IN THE MATTER OF MASCENIK, (D.Colo. 7-16-1980)

JIM CARRIGAN, District Judge

This matter is before the Court on appeal from a decision of the United States Bankruptcy Court for the District of Colorado. This Court has jurisdiction pursuant to 28 U.S.C. § 1334, as amended by § 238(a) of the Bankruptcy Reform Act, Pub.L. No. 95-598 (1978). The Court has considered the briefs, oral argument, and the record of proceedings before the Bankruptcy Court. Accordingly, the case is ripe for decision.

In January, 1979, the defendant-appellee (Ryan) filed an action in the District Court for the County of Boulder, Colorado, to foreclose a landlord's lien claimed on certain personal property owned by the petitioners-appellants (Masceniks). A summons and complaint in that proceeding were served on the Masceniks on January 24, 1979. The summons stated the name and county of the court, the civil action number, and the parties' names, and required the Masceniks to file an answer or other response to the complaint within twenty days after service. The Masceniks did not timely file an answer, enter an appearance, or otherwise respond to the complaint. The state court entered default judgment on March 2, 1979. Pursuant to that judgment, which stated that Ryan had a valid lien, the subject property was sold at public auction on May 26, 1979.

Based on this series of events, and in conjunction with a Chapter 13 bankruptcy petition filed on October 15, 1979, the Masceniks brought the instant adversary proceeding in Bankruptcy Court. The complaint in this case alleged four claims for relief: (1) to recover the value of the property sold at foreclosure on a conversion theory; (2) to recover damages pursuant to Colorado statutes for Ryan's alleged failure to comply with lien foreclosure procedures; (3) to obtain a declaratory judgment that, because of a defect in the summons, the state court did not have jurisdiction to determine the validity of the landlord's lien, and therefore that the state court judgment was void; and (4) to recover the property's value on a lien avoidance theory pursuant to 11 U.S.C. § 545.

Ryan moved to dismiss all four claims under Rule 712(b) of the Rules of Bankruptcy, and the Bankruptcy Court granted the motion. The Masceniks now appeal the dismisal, but only as to the first, third, and fourth claims.

The Bankruptcy Court held, and the parties apparently concur, that the first and third claims for relief are barred by res judicata unless the state court judgment was void for lack of personal jurisdiction over the Masceniks. The validity of that judgment in turn depends on the import of a defect in the summons served upon the Masceniks.

Section 38-20-108(2), C.R.S. 1973, as amended, sets forth the following requirements for a summons in a landlord's lien foreclosure action:

"(2) Upon filing the complaint, the clerk of the court shall issue a summons as in other cases; except that it shall command the defendant to appear before the court at a place named in such summons and at a time and on a day which shall be not less than three nor more than five days from the day of issuing the same to answer the complaint of plaintiff."

It is not disputed that the summons served on the Masceniks did not comply with these special requirements, but simply required that the complaint be answered within twenty days as in any other civil action.

The Bankruptcy Court held, however, that this defect was not sufficient, under Colorado law, to render the summons a nullity and deprive the state court of jurisdiction to enter the default judgment. Therefore that Court held that the first and third claims were barred by res judicata.

The Masceniks rely principally on Fletcher v. District Court, 137 Colo. 143, 322 P.2d 96, 97 (1958), in which the court stated: "It is settled law in [3] Colorado that a summons which does not meet the requirements of the law is a nullity." The court also stated that if the summons is void, there can be no jurisdiction over the parties. The Masceniks also cite Smith v. Aurich, 6 Colo. 388 (1882), in which the court stated that a summons must contain all that is required by statute, "whether deemed needful or not."

On the other hand. seemingly directly contradicting Fletcher, the Colorado Supreme Court made the following statement in Clark v. National Adjusters, Inc., 140 Colo. 593, 348 P.2d 370, 372 (1959):

"It is well established in Colorado that service of process will not be set aside for a mere technical error, defect, or omission . . . in the summons . . . where the error, defect or omission affects no substantial rights of the defendant."

The Clark opinion concluded that the defects in question in that case could have had no material effect on the defendant's rights. See also Rich v. Collins, 12 Colo. App. 511, 56 P.2d 207, 208 (1899) ("It is manifest, without argument, that a defect in the summons which will be sufficient to constitute it void or erroneous must be of such character as to mislead the defendant to his prejudice, and to prejudicially affect, or tend to so affect, some substantial right.")

The Fletcher and Clark cases are apparently irreconcilable, and the problem is made no easier by the fact that the Clark opinion does not even cite, let alone discuss, Fletcher. However, the slightly more recent Clark opinion correctly notes that its less technical rule is more consistent "with our modernized Rules of Civil Procedure . . ." 348 P.2d at 372. The rationale of Clark, together with the fact that it was decided after Fletcher, indicates that it states the controlling Colorado law.

The next question is whether, under Clark, the defect in the instant summons was prejudicial to any "substantial right" of the Masceniks. As the Bankruptcy Court noted, the summons could not have prejudiced the Masceniks because it simply enlarged the time period within which they could answer the complaint. It may be, as the Masceniks argue, that the requirements in section 38-20-108 "must" be "material" because the legislature would presumably not have added them if they were not. Nevertheless, the question here is whether Ryan's failure to comply with those requirements in this case resulted in any prejudice to the Masceniks. This Court cannot perceive that it did. Therefore the state court had jurisdiction to enter default judgment against the Masceniks, and their first and third claims are barred by res judicata.

