Andrews v. Ernandez

TRUSTEE LYNN HARWELL ANDREWS, Appellant, v. DEBTOR SUSAN D. ERNANDEZ, Appellee.

TRUSTEE LYNN HARWELL ANDREWS Appellant, v. DEBTOR CHARLES B. WILLIAMSON, Appellee.

TRUSTEE LYNN HARWELL ANDREWS Appellant, v. DEBTOR THEODORE SMITH, JR., Appellee.

TRUSTEE LYNN HARWELL ANDREWS Appellant, v. DEBTOR ANGELA R. SHAFFER, Appellee.

CIVIL ACTION NO. 16-0284-CG-C

CIVIL ACTION NO. 16-0285-CG-C

CIVIL ACTION NO. 16-0286-CG-C

CIVIL ACTION NO. 16-0287-CG-C

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION

January 11, 2017

ORDER

These matters are before the Court on appeals from the bankruptcy court, pursuant to 28 U.S.C. § 158(a). The parties have filed appellate briefs, which the court has reviewed. The Court has determined that the facts and legal arguments are adequately presented in the briefs and the record and that the decisional process would not be significantly aided by oral argument. As will be explained below, this Court finds that the bankruptcy court did not err in deciding to overrule the Chapter 7 Trustee's objections to the Debtors' claims of exemptions. Accordingly, the orders appealed in each of these cases will be affirmed.

I. Facts

The facts of these cases are not disputed. All four cases involve debtors who filed for Chapter 7 bankruptcy relief after Alabama amended the state's homestead and personal property exemptions. On June 11, 2015, Alabama raised the personal property exemption from $3,000 to $7,500 and raised the homestead exemption from $5,000 to $15,000. ALA. CODE §§ 6-10-2, 6-10-6. All of the debtors in these cases have debts that arose both before and after the June 11, 2015 amendment. In such "mixed debt" cases the parties dispute the extent to which the new exemptionlimits should apply. The Bankruptcy Court for the Southern District of Alabama ruled in In re Middleton, 544 B.R. 449 (Bankr. S.D. Ala. 2016) that in mixed debt cases the date of the petition determines which exemption limits apply. As such, the new exemption limits were applied to mixed debt cases that were filed after June 11, 2015. In the cases on appeal here, the Trustee objected to the application of the amended exemptions and the bankruptcy court overruled those objections based on In re Middleton. The Trustee now appeals the decisions overruling the objections.

II. Standard of Review

A bankruptcy court's findings of fact are reviewed for clear error, and its legal conclusions and any mixed questions of law and fact are reviewed de novo. Educ. Credit Mgmt. v. Mosley (In re Mosley), 494 F.3d 1320, 1324 (11th Cir. 2007) (citation omitted); Christopher v. Cox (In re Cox), 493 F.3d 1336, 1340 n. 9 (11th Cir. 2007) (citation omitted); FED. R. BANKR. P. 8013. "The district court makes no independent factual findings," but instead reviews "the bankruptcy court's factual determinations under the 'clearly erroneous' standard." In re Colortex Industries, Inc., 19 F.3d 1371, 1374 (11th Cir. 1994) (citation omitted). In the instant cases, the parties do not dispute the bankruptcy court's factual findings, only it legal conclusions. Therefore, this Court's review is de novo.

III. Discussion

The Trustee contends that the exemption to be used should be determined by the date each debt was created. The Trustee argues that under ALA. CODE § 6-10-1,the right of exemption is "governed by the law in force when the debt or demand was created." Section 6-10-1 has been applied to prevent a debtor from claiming the new exemption if the debts were incurred prior to the amendment. In First National Bank of Mobile v. Norris, 701 F.2d 902 (11th Cir. 1983), the Court of Appeals for the Eleventh Circuit addressed the application of a similar homestead exemption increase that went into effect on May 19, 1980. In Norris, the Eleventh Circuit concluded that the debtor was limited to the old exemption where the debts were created prior to the change in Alabama law. Norris found that the new exemptions were prospective. Norris, 701 F.2d at 905. However, in Norris all of the debts in the debtor's estate were created prior to the amendment. Norris was solely an "old debt" case and its application to "mixed debt" cases was not considered by that Court.¹

This Court was previously confronted with the issue of how to apply exemption limits to mixed debt estates after Alabama raised the exemption limits on May 19, 1980.² Goldsby v. Stewart, 46 B.R. 692 (S.D. Ala. 1983); In re Perine, 46B.R. 695 (S.D. Ala. 1983); In re Rester, 46 B.R. 194 (S.D. Ala. 1984). In Goldsby, Judge Pittman found that limiting debtors to the pre-amendment exemptions when some of their debts were incurred after the amendment violates § 6-10-1. Goldsby, 46 B.R. at 694. The Court stated that "[u]nder Alabama law, the applicable exemption is determined by the statute in force when the debt was created." Id. (citing ALA. CODE § 6-10-1). Judge Pittman noted there were problems with this conclusion but stated that the accounting and other problems that arise due to different amounts of exemptions being allowed to different creditors "will probably be of short duration" since the pre-May 1980 exemption claims were then approximately three years old. Id. Judge Pittman then remanded the case to the bankruptcy court to determine the manner in which to apply the exemptions. Id.

