Debtor's equity can exceed homestead exemption

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The Wisconsin Supreme Court held on Nov. 8 that sec. 806.19(4) requires the satisfaction of a judgment debt against a homestead, where the underlying judgment has been discharged in bankruptcy, even though the debtor’s equity exceeds the allowable homestead exemption, and the debtor failed to seek avoidance of the judgment lien in the bankruptcy court.

In 1994, Megal Development Corporation obtained a judgment for eviction and money damages against Craig and Susan Shadof in the amount of $52,714. The judgment subsequently became a lien upon the Shadofs’ homestead property.

In 2003, the Shadofs filed for Chapter 7 bankruptcy relief. They included the Megal judgment as a dischargeable debt on Schedule D of their bankruptcy forms. At the conclusion of the bankruptcy proceedings, Judge James E. Shapiro granted the Shadofs a Discharge of Debtor, which included a discharge of the debt to Megal.

The Trustee found that after subtracting the first and second mortgages, the $40,000 homestead exemption, and Megal’s judgment lien from the value of the homestead, there was no money left in the estate to pay unsecured creditors, and therefore abandoned the property, at which point it reverted to the Shadofs. Coming out of bankruptcy, the Shadofs’ homestead equity exceeded the $40,000 homestead exemption.

During the bankruptcy proceeding, Megal had objected to the claim for exemption, because the Shadofs had equity in excess of the $40,000 exemption. The bankruptcy court set aside Megal’s objection as premature, because the Shadofs had not sought to avoid any portion of Megal’s judgment lien. However, the order specified that Megal retained the right to challenge any subsequent lien avoidance motion brought under 11 U.S.C. 522(f).

After discharge, the Shadofs filed an application in Waukesha County, seeking an order satisfying the Megal judgment and the judgment lien pursuant to sec. 806.19(4). Circuit Court Judge Donald J. Hassin, Jr., granted the application, but vacated it after Megal objected.

After a hearing, Judge Mark Gempeler denied satisfaction of the judgment, and granted Megal an indefinite extension of the judgment lien to permit Megal to execute on its judgment. However, the court stayed Megal’s right to execution of the judgment pending appeal.

The Shadofs appealed, and the court of appeals certified the case to the Supreme Court, which reversed in a unanimous decision by Justice N. Patrick Crooks.

Section 806.19(4)(a) provides: “Any person who has secured a discharge of a judgment debt in bankruptcy and any person interested in real property to which the judgment attaches may submit an application for an order of satisfaction of the judgment and an attached order of satisfaction to the clerk of the court in which the judgment was entered.”

Subsection (4)(d) then states in relevant part that “Upon receipt of a completed application … the clerk shall satisfy of record each judgment described in the application. Upon satisfaction, a judgment shall cease to be a lien on any real property that the person discharged in bankruptcy owns or later acquires.”

The court concluded that the statute unambiguously requires satisfaction of both the judgment debt and the judgment lien, even though the equity in the homestead to which the lien attaches exceeds the homestead exemption.

Megal argued to the contrary, relying heavily on Dewsnup v. Timm, 502 U.S 410, 112 S.Ct. 773 (1992), in which the U.S. Supreme Court held that an in rem judgment lien survives bankruptcy, even if a debtor’s in personam debt is discharged.

Because an in rem lien survives bankruptcy, Megal argued, a debtor must obtain lien avoidance pursuant to 11 U.S. C. 522(f) in order for the lien to be eligible for satisfaction under sec. 806.19(4).

Neither the Shadofs nor the court disputed that liens survive bankruptcy, and that the Bankruptcy Code provides a means for lien avoidance if appropriate.

Nevertheless, the court found the statute does not require the debtor to seek avoidance, but instead requires that the lien be satisfied by the circuit court.

The court reasoned, “even if we accept Megal’s parsing of the statute, satisfaction of the in personam money judgment would lead to a satisfaction of the entire judgment. Once the judgment is satisfied, the judgment lien would be satisfied in accord with sec. 806.19(4)(d). There is no statutory language requiring that an associated judgment lien first be avoided before it can be satisfied.”

Finding that a “judgment lien” is not the same as a “judgment in rem,” the court concluded, “We find the language clearly provides that a debtor may have a judgment and an associated judgment lien satisfied through operation of state law, when the underlying judgment has been discharged in bankruptcy. Megal urges this court to read into the statute requirements that are simply not there. Had the Wisconsin Legislature intended to require avoidance under 11 U.S.C. sec. 522(f)(2004) before a judgment and judgme
nt lien could be satisfied through state procedure, it could have done so. It did not. Another interpretation would require us to read additional language into the statute. We decline to do so.”

The court also found that legislative history supported its construction. Twice, in 1985 and 1995, the Legislature amended sec. 806.19 — both times in response to Wisconsin state court decisions holding that a judgment lien could still be enforced despite discharge of the underlying debt in bankruptcy.

The court thus concluded, “The Wisconsin Legislature, on multiple occasions, has demonstrated its intent to allow debtors to obtain satisfaction of both a judgment and a judgment lien when the underlying judgment has been discharged in bankruptcy. In this decision, we are recognizing and enforcing policy choices made by the Wisconsin Legislature. If the legislature determines such policies are no longer consistent with the best interests of the citizens of this state, it is its exclusive prerogative to amend the statute.”

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The court next held that sec. 806.19(4) is not implicitly preempted by the Supremacy Clause of the U.S. Constitution.

Megal argued that permitting satisfaction of a judgment lien, even though equity remains after applying the homestead exemption, would interfere with the Bankruptcy Code by giving a debtor a “head start,” rather than a “fresh start.”

Rejecting the argument, the court concluded, “After determining that once secured creditors were accounted for, along with the homestead exemption, there would be no assets left in the estate to pay unsecured creditors, the Trustee abandoned the homestead property which then reverted back to the Shadofs.”

Accordingly, the court affirmed.

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David Ziemer can be reached by email.