Daily Development for Thursday, December 1, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
BANKRUPTCY; HOMESTEAD; JUDGMENT LIENS; DISCHARGE: Under Wisconsin statute, which is not preempted in bankruptcy, debtor can obtain a post-discharge state court order satisfying a pre-petition judgment lien, even though the debtor's property interest exceeded the exemption claim to which debtor was entitled in bankruptcy.
Megal Development Corp. v. Shadof, 2005 WI 151 (2005)
Homeowners filed Chapter 7 petition for bankruptcy and listed in debtors' schedule of unsecured creditors a creditor that obtained a judgment in the amount of $52,714. During the bankruptcy proceeding, the judgment creditor filed an objection to debtors' claim for exempt homestead property, but the bankruptcy court set aside the objection as premature, because debtors had not sought to avoid any portion of the judgment lien. After discharge, debtor filed application with state court pursuant to a Wisconsin statute, Sec. 806.19(4), Wis. Stats., seeking an order satisfying the judgment. Creditor objected on the ground that the net equity in the property exceeded the maximum homestead exemption of $40,000
The state court held that the debtors were not entitled to an order satisfying the judgment, where the property's value exceeded the applicable exemption. Wisconsin Court of Appeals certified the matter to the Wisconsin Supreme Court.
The Supreme Court reversed, upholding the complete release of the judgment lien claim.
The court determined that the Wisconsin statute provided a post-discharge mechanism through operation of state law for a debtor to obtain, where the judgment creditor's claim was discharged in bankruptcy, satisfaction of a judgment and a judgment lien that had, by operative statute, attached to debtor's real estate. The language of the statute, regardless of any state or bankruptcy exemption limits, mandates that the clerk shall satisfy each judgment described in the applicable, upon which the judgment shall cease to be a lien on any real estate owns or later acquires.
The Wisconsin Supreme Court then examined the state statute in the context of federal bankruptcy law. It held that the Wisconsin statute is not preempted by the Supremacy Clause of the United States Constitution, because a state statute that permits a state court to satisfy post-discharge a judgment and extinguish a judgment lien reflects policy decisions of the legislature to provide additional protections to Wisconsin residents at the conclusion of bankruptcy, and does not interfere with the Bankruptcy Code. The state statute does not create an exemption, nor does it limit the powers of the bankruptcy trustee during bankruptcy. The statute simply does not operate during bankruptcy at all, but is dormant until the conclusion of the federal bankruptcy proceeding, and thus does not conflict with the Code. For states that do not, like Wisconsin, have such a statute, 11 U.S.C. Sec. 522(f) provides a similar mechanism to avoid liens through the federal bankruptcy code. Fina!
he Wisconsin statute does not deprive judgment creditors of a property right without due process of law. The judgment lien, which is nothing more than a mechanism for the enforcement of an in personam money judgment, does not constitute or create an estate interest or right of property
Comment: I asked bankruptcy expert Paul Hoffman, of the Stinson, Morrison firm here, to comment. He responded in some length as follows. Note that Paul assumes that the Wisconsin statute is a rarity. Is this really true? DIRT would like to know.
Here are Paul’s comments:
Hypothetical 1: Debtor has home worth $160,000, subject to first and second mortgages in the aggregate amount of $100,000 and a judgment lien for $50,000. The relevant state law homestead exemption is $40,000. Debtor files Chapter 7 and gets a discharge. Under 522(f) of the Bankruptcy Code, the debtor has $60,000 in "equity" (above the mortgages) and is entitled to "avoid" $30,000 of the $50,000 judgment as "impairing" her entitlement to a homestead exemption of $40,000. However, the $20,000 balance of the judgment lien "survives" and should be enforceable against the homestead after the automatic stay is terminated. As noted in the Dewsnup case, the discharge only affects the debtor's personal liability for the judgment, not the in rem lien created by the judgment.
522(f) exists to "avoid" the in rem lien "to the extent" that it impairs an exemption. There is no need for 522(f) if the discharge otherwise eliminates the in rem lien.
