Opinion
Case No. 17-22036-GMH
08-22-2018
In re: Stanley B. Immel, Debtor.
Chapter 13 OPINION ON CERTIFICATION OF THE AUGUST 2, 2018 ORDER FOR DIRECT REVIEW IN THE COURT OF APPEALS UNDER 28 U.S.C. §158(d)(2)
This opinion accompanies this court's certification for direct appeal under 28 U.S.C. §158(d)(2) of the August 2, 2018 order finally adjudicating the debtor's request to avoid the entire lien of the State Bank of Newburg under 11 U.S.C. §522(f). See Fed. R. Bankr. P. 8006(e)(1).
QUESTION PRESENTED
Section 522(f) of the Bankruptcy Code authorizes debtors to avoid most liens on specified types of exempt property, including "nonpossessory, nonpurchase-money security interest[s] in" implements and tools of the trade of the debtor. 11 U.S.C. §522(f)(1)(B)(ii). Section 522(f)(3) of the Code caps the extent to which a debtor can avoid these liens at $6,425 when the debtor elects to use exemptions under the law of a state that "prohibits avoidance of a consensual lien on property otherwise eligible to be claimed as exempt". 11 U.S.C. §522(f)(3).
The sole question presented is:
Does Wisconsin law, which provides that "No property otherwise exempt may be claimed as exempt . . . against the claim or interest of a holder of . . . any consensual . . . lien", Wis. Stat. §815.18(12), "prohibit[] avoidance of a consensual lien on property otherwise eligible to be claimed as exempt", as stated in 11 U.S.C. §522(f)(3)(B), thus triggering §522(f)(3)'s lien-avoidance cap?
In answering this question affirmatively, the bankruptcy court ruled consistently with In re Parrish, 186 B.R. 246 (Bankr. W.D. Wis. 1995), and declined to follow the contrary holdings of the district court and bankruptcy court in United States v. Ehlen (In re Ehlen), 207 B.R. 179 (W.D. Wis. 1997) (Crabb, J.), aff'g In re Ehlen, 202 B.R. 742 (Bankr. W.D. Wis. 1996) (Utschig, J.).
NECESSARY FACTS AND PROCEDURAL BACKGROUND
State Bank of Newburg has a perfected, first-priority security interest in substantially all of the debtor's personal property, including the debtor's farm equipment. The debtor has asserted that $15,000 of his farm equipment is exempt under Wisconsin Statutes §815.18(3)(b). These matters are uncontested.
The debtor's modified chapter 13 plan proposed that the debtor would sell the farm equipment and retain the first $15,000 of the net sale proceeds, asserting a right to avoid under §522(f)(1) State Bank of Newburg's lien on the equipment up to the $15,000 Wisconsin-law exemption. CM-ECF Doc. No. 55, at 2. The Bank objected, contending that the debtor can only avoid its lien up to §522(f)(3)'s $6,425 cap. CM-ECF Doc. No. 56.
The court, with the parties' agreement, approved the plan modification subject to its later determining the extent to which §522(f) authorizes avoidance of the Bank's lien. CM-ECF Doc. No. 63. The court directed the debtor to hold the first $15,000 of net proceeds in his attorney's trust account pending this court's final resolution of the lien-avoidance issue. CM-ECF Doc. No. 67-2.
On August 2, 2018, this court ordered that §522(f) only authorizes the debtor to avoid the bank's lien up to $6,425, as provided in §522(f)(3). CM-ECF Doc. Nos. 92 and 93. The August 2 order finally adjudicates the parties' dispute over the extent to which the debtor can avoid the Bank's lien.
STATEMENT ON JURISDICTION
1. Bankruptcy court's jurisdiction. The bankruptcy court has jurisdiction over the debtor's chapter 13 bankruptcy case by operation of 28 U.S.C. §157 and the district court's order of reference to the bankruptcy court of all cases and proceedings arising in, under, or related to title 11 of the United States Code. See Order of Reference (E.D. Wis. July 16, 1984), available at http://www.wied.uscourts.gov. Section 1334 of title 28 gives the district court jurisdiction over the debtor's bankruptcy case and the parties' lien dispute. 28 U.S.C. §1334. Section 157(a) of title 28 authorizes the district court to refer those matters to the bankruptcy court. 28 U.S.C. §157(a). The parties' dispute over the extent to which the debtor can avoid the bank's lien is a core proceeding under 28 U.S.C. §157(b)(2)(B), (K) & (L).
