The Enforceability of Restitution Liens Under the Mandatory Victims Restitution Act
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 18 U.S.C. §16; (2) an offense against property under Title 18, including any offense by fraud or deceit or an offense under 18 U.S.C. §1365 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 Internal Revenue Code of 1986." 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 26 U.S.C. §6323(b), (c) and (d).2 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 26 U.S.C. §6321, and (3) the taxpayer must refuse or neglect to pay the tax due. The lien is recorded in accordance with state law. 26 U.S.C. §6323(f). 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.
Is a Restitution Lien a Judicial or Statutory Lien?
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." 11 U.S.C. §101(36). 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 U.S.C. §101(53). In In re Holmes, 1998 WL 19489 (N.D. Cal. Jan. 5, 1998), 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.3
Similarly, the United States argued in Reasonover v. United States (In re Reasonover), 236 B.R. 219 (Bankr. E.D. Va. 1999), subsequently remanded by 238 F.3d 414 (4th Cir. 2000), on remand on other grounds, 2001 WL 1168181 (Bankr. E.D. Va. April 16, 2001), 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. Reasonover, 236 B.R. at 237. However, §3613(e) does not address unperfected liens that arise upon entry of judgment but before recordation. See United States v. West Indies Transport Co. Inc., 35 F.Supp. 2d 450, 455 (D. V.I. 1998). 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. Id. 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. Id. Therefore, the lien was avoidable.
What Priority Does a Restitution Lien Have in Bankruptcy?
The Supreme Court's ruling in Kelly v. Robinson, 479 U.S. 36 (1986), 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 In re Bennett, 237 B.R. 918 (Bankr. N.D. Tex. 1999),4 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 Internal Revenue Code of 1986. 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." Id. at 923.5
Who Can Enforce a Restitution Lien?
Obviously, the United States can enforce restitution liens under §3613. However, can a victim enforce the restitution obligation? In Auclair v. Sher, 63 F.3d 407 (5th Cir. 1995), 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. Id. at 409. 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. Id. 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.6
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.
3 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. Return to article
5 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 Dowdy v. Charter Financial Group Inc., 122 F.Supp. 2d 1347 (M.D. Fla. 2000). Return to article