In re Middleton

544 B.R. 449

In re: Stephen M. Middleton, Allyson N. Singley, Jennifer Pistole, Crystal R. Vinson, Leonard G. Thiewes and Michele M. Thiewes, Diana C. Chapman, Thomas Marshall Marr, Jr., James A. Harper, Tamarcus Jerome Monigan, Melissa Jerkins Zak, Mary Paige Rabren, Brad A. Shelton, Terri L. Justice, Timmie Eugene Godwin and Simone Godwin, Joanne O. Brodie, Willie E. Niles and Lula L. Niles, Rhodongia R. Cleveland, Scott N. Murphy, Elijah Howard and Shelia Yelding Howard, Patsy Bayer, Joseph S. Skelton and Marty M. Flirt, Monica Latrese Hegler, Tiffany M. Murray, Brandon W. Saksa, Carolyn E. Reid, Angela R. Shaffer, Susan D. Ernandez, Carola A. Conrad, Alicia V. Shamberger, Robert Kimbrough, Gabrielle S. Morgan, Gwendolyn Mitchell LeFoy, Walter Raymond Lister and Barbara Jean Lister, Rickie Earl Dailey, Jr., Lana Joy Phillips, Darrell V. Miller and Charlene D. Miller, Shermiane Cartez Hall, Philip Wayne Linton and Peggy Ray Linton, Byron Cowan, Jr. and Constance Cowan, John F. Herman, Evelyn F. Ellzey

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United States Bankruptcy Court, S.D. Alabama.

Signed January 15, 2016

Irvin Grodsky, Mobile, AL, for Stephen M. Middleton.

OPINION

HENRY A. CALLAWAY and JERRY C. OLDSHUE, JR., U.S. BANKRUPTCY JUDGES

These cases present an issue which last vexed Alabama bankruptcy petitioners and judges in the early 1980's: how to apply a change in Alabama's exemption limits—which by statute are based on the date of debt—to bankruptcy cases with dozens of debts? We find that, under the binding authority of First National Bank v. Norris, 701 F.2d 902 (11th Cir.1983), the "old" exemption limits apply in Chapter 7 cases where all the debts were incurred prior to the exemption change. But for "mixed" cases involving debts incurred both before and after the exemption change, Bankruptcy Code § 726(b)'s mandate that claims of the same class be paid "pro rata" prohibits apportionment of payments to unsecured creditors based upon the date of debt. After examining various options, the Court finds that applying the exemption limits as of the date of the petition in "mixed debt" Chapter 7 cases complies with § 726(b) and is the approach most consistent with bankruptcy law and other state laws.

Jurisdiction

The two undersigned bankruptcy judges heard oral argument on the trustees' objections to exemptions in the 41 above-listed Chapter 7 cases on December 11, 2015. The Court has jurisdiction to hear the matter pursuant to 28 U.S.C. §§ 1334 and 157 and the order of reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), and the Court has authority to enter a final order. However, this opinion is not a final order. Because the entry of an order on exemptions will involve a review of the claims in each Chapter 7 case, the Court will set the cases for separate hearings to determine the exemptions available in each particular case pursuant to the guidelines set out in this opinion. The rulings in this opinion will be incorporated in a final order on objections to exemptions which will be entered separately in each case.

Discussion

On June 11, 2015, Alabama amended the state's homestead and personal property exemptions for the first time in over thirty-five years. The personal property exemption was raised from $3,000 to $7,500, and the homestead exemption was raised from $5,000 to $15,000. Alabama Code §§ 6–10–2, 6–10–6. A new provision found at § 6–10–12 provides that every three years, beginning in April 2018, the exemption limits shall be adjusted to reflect the cumulative change in the federal Consumer Price Index.

Although the Bankruptcy Code provides for both state and federal exemptions, it allows states to "opt out" of the federal exemptions altogether, which Alabama has done. 11 U.S.C. § 522(b)(2) ; Alabama Code § 6–10–11. Alabama bankruptcy debtors are thus limited to the state exemptions. By comparison, the current federal bankruptcy exemptions are $3,675 for a motor vehicle, $12,250 for household items, and $22,975 for homestead. 11 U.S.C. § 522(d).

