Memorandum Opinion re: Appeal from Bankruptcy Court (Doc. No. 1)

ARTHUR J. SCHWAB, District Judge.

I. Introduction

Bradley J. Young ("Young") appeals from a Final Order of the United States Bankruptcy Court for the Western District of Pennsylvania dismissing his adversarial proceeding against 1200 Buena Vista Condominiums, et al ("Buena Vista").1 Doc. Nos. 1 and 1-7.2 The Bankruptcy Court held that the lien held by Buena Vista was a security interest, and not a statutory lien, within the meaning of the Bankruptcy Code. In re Young ("Young II"), 467 B.R. 792, 800-05 (Bankr.W.D.Pa.2012). Young originally filed for Chapter 13 bankruptcy in 2009 ("2009 bankruptcy proceeding"). Doc. No. 6, 23. The Bankruptcy Court dismissed the case without prejudice in July, 2011. Id., 24. Young then filed for Chapter 13 bankruptcy in November, 2011 ("underlying bankruptcy proceeding"). Doc. No. 7, 10-11. That same month, Young filed an adversarial proceeding in the Bankruptcy Court, which attempted to partially avoid the lien held by Buena Vista,3 or in the alternative sought relief under 11 U.S.C. § 522(f). Id. at 27. The Bankruptcy Court dismissed the adversarial proceeding. Doc. No. 1-7; Young II, 467 B.R. 792. Young appealed arguing that the Bankruptcy Court erred in characterizing the lien held by Buena Vista as a security interest rather than a statutory lien. For the reasons that follow, the Court agrees with Young and therefore, the decision of the Bankruptcy Court will be REVERSED.

II. Jurisdiction and Standard of Review

The Bankruptcy Court had jurisdiction pursuant to 28 U.S.C. § 157.4 Young sought certification from the Bankruptcy Court to file a direct appeal to the United States Court of Appeals for the Third Circuit pursuant to 28 U.S.C. § 158(d)(2)(A). Doc. No. 1-10. The Bankruptcy Court denied the request. Doc. No. 1-12. This Court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1).

The standard of review is the same for the District Court and for the Court of Appeals, both of which review findings of fact for clear error and exercise plenary review over questions of law. In re Mintze, 434 F.3d 222, 227-28 (3d Cir. 2006); In re Schick, 418 F.3d 321, 323 (3d Cir.2005). When considering a mixed question of fact and law, the issue must be broken down into its component parts, with underlying questions of fact being reviewed for clear error and underlying questions of law being reviewed de novo. Hornick v. I.R.S., 252 B.R. 897, 899 (W.D.Pa.2000) (Lee, J.) (citing In re Brown, 951 F.2d 564 (3d Cir.1991)).

III. Factual Background

There are no disputes with respect to the facts of this case. Young and his ex-wife jointly conveyed to Young, individually, the deed for the condominium as issued on November 1, 1991.5 Doc. No. 8, 19. The deed provided that it was, "[t]ogether with and subject to those rights, duties and obligations as set forth in the aforementioned Declaration of Condominium and as set forth in the By-Laws of the 1200 Buena Vista Condominium." Id.

The Declaration of Condominium provides, in relevant part:

Id., 17; Bankr.W.D. Pa. No. 11-26777, Doc. No. 37-3, 15. The By-Laws provide, in relevant part:

Id., 18. Sometime during the year 2000, Young stopped paying his assessment, and on February 27, 2009, Buena Vista obtained a judgment against Young in the amount of $14,900. Young II, 467 B.R. at 795-96 (citing In re Young ("Young I"), 2011 WL 7110250, *1 (Bankr.W.D.Pa. March 4, 2011)). The judgment, however, remained unpaid. During the 2009 bankruptcy proceeding, Young filed an objection to the lien of Buena Vista which was denied by the Bankruptcy Court.7 Young I, 2011 WL 7110250, *3.