In their fourth claim, the Masceniks attempted to avoid the landlord's lien pursuant to 11 U.S.C. section 545, which provides in applicable part that "[t]he trustee may avoid the fixing of a statutory lien on the property of the debtor to the extent that such lien . . . is for rent . . ." The Bankruptcy Court held that "[b]ecause the property has already been sold, there is no property interest against which a charge or interest is asserted by the Defendant, and hence no `lien' within the meaning of 11 U.S.C. section 101(28) to be avoided."

The question is whether a landlord's lien, after it has been reduced to judgment and the property has been sold, is an avoidable "statutory lien" within the meaning of section 545. A "statutory lien" is defined in 11 U.S.C. section 101(38) as a "lien arising solely by force of a statute on specified circumstance or conditions, or a lien of distress for rent, whether or not statutory . . ." "Lien" is further defined in section 101(28) as a "charge against or interest in property to secure payment of a debt or performance of an obligation."

As the Bankruptcy Court indicated, the above-quoted definitions imply a present interest in property. The rationale of the Bankruptcy Court's holding was that since the landlord's lien had already been reduced to judgment and the property subject to the lien had been sold prior to filing of the bankruptcy petition, the lien had been fully extinguished and no longer constituted a "charge against or interest in property."

The House Judiciary Report to section 545, however, expressly states that "[t]he trustee may avoid a transfer of a lien under this section even if the lien has been enforced by sale before commencement of the case." H.R. Rep. No. 595, 95th Cong., 1st Sess. 371 (1977). Substantially identical language is contained in S. Rep. No. 989, 95th Cong., 2d Sess. 85 (1978). It is this language which casts the only doubt, in this Court's view, on the Bankruptcy Court's holding, The Bankruptcy Court did not discuss the import of the quoted language, but at this Court's request the issue has been briefed and argued on this appeal. The Court now concludes that the [5] Bankruptcy Court correctly held that in this case there was no lien avoidable under section 545.

The code defines three mutually exclusive categories of liens — judicial liens, security interests (consensual liens) and statutory liens. The definition of statutory liens specifically excludes judicial liens, "whether or not such . . . lien is dependent on a statute and whether or not such interest is made fully effective by statute." 11 U.S.C. section 101(38) (emphasis added). The House Judiciary Report stresses that "a statutory lien is only one that arises automatically, and is not based on an agreement to give a lien or on judicial action." H.R. Rep. No. 595, 95th Cong., 1st Sess. 314 (1977) (emphasis added). A judicial lien, on the other hand, is a "lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding." 11 U.S.C. section 101(27).

Applying the foregoing definitions and distinctions to the landlord's lien provided by Colorado law, it appears that the lien is not simply a "statuory" lien. Although it "arises" automatically upon specified conditions, it is unenforceable until a judicial foreclosure proceeding has been carried through to judgment. Thus, although in some sense the landlord's interest is "made fully effective by statute," to provide any recovery the lien must still be "based on judicial action."

Moreover, even if a landlord's lien could fairly be characterized as a statutory lien at the time it arises; the character of the lien changes once it has been reduced to judgment. At that point, clearly, the only interest the landlord has is that declared by the Court in its judgment. Whether the judgment creates a "judicial lien" as defined in the code. or the lien simply merges in the judgment, the crucial point is that there plainly is no longer a statutory lien as contemplated by section 101(38).

This distinction comports with the policy behind the avoidance powers provided by the Code. The general purpose of section 545 is to limit the ability of lienholders to elevate their status as against other general creditors and frustrate the distribution scheme devised by the Code. See generally 4 Collier on Bankruptcy (15th Ed. 1979), paragraph 545.01. That purpose is not at all contradicted by protecting liens such [6] as Ryan's which have been foreclosed, reduced to judgment, and the debt collected.

On the other hand, to extend the avoidance power to the circumstances presented by this case would be to provide a windfall to the creditors and to unduly penalize the lienholder who has diligently pursued his rights and even obtained and executed upon a judgment prior to the filing for bankruptcy. Given the protection that section 545 provides for persons other than landlords who have perfected their liens prior to filing of the petition, the Court is persuaded that the open-ended avoidance power urged by the Masceniks was not intended to be conferred by section 545.

The language of the House and Senate Reports, providing that a lien is avoidable "even if [it] has been enforced by sale prior to commencement of the case," does not necessarily require the result sought by the Masceniks in this case. There are numerous conceivable situations in which a lien can be "enforced by sale" without being reduced to judgment, and the application of section 545 to those situations can serve the purpose of section 545 without over-extending the avoidance power beyond its intended scope. This Court construes the committee report language not to apply to cases in which a lien has been obtained, perfected, and extinguished pursuant to judicial action, and the property sold pursuant to judicial decree. Accordingly, it is

ORDERED that the judgment of the Bankruptcy Court be and hereby is affirmed, and that the defendant-appellee shall receive the costs of this appeal.