Hypothetical 2: Same facts, except home is worth $250,000. Debtor has $150,000 in equity above the mortgages, and is entitled to a $40,000 exemption.
The debtor cannot avoid any part of the judgment lien because it does not "impair" her exemption. Accordingly, the lien "survives" the discharge and can be foreclosed if not satisfied (most debtors in this circumstance will arrange to sell or refinance the home to eliminate the judgment lien). Moreover, the trustee sees "equity" above all the liens and the exemption in the amount of $60,000 and will arrange to sell the home (or negotiate with the debtor about refinancing or selling the home to pay this estimated equity to the trustee) to capture that non-exempt equity in the bankruptcy case. This is a highly unusual situation because most debtors with this much equity in their home do not need to file bankruptcy.
3. Now consider the above examples under this Wisconsin case:
In hypothetical 1, above, the debtor gets to deem the judgment "satisfied" under Wisconsin law upon getting a discharge. This means the debtor will then get to keep $60,000 in equity in the homestead instead of the $40,000 permitted under the homestead statute and the Bankruptcy Code. Under the Bankruptcy Code, this $20,000 should have gone to the judgment creditor, as argued in the case. Query whether the trustee can now argue that this $20,000 should go to the estate based on this interpretation of the Wisconsin statute.
Wisconsin law applied to hypothetical 2, above, results in an even more egregious consequence. The debtor gets to deem the entire $50,000 judgment lien "satisfied" and keep $90,000 in equity above the mortgages.
Readers are encouraged to respond to or criticize this posting.
Items reported on DIRT and in the ABA publications related to it are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data provided and opinions expressed by the DIRT editor the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.
Parties posting messages to DIRT are posting to
source that is readily accessible by members of
the general public, and should take that fact
into account in evaluating confidentiality
DIRT is an internet discussion group for serious
real estate professionals. Message volume varies,
but commonly runs 5 - 15 messages per work day.
Daily Developments are posted every work day.
subscribe, send the message
subscribe Dirt [your name]
To cancel your subscription, send the message
signoff DIRT to the address:
for information on other commands, send the
Help to the listserv address.
DIRT has an alternate, more extensive coverage that includes
commercial and general real estate matters but also focuses upon residential real estate matters. Because real estate brokers generally find this service more valuable, it is named “BrokerDIRT.” But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list. If you subscribe to BrokerDIRT, it is not necessary also to subscribe to DIRT, as BrokerDIRT carries all DIRT traffic in addition to the residential discussions.
To subscribe to BrokerDIRT, send the message
subscribe BrokerDIRT [your name]
To cancel your subscription to BrokerDIRT, send the
signoff BrokerDIRT to the address:
DIRT is a service of the American Bar
Section on Real Property, Probate & Trust Law and
the University of Missouri, Kansas City, School
of Law. Daily Developments are copyrighted by
Patrick A. Randolph, Jr., Professor of Law, UMKC
School of Law, but Professor Randolph grants
permission for copying or distribution of Daily
Developments for educational purposes, including
professional continuing education, provided that
no charge is imposed for such distribution and
that appropriate credit is given to Professor
Randolph, DIRT, and its sponsors.
DIRT has a WebPage at:
Members of the ABA Section on Real Property,
and Trust Law or of the National Association of Realtors can subscribe to a quarterly hardcopy report that includes all DIRT Daily Developments, many other cases, and periodic reviews of real estate oriented literature and state legislation by contacting Antonette Smith at (312) 988 5260 or firstname.lastname@example.org
Your e-mail address will only be used within the ABA and its entities. We do not sell or rent e-mail addresses to anyone outside the ABA.
To change your e-mail address or remove your name from any future general distribution e-mails you can call us at 1-800-285-2221, or write to: American Bar Association, Service Center, 321 N Clark Street, Floor 16, Chicago, IL 60610
If you are an ABA member, log in to the ABA Web site at https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://www.abanet.org/abanet/common/MyABA/home.cfm to edit your member profile. Otherwise, complete the form located at https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=https://www.abanet.org/members/join/coa2.html
To review our privacy statement, go to https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://www.abanet.org/privacy_statement.html.
If you have any problems, please contact the list owner