decided as amended january 26 1982.: January 6, 1982.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA (Bankruptcy Court -- Wilkes-Barre)
Before Gibbons and Higginbotham, Circuit Judges and Meanor, District Judge.*fn*
This appeal presents questions of first impression: the applicability to Pennsylvania cognovit notes of the exemption provision of Section 522(f) of the Bankruptcy Reform Act of 1978, 11 U.S.C. § 522(f) (Supp.III 1979); and if that section is applicable to cognovit notes, its constitutionality. The case is before us on appeal from a bankruptcy judge upon agreement of the parties under that Act, Pub.L.No. 95-598, Title IV, § 405, 92 Stat. 2685 (1978). The bankruptcy judge held that the lien of a cognovit note was a judgment lien subject to avoidance to the extent permitted by Section 522, and that as applied the section is constitutional. We affirm.
In 1973, Charles E. Ashe and Susan J. Ashe (the Debtors) borrowed $45,287.62 from the Commonwealth National Bank (the Bank). This commercial loan was evidenced by a promissory note containing a confession of judgment clause in the form commonly used in Pennsylvania. The judgment note was duly filed with the Prothonotary's Office of the Court of Common Pleas of Dauphin County. At that time the Debtors owned two pieces of real estate in Dauphin County, one of which was their residence. The note was refiled in 1978 in the amount of $43,733.47. The loan became delinquent, and on May 30, 1979, the Bank filed a complaint in assumpsit in the Court of Common Pleas of Dauphin County. This action was necessary because under Pennsylvania law, in order to obtain a writ of execution on residential property, a separate action is required in addition to the cognovit note judgment. Judgment in the separate action merges, so that the judgment lien relates back to the date the confessed judgment note was filed.*fn1 The Bank obtained a default judgment for $54,010.83, and a writ of execution was issued on August 31, 1979. An execution sale was scheduled for October 11, 1979, but on October 10, the Debtors filed a Petition under Chapter 7 of the Bankruptcy Reform Act, 11 U.S.C. § 701 et seq. This resulted in a stay of the execution sale.
The Bankruptcy Reform Act provides that "... an individual debtor may exempt from property of the estate ... property that is specified in subsection (d)...." 11 U.S.C. § 522(b)(1). Subsection (d) permits exemption of "(t)he debtor's aggregate interest, not to exceed $7,500 in value, in real property or personal property that the debtor ... uses as a residence...." 11 U.S.C. § 522(d)(1). The debtors claimed exemptions with respect to their Dauphin County residence in the aggregate amount of $15,000. When their bankruptcy petition was filed, the fair market value of the residence did not exceed $50,000, while encumbrances on it listed on their Bankruptcy Schedule A-2 (Creditors Holding Security) totaled $85,244.79. These encumbrances included liens having priority under Pennsylvania law over that of the Bank totaling $9,118.49. Thus the prior encumbrances and the Bank's lien exceeded the fair market value of the residence.
The Bankruptcy Reform Act also provides that "(notwithstanding) any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is-(1) a judicial lien...." 11 U.S.C. § 522(f)(1). The Bank filed a timely objection to the allowance of the $15,000 exemption insofar as its lien would be impaired, but after a hearing the Bankruptcy Court held that the lien was a judgment lien, avoidable by virtue of Section 522(f)(1). The economic effect of this ruling is to increase interests in the residence having priority over the Bank's lien by $15,000. Thus if an execution sale brought a bid of $50,000 the Bank would recover only $25,881.51, rather than $40,881.51. The Bank contended that if Section 552(f)(1) was so applied, it was unconstitutional. That contention was rejected by the Bankruptcy Court, and this appeal followed.*fn2
The Bank contends that the court erred in holding that the lien of a cognovit note is a judicial lien within the meaning of Section 522(f)(1). Since a decision in its favor on that question would avoid the necessity for considering the Bank's contention that the law is unconstitutional, we turn to that question first. The term "judicial lien" is defined in the Bankruptcy Reform Act as a "lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding." 11 U.S.C. § 101(27). The term "lien" is defined as a "charge against or interest in property to secure payment of a debt or performance of an obligation." 11 U.S.C. § 101(28). Thus a "judicial lien" is a charge against or interest in property to secure payment of a debt, obtained by judgment or other legal proceedings. Only such liens are avoidable under Section 522(f)(1). A "security interest", defined as a "lien created by an agreement," 11 U.S.C. § 101(37), is not avoidable under that section.*fn3 Thus a mortgage, for example, is a lien, since it is a charge against or interest in property to secure payment of a debt. It is not, however, affected by Section 522(f)(1) because the charge against or interest in property is created by a conveyance or contract rather than by a judgment or other legal proceeding.
