Redstone Fed. Credit Union v. Whited, Case No.: 5:17–cv–00496–MHH

584 B.R. 71

REDSTONE FEDERAL CREDIT UNION, Appellant,

v.Manuel WHITED and Connie Whited, Appellees.

Case No.: 5:17–cv–00496–MHH

United States District Court, N.D. Alabama, Northeastern Division.

Signed March 27, 2018

Jeffrey L. Cook, C. Howard Grisham Attorney at Law, Huntsville, AL, for Appellant.

George John Dezenberg, Jr., Dezenberg & Larsen, P.C., Huntsville, AL, for Appellees.

MEMORANDUM OPINION AND ORDER

MADELINE HUGHES HAIKALA, UNITED STATES DISTRICT JUDGE

Redstone Federal Credit Union appeals from the Bankruptcy Court's order overruling Redstone's objection to Mr. Manuel Whited and Ms. Connie Whited's claim of exemptions and the Bankruptcy Court's order denying Redstone's motion to alter or amend judgment. For the following reasons, the Court affirms the Bankruptcy Court's orders.

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: "[t]he 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).

When it reviews final decisions of a bankruptcy court, the district court functions as an appellate court. In re Piper Aircraft Corp. , 362 F.3d 736, 738 (11th Cir. 2004). "In reviewing a bankruptcy court judgment as an appellate court, the 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

On October 23, 2013, Redstone obtained a $76,768.02 judgment against the Whiteds. (Doc. 1–4, p. 2, ¶ 1). On December 2, 2013, Redstone recorded the judgment in Jackson County, Alabama. (Doc. 1–4, p. 2, ¶ 1). By recording the judgment, Redstone obtained a lien on Mr. Whited's homestead property. (Doc. 5, p. 6). Mr. Whited owned the homestead property before Redstone obtained and recorded the judgment. (Doc. 5, p. 6). When Redstone obtained and recorded the judgment, Alabama's homestead exemption was $5,000 for individuals and $10,000 for jointly owned property. (Doc. 1–4, p. 2, ¶ 1); Ala. Code § 6–10–2.

On June 11, 2015, the Alabama Legislature increased the state's homestead exemption amounts to $15,000 for individuals and $30,000 for jointly owned property. (Doc. 1–4, p. 2, ¶ 2). The same day, the Alabama Legislature enacted Alabama Code § 6–10–12, which provides that every three years, the State Treasurer shall adjust the homestead exemption amount "to reflect the cumulative change in the consumer price index .... The adjusted amounts apply to exemptions claimed on or after April 1 following the adjustment date."

On August 25, 2016, the Whiteds filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Northern District of Alabama. (Doc. 1–4, p. 2, ¶ 2). Creditors filed proofs of claim in the Whiteds' Chapter 13 case for debts that arose both before and after the effective date of Alabama's new homestead exemption. (Doc. 1–4, p. 9, ¶ 27). On September 2, 2016, Redstone filed in the Whiteds' Chapter 13 case a proof of claim secured by the judgment lien on Mr. Whited's property. (Doc. 1–4, p. 2, ¶ 6).

On September 7, 2016, the Whiteds claimed the $30,000 jointly owned property homestead exemption in the property encumbered by Redstone's judgment lien. (Doc. 1–4, p. 2, ¶¶ 3, 5). On October 7, 2016, Redstone objected to the Whiteds' claim of the $30,000 homestead exemption. (Doc. 3–3). In its objection, Redstone argued that the Whiteds' homestead exemption should be limited to $10,000, the exemption amount for jointly owned property in force when Redstone obtained and recorded its judgment. (Doc. 3–3, p. 1, ¶ 6).¹ As support for its objection, Redstone asserted that because Alabama Code § 6–10–1"specifically states: ‘The right of homestead or other exemption shall be governed by the law in force when the debt or demand was created,’ " the Whiteds could only claim the homestead exemption in force when the judgment lien fixed to Mr. Whited's property. (Doc. 3–3, p. 1, ¶ 5).

The Whiteds opposed Redstone's objection. (Doc. 3–4). The Whiteds argued that they incurred debt after July 11, 2015, the effective date of the new homestead exemption. (Doc. 3–4, p. 1, ¶ 1). Pursuant to In re Middleton , 544 B.R. 449 (Bankr. S.D. Ala. 2016), the Whiteds assert that they are entitled to the $15,000 homestead exemption in force when they filed for bankruptcy. (Doc. 3–4, p. 1, ¶ 1). And pursuant to Owen v. Owen , 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991), the Whiteds assert that the Bankruptcy Court should "utilize the State Court exemptions to which the Debtors would be entitled but for the existence of the lien." (Doc. 3–4, p. 1, ¶ 2). According to the Whiteds, "[u]nder this standard, the [Bankruptcy] Court should apply a $15,000 homestead exemption." (Doc. 3–4, p. 1, ¶ 2).

