Beth E. Hanan, United States Bankruptcy Judge.
In Celtic lore, a selkie was a seal who could take human form on land, and become a seal again upon returning to the sea. Unfortunately for the debtor's argument, statutory liens do not have that same transformative quality and do not become avoidable judicial liens when the creditor returns with a money judgment.
The debtor, David Doss, filed this adversary proceeding against Norhardt Crossing Condominium Association Inc., which has a statutory lien against the debtor's condominium unit, by virtue of Wis. Stat.
The debtor filed a Chapter 13 bankruptcy petition on February 27, 2017, and converted the case to a Chapter 7 in October 2017. Because he failed to file a certificate showing that he had completed a course in personal financial management, see § 727(a)(11), the debtor's case was closed without a discharge on March 7, 2018. The debtor subsequently moved to reopen his case to file the certificate and obtain his discharge. Shortly before the Court granted his motion, on April 4, the debtor's counsel filed correspondence asking that the case be reopened, but not be closed immediately after discharge, explaining:
Case No. 17-21492-beh, CM-ECF, Doc. No. 88.
The Court reopened the case on April 5, and later that same day the debtor filed a motion to reimpose the stay, citing as authority 11 U.S.C. section 362(c)(3)(B). The Court summarily denied the motion, noting that the cited section of the Code did not apply, and that the only way to "reimpose" the stay once it has lapsed as a matter of law is to seek injunctive relief, which requires an adversary proceeding. The Court's order also pointed out that the debtor appeared intent on initiating a proceeding to avoid Norhardt's lien based solely on its purportedly unsecured status, and that Supreme Court precedent precludes a Chapter 7 debtor from avoiding or "stripping off" a valueless lien. See Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); Bank of America v. Caulkett, ___ U.S. ___, 135 S.Ct. 1995, 1999, 192 L.Ed.2d 52 (2015). The Court therefore ordered the debtor to show cause why his case should remain open once his discharge issues, requiring him to "demonstrate that the relief he appears to be seeking — the avoidance of a lien on his residence based on its purportedly unsecured status — is not prohibited as a matter of law, in light of the Supreme Court's ruling in Caulkett, or otherwise." Case No. 17-21492-beh, CM-ECF, Doc. No. 92.
The debtor responded by initiating this adversary proceeding. His complaint seeks injunctive relief, as well as the avoidance of Norhardt's lien under 11 U.S.C. sections 506(a) and 506(d). It also asserts that Norhardt's claim/lien is dischargeable under section 523(a)(16). The debtor did not move for a preliminary injunction, but instead filed a "Notice of Request for Injunctive Relief," purporting to set a 10-day response deadline to the complaint. The Court issued a summons on April 16 and set a 30-day response deadline (May 16), as prescribed by Bankruptcy Rule 7012(a). On May 8, before the time to respond to the complaint had passed, the debtor filed a proposed order granting his requested injunctive relief "to prevent the confirmation
At the start of the pretrial conference, the debtor's counsel informed the Court of recent developments in Norhardt's state court foreclosure proceeding: on May 24, the parties appeared at a hearing on Norhardt's request for confirmation of the sheriff's sale of the debtor's condominium unit, as well as the debtor's request for a satisfaction of a judgment lien; the state court judge deferred ruling on the requests, explaining that whether Norhardt's lien was "discharged" was a question for the bankruptcy court to decide.
Also at the May 31 pretrial conference, counsel for the debtor conceded that injunctive relief was no longer necessary, and the Court sustained Norhardt's objection to the debtor's May 8 proposed order. Turning to the lien-avoidance request, the debtor's counsel attempted to distinguish Dewsnup and Caulkett by arguing that Norhardt's lien was a judicial lien, and not a mortgage. Counsel's argument on this point was not entirely cohesive: she later conceded that Norhardt had a statutory lien, but that the lien was dischargeable under section 523(a)(16); then asserted that the lien was judicial, and appeared to use the two terms interchangeably.
Because Norhardt's motion to dismiss attached and relied on exhibits not included in the complaint — a statement of condominium lien and a copy of its recorded lien on the debtor's unit — the Court converted the motion to one for summary judgment and allowed the parties to brief the issues and supplement the record with additional evidence relevant to the motion. See Levenstein v. Salafsky, 164 F.3d 345, 347 (7th Cir. 1998) ("The court must either convert
The Court has jurisdiction under 28 U.S.C. § 1334 and this is a core proceeding under 28 U.S.C. § 157(b)(2)(K). This decision constitutes the Court's findings of fact and conclusions of law under Fed. R. Bankr. P. 7052.
