bills becomes a lien against a debtor's property, and has the effect of a judgment, after it has been docketed by the prothonotary and entered in the judgment index. The Third Circuit concluded that the lien was statutory because there was no "legal process or proceeding" giving rise to the lien as required by the definition of a judicial lien under 11 U.S.C. § 101(36). The court explained that the terms "legal process or proceeding", "inherently relate to court procedures or perhaps similar administrative proceedings." Id. at 96. Although the municipal lien statute specifies that the lien only arises upon the docketing of the debt, and not automatically when the municipal services are assessed, the court determined that "the docketing simply [was] a specified condition for creation of the statutory lien as defined in 11 U.S.C. § 101(53)." Id. at 97. The court recognized that "Pennsylvania state law authorizes the City of Philadelphia to impose liens against property benefited by unpaid water and sewer service." Id. at 96 (citing to Ransom v. Marrazzo, 848 F.2d 398, 404 (3d Cir.1988)). In the court's opinion, there was "no reason why the requirement that a ... lien be docketed [should] mean[ ] that it cannot be statutory." Id. See also In re Zukowfsky, CIV.A. 95-2817, 1995 WL 695108, *4 (E.D.Pa. Nov.21, 1995), aff'd, 92 F.3d 1175 (3d Cir.1996) (unpub.opinion) ("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.").

Applying Graffen, New Jersey District Court Judge Brown determined that the DMV surcharge statute at issue here, N.J.S.A.17:29A-35(b)(2), imposes a statutory lien rather than a judicial lien which may be avoided under 11 U.S.C. § 522(f). In re Fennelly, 212 B.R. 61 (D.N.J.1997). Judge Brown explained that the "New Jersey statute merely allows the director of the DMV to issue a certificate to the Clerk of the Superior Court identifying the debtor and the amount of the debt," id. at 65, and that the "mere ministerial act of recording the lien does not create the requisite legal process or proceeding required to be a judicial lien." Id. The court concluded that the resulting lien was therefore a statutory lien, as defined by the Bankruptcy Code, because it arose "solely by force of statute."

In Fennelly, the court focused on the nature of the statutory process required to create a lien under both the Graffen municipal claim statute and the New Jersey surcharge statute, concluding that the processes were substantially the same. Because the Graffen court concluded that the docketing required to give rise to the municipal lien conferred by the statute was not a "legal process or proceeding" within the definition of "judicial lien," Judge Brown reached the same result regarding the surcharge statute. I must respectfully disagree with Judge Brown's conclusion in Fennelly.⁴

As noted above, a lien may be designated as a judicial lien under the Bankruptcy Code if it is obtained by "judgment," by "levy," by "sequestration," or by "other legal or equitable process or proceeding." 11 U.S.C. § 101(36). The Graffen court held, and Fennelly confirmed, that a statutory requirement specifying the process by which a claim is docketed for lien recording purposes is insufficient to characterize a lien as a judicial lien that is "obtained ... by other legal or equitable process or proceeding." Unlike Graffen, the issue here is not whether the surcharge lien conferred upon the state qualifies as a judicial lien because it is "obtained ... by other legal or equitable process or proceeding." Rather, the issue is whether the surcharge lien qualifies as a judicial lien because it is "obtained by judgment."

The surcharge statute confers upon the state the benefits of "a civil judgment docketed in the Superior Court." The NJ MVC has "all the remedies and may take all of the proceedings for the collection thereof which may be had or taken upon the recovery of a judgment in an action." N.J.S.A. 17:29A-35(b)(2). There is no express grant of a lien to the state in the statute. Rather, the state may docket a certificate of debt, which is treated as a New Jersey judgment. When a New Jersey judgment is docketed in the records of the Clerk of the Superior Court, it becomes a lien on the debtor's real estate by operation of N.J.S.A. 2A:16-1.⁵ See In re Blease, 605 F.2d 97, 98 (3d Cir.1979). Here, the "judgment" conferred upon the NJ MVC by the surcharge statute is the basis for obtaining the state's lien upon the debtor's property. The lien is therefore "obtained by judgment," within the definition of a judicial lien under 11 U.S.C. § 101(36). Cf. Gardner v. Commonwealth of Pennsylvania, Dept. of Public Welfare, 685 F.2d 106 (3d Cir.), cert. denied, 459 U.S. 1092, 103 S.Ct. 580, 74 L.Ed.2d 939 (1982) (Liens for reimbursement of public assistance were determined to be judicial liens under § 101(36) of...