In the underlying bankruptcy proceeding, Young admitted that the feasibility of his Chapter 13 plan was contingent on a large percentage of Buena Vista's lien being avoidable.8 Young II, 467 B.R. at 799 (citing recording of oral argument before the Bankruptcy Court). This case presents the issue of whether the condominium lien that Young is trying to partially avoid is a statutory lien or security interest under the Bankruptcy Code. While Young, the appellant, argues that the Bankruptcy Court erred in concluding that the condominium lien was a security interest and thus was not (partially) avoidable, Buena Vista, the appellee, contends that the Bankruptcy Court was correct in its assessment of the lien.9

IV. Discussion

This case raises a question of statutory interpretation with respect to 11 U.S.C. § 101(53) and its interaction with 68 Pa.C.S. § 3315. As the United States Supreme Court has stated, "[i]nitially, it is worth recalling that Congress worked on the formulation of the [Bankruptcy] Code for nearly a decade. It was intended to modernize the bankruptcy laws, [] and as a result made significant changes in both the substantive and procedural laws of bankruptcy." United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (citing Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 52-53, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982)).

As the Bankruptcy Court in this case aptly stated (and the parties do not dispute):

Young II, 467 B.R. at 800.

The United States Supreme Court has noted that:

Ron Pair Enterprises, 489 U.S. at 240-41, 109 S.Ct. 1026.

A. Statutory Liens and Security Interests are Mutually Exclusive

A prima facie issue is whether the lien in this case can be both a security interest and a statutory lien under the Bankruptcy Code. As with all questions of statutory interpretation, the statute's language is the first thing that must be examined in determining if the liens are mutually exclusive. Ron Pair Enterprises, 489 U.S. at 241, 109 S.Ct. 1026 (citing Landreth Timber Co. v. Landreth, 471 U.S. 681, 685, 105 S.Ct. 2297, 85 L.Ed.2d 692 (1985)). Title 11 does not contain any provision which states that the three types of liens either are, or are not, mutually exclusive. See generally 11 U.S.C. § 101 et seq.

Thus, it is appropriate to examine the legislative history of the Bankruptcy Code to determine whether Congress intended that the three types of liens be mutually exclusive. The legislative history to the Code explicitly states that these "three categories are mutually exclusive and are exhaustive except for certain common law liens." H.R.Rep. No. 595, 95th Cong., 1st Sess. 312 (1977), 1978 U.S.C.C.A.N. 5963, 6269; see also Young II, 467 B.R. at 801; In re Aikens, 87 B.R. 350 (Bankr.E.D.Pa. 1988). Because condominium liens are a creation of statute, 68 Pa.C.S. § 3315, they cannot be common law liens. In re Chen, 351 B.R. 355, 361 (Bankr.E.D.Va.2006). Thus, the lien at issue in this case must either be a statutory lien, a judicial lien, or a security interest. It cannot be both a statutory lien and a security interest.10

B. Condominium Liens Automatically Arise Under Pennsylvania Law

In Gateway Towers Condominium Assoc. v. Krohn, 845 A.2d 855 (Pa.Super.2004), the Pennsylvania Superior Court held that a condominium lien could be recovered both by suit and by foreclosure. Id. at 860. However, Gateway dealt with a special condominium, one covered by both the Unit Property Act and the Uniform Condominium Act. Id.; 68 Pa. C.S. § 3102(a.1). As 1200 Buena Vista was formed after October 30, 1980, it is covered only by the Uniform Condominium Act.

When the Pennsylvania General Assembly passed the Uniform Condominium Act and repealed the Unit Property Act, the language relating to the collection of assessments was drastically changed. 1980 P.L. 286, No. 82. Under the Unit Property Act:

1963 P.L. 196, No. 117 (repealed). Under the Uniform Condominium Act, which is applicable to the instant dispute, "[t]he association has a lien on a unit for any assessment levied against that unit or fines imposed against its unit owner from the time the assessment or fine becomes due." As the Bankruptcy Court in this case noted, "the statutory language not only automatically grants the Association a lien from the time the assessment becomes due, but it allows for the lien to be foreclosed in like manner as a mortgage on real estate." Young II, 467 B.R. at 801 (citing 68 Pa.C.S. § 3315(a)) (emphasis in original) (internal quotation marks omitted).