Summary judgment is appropriate if the pleadings and affidavits on file show there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. See Fed. R. Bankr. P. 7056; Fed. R. Civ. P. 56; Tapley v. Chambers, 840 F.3d 370, 376 (7th Cir. 2016). A factual dispute is "genuine" only if there is sufficient evidence for a reasonable jury to find in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202, (1986). For a fact to be material, it must be "outcome determinative under governing law." Contreras v. City of Chicago, 119 F.3d 1286, 1291-92 (7th Cir. 1997). To succeed in opposing a motion for summary judgment, the nonmoving party must present "definite, competent evidence to rebut the motion." Smith v. Severn, 129 F.3d 419, 427 (7th Cir.1997) (internal quotation marks omitted). In determining whether there is a genuine issue of material fact, the Court must view the evidence and draw all reasonable inferences in the light most favorable to the non-moving party. E.E.O.C. v. Sears, Roebuck & Co., 233 F.3d 432, 436-37 (7th Cir. 2000).
Although the debtor's response brief asserts there are "issues of fact that preclude entry of summary judgment" for Norhardt, the purported factual disputes that the debtor appears to raise are not material to the determination of whether Norhardt has a non-avoidable lien on the debtor's condominium unit.
Based on the parties' briefing and the record in this case, the Court finds that the following facts are undisputed or not reasonably subject to dispute:
The parties' briefing raises two questions of law for the Court to decide. First, did Norhardt's foreclosure of its statutory lien change the nature of the lien to a judicial lien? Second, whatever the nature of the lien, can the debtor avoid it?
In Wisconsin, condominiums are governed by the Condominium Ownership Act, Chapter 703 of the Wisconsin Statutes.
Wis. Stat. § 703.165(3). Additionally, section 703.165(7) allows for the foreclosure of such a lien in the same manner as the foreclosure of a mortgage on real property:
Wis. Stat. § 703.165(7) (italics added). The italicized portion of this provision indicates that a condominium association has at least two remedies to recover delinquent assessments from a unit owner: a suit to recover a money judgment (an in personam action), and a foreclosure suit (an in rem action). Notably, obtaining a money judgment does not result in a waiver of the lien securing it.
Consistent with the above provisions, in September 2015 Norhardt filed a statement of lien with the Waukesha County Clerk of Courts, giving rise to a statutory lien under Wis. Stat 703.165(3). Norhardt then took action to enforce its lien through foreclosure proceedings, under Wis. Stat 703.165(7). In doing so, Norhardt exercised both of its available remedies: it foreclosed its lien to obtain a foreclosure judgment, and it also obtained a money judgment against the debtor personally for the delinquent balance. The debtor asserts, without any supporting authority, that Norhardt's "condo lien filed in September 2015 [would be] a statutory lien that cannot be avoided in bankruptcy ... if [Norhardt] had not pursued legal action to foreclose on the lien and obtained a money judgment, creating
There are several fundamental flaws with the debtor's lien transformation argument. First, the debtor appears to conflate Norhardt's money judgment with its foreclosure judgment. The money judgment Norhardt obtained against the debtor is not the result of the enforcement/foreclosure of Norhardt's statutory lien — it is the result of the enforcement of the debtor's personal obligations under his contractual agreement with the association. To highlight the distinction, the money judgment is the result of Norhardt's in personam action (and would have allowed, for example, the garnishment of the debtor's wages),
Assuming, however, that the debtor means to argue that the foreclosure judgment — and not the corresponding money judgment — replaced or nullified Norhardt's statutory lien, that contention also must fail. Despite exhaustive efforts, the Court has been unable to find a single case or statute that would sustain this argument. Instead, every authority the Court has located holds to the contrary. See, e.g. In re Cunningham, 478 B.R. 346, 361 (Bankr. N.D. Ind. 2012) (judicial action to foreclose a statutory mechanic's lien in order to enforce it does not alter the characterization of the lien, and the entry of judgment on foreclosure of the mechanic's lien does not convert a statutory mechanic's lien into a judicial lien); In re Green, 494 B.R. 231, 236 n.24 (Bankr. E.D. La. 2013), aff'd, 516 B.R. 347 (E.D. La. 2014), aff'd, 793 F.3d 463 (5th Cir. 2015) ("The Court notes that `judicial action taken to enforce a lien does not transform a statutory lien into a judicial lien.' ... Also, `[t]he requirement of a judicial action to enforce the lien and establish its particular priority does not transform its essential character to a judicial lien.' ... Therefore, the entry of the Default Judgment does not change the nature of the lien.").
