Opinion
Case No. 01-20724 (JHW), Civil Action No. 02-4412.
June 12, 2003
David P. Daniels, Esq., Camden, New Jersey, Attorney for Debtor, Mary Lindsey.
Lisa M. Kmiec, Solicitor, Camden County Municipal Utilities Authority, By: Nancy E. Scott, Esq., Camden, New Jersey, Attorney for Appellant, Camden County Municipal Utilities Authority.
OPINION
I. INTRODUCTION
This is an appeal of the Order of the Honorable Judith H. Wizmur, of the United States Bankruptcy Court for the District of New Jersey, entered on July 26, 2002, ordering the bifurcation, or "cram down," of the perfected statutory lien of Appellant, Camden County Municipal Utilities Authority ("CCMUA"), to a partially secured and partially unsecured claim, pursuant to 11 U.S.C. §§ 506 and 1322(b)(2). For the reasons set forth below, Judge Wizmur's Order of July 26, 2002, bifurcating CCMUA's perfected statutory lien, shall be affirmed.
II. FACTS AND PROCEDURAL HISTORY
The parties do not dispute the underlying facts of this case, as set forth in CCMUA's submissions.
Debtor-Appellee, Mary Lindsey ("Lindsey"), filed this most recent Chapter 13 bankruptcy petition on November 1, 2001. See Appellant's Ex. B. Lindsey's case was dismissed on March 13, 2002 for failure to make required payments to the Trustee, but was reinstated on April 25, 2002. See id., Ex. D.
Lindsey previously filed two other Chapter Thirteen bankruptcy petitions, #95-17416 and #99-15317. See Appellant's Ex. F, at Pa61.
Lindsey owns two properties, located at 1905 Broadway and 240 Morse Street in Camden, New Jersey, both of which receive wastewater treatment services from CCMUA. See Appellant's Ex. F, at Pa59 (Certification of Douglas O. Burns, 6/3/02), ¶ 3. During the pendency of her three Chapter 13 bankruptcy plans, Lindsey never paid a sewer bill. Id. at ¶ 5. On March 11, 2002, CCMUA filed a secured proof of claim on Lindsey's two properties in the amount of $16,907.15. See Appellant's Ex. C. Lindsey then moved to void and reclassify the CCMUA lien, and CCMUA cross-moved for adequate assurance of payment and for cash deposit.
Apparently, one of these properties has been surrendered asin rem relief to the City of Camden. See Appellant's Ex. G, at Pa74, 7:23 to 8:6.
On June 10, 2002, Judge Wizmur held a hearing on the motions, and ordered Lindsey to pay $100.00 to CCMUA as adequate protection on its claim. See Appellant's Ex. G, at Pa75, 8:14-19. In a Letter Opinion dated July 26, 2002, Judge Wizmur granted Lindsey's motion to "cram down," or bifurcate, CCMUA's perfected statutory lien on Lindsey's property pursuant to 11 U.S.C. §§ 506(a) and 1322(b)(2). CCMUA timely filed a notice of appeal to this Court. See Appellant's Ex. K.
During a subsequent hearing on July 22, 2002, the Court admonished Lindsey for failing to pay the protection, as ordered, and granted Lindsey five additional days to make the payment.See Appellant's Ex. J, at Pa99, 8:8-25.
CCMUA does not contest the Bankruptcy Court's conclusion as to the inapplicability of 11 U.S.C. § 503(b)(3) to CCMUA's claim.See 7/26/02 Letter Op. at 3-4.
This Court has jurisdiction over the final judgments, orders and decrees of the United States Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1) (2003). See In re First Jersey Secs., Inc., 180 F.3d 504, 508 (3d Cir. 1999). The Court has considered the submissions of the parties and decided this motion on the papers without oral argument pursuant to Fed.R.Civ.P. 78.
III. DISCUSSION
A. STANDARD OF REVIEW FOR BANKRUPTCY APPEALS
A United States District Court sits as a Court of Appeals from the decisions of the United States Bankruptcy Court. See 28 U.S.C. § 158(a) (2003); S'holders v. Sound Radio, Inc., 109 F.3d 873, 882 (3d Cir. 1997); In re Applied Paging Techs., Inc., 250 B.R. 496, 499 (D.N.J. 2000). The District Court reviews the Bankruptcy Court's findings of fact for clear error and its legal conclusions de novo. See In re Pransky, 318 F.3d 536, 542 (3d Cir. 2003).
