The Enforceability of Restitution Liens Under the Mandatory Victims Restitution Act

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Mar 2002

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Congress passed the Victim and Witness Protection Act (VWPA) in 1982 as the
first general federal victim restitution statute. The VWPA was amended several times
thereafter to effectuate minor amendments. In 1994 Congress passed the Violence
Against Women Act that identified certain crimes that would be subject to mandatory
restitution: sexual abuse, sexual exploitation, abuse of children, domestic violence
and telemarketing. Thereafter, on April 24, 1996, the Antiterrorism and
Effective Death Penalty Act was enacted. Title II of the Act—the Mandatory Victims
Restitution Act (MVRA)—changes the manner in which restitution liens are enforced,
most notably giving restitution liens the same status as perfected Internal Revenue
Service (IRS) liens and allowing the liens to be enforceable against property
otherwise exempt under state law.

Under the MVRA, the court is required to order full restitution upon conviction
or a plea of guilty, regardless of the defendant's economic condition for (1) a
crime of violence as defined under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §16</a>; (2) an offense against
property under Title 18, including any offense by fraud or deceit or an offense
under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §1365</a> relating to tampering with consumer products, and (3)
if there is an identifiable victim(s) who has suffered a physical injury or pecuniary
loss. The exceptions to mandatory restitution are where identifiable victims are so
numerous as to make restitution impracticable or where the determination of complex fact
issues related to the cause or amount of the victim's losses would complicate or
prolong the sentencing process to a degree that the need to provide restitution to any
victim would be outweighed by the burden to the sentencing process.

Title 18 §3613(c) defines the enforcement mechanism for restitution liens
under the MVRA. A restitution order is a "lien in favor of the United States on
all property and rights to property of the person fined as if the liability of the
person fined were a liability for a tax assessed under the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Revenue Code of
1986</a>." The lien arises on judgment (it still has to be recorded in accordance
with state law) and continues for 20 years or until the liability is satisfied,
remitted, set aside or terminated under §3613(b).

Section 3613(d) provides that upon the filing of a notice of restitution lien
in the manner in which notice of a federal tax lien is filed under §6323(f)(1)
and (2), the lien is valid against all other encumbrances except for those
identified under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §6323(b)</a>, (c) and (d).<a href="#2" name="2a">2</a> Further,
§3613(e) states that a fine is not dischargeable under Title 11 and that the
lien shall not be voided in a bankruptcy proceeding.

By comparison, a federal tax lien arises upon three conditions: (1) there must
be an assessment of the tax, (2) there must be a demand pursuant to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §6321</a>, and (3) the taxpayer must refuse or neglect to pay the tax
due. The lien is recorded in accordance with state law. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§6323(f)</a>. For example, in Texas, liens against real property are recorded in
the county deed records where the property is located. Liens against personal property
are recorded with the Texas Secretary of State. Tax liens attach to all property
interests of the taxpayer except for purchasers, security interest-holders, mechanic's
lienors and judgment lien creditors who recorded their liens prior to the federal tax
liens notice. As noted, there are further exceptions to the IRS's lien that take
priority as defined under §6326(b), (c) and (d) and ad valorem taxes on real
property.

Inasmuch as the MVRA is roughly five years old, case law development has been
significant with a few emerging theories of law.

<h3>Is a Restitution Lien a Judicial or Statutory Lien?</h3>

The lien's status is important for at least two reasons: priority and whether it
can be avoided in bankruptcy. A "judicial lien" is "obtained by judgment, levy,
sequestration or other legal or equitable process or proceeding." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§101(36)</a>. A statutory lien arises "solely by force of a statute on specified
circumstances or conditions...but does not include security interest or judicial lien."
11 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §101(53). In In re Holmes, 1998 WL 19489 (N.D.
Cal. Jan. 5, 1998)</a>, the United States argued that a properly filed restitution
judgment was transmuted into a statutory lien under §3613 and not avoidable under
§522(f)(1). The court disagreed, noting that §3613 only deals with the lien
enforcement, not the lien's substantive nature.<a href="#3" name="3a">3</a>

Similarly, the United States argued in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. United States (In re
Reasonover), 236 B.R. 219 (Bankr. E.D. Va. 1999)</a>, subsequently
remanded by <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d 414 (4th Cir. 2000)</a>, on remand on other
grounds, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… WL 1168181 (Bankr. E.D. Va. April 16, 2001)</a>,
that a restitution judgment, perfected after bankruptcy, was unavoidable by the chapter
7 trustee under §3613(e) because the statute prohibits avoidance. The United
States argued that because the lien arose pre-petition (judgment was rendered prior to
bankruptcy), recording the lien post-petition was irrelevant, because the trustee could
only remove the lien by avoiding it, the precise action that §3613(e) prohibits.

In reviewing §3613(e), the Reasonover court noted that Congressional intent
was far from clear, and that there is no legislative history to §3613(e) on
avoidance issues. As such, the court focused on the statute's text. In doing so,
the court noted that §3613(e) states "a lien filed as prescribed by this section"
cannot be avoided in bankruptcy. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 236 B.R. at 237</a>. However,
§3613(e) does not address unperfected liens that arise upon entry of judgment but
before recordation. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… States v. West Indies Transport Co. Inc., 35
F.Supp. 2d 450, 455 (D. V.I. 1998)</a>. Nonetheless, the court noted
that when the debtors filed bankruptcy, the restitution had not been recorded, and
as such, there was nothing for the trustee to set aside. Moreover, the court noted
that §3613(c) states that an unperfected lien is not valid against a purchaser.
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; By analogy, the court reasoned that the subsequent recording of the lien was
ineffective against the trustee just as an unrecorded lien would be ineffective against
a subsequent purchaser. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; Therefore, the lien was avoidable.

