Homestead Case Analysis

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Although the court may be correct that the statutory language of sec. 80619(4) unambiguously requires that the judgment lien be satisfied, the court’s citation to legislative history is misplaced.

Although the Legislature amended the statute twice, in 1985 and 1995, neither amendment sheds any light on the question actually posed in this case — whether satisfaction is required, even though the debtor has more equity than the homestead exemption allows and failed to seek avoidance of the lien in bankruptcy court.

In State Central Credit Union v. Bigus, 101 Wis.2d 237, 304 N.W.2d (Ct.App.1981), the debtor’s equity was less than the homestead exemption (then $25,000).

The court of appeals’ decision — that the lien survived bankruptcy — effectively gutted the debtor’s discharge, and the legislature responded accordingly.

However, that amendment says nothing about legislative intent where the debtor’s equity exceeds the homestead exemption.

Furthermore, the legislative history actually suggests that the lien is only satisfied up to the amount of the discharge.

Consider the following excerpt from the legislative history (ironically included by the Wisconsin Land Title Association in an amicus curiae brief supporting the Shadofs’ construction of the statute) — a Sept. 19, 1985 response in support of the proposed amendment by U.S. Bankruptcy Judge Dale E. Ihlenfeldt:

“In the ordinary case, the debtor’s homestead is the only real estate involved, the debtor has claimed the state homestead exemption in the bankruptcy case, and the state homestead exemption exceeds the debtor’s equity in the property. In these cases, the debtor should be able to go directly into the state court and clear the record of a judgment and an apparent (but not valid) judgment lien. … In most cases, the Wisconsin’s $25,000 homestead exemption is so greatly in excess of the debtor’s equity that the issue will not be raised by the judgment creditor and there will be no need for a hearing. The state court clerk will satisfy the judgment by default. In such cases, there should be no need for the debtor to bring a prior proceeding in bankruptcy court under sec. 522(f)(1).

…

“Upon receipt of an application under sec. 806.19, a judgment creditor would be expected to appear and oppose the application in situations where the judgment evidences a nondischargeable debt where the value of the property exceeds the total of the mortgage liens and the debtor’s homestead exemption (emphasis added).”

If the Wisconsin Legislature accorded any weight to the view of the state’s most eminent bankruptcy judge at the time, then the decision in the case at bar is clearly contrary to legislative intent.

The letter of Judge Ihlenfeldt appears quaint today. In 1985, the judge could write in all seriousness, “in most cases, the Wisconsin’s $25,000 homestead exemption is so greatly in excess of the debtor’s equity that the issue will not be raised by the judgment creditor.”

Today, the exemption is $40,000, but the assumption no longer holds. Because of a combination of generous credit practices, and skyrocketing real estate values, it is not at all unlikely that a person could be insolvent and nevertheless have more than $40,000 in equity in a homestead.

The letter was drafted and the statute amended based upon an assumption — hardly anyone who has more than $25,000 in equity in their home would be filing for bankruptcy — that no longer holds.

Nevertheless, it is clear that the opinion of Judge Ihlenfeldt was that, in the (then) rare case where equity would exceed the homestead exemption, a debtor should seek lien avoidance in bankruptcy court pursuant to 11 U.S.C. 522(f)(1), and satisfaction should not be granted by default if a creditor objects, but only a partial satisfaction should issue.

Furthermore, that was the apparent assumption of the bankruptcy judge in the case at bar, when it set aside Megal’s objection to the Shadofs’ homestead exemption as premature, but specified that Megal could challenge any lien avoidance motion the Shadofs might bring.

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The court states that the Legislature could have drafted the statute differently, but did not. While this is true, it says nothing to the legislative intent when the debtor’s equity exceeds the homestead exemption.

The court could just as easily have concluded that, had the Legislature intended that debtors be able to effectively keep more than $40,000 in equity under the homestead exemption, then the Legislature could have set a higher amount.

As noted above, the plain language of the statute may dictate the result in this case, and given the high burden on any party claiming a state statute is preempted by federal law, the court may be correct in its ultimate judgment. Nevertheless, it is clear that reliance on legislative history is misplaced, and the result is unreasonable in its effect.

It is also clear that,
in the future, if creditors object to homestead exemptions because the equity exceeds $40,000, such objections can not be dismissed as premature. Instead, they are very necessary.

– David Ziemer

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David Ziemer can be reached by email.