The District Court may set aside the Bankruptcy Court's findings of fact only if clearly erroneous, see In re Applied Paging, 250 B.R. at 499; Matter of Halvajian, 216 B.R. 502, 508 (D.N.J. 1998). In conducting its review, the District Court is limited to the factual record before the Bankruptcy Court.See Applied Paging, 250 B.R. at 499. A factual finding is clearly erroneous if it is either completely devoid of minimum evidentiary support displaying some hue of credibility, bears no rational relationship to the evidence, or if, even though there is some evidence to support it, the reviewing court is left with the definite and firm conviction that a mistake has been made.See FGH Realty Credit Corp. v. Newark Airport/Hotel Ltd. P'ship, 155 B.R. 93, 97 (D.N.J. 1993) (citations and quotations omitted). "A reviewing court may not substitute its own findings for those of the primary tribunal merely because it finds other inferences more likely." Universal Minerals, Inc. v. C.A. Hughes Co., 669 F.2d 98, 104 (3d Cir. 1981). Thus, the fact that a reviewing court could have decided the matter differently does not render a finding of fact clearly erroneous. See Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985).
The Bankruptcy Court's legal conclusions, or questions of law, are subject to de novo, or plenary, review. See United States v. Fegeley, 118 F.3d 979, 982 (3d Cir. 1997);Halvajian, 216 B.R. at 508. Thus, where an issue requires interpretation and application of legal statutes and principles, the District Court's review is plenary. See In re Marcucci, 256 B.R. 685, 688 (D.N.J. 2000); see also Ram Constr. Co., Inc. v. American States Ins. Co., 749 F.2d 1049, 1053 (3d Cir. 1984). Mixed questions of law and fact must be divided into their respective components, and the appropriate standard must be applied. See Ram, id.; In re Savini, 260 B.R. 689, 690 (D.N.J. 2001) (citing In re Brown, 951 F.2d 564, 567 (3d Cir. 1991)).
B. APPLICABILITY OF 11 U.S.C. § 545 TO Lindsey'S "CRAM DOWN" OF CCMUA'S STATUTORY LIEN
A "statutory lien" is defined in the Bankruptcy Code as a "lien arising solely by force of a statute on specified circumstances or conditions . . . but does not include security interest or a 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." 11 U.S.C. § 101(53) (West 2003) (emphasis added). CCMUA's sewer lien on Lindsey's property constitutes a statutory lien under New Jersey's municipal and county utilities authorities law, N.J.S.A. 40:14B-42, which provides, in relevant part:
In the event that a service charge of any municipal authority with regard to any parcel of real property owned by any person other than the State . . . shall not be paid as and when due, the unpaid balance thereof and all interest accruing thereon shall be a lien on such parcel. Such lien shall be superior and paramount to the interest in such parcel of any owner, lessee, tenant, mortgagee or other person except the lien of municipal taxes and shall be on a parity with and deemed equal to the lien on such parcel of the municipality where such parcel is situate for taxes thereon due in the same year and not paid when due. Such lien shall not bind or affect a subsequent bona fide purchaser of such parcel for a valuable consideration without actual notice of such lien. . . .Id. (West 2003) (emphasis added); see also Graffen v. City of Phila., 984 F.2d 91, 96 (3d Cir. 1992) (finding statutory lien under Pennsylvania state law that authorized imposition of liens against properties receiving unpaid water and sewer service); In re Sullivan, 254 B.R. 661, 663-64 (Bankr. D.N.J. 2000) (holding that state tax liens under the New Jersey State Tax Uniform Procedure Law, N.J.S.A. § 54:49-1, et seq., are statutory liens); In re Zukowfsky, Civ. A. No. 95-2817, 1995 WL 695108, at *4 (E.D. Pa. Nov. 21, 1995) (liens held by state Department of Environmental Resources as penalties under Surface Mining and Conservation and Reclamation Act constitute statutory liens).