Under Pennsylvania law a confession of judgment for money "may be entered by the prothonotary ... without the agency of an attorney and without the filing of a complaint, declaration, or confession, for the amount which may appear to be due from the face of the instrument." Pa.Rules Civ.P. 2951(a), 42 Pa.Cons.Stat.Ann. (Purdon 1975).*fn4 Once entered, the judgment note, as in the case of a litigated judgment, results in a lien upon all real property of the debtor in the county of filing. 42 Pa.Cons.Stat.Ann. § 4303 (Purdon 1981); Scott Factors, Inc. v. Hartley, 425 Pa. 290, 228 A.2d 887 (1967); In re Fell, 18 F. Supp. 989 (E.D.Pa.1937). Moreover, the priority of such liens is determined by the date they are left for entry by the prothonotary. 42 Pa.Cons.Stat.Ann. § 8141 (Purdon Pamph. 1981). As a practical matter, therefore, the taking of a cognovit note in connection with a loan to an owner of real estate serves most of the same functions as a mortgage. The chief difference between the two security devices is that a mortgage requires a conveyance of specific property, while the cognovit note creates a lien on all real property of the debtor in the county, with no need for a description or conveyance. The Bank contends that because cognovit notes are consensual undertakings they should be treated, like mortgages, as "security interests" rather than "judicial liens." But that is equally true of consent judgments settling initially litigated matters. With either, the lien is created not by the agreement, but by the judgment. Literally, both a filed cognovit note and a consent judgment fit within the definition of "judicial lien" in 11 U.S.C. § 101(27).
When Congress wrote the definitions of judicial lien and security interest, the cognovit note problem was not unknown. Under prior sections 60 and 61 of the Bankruptcy Act dealing with voidable preferences including liens obtained by judgment, those obtained by confession were considered to be ordinary judgment liens. See In re Fell, 18 F. Supp. 989, 991 (E.D.Pa.1937); Nogi v. Greenwood, 1 F. Supp. 60, 62-63 (M.D.Pa.1932); In re Albright, 18 F.2d 591, 592 (E.D.Pa.1927), aff'd sub nom. Shick v. Goodman, 33 F.2d 291 (3d Cir.), cert. denied, 280 U.S. 561, 50 S. Ct. 19, 74 L. Ed. 616 (1929); Greenberger v. Schwartz, 261 Pa. 265, 104 A. 573 (1918); 4 Collier on Bankruptcy 116, P 67.08 n.1 (14th ed. 1978). Given that background, and in the absence of any indication in the legislative history of the Bankruptcy Reform Act that something else was intended, we would not be justified in rewriting Section 522(f)(1) and Sections 101(27) and (28) so as to treat cognovit note judgment liens differently from all other judgment liens. Thus we reject the Bank's contention that Section 522(f)(1) is inapplicable.
The holding in Part II requires the consideration of the Bank's constitutional challenge. It contends that prior to the enactment of the Bankruptcy Reform Act it had a valid property interest under Pennsylvania law in all the Debtor's real estate in Dauphin County, and that retroactive application of the exemption provision in Section 522(f)(1) would be a taking of that property interest, to the extent of $15,000, without due process of law. In advancing that contention the Bank relies chiefly on Louisville Joint Stock Bank v. Radford, 295 U.S. 555, 55 S. Ct. 854, 79 L. Ed. 1593 (1935), which held unconstitutional certain provisions of the Frazier-Lemke Act, Pub.L.No. 486, ch. 869, 48 Stat. 1289 (1934). The United States, which intervened in the ...