2. Court of appeals' discretionary jurisdiction over the bankruptcy court's final order. The court of appeals has permissive jurisdiction under 28 U.S.C. §158(d)(2)(A) to hear an appeal of a final bankruptcy-court order if (among other alternatives) the bankruptcy court certifies that the order meets one or more of that section's criteria and the court of appeals authorizes a direct appeal:
The appropriate court of appeals shall have jurisdiction of appeals described in the first sentence of subsection (a) if the bankruptcy court . . . acting on its own motion . . . certif[ies] that—
(i) the . . . order . . . involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States, or involves a matter of public importance;
[or]
(ii) the . . . order . . . involves a question of law requiring resolution of conflicting decisions . . .
. . .
28 U.S.C. §158(d)(2)(A); see also §158(a) (affording the district court "jurisdiction to hear appeals . . . from final . . . orders . . . of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title").and if the court of appeals authorizes the direct appeal of the . . . order . . . .
The August 2, 2018 order declares that §522(f) of the Bankruptcy Code authorizes the debtor to avoid the lien only up to §522(f)(3)'s $6,425 cap and directs the debtor to remit sale proceeds in excess of that amount to the bank. (A copy of the August 2, 2018 order is attached to the notice of appeal, which is attached as exhibit A to this opinion.) The order thus definitively resolves a controversy over the application of §522(f)'s lien-avoidance authority, thereby resolving an "individual controvers[y] that might exist as a standalone suit outside of bankruptcy." Germeraad v. Powers, 826 F.3d 962, 965 (7th Cir. 2016). Therefore, the August 2, 2018 order is "final" for purposes of 28 U.S.C. §158.
The debtor appealed the bankruptcy court's August 2, 2018 order to the district court on August 10, 2018. CM-ECF Doc. No. 96 (attached as exhibit A to this opinion). Under Federal Rule of Bankruptcy Procedure 8006(b), the matter remains pending in the bankruptcy court until 30 days after the effective date of the notice of appeal under Federal Rule of Bankruptcy Procedure 8002. As there is no pending motion under Federal Rules of Bankruptcy Procedure 7052, 9023, or 9024, the notice of appeal was effective when filed on August 10, 2018. See Fed. R. Bankr. P. 8002.
DECISIONS RELEVANT TO THE APPEAL
The bankruptcy court's August 2, 2018 decision on lien avoidance is exhibit B to this opinion.
The decisions in United States v. Ehlen (In re Ehlen), which reached holdings contrary to this court's August 2 decision are exhibits C (district court, 207 B.R. 179 (W.D. Wis. 1997) (Crabb, J.)) and D (bankruptcy court, 202 B.R. 742 (Bankr. W.D. Wis. 1996) (Utschig, J.)) to this opinion.
The decision in In re Parrish, which applied §522(f)(3) under Wisconsin law in the same way as the August 2 decision, is exhibit E to this opinion (186 B.R. 246 (Bankr. W.D. Wis. 1995) (Martin, J.)).
STATUTES NECESSARY TO UNDERSTAND THE QUESTION PRESENTED
Section 522(f), title 11, United States Code (emphasis added):
(1) Notwithstanding any waiver of exemptions but subject to paragraph (3), 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 under subsection (b) of this section, if such lien is—
. . .
(B) a nonpossessory, nonpurchase-money security interest in any—
. . .
(ii) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor . . .
. . . .
(3) In a case in which State law that is applicable to the debtor—
. . .
(B) either permits the debtor to claim exemptions under State law without limitation in amount, except to the extent that the debtor has permitted the fixing of a consensual lien on any property[,] or prohibits avoidance of a consensual lien on property otherwise eligible to be claimed as exempt property;
the debtor may not avoid the fixing of a lien on an interest of the debtor or a dependent of the debtor in property if the lien is a nonpossessory, nonpurchase-money security interest in implements, professional books, or tools of the trade of the debtor or a dependent of the debtor or farm animals or crops of the debtor or a dependent of the debtor to the extent the value of such implements, professional books, tools of the trade, animals, and crops exceeds $6,425.
Section 815.18, Wisconsin Statutes:
(2) DEFINITIONS. In this section:
. . . .
(h) "Exempt" means free from any lien obtained by judicial proceedings and is not liable to seizure or sale on execution or on any provisional or final process issued from any court, or any proceedings in aid of court process.
. . . .
(3) EXEMPT PROPERTY. The debtor's interest in or right to receive the following property is exempt, except as specifically provided in this section . . .
. . . .
(b) Business and farm property.
1. Equipment, inventory, farm products, and professional books used in the business of the debtor or the business of a dependent of the debtor, not to exceed $15,000 in aggregate value.
. . . .
(12) LIMITATIONS ON EXEMPTIONS. No property otherwise exempt may be claimed as exempt in any proceeding brought by any person to recover the whole or part of the purchase price of the property or against the claim or interest of a holder of a security interest, land contract, condominium or homeowners association assessment or maintenance lien or both, mortgage or any consensual or statutory lien.
