Redstone Fed. Credit Union v. Brown, Case No.: 5:18-cv-00161-MHH

REDSTONE FEDERAL CREDIT UNION, Appellant, v. STEVEN EDWARD BROWN, Appellee.

Case No.: 5:18-cv-00161-MHH

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ALABAMA NORTHEASTERN DIVISION

February 13, 2019

MEMORANDUM OPINION AND ORDER

In this action, appellant Redstone Federal Credit Union challenges a Bankruptcy Court order overruling Redstone's objection to appellee Steven Brown's claim of a homestead exemption "in an amount up to $15,000," the maximum exemption available under Alabama law when Mr. Brown filed his Chapter 13 bankruptcy petition. Redstone argues that Mr. Brown is entitled to an exemption of only $5,000, the maximum exemption available under Alabama law when Mr. Brown incurred the debt that produced a judgment lien on his property. For the reasons discussed below, the Court affirms the Bankruptcy Court's order.

I. JURISDICTION AND STANDARD OF REVIEW

The Court has jurisdiction over Redstone's appeal under 28 U.S.C. § 158(a)(1). Section 158(a)(1) states: "The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees . . . of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title." 28 U.S.C. § 158(a)(1).

A district court "functions as an appellate court in reviewing bankruptcy decisions." In re Piper Aircraft Corp., 362 F.3d 736, 738 (11th Cir. 2004) (quoting In re Glados, 83 F.3d 1360, 1362 (11th Cir. 1996)). "In reviewing a bankruptcy court judgment as an appellate court, [a] district court reviews the bankruptcy court's legal conclusions de novo." In re Englander, 95 F.3d 1028, 1030 (11th Cir. 1996).

II. PROCEDURAL HISTORY AND FACTUAL BACKGROUND

Mr. Brown owns property in Hartselle, Alabama. (Doc. 4-13, p. 10). On May 27, 2016, Redstone obtained a $5,355.34 judgment plus $282.30 in court costs against Mr. Brown. (Doc. 4-4, p. 3). The judgment is based on credit card debt. The purchases that constitute the credit card debt occurred in February of 2014. (Doc. 4-18, pp. 1, 5). On July 11, 2016, Redstone recorded the judgment in Morgan County, Alabama. (Doc. 4-4, p. 3). The judgment became a lien against Mr. Brown's Hartselle property.

On November 3, 2017, Mr. Brown filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Northern District of Alabama. (Doc. 4-13). In his bankruptcy schedule of assets, Mr. Brown valued the Hartselle propertyat $109,900 (Doc. 4-13, p. 10) and indicated that Fay Servicing is a secured mortgagee of the property with a claim of $100,203 in the property (Doc. 4-13, p. 18). Thus, according to his bankruptcy petition, Mr. Brown holds $9,697 in equity in the Hartselle property. In his bankruptcy petition, Mr. Brown claimed a homestead exemption of $10,916.95 for the Hartselle property. (Doc. 4-13, p. 16).

On December 20, 2017, Mr. Brown asked the Bankruptcy Court for an order "avoiding the judicial lien" on the Hartselle property. (Doc. 4-16, p. 1). Relying on the homestead exemption in place when he filed his bankruptcy petition, Mr. Brown argued that there was "no equity in said property for the lien to attach." (Doc. 4-16, p. 2, ¶ 6). On December 27, 2017, Redstone answered the motion and requested a hearing. (Doc. 4-20).

On January 2, 2018, Redstone objected to Mr. Brown's request for "an exemption of the equity in the real estate in an amount up to $15,000." (Doc. 4-16, p. 2, ¶ 5; Doc. 4-18). Redstone argued that Mr. Brown's homestead exemption should not exceed $5,000 because Alabama Code § 6-10-1 states: "The right of homestead or other exemption shall be governed by the law in force when the debt or demand was created.'" (Doc. 4-18, p. 1, ¶ 6). Redstone argued that Mr. Brown's debt arose in February of 2014, and, at the time, Alabama law capped homestead exemptions at $5,000. (Doc. 4-18, p. 1, ¶ 7).

During a hearing on January 22, 2018, the Bankruptcy Court overruled Redstone's objection. (In re Brown, No. 17-83317-CRJ (Bankr. N.D. Ala. 2018) Jan. 22, 2018, hearing audio transcript (on file with the Court) 10:24:10 a.m. (hearing time); 2:33 (tape time)). The Bankruptcy Court stated that it had ruled against Redstone on this identical issue previously. (Id. at 10:22:02 a.m. (hearing time); 0:21 (tape time)). The Bankruptcy Court added: "There also are mixed debts in the case where the [ ] exemption [ ] under ruling by my colleague down in the Southern District would be you follow the new exemption." (Id. at 10:22:36 a.m. (hearing time); 0:56 (tape time)). In an order dated January 23, 2018, the Bankruptcy Court ruled:

For the reasons stated on the record and in conformity with prior decisions of the Court holding that Alabama's new homestead exemption in effect on the petition date is controlling in mixed debt cases, the Court finds that the Objection to Debtor's Claim of Exemptions should be denied.

