In re Sullivan, No. 99-61058 RTL.

• Decision Date: 01 November 2000
• Docket Number: No. 99-61058 RTL.
• Citation: 254 BR 661
• Parties: In re William F. SULLIVAN, Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

254 B.R. 661 (2000)

In re William F. SULLIVAN, Debtor.

No. 99-61058 RTL.

United States Bankruptcy Court, D. New Jersey.

November 1, 2000.

John J. Farmer, Jr., Attorney General of New Jersey, Tracy E. Richardson, Deputy Attorney General, Trenton, NJ, for State of New Jersey, Division of Taxation.

Andrea Dobin, Sterns & Weinroth, P.C., Trenton, NJ, for Chapter 7 Trustee.

OPINION

RAYMOND T. LYONS, Bankruptcy Judge.

The chapter 7 trustee moved under 11 U.S.C. §§ 544 and 545 (West 2000) to avoid a tax lien of the State of New Jersey arising pursuant to N.J. STAT. ANN. §§ 54:49-1 and 49-12. (West 2000).¹ This court has jurisdiction under 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and (b)(1), and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984 referring all cases under Title 11 of the United States Code to the bankruptcy court. Additionally, this is a core proceeding that can be heard and determined by a bankruptcy judge under 28 U.S.C. § 157(b)(2)(K) regarding the validity, extent, and priority of liens.

The issue in this case is whether a chapter 7 trustee can avoid a state tax lien using 11 U.S.C. § 544 or § 545 where the State has filed a certificate of debt ("COD") but has not levied on the debtor's assets.² This court concludes that a chapter 7 trustee cannot avoid a state tax lien under § 544 or § 545 where the State files a COD but has not levied because: (1) the tax lien arises solely by force of statute under N.J. STAT. ANN. §§ 54:49-1 and 49-12, thereby satisfying the definition of "statutory lien" under 11 U.S.C. § 101(53); (2) 11 U.S.C. § 545 is the exclusive provision available to a trustee when avoiding statutory liens; and (3) a state lien with a COD is superior to the rights of a bona fide purchaser under § 545(2) and thus cannot be avoided.

FACTS

On December 10, 1998, the State of New Jersey Division of Taxation filed a COD against the debtor with the Clerk of Superior Court for delinquent gross income taxes related to the debtor's prepetition operation of Chelsea Strategic Systems, Inc. This lien attached to all the property owned by the debtor. See N.J. STAT. ANN. § 54:49-1. On October 1, 1999, the debtor filed a chapter 7 petition and the State filed a secured proof of claim against the debtor in the amount of $26,275. The chapter 7 trustee sold a piece of real estate free and clear of liens, with liens to attach to the proceeds, then moved to expunge or modify the State's claim on the grounds that the claim was unsecured, rather than secured.

The trustee sought to avoid the tax lien under 11 U.S.C. § 544(a)(3), arguing that although the State had filed a COD, it had not levied on the debtor's assets. The trustee maintained that the State stood in the same position as any other judgment creditor who had not levied, and that a trustee, who has the power of a hypothetical bona fide purchaser of the debtor's real property under § 544(a)(3), could avoid the State's tax lien. Furthermore, § 545(a)(2) gives the trustee the rights of a bona fide purchaser against statutory liens, bolstering her motion to avoid the state's tax lien. In response, the State argued that its lien was automatically perfected by statute, and therefore was a statutory lien, as opposed to a judgment lien. Furthermore, the State asserted that § 545 is the exclusive provision for avoiding statutory liens thereby prohibiting the trustee from relying on § 544. Since the filed COD gave constructive notice of the tax lien, the State maintained that its lien was enforceable against a bona fide purchaser. Accordingly, the state argued that the trustee could not avoid it under 11 U.S.C. § 545.

DISCUSSION

The Bankruptcy Code recognizes three types of liens: judicial liens, consensual liens, and statutory liens. H.R.Rep. No. 95-595, at 312 (1977). Because the tax lien in question was not created by consent, the preliminary issue is whether the tax lien is a statutory lien or a judicial lien. A judicial lien is a lien "obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding." 11 U.S.C. § 101(36). By contrast, a statutory lien arises "solely by force of a statute on specified circumstances or conditions." § 101(53).

A. The tax lien is a statutory lien.

The tax lien arises solely by force of statute under N.J. STAT. ANN. §§ 54:491³ thereby satisfying the definition of "statutory lien" under 11 U.S.C. § 101(53).⁴ The legislative history of the Bankruptcy Code buttresses this finding, indicating that "a statutory lien is only one that arises automatically, and is not based on an agreement to give a lien or on judicial action." S.Rep. No. 95-989, at 27 (1978). In addition, the House and Senate Reports list tax liens and mechanics' liens as examples of statutory liens. H.R.Rep. No. 95-595, at 314 (1977); S.Rep. No. 95-989, at 27 (1978).