In Perine, Judge Pittman again found that § 6-10-1 requires the application of the exemption statute that was in force when a debt was created and thus, that the debtor could not be limited to the pre-May 19, 1980 exemption when some listed debts were created after May 19, 1980. In re Perine, 46 B.R. at 697. "Rather, the pre-May 19, 1980 exemptions apply to the debts incurred prior to May 19, 1980, and the post-May 19,1980 exemptions apply to the debts incurred after that date." Id. Judge Pittman then remanded the case to the bankruptcy court to apply the exemptions consistent with his order. Id.

In Rester, Judge Hand noted the decisions by Judge Pittman in Goldsby and Perine and found that in the case before him the bankruptcy court's attempt to apply the different exemption limits was not proper because it had not engaged inany apportionment. In re Rester, 46 B.R. at 198. The bankruptcy court had allowed the debtor the post-amendment $3,000 personal property exemption for the post-amendment debts, but then allowed any creditors with pre-May 19, 1980 claims to reach up to the excess of $2,000 over the old exemption.³ Id. Judge Hand found that this method did "not [afford] the debtor any advantage to which the new Alabama law entitles him." Id. Judge Hand stated that this resulted in the pre-amendment creditors being granted priority "based on the fortuitous date selected by the Alabama legislature to improve the lot of bankrupts by increasing the Alabama exemptions." Id. at 199. Judge Hand noted that the intent of Congress "was to give all individual debtors a fresh start, not allow some creditors to profit at the expense of the debtor's exemptions." Id. (internal citations omitted). Judge Hand further stated the following:

Strictly applied, Norris does not mandate the Court's holding in this case that exemptions are dependent on the date on which the debt was incurred. There are at least three arguments for rejecting Norris' application in this situation. First, the bankruptcy courts in the other federal districts in Alabama are allowing the debtor a full $3,000.00 exemption in situations like this one. Thus the interest of uniformity in the bankruptcy laws, inclines the Court to reject split exemptions. More important is Congress' scheme for allowing bankrupts to salvage a limited amount of personal property from the financial debacle. Section 522(b) authorizes an "individual debtor" to "exempt from property of the estate", 11 U.S.C. § 522(b) (1979) (emphasis added). The estate is created by the filing of a bankruptcy petition. 11 U.S.C. § 541(a) (1979). Thus, the appropriate date for determining exemptions is the date of filing, not the date of indebtedness. Use of the latter time creates confusion in a process intended to simplify financial problems.

Finally, it is evident from the legislative history that Congress intended some equitable amount of property to be exempt. The "opt-out" provision of section 522(b) does allow states to set exemptions based on local conditions and circumstances. The state exemption need not be identical to the federal exemptions in section 522(d). See, e.g., Rhodes v. Stewart, 705 F.2d 159 (5th Cir.1983). It is argued that the state exemption must not be set so low as to make a mockery of the "fresh start" intended by Congress. See, e.g., Cheeseman v. Nachman, 656 F.2d 60 (4th Cir.1981). There is some reasoning that Congress did not merely defer completely to the states on exemptions. Comporting with this rationale, the low exemptions available under Alabama law before May 19, 1980 would not meet the needs of the present bankruptcy system. It is arguable therefore that construing the new Alabama law as not completely repealing Ala.Code § 6-10-1 (1975) would result in a conflict between the Alabama exemption law and the superior federal Bankruptcy Code. To prevent such a conflict it would be necessary to hold that the new Alabama exemptions apply without regard to the date on which the debt was incurred. Such an approach to the Alabama exemption problem cannot now be applied, as prior opinions of the District have concluded otherwise.

In re Rester, 46 B.R. at 199-200 (footnotes omitted). Thus, Judge Hand believed a Debtor with pre and post-May 19, 1980 debts should be granted the post-amendment exemption, but he found it inappropriate to do so because of Judge Pittman's prior decisions. Instead, Judge Hand held that a pre-amendment creditor (or "old" creditor) would share in the $2,000 difference between the exemption limits to the extent of each old creditor's share in the total unsecured indebtedness. Id. at 201. For instance, if the pre-amendment unsecured claims...