On February 2, 2017, the Bankruptcy Court overruled Redstone's objection. (Doc. 1–4). The Bankruptcy Court found "pursuant to [Owen ] that Alabama's ‘new’ homestead exemption in effect on the petition date is controlling for purposes of any action the [Whiteds] may file to avoid Redstone's judgment lien pursuant to 11 U.S.C. § 522(f)." (Doc. 1–4, p. 1). The Bankruptcy Court noted that 11 U.S.C. § 522(f)(1) states that "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 ...." (Doc. 1–4, p. 3, ¶ 7) (emphasis in original). The Bankruptcy Court held that the exemption amount to which the debtor "would have been entitled" is the exemption amount "on the date of filing the petition." (Doc. 1–4, p. 5, ¶ 14). The Bankruptcy Court found that the Whiteds would have been entitled to the $15,000 exemption on the date they filed their petition. (Doc. 1–4, p. 10, ¶ 30).

The Bankruptcy Court reasoned that "in ‘mixed debt’ cases," where debts are incurred before and after the effective date of the new homestead exemption, "the exemption limits on the petition date should be applied despite § 6–10–1's ‘date of debt’ provision." (Doc. 1–4, p. 7, ¶ 20). The Bankruptcy Court discussed and agreed with the reasoning in Middleton . The Middleton court held that applying the petition date exemption in mixed debt cases is consistent with the Bankruptcy Code which establishes rights as of the petition date and with the Code's "fresh start" policy. (Doc. 1–4, pp. 8–9, ¶¶ 25–26).

On February 10, 2017, Redstone asked the Bankruptcy Court to alter or amend the order overruling Redstone's objection in light of the Eleventh Circuit's holding on remand in In re Owen , 961 F.2d 170 (11th Cir. 1992). (Doc. 3–8, p. 1). Redstone stated that "the [Eleventh] Circuit, on remand,...ruled that, since the Debtor had no interest in the property prior to the fixing of the lien, there was no exemption available." (Doc. 3–8, p. 2). Redstone asked the Bankruptcy Court to "consider whether the change in the exemption amount altered [Mr. Whited's] interest in the property [versus] that of Redstone and to what extent." (Doc. 3–8, p. 2). Redstone argued that "[i]f the change in the exemption amount increased [Mr. Whited's] interest, then the proper response to that increase is to note that, since Redstone's lien attached prior to that increase, the lien cannot be avoided to that extent, as [Mr. Whited] did not have this interest ‘prior to the fixing of the lien.’ " (Doc. 3–8, p. 2).

On March 17, 2017, the Bankruptcy Court denied Redstone's motion to alter or amend judgment. (Doc. 1–3). The Bankruptcy Court found that "the controlling issue in this case remains whether Redstone's lien impairs an exemption to which [the Whiteds] would have been entitled on the petition date but for the lien itself." (Doc. 1–3, p. 3). The Bankruptcy Court repeated that the Whiteds would be entitled to the $15,000 homestead exemption but for Redstone's lien. (Doc. 1–3, p. 7).

On March 29, 2017, Redstone appealed from the Bankruptcy Court's order overruling Redstone's objection to the claim of exemption and the Bankruptcy Court's order denying Redstone's motion to alter or amend judgment. The issues on appeal are fully briefed and ripe for resolution.

III. ANALYSIS

1. Redstone's Objection to the Whiteds' Claim of Exemption

Redstone argues that the Whiteds can claim only the homestead exemption in effect when Redstone obtained its judgment. The Court disagrees. The Bankruptcy Court properly found that applying Alabama's new homestead exemption in a mixed debt case like this one fulfills the objectives of the Bankruptcy Code and is consistent with Owen .

Pursuant to 11 U.S.C. § 522(f)(1), a "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...." (emphasis added). Pursuant to subsection (b), exempt property is determined according to State law that is "applicable on the date of the filing of the petition...." 11 U.S.C. § 522(b)(3)(A). In Owen v. Owen , 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991), the Supreme Court found that the exemption to which the debtor would be entitled under state law is the exemption to which the debtor would be entitled but for the lien . 500 U.S. at 311, 111 S.Ct. 1833.

The debtor in Owen purchased a condominium subject to the creditor's pre-existing judgment lien. On the date of purchase, the condominium did not qualify as a homestead under Florida law. Then, the debtor filed for Chapter 7 bankruptcy. Later, the condominium achieved homestead status.

The debtor claimed a homestead exemption in his condominium and sought to avoid the creditor's lien pursuant to 11 U.S.C. § 522(f)(1). The bankruptcy court did not allow the debtor to avoid the lien. Owen , 500 U.S. at 307–08, 111 S.Ct. 1833. The...