At the outset it is important to understand how a lien is created under the N.J. State Tax Uniform Procedure Law. See N.J. STAT. ANN. § 54-48-1. Under this statute, taxes imposed by any State tax law are a personal debt of the taxpayer and are a lien on all of his property except as against an innocent purchaser for value without notice. See N.J. STAT. ANN. § 54-49-1; see also 13A N.J. PRACT. § 24.61 (John Celentano ed., 1991). The Division of Taxation is authorized to make an assessment if it determines that there is a deficiency in payment. See N.J. STAT. ANN. § 54:49-6; see generally Monica Fuel Inc. v. I.R.S., 56 F.3d 508, 509 (3d Cir.1995). On the day the assessment is made, the State's lien becomes established and enforceable. See id. at 512 (state tax liens choate at time of federal assessment and superior to federal tax lien because on date of Division's final assessment the identity of lienor, property subject to lien and amount of lien had been established). Once a tax is properly assessed, no judicial action is required to enforce the state's lien. See In re Johns, 242 B.R. 265, 269 (D.N.J.1999) (state income tax liens entitled to priority over later federal tax liens, but only as to unpaid taxes due on state income tax returns filed prior to date of federal tax assessments) (citing Monica Fuel, 56 F.3d 508, 513).

Summary enforcement can be accomplished either by a warrant of execution on the taxpayer's property under N.J. STAT. ANN. § 54:49-13a, or by the filing of a COD with the clerk of the Superior Court of New Jersey who enters the debt as a judgment. N.J. STAT. ANN. § 54:49-12.⁵ Monica Fuel, 56 F.3d 508, 513 (Sloviter, J., concurring). In this case, the State filed a COD against the debtor for delinquent gross income taxes related to the debtor's prepetition operation of Chelsea Strategic Systems. Under N.J. STAT. ANN. §§ 54A:7-1 and 54A:7-5, every employer is required to deduct and withhold income taxes from its employees and is made liable for such tax. "Any amount required to be withheld and paid over to the State . . . shall be considered the tax of the employer." Id. A person required to withhold tax who willfully fails to pay it over is liable for a penalty equal to the amount of tax not paid over. N.J. STAT. ANN. 54A:9-6(g). This is, presumably, the source of Mr. Sullivan's tax liability as a responsible person for Chelsea Strategic Systems, Inc.

The gist of the trustee's argument is that the State, having filed a COD, stands in the same position as any other nonlevying judgment creditor. Specifically, the trustee cites N.J. STAT. ANN. § 54:49-12 and argues that because the filing of a COD is considered as having the same force and effect as the entry of a docketed judgment, absent levy the State has no greater right than any other non-levying judgment creditor. In effect, says the trustee, the State's lien is equivalent to a judgment lien.

This court rejects the trustee's argument. N.J. STAT. ANN. § 54:49-1 specifically creates the lien. Although the language of N.J. STAT. ANN. § 54:49-12 states that the filing of a COD is considered as having the same force and effect as the entry of a docketed judgment, that does not make the tax lien a judgment lien for purposes of 11 U.S.C. § 101(36). Rather, the filing of a COD is merely an alternate collection remedy provided by N.J. STAT. ANN. § 54:49-12. Monica Fuel, 56 F.3d at 513; see also Graffen v. City of Phila., 984 F.2d 91, 96 (3d Cir.1992) (filing of city lien is simply a means of protecting priority of lien as to subsequent purchasers and lienors); In re Fennelly, 212 B.R. 61, 65 (D.N.J.1997) (mere ministerial act of recording lien does not create requisite legal process or proceeding required for judicial lien); see also Pennsylvania v. Zukowfsky, 1995 WL 695108, *4 (E.D.Pa. Nov.22, 1995), aff'd by 92 F.3d 1175 (3d Cir.1996) (use of the word judgment is belied by the lack of judicial process necessary to effectuate liens).

Ultimately, whether a lien arises solely by force of a statute is determined by state law or by federal non-bankruptcy law. In re Loretto Winery, Ltd., 898 F.2d 715, 720 (9th Cir.1990). The statute at issue in Graffen stated, "The docketing of the lien shall be given the effect of a judgment against the said property only with respect to which the claim is filed as a lien."⁶ Similarly, the N.J. statute states that "the making of the entries shall have the same force and effect as the entry of a docketed judgment in the office of such clerk." N.J. STAT. ANN. § 54:49-12. Noting that the language of the tax lien is similar to the language of PA. STAT. ANN. tit. 53 § 7106(b) cited in Graffen, this court concludes that the State's lien arises "solely by force of statute" and is statutory.

B. Section 545 is the exclusive provision available to a trustee.

This court also finds that 11 U.S.C. § 545 is the exclusive provision under which a trustee can avoid a statutory lien.⁷ The Code's legislative history supports this finding specifically stating that § 545(b)⁸ "limits the trustee's power to...