<h3>What Priority Does a Restitution Lien Have in Bankruptcy?</h3>

The Supreme Court's ruling in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Robinson, 479 U.S. 36 (1986)</a>,
held that a criminal restitution order is non-dischargeable in chapter 7 under
§523(a)(7). Congress amended chapter 13 to make restitution in connection with
a criminal conviction non-dischargeable. Section 3613(f) makes federal restitution
non-dischargeable. As such, is a debt for restitution entitled to priority under the
Bankruptcy Code?

In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bennett, 237 B.R. 918 (Bankr. N.D. Tex. 1999)</a>,<a href="#4" name="4a">4</a>
the bankruptcy court considered this argument as a matter of first impression. The
United States filed a restitution judgment as a priority claim, classifying it as a
claim under §507(a)(8). The United States contended that the restitution was
entitled to priority under §507(a)(8) because §3613 references tax law in the
way that restitution liens are enforced. The bankruptcy court noted that there is no
express priority for restitution judgments in §507. The court recognized that
§3613(c) references the Internal Revenue Code, where it states that a restitution
lien in favor of the United States is a liability of the person fined as if the
liability were a liability for a tax assessed under the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Revenue Code of
1986</a>. Moreover, §3613(d) explains that the procedures for filing restitution
liens are the same as those for federal tax liens. Nonetheless, the court found that
nowhere in §3613 does a restitution judgment receive the same rights as an unsecured
tax claim. As such, the court held that a restitution judgment is not entitled to
priority under §507(a)(8).

As an alternative argument, the United States argued that the court should find
that the judgment is entitled to priority status because the restitution is for the
benefit of the victims. The court rejected the argument on two grounds. First, the
court found that a bankruptcy court does not have the authority to establish bankruptcy
policy; only Congress has that province. Second, if the court were allowed to
separately classify the restitution obligation, the debtors' unsecured creditors would be
penalized by reducing the distribution to them. The court found that the "two purposes
of criminal sanctions are to deter and punish the wrongdoer. Both of these purposes
are undermined when innocent creditors are required to help pay for a debtor's criminal
sanctions." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 923.</a><a href="#5" name="5a">5</a>

<h3>Who Can Enforce a Restitution Lien?</h3>

Obviously, the United States can enforce restitution liens under §3613. However,
can a victim enforce the restitution obligation? In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Sher, 63 F.3d
407 (5th Cir. 1995)</a>, a beneficiary of a restitution judgment argued that
a private individual could enforce the judgment in the same manner as the United
States, specifically as to exempt property. The Fifth Circuit disagreed, relying upon
the language of §3663. Section 3663(h) provides that a restitution award may
be enforced by (1) the United States in the same manner as a tax lien or judgment
in a civil action, and (2) by a victim named in the order of restitution in the
same manner as judgment in a civil action.

As to the United States, the Fifth Circuit found that the United States can
enforce a restitution lien in the same manner as a tax lien, which means that the
debtor's property is not exempt from attachment under state law. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 409</a>.
Further, the United States may also enforce a restitution judgment in the same manner
as a civil action. Therefore, the United States has two options in enforcing
restitution. On the other hand, a private individual is limited under
§3663(h)(2) to enforcing the restitution in the same fashion as the collection
of a judgment in a civil action. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; The procedures for such an action are governed
by Fed.R.Civ.P. 69(a) which in essence is a writ of execution. Therefore,
a victim may only enforce a restitution judgment through a writ of execution. As
such, the ability of a private individual to enforce a restitution obligation is not
as great as the federal government's.<a href="#6" name="6a">6</a>

<h3>Conclusion</h3>

Federal restitution awards are secured claims or encumbrances attaching to all
property interests of the debtor. The restitution obligations are not priority debts
under the Bankruptcy Code, although their secured status may allow them to receive
a greater distribution under the Code. Finally, the United States may enforce
restitution obligations as either a tax lien or suit for a civil judgment.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> The views expressed in this article are Mr. Gargotta's and do not necessarily reflect the views of the Department of Justice. <a href="#1a">Return to article</a>

<a name="2">2</a> Security interests, commercial transactions financing agreements and the "45-day rule" for disbursements subject to pre-existing security
interests. <a href="#2a">Return to article</a>

<a name="3">3</a> The court nonetheless avoided the lien, apparently finding that the lien could not be enforced against the debtors' exempt homestead
property. The court's ruling would appear to contravene §3613(e), which prohibits the avoidance of perfected restitution liens. <a href="#3a">Return to article</a>

<a name="4">4</a> Accord, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Big R Sand & Gravel Inc. (In re Ellison), 245 B.R. 361 (Bankr. W.D. Mo. 1999)</a>;
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Limbaugh, 194 B.R. 488 (Bankr. D. Ore. 1996)</a>. <a href="#4a">Return to article</a>

<a name="5">5</a> Priority of payment is different than priority of liens. Restitution liens do have the force and effect of tax liens in the
determination of priority of liens. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Charter Financial Group Inc., 122 F.Supp. 2d 1347 (M.D. Fla. 2000)</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> The Fifth Circuit remanded back to the district court whether the restitution beneficiary could execute against exempt property under
state law. <a href="#6a">Return to article</a>

Journal Authors

Craig A. Gargotta

Journal Date

Friday, March 1, 2002 - 12:00

Bankruptcy Rule

2002