Most notably, a bankruptcy court in this district rejected an almost identical argument regarding a Wisconsin statutory construction lien. In Matter of Sato, 9 B.R. 38, 39 (Bankr. E.D. Wis. 1980), the bankruptcy court dismissed the debtors' claim that a judgment resulting from the foreclosure of a statutory construction lien was a "judicial lien" subject to avoidance under section 522(f)(1). After concluding that the lien at issue arose as a matter of law rather than through any judicial action — much in the same way that the lien here arose, by operation of law after the filing of a statement with the clerk of the circuit court — the court went on to explain:
Matter of Sato, 9 B.R. at 39. The same is true for Norhardt's statutory lien — it has not lost its character or force as a statutory lien because of the foreclosure judgment.
In its reply brief, Norhardt points out that Wisconsin courts have refused to adopt the debtor's theory when it comes to mortgage foreclosure judgments, citing Bank of Sun Prairie v. Marshall Dev. Co., 2001 WI App 64, ¶ 18, 242 Wis.2d 355, 626 N.W.2d 319 ("We find nothing in the holding or reasoning of this or other similar cases to suggest a valid mortgage no longer exists solely because the debt the mortgage secures has been reduced to a judgment."). It appears that Congress endorsed this "anti-merger" rule in enacting 11 U.S.C. § 522(f)(2)(C), which essentially clarifies that mortgage foreclosure judgments are not "judicial liens" that can be avoided under section 522(f). As the First Circuit B.A.P. explained:
In re Hart, 282 B.R. 70, 77 (1st Cir. BAP 2002), aff'd, 328 F.3d 45 (1st Cir. 2003); see also In re Linane, 291 B.R. 457, 461 (Bankr. N.D. Ill. 2003) (Hart explained that "[s]ection 522(f)(2)(C) was not included to create any exception to otherwise avoidable judicial liens, but was instead added to clarify that mortgage foreclosure judgments, which involve the sale and eventual transfer of a property's title to a third party, are not, and do not become, judicial liens subject to avoidance under Section 522.").
Norhardt then reminds that condominium liens are foreclosed in the same manner as mortgages in Wisconsin, and asserts that the anti-merger rule likewise applies to the foreclosure of condominium liens. In further support, Norhardt explains: "Without [the anti-merger] rule, creditors would lose their priority status once they decide to enforce their mortgages or liens. Such result would put the entire lien priority structure on its head."
The Court agrees. The foreclosure judgment here is essentially an order of sale; it is not a lien and cannot be avoided. If the Court were to accept the debtor's argument that the enforcement of a statutory lien through judicial action renders the lien "judicial," then, as one district court described, "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." Young v. 1200 Buena Vista Condominiums, 477 B.R. 594, 602 (W.D. Pa. 2012).
Finally, as Norhardt pointed out at both the May 31 pretrial conference and in its reply brief, the authority on which the debtor relies to make his "judicial lien" argument actually supports Norhardt's position.
In sum, the Court concludes that Norhardt's actions in enforcing its statutory lien and obtaining a foreclosure judgment did not alter the nature of its statutory lien and render it a judicial lien. The debtor's bankruptcy and subsequent discharge likewise had no effect on the rights created by the judgment of foreclosure that Norhardt obtained in enforcing its statutory lien.
In his complaint, the debtor relies on 11 U.S.C. sections 506(a) and 506(d) as the authority for avoiding Norhardt's lien. The debtor cited to these provisions of the Code despite the Court's warning in its order to show cause that the Supreme Court's decisions in Dewsnup and Caulkett appear to foreclose the use of that Code section to avoid "unsecured" liens in a Chapter 7 bankruptcy. The debtor attempts to distinguish Dewsnup and Caulkett by arguing — again without any supporting legal authority — that those cases do not apply because Norhardt has a judicial lien rather than a mortgage.