CCMUA contends that the Bankruptcy Court erred in permitting Lindsey to "cram down" CCMUA's perfected statutory lien on Lindsey's property under 11 U.S.C. §§ 506(a) and 1322(b)(2). Instead, CCMUA argues that the exclusive statutory provision under which a statutory lien may be avoided is 11 U.S.C. § 545, which provides:
The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien —
(1) first becomes effective against the debtor —
(A) when a case under this title concerning the debtor is commenced;
(B) when an insolvency proceeding other than under this title concerning the debtor is commenced;
(C) when a custodian is appointed or authorized to take or takes possession;
(D) when the debtor becomes insolvent;
(E) when the debtor's financial condition fails to meet a specified standard; or
(F) at the time of an execution against property of the debtor levied at the instance of an entity other than the holder of such statutory lien;
(2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists;
(3) is for rent; or
(4) is a lien of distress for rent.
Id. (West 2003) (emphasis added). Indeed, several courts, including courts within the Third Circuit, have held that 11 U.S.C. § 545 is the exclusive provision for avoiding statutory liens. See, e.g., In re Cagle, No. 00-82350, 2002 WL 750835, at *4 (Bankr. C.D. Ill. Mar. 5, 2002); In re Sullivan, 254 B.R. at 666. Judge Wizmur, however, rejected CCMUA's argument and noted that Lindsey did not seek to avoid the entire statutory lien under 11 U.S.C. § 545, "but to modify the lien under section 506(a) by cramming down the secured portion of the claim to the value of the debtor's interest in the property." 7/26/02 Letter Op., at 6. This interpretation is consistent with the language of Section 545, which applies to avoidance of the "fixing" of a statutory lien on the property, not to the modification of a lien that has already been perfected prior to the commencement of a debtor's bankruptcy filing. Indeed, in Matter of Merchants Grain By and Through Mahern, 93 F.3d 1347 (7th Cir. 1996), a Chapter 11 action, the United States Court of Appeals for the Seventh Circuit analyzed Section 545 and noted that the text of the statute does not permit the trustee to avoid a lien entirely, but to avoid "the fixing of a statutory lien." Id. at 1356 (citingFarrey v. Sanderfoot, 500 U.S. 291, 296 (1991)). Here, CCMUA's statutory lien became fixed prior to the commencement of Lindsey's Chapter 13 case, which Lindsey does not dispute. As the Bankruptcy Court noted, however, this timing is irrelevant because Lindsey seeks to cram down, or bifurcate, CCMUA's claim, not to avoid its fixation. Thus, reviewing de novo the Bankruptcy Court's interpretation of 11 U.S.C. § 545, the Court shall affirm Judge Wizmur's conclusion with respect to the inapplicability of Section 545 to Lindsey's motion to cram down CCMUA's sewer lien.
C. WHETHER THE BANKRUPTCY COURT PROPERLY APPLIED 11 U.S.C.
§§ 506(a) and 1322(b)(2) TO CRAM DOWN CCMUA'S STATUTORY LIEN
Lindsey's motion to cram down CCMUA's sewer claim was predicated on the lack of sufficient equity in Lindsey's property to secure CCMUA's claim. Bifurcation would divide CCMUA's secured claim into a secured portion, secured by the value of Lindsey's property and payable through Lindsey's Chapter 13 plan, and an unsecured portion, to be treated like other unsecured creditors under the bankruptcy plan. See 7/26/02 Letter Op. at 2. The Bankruptcy Court, thus, applied 11 U.S.C. § 506(a) to [BLANK PAGE] bifurcate CCMUA's claim into secured and unsecured portions,see 7/26/02 Letter Op. at 3, and held that 11 U.S.C. § 506(d) could "invalidate a lien in a Chapter 13 case where the lien `secures a claim against the debtor that is not an allowed secured claim.'"Id.
Under 11 U.S.C. § 506(a):
An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.Id. (West 2003).
Under 11 U.S.C. § 506(d):
To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless —
(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.Id.
The Bankruptcy Court rejected Lindsey's argument that 11 U.S.C. § 502(b)(3) disallows a tax claim where the claim exceeds the value of the interest of the estate in such property because CCMUA's sewer charges are not taxes. See 7/26/02 Letter Op. at 3 (citing DSC of Newark Enters. v. South Plainfield Boro., 17 N.J. Tax. 510, 515 (Tax Ct. 1997), aff'd, 17 N.J. Tax 507 (App. Div. 1998)).
