Bankruptcy Judge Susan V. Kelley of Milwaukee explored the difference between judicial liens and statutory liens and in the process concluded that her state’s law allows a consumer debtor to void a lien for overpayment of unemployment benefits, while Pennsylvania’s law makes the state’s security interest inviolable.

Judge Kelley’s opinion is significant for its holding that agency proceedings can give rise to judicial liens.

The distinction between judicial liens and statutory liens is important because Section 522(f)(1)(A) allows the court to void a judicial lien that impairs an exemption. Section 101(36) defines a judicial lien as one “obtained by judgment . . . or other legal or equitable process.”

A statutory lien, on the other hand, is defined in Section 101(53) as one “arising solely by force of a statute on specified conditions.”

Wisconsin argued that a lien for overpayment of unemployment benefits is a statutory lien that survives bankruptcy. If that were true, the state would also have an unavoidable lien on the debtor’s real and personal property.

Judge Kelly cited the Code’s legislative history for the proposition that a statutory lien arises automatically and is not based on an agreement or judicial action. She noted how Wisconsin law calls for agency hearings and the possibility of eventual judicial review before the state can file a warrant with the county clerk, which, by law, is considered a “final judgment constituting a perfected lien” on the debtor’s real and personal property.

By contrast, Judge Kelley said Wisconsin automatically grants liens to auto mechanics and builders without similar procedures. She also cited the Code’s legislative history, which says that mechanics’, materialmen’s and warehousemen’s liens are examples of statutory liens.

The state relied on a Pennsylvania bankruptcy court opinion that held that the Keystone State’s law gives rise to a statutory lien for overpayment of unemployment benefits. Judge Kelley said Pennsylvania’s law automatically grants a lien and has none of the appellate procedures found in Wisconsin. She disagreed with the part of the Pennsylvania decision that said that agency proceedings do not qualify as “legal or equitable process” required for the creation of a judicial lien.

In sum, Judge Kelley believes that agency proceedings are not “specified conditions” leading to a statutory lien. Instead, she holds that agency proceedings qualify as “legal or equitable proceedings” underpinning judicial liens.