Setting aside that Norhardt has a valid statutory lien, the debtor's argument still fails. Nothing in the language of Dewsnup or Caulkett suggests that the reading of section 506(d), and the meaning of an "allowed secured claim," should be different when a lien is nonconsensual. Numerous courts have reached that same conclusion, holding that Dewsnup applies to both consensual and non-consensual liens, including judicial liens. See, e.g., In re Swiatek, 231 B.R. 26, 29 (Bankr. D. Del. 1999) ("Dewsnup concerned a consensual lien and not a judgment lien, but the Supreme Court's examination of the history of liens under the Bankruptcy Code and its conclusion based on that examination is not so limited. The Court was very clear in stating that if the claim has been allowed, the lien is not avoidable."); In re Concannon, 338 B.R. 90, 95-96 (9th Cir. BAP 2006) ("Debtors [argue] that Dewsnup and its progeny apply only to consensual liens. Debtors reason that Imperial's wholly unsecured judgment lien may be stripped off simply because it is nonconsensual. This is a distinction without a difference.") (citing cases); and Boring v. Promistar Bank, 312 B.R. 789, 796-97 (W.D. Pa. 2004) ("The Court disagrees with the bankruptcy judge's analysis and conclusion that pursuant to the guidance provided by Dewsnup consensual and non-consensual liens should be treated differently under § 506(d). This Court adopts the opposite position.... This is consistent with the Supreme Court's finding in Dewsnup that Congress intended that liens pass unaffected through the bankruptcy proceedings; no differentiation between consensual and nonconsensual liens was articulated by the Supreme Court in Dewsnup.").
And, although the Seventh Circuit has not weighed in on the issue, there is a strong argument that it would agree. In In re Ryan, 725 F.3d 623 (7th Cir. 2013), the Seventh Circuit was tasked with determining whether Dewsnup applied in the Chapter
725 F.3d at 625-27.
Now, after filing his complaint and pressing his initial arguments at one hearing, the debtor apparently recognizes the lack of legal authority for his position, and urges the Court to avoid the lien under another section of the Code not cited in his complaint, section 522(f)(1), which allows the avoidance of judicial liens that impair a debtor's exemptions. See CM-ECF, Doc. No. 15, at 3. But Norhardt's lien is not a selkie. For the reasons explained above, Norhardt has an unavoidable statutory lien, and therefore section 522(f)(1) cannot invalidate that lien or the related foreclosure judgment.
The debtor then cites to 11 U.S.C. § 523(a)(16) as further support that Norhardt's lien should be dischargeable. That provision of the Code, which was enacted in 1994 and later amended in 2005, provides that a discharge under section 727 does not discharge a debtor from any debt:
11 U.S.C. § 523(a)(16).
The debtor's argument on this point is not entirely clear. He cites to In re Rosteck, 899 F.2d 694, 697 (7th Cir. 1990) and In re Stone, 243 B.R. 40 (Bankr. W.D. Wis. 1999), and appears to suggest that, under the logic of these cases, any post-petition condominium fees he owes to Norhardt were included in his discharge. See CMECF, Doc. No. 15, at 4-6 (summarizing Rosteck and Stone, in which the courts concluded that post-petition condominium fees were included in the debtors' discharge, then stating: "In this case before the court, Debtor entered into a contract with Norhardt Crossing Condominium Association just as the other Debtors had in the above referenced cases."). If this is, in fact, the debtor's argument, it is wrong. Section 523(a)(16) was codified in response to cases like the Seventh Circuit's Rosteck decision, and the 2005 amendment to section 523(a)(16) limited the validity of Stone. In other words, if Rosteck or Stone had been decided under the current version of section 523(a)(16), the results in those cases would have been different.
More fundamentally, section 523(a)(16) governs the discharge of personal liability, not liens. There is no question that the debtor's discharge here included his personal liability for any pre-petition fees and assessments owed to Norhardt. But his discharge had no effect on the validity of Norhardt's statutory condominium lien, or Norhardt's ability to enforce the foreclosure judgment it obtained by foreclosing the lien against the debtor's condominium unit.
As a final point, the debtor adds an argument about Wisconsin Statute § 806.19(4). This state statute concerns the satisfaction of judgment liens after a bankruptcy discharge. Like 11 U.S.C. § 522(f), this statutory provision was not referenced in the debtor's complaint (and could not have been, because at the time he filed it, the debtor had not received his discharge). Whether the debtor is entitled to a satisfaction of a judgment under Wis. Stat. § 806.19(4) is a question that can and should be decided by the state court. The only issue before this Court is whether the debtor may "avoid" Norhardt's condominium lien under 11 U.S.C. § 506(d). And based on the undisputed material facts before the Court, he cannot. Norhardt continues to hold a valid statutory lien, as defined by the Bankruptcy Code. This lien arose by virtue of Wis. Stat. §§ 703.165(3) and (7) — not by virtue of the docketing of a judgment under Wis. Stat. §§ 806.10 and 806.15.
For the foregoing reasons, the Court concludes that there are no genuine disputes as to any material facts and that Norhardt is entitled to judgment as a matter of law.
An order will be entered consistent with this decision.
CM-ECF, Doc. No. 14 (audio recording beginning at approximately 35:30).