(Doc. 4-19, p. 1).

III. ANALYSIS

Section 6-10-2 of the Alabama Code governs homestead exemptions. When Mr. Brown filed his bankruptcy petition in 2017, Section 6-10-2 provided (and still provides):

The homestead of every resident of this state, with the improvements and appurtenances, not exceeding in value fifteen thousand dollars ($15,000) . . . , shall be, to the extent of any interest he or she may have therein, . . . exempt from levy and sale under execution or otherprocess for the collection of debts during his or her life and occupancy . . . .

ALA. CODE § 6-10-2 (1975). The Alabama Legislature increased the exemption from $5,000 to $15,000 in 2015. 2015 Alabama Laws Act 2015-484 (S.B. 327). In his bankruptcy petition, Mr. Brown reported debts that he incurred before and after the Alabama Legislature amended § 6-10-2. (Doc. 4-13, p. 18-25). Thus, this is a "mixed" debt case. A mixed debt bankruptcy case is a case "with debts arising both before and after the June 11, 2015 change in exemption limits." See In re Middleton, 544 B.R. 449, 454 (Bankr. S.D. Ala. 2016) (emphasis in original).

Relying on Alabama Code § 6-10-1, Redstone argues on appeal that the proper homestead exemption amount is $5,000, the statutory exemption amount in effect when Mr. Brown made the credit card charges that eventually produced a judgment lien of just over $5,500, the debt which Redstone seeks to recover. (Doc. 5). Redstone also argues that precedent concerning "mixed debt" cases should not apply where "only a single creditor has objected to its treatment under the plan." (Doc. 5). Before addressing Redstone's arguments, the Court examines the doctrine of merger, a concept that is fatal to Redstone's appeal.

A. Merger

Redstone's argument concerning Alabama Code § 6-10-1 proceeds from the premise that the debt that the company seeks to enforce was created in 2014. As a matter of law, that is not so.

Under Alabama Code § 6-10-1, "[t]he right of homestead or other exemption shall be governed by the law in force when the debt or demand was created." Redstone argues that Mr. Brown is entitled to only the $5,000 homestead exemption in effect in 2014 when Mr. Brown made credit card charges because these are the charges that gave rise to the debt for which Redstone eventually sued Mr. Brown in state court. (Doc. 5, p. 6; see also Doc. 4-18, p. 1). But Redstone does not seek to recover the credit card charges; Redstone seeks to recover its 2016 judgment lien of just over $5,500. (Doc. 5, pp. 6-7; Doc. 4-18, p. 1, ¶¶ 1, 4).¹

As a matter of law, this debt - the judgment lien - is separate from the underlying debt, and the lien is separate from the judgment on the underlying debt. With respect to the judgment itself, it is well-settled that a debt merges into a judgment on the debt, and the debt ceases to exist. Wilson v. Taylor, 8 So. 149, 150 (Ala. 1870) (once a creditor obtains a judgment on a debt, "the debt is merged into the judgment"); Hare v. Hartley, 349 So. 2d 1151, 1152 (Ala. 1977) (same); In re Bernard, 152 B.R. 1016, 1021 (Bankr. S.D. Fla. 1993) ("the causes of action for alleged conversion and violation of a constructive trust were settled in the Circuit Court of Florida and a Final Judgment was entered by that court for default by the Debtor of payments under a stipulation approved by the court. This resulted in amerger of the causes of action in a judgment with the old debt ceasing to exist and the new judgment debt taking its place."). Here, the judgment on the underlying credit card debt was created on May 27, 2016 (Doc. 4-4, p. 3). Thus, the new judgment debt was created after the Alabama Legislature increased the homestead exemption from $5,000 to $15,000.

Moreover, the judgment lien relating to the May 2016 judgment is a contract right separate and apart from the judgment debt. See generally In re Gayle, 189 B.R. 914, 920 (Bankr. S.D. Tex. 1995) ("a judgment on an underlying debt does not destroy a lienor's right to nonjudicial foreclosure since a note and a lien are two separate and severable contractual rights held by a mortgagee"); Wilson, 8 So. at 150. The judgment lien was created on July 11, 2016. (Doc. 4-4, p. 3). Thus, the judgment lien - the debt which Redstone seeks to enforce - was created after the Alabama Legislature increased the homestead exemption from $5,000 to $15,000.²

Consequently, in this case, Redstone does not hold a debt that was created before the Alabama Legislature increased the homestead exemption from $5,000 to $15,000. In the absence of a pre-amendment debt, Redstone has no basis for its appeal. Nevertheless, assuming for argument's sake that Redstone has a pre-amendment debt, the Court will review the analysis set out in Redstone FederalCredit Union v. Whited, 584 B.R. 71 (Bankr. N.D. Ala. 2018), a decision in which the Court held that in mixed debt cases, a debtor may claim the homestead exemption in place on the date the debtor filed his bankruptcy petition.

B. The petition date test for Chapter 13 mixed debt cases

A federal statute, 11 U.S.C. § 522, governs property exemptions in bankruptcy. Tha...