REASONS FOR CERTIFYING ORDER FOR DIRECT REVIEW
A
1. The appeal presents a question of law as to which there is no controlling precedent. The resolution of the parties' dispute depends solely on the answer to a legal question on which there is no controlling precedent from the Supreme Court or the Court of Appeals for the Seventh Circuit: Does Wisconsin Statutes §815.18(12) prohibit avoidance of a consensual lien on otherwise exempt property, thus triggering 11 U.S.C. §522(f)(3)'s $6,425 cap on the §522(f)'s lien-avoidance authority?
2. The question of law presented requires resolution of conflicting decisions. In one of the earliest decisions examining §522(f)(3) after Congress added that provision in the Bankruptcy Reform Act of 1994, Bankruptcy Judge Robert Martin ruled, like the bankruptcy court in this case, that Wisconsin exemption law triggered §522(f)(3)'s lien-avoidance limitation. In re Parrish, 186 B.R. 246.
The following year, Bankruptcy Judge Thomas Utschig reached the opposite conclusion in In re Ehlen, 202 B.R. 742. And the District Court for the Western District of Wisconsin affirmed that ruling. See United States v. Ehlen (In re Ehlen), 207 B.R. 179.
The Ehlen courts' rulings depend on two statutory-interpretation conclusions—one about the Bankruptcy Code and another about Wisconsin's exemption statute. The Ehlen decisions read "prohibits avoidance of a consensual lien on property otherwise eligible to be claimed as exempt property" in §522(f)(3)(B) to encompass only those state laws that prohibit avoidance of consensual liens expressly—that is, statutes that use the word "avoidance". See 207 B.R. at 184 ("[Section] 815.18 says nothing about avoidance of the lien . . . . To give proper effect to the language of § 522(f)(3)(B), state law . . . must prohibit lien avoidance explicitly . . . ."); 202 B.R. at 749 ("[T]here is no reference to lien avoidance in the text of § 815.18(12)."). The Ehlen decisions read §815.18(12), which provides that "No property otherwise exempt may be claimed as exempt . . . against the claim or interest of a holder of . . . any consensual . . . lien", as defining what property can be exempt, rather than prohibiting the use of exemptions against consensual liens. See 207 B.R. at 184 (Section 815.18(12) "simply provides that property subject to a consensual lien may not be claimed as exempt." (quoting 202 B.R. at 749)); see also 202 B.R. at 750 (Section 815.18(12) "defines or qualifies the Wisconsin exemptions in a way that precludes debtors from claiming the property as exempt.").
The decision in this case disagrees with both of these statutory constructions.
a. Ehlen's method of construing the Bankruptcy Code conflicts with decisions of the Supreme Court and the Seventh Circuit.
The Ehlen decisions' conclusion that §522(f)(3)(B)'s avoidance trigger applies only where state law refers explicitly to lien "avoidance" is based on legislative history rather than a fair reading of the text. Both Ehlen courts relied on a written statement submitted by the American Bankers Association to the House of Representatives Judiciary Committee's Subcommittee on Economic and Commercial Law when the subcommittee was considering what became the Bankruptcy Reform Act of 1994. 207 B.R. at 185; 202 B.R. at 748. As the Ehlen bankruptcy-court decision stated in its more extensive discussion:
This portion of § 522(f)(3)(B) was added specifically to benefit Texas lenders, although it likely applies to all debtors similarly situated. Texas provides debtors with a "personal property exemption" in an aggregate value of $60,000.00 per family, or $30,000.00 per individual debtor. Despite the generous dollar amount of this exemption, it is limited by the following provision:
Personal property, unless precluded from being encumbered by other law, may be encumbered by a security interest . . . or . . . lien fixed by other law, and the security interest or lien may not be avoided on the ground that the property is exempt under this chapter.
This is the type of state provision Mr. Corwin [of the American Bankers Association] and the creditors' groups contemplated when they proposed the addition of the second phrase in § 522(f)(3)(B).202 B.R. at 749 (citations omitted) (remaining omissions in original); see also 207 B.R. at 185.
Based on this acknowledged "interest group statement", the Ehlen courts reasoned that §522(f)(3)(B)'s lien-avoidance prohibition "was directed specifically at Texas law". 207 B.R. at 185; 202 B.R. at 749; see also In re Zimmel, 185 B.R. 786, 794 (Bankr. D. Minn. 1995) ("The second alternative application described in 11 U.S.C. § 522(f)(3)(B), where state law 'prohibits avoidance of a consensual lien on property otherwise eligible to be claimed as exempt property,' specifically targets Texas law."). Since Wisconsin's §815.18(12), unlike the Texas statute, contains "no reference to lien avoidance", the Ehlen courts ruled §522(f)(3)(B) inapplicable. 202 B.R. at 749; 207 B.R. at 184.
