## Facts

- Joseph and Mary Downey filed a Chapter 7 bankruptcy petition.
- Joseph Downey employed Lewis Golden as a taxi driver, and Golden was injured during the course of his employment.
- The Director of New Jersey’s Division of Workers’ Compensation issued Golden a $38,225 workers’ compensation award against Joseph Downey and also issued findings of fact, conclusions of law, and a judgment in connection with the award.
- Because Joseph Downey did not carry workers’ compensation insurance, New Jersey filed the award materials and judgment with the Superior Court of New Jersey, where the judgment was docketed.
- Joseph Downey defaulted on the judgment. No levy or execution occurred, and Golden received no payment.
- The Chapter 7 trustee sought to sell New Jersey real property owned by the debtors and filed an adversary proceeding against Golden, New Jersey, and other potential lienholders to determine the extent, validity, and priority of any liens affecting the property.
- Only Golden and New Jersey responded. The trustee argued the workers’ compensation lien was an unlevied judicial lien avoidable under 11 U.S.C. § 544(a)(1).
- New Jersey argued the lien arose from the workers’ compensation statute and was a statutory lien (addressed under the Bankruptcy Code’s statutory-lien provisions), not avoidable under § 544(a)(1).

## Issues

1. Whether the lien arising from a New Jersey workers’ compensation award that is filed and docketed in the Superior Court is a “statutory lien” under 11 U.S.C. § 101(53) or a “judicial lien” under 11 U.S.C. § 101(36).
2. If the lien is statutory, whether a Chapter 7 trustee may avoid it using the strong-arm powers of 11 U.S.C. § 544(a)(1) based on the absence of any levy or execution.

## Decision

- The court held that the lien created by the New Jersey workers’ compensation scheme was a statutory lien, not a judicial lien.
- The court ruled that the statutory requirement to file and docket the award/judgment in the Superior Court functioned as a step that makes the statutory lien effective, not a transformation of the lien into a judicial lien.
- Because § 544(a)(1) targets interests that can be defeated by a hypothetical judgment lien creditor and does not authorize avoidance of a valid statutory lien on that theory, the trustee could not avoid the workers’ compensation lien under § 544(a)(1).
- Judgment was entered against the trustee on the avoidance theory, leaving the workers’ compensation lien in place against the property (and, if sold, against the proceeds) according to applicable state-law priority.

## Legal Principles

- A “judicial lien” is a lien “obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” 11 U.S.C. § 101(36).
- A “statutory lien” is a lien “arising solely by force of a statute on specified circumstances or conditions,” and not a security interest or judicial lien. 11 U.S.C. § 101(53).
- A lien may be statutory even when a statute requires filing, docketing, or similar recordation to make the lien effective against third parties; the classification turns on whether the right to the lien exists because the statute grants it upon stated conditions.
- Section 544(a)(1) gives a Chapter 7 trustee the rights of a hypothetical judgment lien creditor as of the petition date, but it does not permit the trustee to recharacterize a state-created statutory lien as a judicial lien merely because the statute uses a judgment-and-docketing mechanism.
- The absence of levy or execution is relevant to the creation and perfection of many judgment liens, but it does not defeat a statutory lien that arises under a statute once its statutory prerequisites (including docketing, if required) are satisfied.

## Conclusion

In re Downey held that New Jersey’s workers’ compensation scheme creates a statutory lien for an unpaid award against an uninsured employer once the award materials are filed and docketed as the statute directs, and that this ministerial court filing does not convert the lien into an avoidable judicial lien; therefore, the Chapter 7 trustee could not avoid the lien under § 544(a)(1).


In re Downey, 261 B.R. 124 (2001)