District Court Upholds Bankruptcy Court Determination that Lien Based on Unemployment Over-payment is a Judicial Lien, which Can be Avoided under § 522(f)

District Court Upholds Bankruptcy Court Determination that Lien Based on Unemployment Over-payment is a Judicial Lien, which Can be Avoided under § 522(f)

The Department of Workforce Services recorded two liens in a state circuit court against the Debtor after she received an overpayment of unemployment compensation benefits. The Debtor filed for Chapter 13 relief under the bankruptcy code and sought to avoid the two liens as judicial liens. See 11 U.S.C. § 522(f). The bankruptcy court agreed, holding that the liens were obtained by a “process or proceeding within the Code’s definition of a judicial lien.” The department appeals this holding.

On November 30, 2011, the Department mailed the Debtor a Notice of Fraud Overpayment Determination. The notice informed her that she had failed to report her earnings accurately and as a result had been overpaid $552.00 in unemployment benefits.  The Department sent a similar but separate notice on October 4, 2012. This notice advised the Debtor that she had been overpaid $1,652.00 in unemployment benefits. Because the Department determined that in both cases she was overpaid due to fraud, it sought recovery of the overpayments.   The Department certified that “final notification was made to [the Debtor]” and “that all appeal rights ha[d] been exhausted.” Pursuant to state law, the recording of the certificates created liens on the Debtor’s real and personal property, bearing interest at a rate of ten percent annually. The Debtor later filed for Chapter 13 bankruptcy. She filed a motion with the bankruptcy court to avoid the Department’s two liens, arguing that they were judicial liens and therefore avoidable. The bankruptcy court agreed.

The Department’s appeal solely concerns the bankruptcy court’s legal determination that the Department’s liens are judicial. Accordingly, this Court’s review is de novo.

If the Department’s liens fit under the bankruptcy code’s definition of judicial liens, then the Debtor can properly avoid the liens under 11 U.S.C. § 522(f). If they are statutory liens, however, they are not avoidable. 11 U.S.C. § 522(c)(2)(A). The code defines a judicial lien as one “obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” § 101(36). A statutory lien arises “solely by force of a statute on specified circumstances or conditions” but does not include security interests or judicial liens, even if they are provided for by statute. Id. § 101(53). Judicial liens and statutory liens are mutually exclusive. In re Strother, 328 B.R. 818, 820 (B.A.P. 10th Cir. 2005).

 

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