The problem with applying Alabama exemptions in bankruptcy court is caused by Alabama Code § 6–10–1, which provides that the exemptions as of the date of debt apply:

The right of homestead or other exemption shall be governed by the law in force when the debt or demand was created, but the mode or remedy for asserting, ascertaining, contesting, and determining claims thereto shall be as prescribed in this chapter.

Application of this "date of debt" provision is straightforward enough in the usual state court context of a creditor suing a debtor on one note or debt. But the statute, which predates both the 1898 Bankruptcy Act and the 1978 Bankruptcy Code, does not fit perfectly in the context of a single bankruptcy case with numerous debts arising on different dates.

The applicable exemptions in a Chapter 7 determine what the debtor will be allowed to keep when making the "fresh start" envisioned by the bankruptcy process. The Chapter 7 trustee liquidates all property of the estate that is not exempt and distributes the proceeds to creditors pursuant to the distribution scheme of Bankruptcy Code § 726. If the debtor wants to keep personal property or homestead valued at more than the applicable exemption, he can "buy back" the property from the trustee by either paying cash or agreeing to pay over time. For example, assume a Chapter 7 debtor under the pre-June 2015 law owns a vehicle worth $5,000 with no lien on it. Even if he has no other personal property whatsoever, he must pay the trustee the $2,000 over and above his $3,000 exemption in order to keep the car. The debtor thus in effect pays twice for the vehicle—once to the original seller and then (at least for a significant portion) again to the trustee.

Pure "old debt" cases. The Eleventh Circuit considered the application of Alabama Code § 6–10–1 in the context of a Chapter 7 case where all the debts predated the exemption change in First National Bank v. Norris , 701 F.2d 902 (11th Cir.1983). Prior to May 19, 1980, Alabama's homestead exemption was $2,000, to be shared by joint debtors; on that date, it was increased to $5,000, which could be claimed by each debtor in a joint case. Id. at 903–4. The married debtors in Norris claimed a $10,000 joint homestead exemption based upon the amended law even though all their debts predated the change in law. The Eleventh Circuit found that Bankruptcy Code § 522(b)(3),¹ which provides for state's exemptions that are "applicable on the date of the filing of the petition," incorporates all of the state exemption law, including the "date of debt" provision of Alabama Code § 6–10–1. Id. at 905. The court thus ruled that the old exemptions applied in a pure "old debt" Chapter 7 case.

The debtors here argue that Norris is no longer good law for two reasons. First, debtors argue that the inflation index provision found in the new Alabama Code § 6–10–12 implicitly repeals Alabama Code § 6–10–1's "date of debt" provision in favor of a "date of claiming" rule:

On July 1, 2017, and at the end of each 3–year period thereafter, the State Treasurer shall adjust each dollar amount in this article or, for each adjustment after July 1, 2017, each adjusted amount, by an amount determined by the State Treasurer to reflect the cumulative change in the Consumer Price Index (CPI) as published by the United States Department of Labor, or, if that index is no longer published, a generally available comparable index, for the 3–year period ending on the December 31, preceding the adjustment date and rounded to the nearest twenty-five dollars ($25.00). The State Treasurer shall publish the adjusted amounts. The adjusted amounts apply to exemptions claimed on or after April 1, following the adjustment date.

[Emphasis added.] The last sentence of § 6–10–12 appears inconsistent with the "date of debt" provision of § 6–10–1. However, at least in the context of this case, the Court finds that the new § 6–10–12 does not amend or repeal § 6–10–1 by implication. Alabama Constitution Article IV, Section 45 requires a statute to list specifically any prior laws it is amending, which did not occur with respect to § 6–10–1. And the indexing provision of § 6–10–12 does not take effect until April 2018; there may be an argument as to implicit amendment or repeal in 2018, but it is not yet ripe.

Second, debtors contend that U.S. v. Security Industrial B an k , 459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982), cited by the Eleventh Circuit in Norris, has been subsequently overruled in Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991), and thus the rationale of Norris has been undermined. Even if that were true, until the Eleventh Circuit overrules Norris, it is still binding precedent in this circuit and on this court. See Rodriguez De Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 484, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989) (the court of appeals should follow its precedent in a directly controlling case even if it "appears to rest on reasons rejected in some other line of decisions"). Moreover,...