The change between writs of assumpsit and foreclosure was meant to simplify the process by which a condominium association could recover condominium assessments that were past due and to make clear that condominium liens take precedence over most other liens and encumbrances. (See 68 Pa.C.S. § 3315 Pennsylvania Comment and Comment by the National Conference of Commissioners on Uniform State Laws.)

Furthermore, under 68 Pa.C.S. § 3205(6) the Declaration of Condominium must include the way in which a condominium assessment will be assessed. Thus, every condominium created in Pennsylvania since October 30, 1980, includes within the declaration a provision regarding assessments. Therefore, contrary to the arguments put forth by Buena Vista, there is no leeway within the Act for this language to be omitted from the condominium's governing documents. Thus, if Buena Vista's position were to be adopted by this Court, it would mean all condominium liens would be security interests and not statutory liens, a finding which would be contrary to the statute's intent.

C. Condominium Liens Do Not Fall Within the Exclusional Clause

A statutory lien is defined as a:

11 U.S.C. § 101(53). There is no dispute as to whether the lien arises "by force of statute." There is also no dispute that this is not a "lien of distress for rent." Rather, the dispute is whether the lien arises "solely" by force of statute or is a security interest that is "provided by or is dependent on a statute." The Bankruptcy Court referred to the latter as the "exclusional clause."

1. Courts are Split on Whether Condominium Liens are Statutory Liens

The parties cite a number of cases in support of their respective positions (as does the Bankruptcy Court in its decision). Although the Bankruptcy Court treated this as a question of first impression within this district, this Court respectfully disagrees and finds (contrary to the Bankruptcy Court) that In re Johnson, 108 B.R. 81 (Bankr.W.D.Pa.1989) is applicable and persuasive authority.11 Young II, 467 B.R. at 806.

In In re Johnson, the debtor attempted to avoid the condominium lien under 11 U.S.C. § 522(f)(1) by arguing that it was a judicial lien. In re Johnson, 108 B.R. at 82. The Bankruptcy Court in Johnson held that the lien was a "perfected statutory lien" and not a judicial lien. Id. The Bankruptcy Court in the instant case addressed Johnson and distinguished it by stating that the question before the Bankruptcy Court in Johnson was whether the lien was a judicial lien and was not presented with the question of whether the lien was a security interest.12 Young II, 467 B.R. at 804-05. Buena Vista makes similar arguments in its Brief. Doc. No. 9, 5.

As the Bankruptcy Court in this case noted, the ultimate question before the Bankruptcy Court in Johnson was whether or not the lien was a judicial lien. Young II, 467 B.R. at 804-05. In Johnson, the creditor argued that the lien was either a statutory lien or a security interest. Brief of East Hills Assoc. No. 1, In re Johnston, 89-2024713 (Bankr.W.D.Pa. Nov. 1, 1989), 4-7. The Bankruptcy Court in Johnson considered whether the lien was a statutory lien or a security interest, and without elaboration, held that it was a statutory lien.14

The condominium governing documents in Johnson included many of the same provisions relied upon by the Bankruptcy Court for its determination that the lien in the instant case is a security interest. For example, the Membership Agreement stated, in relevant part:

Brief of East Hills Assoc. No. 1, In re Johnston, 89-20247 (Bankr.W.D.Pa. Nov. 1, 1989), App'x A, ¶ 3. This language is similar to language that would be found in a security agreement, as is the language at issue in the instant case. The language in the Membership Agreement also referred to governing statutes for its rights with respect to the lien as in the case at bar. Thus, Johnson is a case both factually and legally similar to the case before this Court. The Bankruptcy Court in Johnson decided that the lien was a statutory lien, explicitly rejecting the argument that it was a judicial lien and implicitly rejecting the argument that it was a security interest.

