by The State Treasurer’s lien based on a statute authorizing the state to seek reimbursement from a prisoner for the costs of his incarceration was not a statutory lien but a judicial lien which the debtor could avoid as impairing his exemptions. State Treasurer v. Wigger, No. 19-732 (W.D. Mich. Nov. 16, 2020).
The debtor was a prisoner in the Central Michigan Correctional Facility. The Michigan State Treasurer sought to recover some of the costs of his incarceration under the State Correctional Facility Reimbursement Act (SCFRA). After a bench trial, the state court found the State Treasurer was entitled to reimbursement from the debtor’s IRA funds and from proceeds from a judgment the debtor had against his son. The debtor initiated a chapter 7 bankruptcy and filed an adversary proceeding seeking to have the state’s lien voided as a judicial lien impairing his exemptions under section 522(f)(1). The bankruptcy court granted the debtor’s lien avoidance motion finding that the lien impaired his exemption for retirement funds under section 522(d)(12), and his exemption for property valued up to $13,100 under section 522(d)(5).
On appeal to the district court, the Treasurer argued that section 522(f) was inapplicable because its lien was statutory rather than judicial. The Treasurer further argued that, if the court found the lien to be judicial, only the reimbursement for pre-petition incarceration costs should be discharged.
The district court began with a comparison of statutory and judicial liens. The Bankruptcy Code defines a statutory lien in section 101(53) as “a lien arising solely by force of a statute on specified circumstances or conditions[.]” The court offered a mechanic’s lien as illustrative of statutory liens. Mechanic’s liens are created automatically when a person delivers an item to a mechanic, and the value of the lien is established by the labor and skill applied to the item.
A judicial lien, on the other hand, is defined in section 101(36) as a lien “obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
Unlike a mechanic’s lien, the SCFRA does not create an automatic lien upon specified circumstances or conditions. Instead, the Act delineates steps necessary to create the lien. Under the SCFRA, the director of the Michigan Correctional Department initiates the process by sending the attorney general a calculation of the cost of the prisoner’s incarceration. The attorney general must then determine whether there is good cause to believe the prisoner has sufficient assets to cover at least 10% of those costs. At that point, the attorney general may file a complaint in state court seeking reimbursement. The court then holds a hearing and makes a determination, based on certain discretionary factors, that the prisoner has an obligation to reimburse the state. The court found that a lien coming out of this process falls under the definition of a judicial lien.
The Treasurer argued that State Treasurer v. Snyder, 823 N.W.2d 284 (Mich. Ct. App. 2011), supported the argument that the lien was automatic and therefore statutory. That case held that the State had an interest in the prisoner’s right to collect insurance proceeds under the SCFRA and could prevent the prisoner from disclaiming his interest in the funds. The court disagreed with the Treasurer’s interpretation finding that, while the SCFRA gave the state an interest in the insurance proceeds, that interest was not a lien. Under the SCFRA an interest in the prisoner’s property does not become a lien until judicial action is completed. The court differentiated between the judicial steps the holder of a mechanic’s lien may take to enforce the lien, and the judicial steps the state must take under SCFRA to create the lien.
The Treasurer argued next that the SCFRA does not create a judicial lien because it does not fall within Michigan’s judgment lien statute. The court found that the state judgment lien statute was limited to liens on real estate and was distinguishable from more general judicial liens in bankruptcy which arise from a “legal or equitable process or proceeding.”
The court rejected the Treasurer’s argument that if the lien is deemed a judicial lien, only the pre-bankruptcy reimbursement costs should be included in the debtor’s discharge leaving the state free to seek reimbursement for post-bankruptcy costs. The court found that a “claim” in bankruptcy is broadly defined to include unmatured, contingent or unliquidated claims. The fact that the Treasurer included reimbursement for future costs in his state court claim under the SCFRA did not help his case.
The court affirmed.