Statutory vs. Judicial Lien

Posted by NCBRC - October 28, 2022

Where the state workers’ compensation procedure involves quasi-judicial steps including the right to notice, an opportunity to be heard, and the right to appeal an unfavorable decision, a lien arising out of that process is “judicial” rather than “statutory.” In re Shippy, No. 22-40706 (Bankr. W.D. Wash. Oct. 24, 2022).

The chapter 13 debtors’ residence was valued at $441,169.00 and encumbered by a deed of trust in the amount of $141,709.00. When the debtors filed for bankruptcy, The Boeing Company filed a claim for $71,635.19 based on overpayment of workers compensation benefits and secured by a lien on the debtors’ residence. The lien was generated by an order by the Washington State Department of Labor and Industries (“L&I”) and a Warrant for Overpaid Workers’ Compensation Benefits (“Warrant”).

The debtors moved to avoid the lien as impairing their homestead exemption. Boeing objected, arguing that the lien was statutory rather than judicial and was therefore not subject to avoidance under section 522(f).

Section 522(f) allows a debtor to avoid a judicial lien that impairs an exemption. The parties did not dispute that there was a lien on the debtors’ property and that the lien impaired their exemption. The only issue before the court was whether the lien was judicial, as argued by the debtors, or statutory, as argued by Boeing.

“Judicial lien” is broadly defined in section 101(36) as a lien “obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” In contrast, a “statutory lien” is narrowly defined in section 101(53) as a lien “arising solely by force of a statute on specified circumstances or conditions . . . 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.”

Finding no Ninth Circuit case law on the issue, the court looked to other jurisdictions for guidance.

In In re Schick, 418 F.3d 321, 322 (3rd Cir. 2005), the court found a lien held by the New Jersey Motor Vehicles Commission was statutory rather than judicial because the statute creating the lien did not require any judicial process other than having the clerk of court docket the lien. On the other hand, the Seventh Circuit in Matter of Mance, 31 F.4th 1014 (7th Cir. 2022), found that a lien placed on a vehicle by the City of Chicago due to unpaid traffic fines was judicial rather than statutory because the lien did not come into existence until after a “quasi-judicial” process had been conducted, including providing notice, an opportunity to be heard, and an appeal process. Other courts have emphasized that a lien may be deemed statutory even though a quasi-judicial process is permitted to protest the lien if the judicial process arises only after the lien is created.

With these cases in mind, the court turned to the process in Washington for creating a lien based on workers’ compensation overpayments. It walked through the steps beginning with the employee’s report of an injury either to the self-insured employer or to the L&I. Once that initial step is taken, the “process consists of: (1) an initial determination by the self-insurer; (2) a copy of the determination being sent to the worker and L&I; (3) the ability to dispute the self-insurer’s denial with L&I; (4) the opportunity to appeal L&I’s decision to an industrial appeals judge; (5) the opportunity to present evidence at a hearing conducted by an industrial appeals judge; (6) the opportunity to appeal the industrial appeals judge’s decision to an appeal tribunal; (7) the ability of the appeal tribunal to affirm, reverse, or modify the determination; (8) the ability to seek review of the appeal tribunal’s decision; and (9) the opportunity to seek judicial review in superior court.”

The court determined this process met the requirements for a judicial rather than a statutory lien and found that the debtors were entitled to avoid the lien.

Shippy Bankr WD Wash Oct 2022



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