Although Lindsey did not seek bifurcation under 11 U.S.C. § 1322(b)(2), the Bankruptcy Court concluded, sua sponte, that bifurcation of CCMUA's statutory lien was available under that section of the Bankruptcy Code. CCMUA objects to the Bankruptcy Court's sua sponte reliance on Section 1322(b)(2) in support of Lindsey's motion to cram down, see Reply Br. at 2-4, and now asks this Court to vacate Judge Wizmur's decision so that CCMUA may be heard on the issue of whether cram-down of a statutory lien is permissible under 11 U.S.C. § 1322(b)(2), under which a bankruptcy plan may:
Section 506 of the Bankruptcy Code is usually employed to avoid liens. Under Section 506, debtors are permitted to avoid liens on property to the extent the property is worth less than the debt it secures. 11 U.S.C. §§ 506(a) (d); Rodriguez v. Mellon Bank, N.A., 218 B.R. 764, 772 (E.D. Pa. 1998). In the case of residential real estate, however, Section 1322(b)(2), known as the anti-modification clause, curtails the ability of debtors to modify the rights of creditors with security interests in such property. Id. at 772-73.
[M]odify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;Id. (West 2003) (emphasis added).
There are many reported cases discussing the applicability of Sections 506 and 1322 to debtors' motions to avoid the claims of residential mortgagors, see, e.g., In re Zimmer, 313 F.3d 1220, 1223-27 (9th Cir. 2002); In re McDonald, 205 F.3d 606, 609-12 (3d Cir. 2000); In re Therriault, Civ. A. No. 00-1063, 2002 WL 31767813, at *4-5 (Bankr. D. Vt. 2002), but few applying those sections to statutory liens. The United States Court of Appeals for the Third Circuit, however, did apply Section 1322(b)(2) to modify the interest rate on a secured statutory tax lien, over the creditor's objection, in Rankin v. DeSarno, 89 F.3d 1123 (3d Cir. 1996), cert. denied, 519 U.S. 1108 (1997), in which the court explained:
The Bankruptcy Code defines "security interest" as a "lien created by an agreement." 11 U.S.C. § 101(51) (emphasis added). In contrast, the Code provides that the term "statutory lien" means a "lien arising" solely by force of a statute on specified circumstances or conditions . . . but does not include security interest or judicial lien." 11 U.S.C. § 101(53) (emphasis added). Because plaintiff's tax liens arose under state statute, and not from a consensual or voluntary agreement with the taxpayer defendants, we concur in the bankruptcy court's ruling that those liens are not "security interests" for purposes of § 1322(b)(2).Id. at 1127; see also In re DeMaggio, 175 B.R. 144, 147 (Bankr. D.N.H. 1994) (town's liens, albeit secured claims, were clearly not consensual agreements between the taxpayer and the Town); In re Venable, 48 B.R. 853, 856 (Bankr. S.D.N.Y. 1985) ("tax lien is statutory and not consensual and, therefore, may be modified"). CCMUA contends that these cases, applying Section 1322(b)(2) to statutory tax liens, are not controlling because they "did not modify or void any statutory liens held by the governmental agencies." Appellant's Br. at 23. To the contrary, the Rankin court explicitly applied 11 U.S.C. § 1322(b)(2) to modify a statutory tax lien. See Rankin, 89 F.3d at 1128.
To the extent Rankin and the other cases applying Section 1322(b)(2) to statutory liens address modification of interest on liens and not bifurcation of claims, this is, in CCMUA's words, "a distinction without merit," Appellant's Br. at 24, in light of the statutory text and the definitions in Section 1322(b)(2), as discussed above. The anti-modification provision of Section 1322(b)(2) was specifically enacted to protect the interests of the mortgage lending industry for the purpose of assuring a ready supply of capital for use in home mortgage loans. See Rodriguez v. Mellon Bank, N.A., 218 B.R. 764, 775 (E.D. Pa. 1998) (citing Nobelman v. American Sav. Bank, 508 U.S. 324, 332 (1993)). Thus, the protective anti-modification legislation in 11 U.S.C. § 1322(b)(2) "has no meaningful connection tononconsensual liens that arise simply by operation of law."DeMaggio, 175 B.R. at 147. As a nonconsensual lien, CCMUA's sewer lien under N.J.S.A. § 40:14B-42 is subject to modification under Section 1322(b)(2), just as Judge Wizmur concluded, see 7/26/02 Letter Op. at 4-5. If anything, CCMUA's reliance on cases involving consensual and judicial mortgage liens, such as Assocs. Commercial Corp. v. Rash, 520 U.S. 953 (1997), and Nobelman v. American Sav. Bank, 508 U.S. 324 (1993), is misplaced because consensual and judicial mortgage liens are "security interests" under 11 U.S.C. § 1322(b)(2), see Rankin, 89 F.3d at 1127.