The Bankruptcy Court in this case also cited In re Robinson, 231 B.R. 30, 32 n. 1 (Bankr.D.N.J.1997), as persuasive authority for its holding that the association assessments should be considered security interests.15 Young II, 467 B.R. at 803. The Court agrees with the Bankruptcy Court that Robinson does imply that association assessments should be considered as security interests instead of statutory liens. However, just like the other cases cited by the Bankruptcy Court, the issue was not presented as a central issue for the Court in Robinson to consider. Footnote 1 shows that the arguments for the condominium lien being treated as a security interest and as a statutory lien were being made by the same party.16 Robinson, 231 B.R. at 30 n. 1. Thus, Robinson is no more persuasive than Johnson.

2. Plain Language

The plain language of the statute includes situations like the one presented in this case. Although the parties focus on the exclusional clause at the end of the definition, the first phrase of the definition is equally important. A statutory lien is one arising "solely by force of statute." As the Bankruptcy Court noted, "the statutory language not only automatically grants the Association a lien from the time the assessment becomes due, but it allows for the lien to be foreclosed in like manner as a mortgage on real estate" Young II, 467 B.R. at 801 (emphasis in original). In other words, Buena Vista did not need to take any action after the failure of Young to pay his assessment in order for the lien to arise.

When the exclusional clause, which reads "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," is examined in this light, its broader context becomes apparent. The exclusional clause is meant to ensure that not all liens become statutory liens merely because a provision of the Code allows for parties to bargain for a particular lien.

If the Court were to apply the language as Buena Vista suggests, statutory liens would only be a theoretical possibility. An individual lienholder is not able to recover simply by possessing the lien. Rather, the lienholder must go to court and obtain a judgment against the debtor in order to be able to execute on the lien. This would leave creditors the choice of being able to recover by seeking a judgment or maintaining a statutory lien and not being able to recover.

Both the plain language of 11 U.S.C. §§ 101(36), (51), and (53) and the entire statutory scheme reveals that the classification of a lien depends on how the lien first arose. Thus, if a lien first arises by statute and then there is later action that could be considered the formation of a security interest or a judicial lien, the lien remains a statutory lien. If a lien originally arose via a security agreement and action is later taken to obtain a judgment the lien remains a security interest.

Here, the lien is a statutory lien, because it originally arose solely by the force of statute. While subsequent events may have given the lien the appearance of a security interest and/or a judicial lien, the nature of the lien did not change from a statutory lien, because the classification of a lien depends on how it first arose. Cf. In re King, 208 B.R. 376, 379 (Bankr.D.Md. 1997) ("Whether a lien is judicial or statutory is determined by how the lien arises.").

3. The Declaration of Condominium is Not a Covenant Running with the Land

The Bankruptcy Court alternatively found that the condominium lien was a covenant that ran with the land, and thus was a security interest. Young II, 467 B.R. at 802-03. However, this holding wholly relies upon the argument made regarding the security interest in the first place. The two arguments cannot be separated and offered as distinct reasons for a finding that the condominium lien is a security interest. The section referred to by the Bankruptcy Court, and quoted supra, merely provides notice to individuals that they will have to comply with the Declaration of Condominium. It in no way imposes any other obligation on the owner and does not in and of itself create a lien. Rather, the lien is either created by statute, as this Court has found that it is, or by the operation of a separate section within the Declaration of Condominium and By-Laws, as the Bankruptcy Court held.

V. Conclusion

There is a split within the Bankruptcy Court in this District and at least seven other Bankruptcy Courts outside this Circuit as to whether condominium liens are statutory liens or secured interests. Compare, e.g., In re Johnson, 108 B.R. at 82 with Young II, 467 B.R. at 800. This Court holds that the condominium lien in this case is indeed a statutory lien and therefore, follows the Johnson case, as well as In re Stern, 44 B.R. at 18; In re Nentwick, 79 B.R. at 146; and In re Eatman, 182 B.R. at 390-91. For the foregoing reasons, the Court respectfully finds that the Bankruptcy Court erred in holding that the condominium lien was a security interest rather than a statutory lien. Thus, the decision of the Bankruptcy Court will be REVERSED. The case will be REMANDED to the Bankruptcy Court for further proceedings consistent with this Opinion.

An appropriate Order follows.