Reviewing de novo the Bankruptcy Court's decision to apply 11 U.S.C. § 1322(b)(2) to cram down CCMUA's claim, the Court shall affirm Judge Wizmur's decision to grant Lindsey's motion to cram down, pursuant to 11 U.S.C. §§ 506 and 1322(b)(2). As for CCMUA's contention that it did not have an opportunity to be heard on the issue of whether cram-down of a statutory lien is permissible under 11 U.S.C. § 1322(b)(2), the Court finds that remanding the issue to the Bankruptcy Court would place form over substance. Judicial economy permits the courts to look beyond Fed.R.Bankr.P. 7001 to the merits of the dispute, provided no prejudice will result. See In re Serv. Merch. Co., 256 B.R. 755, 765 (Bankr. M.D. Tenn. 2000). Here, in light of the Third Circuit's decision in Rankin v. DeSarno, 89 F.3d 1123 (3d Cir. 1996), the Bankruptcy Court's decision was well-grounded in controlling authority, the same authority which controls this Court. The appellant CCMUA has now been fully heard upon the issue, and remanding this case for additional argument would not further the interests of judicial economy.
Finally, the Court declines to pass one way or the other upon CCMUA's request to condition the modification of CCMUA's secured claim and statutory sewer lien upon the discharge of Lindsey's Chapter 13 case, in light of Lindsey's consistent failures to pay post-petition sewer charges during the pendency of each of her Chapter 13 plans. See Appellant's Reply Br. at 6-7. In the event Lindsey fails to complete her bankruptcy plan, the issue may be raised again and that portion of CCMUA's statutory lien voided under 11 U.S.C. § 506(d) may be reinstated. See, e.g., In re Feher, 202 B.R. 966, 972 (Bankr. S.D. Ill. 1996).
According to the Bankruptcy Court's docket sheet in No. 01-20724-JHW, the Bankruptcy Court confirmed debtor's modified Chapter 13 plan by Order filed on February 28, 2003 [Docket Item 51], requiring payments of $300 per month for 30 months and recognizing $3,350 paid to date. In the event Lindsey fails to complete her payment schedule, CCMUA may apply for reinstatement of its entire lien pursuant to 11 U.S.C. § 506(d), supra.
IV. CONCLUSION
For the reasons set forth above, the Court concludes that the Bankruptcy Court properly bifurcated CCMUA's secured claim to a partially secured and partially unsecured claim under 11 U.S.C. §§ 506 and 1132(b)(2). Therefore, Judge Wizmur's Order of July 26, 2002 shall be affirmed in all respects. The Court shall enter an appropriate form of Order.
ORDER
This matter having come before the Court on the appeal of Appellant, Camden County Municipal Utilities Authority (the "CCMUA"), from the July 26, 2002 Order of United States Bankruptcy Judge Judith H. Wizmur, ordering the bifurcation, or "cram down," of CCMUA's secured claim, to a partially secured and partially unsecured claim, pursuant to 11 U.S.C. §§ 506 and 1322(b)(2), Lisa M. Kmiec, Esq., appearing on behalf of CCMUA, and David P. Daniels, Esq., appearing on behalf of the Debtor-Appellee, Mary Lindsey; and,The Court having considered the submissions of the parties without oral argument pursuant to Fed.R.Civ.P. 78, for the reasons set forth in the OPINION filed today;
IT IS, on this 12th day of June, 2003, hereby ORDERED that the July 26, 2002 Order of the Honorable Judith H. Wizmur, United States Bankruptcy Judge, ordering the bifurcation of CCMUA's perfected statutory lien to partially secured and partially unsecured, shall be, and it hereby is, AFFIRMED.