This legislative-history approach to interpreting the Bankruptcy Code is one that the Supreme Court and the Seventh Circuit have repeatedly renounced. See, e.g., RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 649 (2012) ("The Bankruptcy Code standardizes an expansive (and sometimes unruly) area of law, and it is our obligation to interpret the Code clearly and predictably using well established principles of statutory construction."); Lamie v. United States Trustee, 540 U.S. 526, 536 (2004) ("We should prefer the plain meaning since that approach respects the words of Congress. In this manner we avoid the pitfalls that plague too quick a turn to the more controversial realm of legislative history."); Bank of Am. Nat'l Tr. and Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 459 (1999) (Thomas, J., concurring in judgment) ("Our precedents make clear that an analysis of any statute, including the Bankruptcy Code, must not begin with external sources, but with the text itself."); Peterson v. Somers Dublin Ltd., 729 F.3d 741, 749 (7th Cir. 2013) ("We apply the text—which both Houses of Congress approved and the President signed—not themes from a history that was neither passed by a majority of either House nor signed into law."). Moreover, the Ehlen courts' legislative-history analysis relies solely on an interest-group statement—a type of statement that the Supreme Court has refused to consider even when interpreting an ambiguous statute. See, e.g., Kelly v. Robinson, 479 U.S. 36, 51 n.13 (1986) ("We acknowledge that a few comments in the hearings and the Bankruptcy Laws Commission Report may suggest that the language bears the interpretation adopted by the Second Circuit. But none of those statements was made by a Member of Congress, nor were they included in the official Senate and House Reports. We decline to accord any significance to these statements.").
b. The Ehlen decisions' construction of Wisconsin law is contrary to Wisconsin's principles of statutory construction.
The Wisconsin Supreme Court's approach to statutory construction is similar to that of the United States Supreme Court. When interpreting Wisconsin statutes the Wisconsin Supreme Court "begins with the language of the statute. If the meaning of the statute is plain, [it] ordinarily stop[s] the inquiry." State ex rel. Kalal v. Cir. Ct. for Dane Cty., 681 N.W.2d 110, 124 (Wis. 2004) (quoting Seider v. O'Connell, 612 N.W.2d 659, 669 (Wis. 2000)). "[S]tatutory language is interpreted in the context in which it is used; not in isolation but as part of a whole; in relation to the language of surrounding or closely-related statutes; and reasonably, to avoid absurd or unreasonable results." Id.
The Ehlen courts' reading of Wisconsin Statutes §815.18(12) ignores that section's full text and the context provided by other sections of Wisconsin's exemption statute. Contrary to those courts' assertion that §815.18(12) "simply provides that property subject to a consensual lien may not be claimed as exempt", 207 B.R. at 184 (quoting 202 B.R. at 749), that section's plain text provides that a debtor cannot claim property as exempt "against . . . a holder of a . . . consensual . . . lien." Moreover, §815.18(2)(h), rather than §815.18(12), defines "exempt". Section 815.18(2)(h) states, "'Exempt' means free from any lien obtained by judicial proceedings and is not liable to seizure or sale on execution or on any provisional or final process issued from any court, or any proceedings in aid of court process."
Section 815.18(2)(h) and §815.18(12) have a common but not identical function. Section 815.18(2)(h)'s definition of "exempt" makes Wisconsin-law exemptions applicable only to judicial liens and processes. Section 815.18(12)'s limitation prohibits using a Wisconsin-law exemption on "property otherwise exempt" (that is, exempt as defined by §815.18(2)(h)) against a consensual (or statutory) lien on that property.
Section 815.18(12)'s text—"No property otherwise exempt may be claimed as exempt . . . against the claim or interest of a holder of . . . any consensual . . . lien"— differs little from that of the Texas statute on which the Ehlen courts focused. The Texas statute stated, "Personal property . . . may be encumbered by a security interest . . . or . . . lien fixed by other law, and the security interest or lien may not be avoided on the ground that the property is exempt under this chapter." 207 B.R. at 184 (omissions in original) (quoting Tex. Prop. Code Ann. §42.002(b) (West 1995)). Wisconsin law thus both restricts the application of exemptions to judicial-collection processes by the definition of "exempt" in §815.18(2)(h) and further limits the use of exemptions against consensual liens in §815.18(12). Nothing about this belt-and-suspenders approach to preserving consensual liens from exemption claims suggests that Wisconsin, like Texas, does anything other than prohibit debtors from avoiding liens based on the provisions of the state's exemption laws.
Neither Ehlen decision suggests a contrary view of Wisconsin exemption law. And neither decision explains why §522(f)(3)'s cap should not apply to Wisconsin's $15,000 exemption for the same reasons as Texas's $30,000 exemption, except that the word "avoidance" does not appear in Wisconsin Statutes §815.18(12).
Properly understood, Wisconsin Statutes §815.18(12)'s prohibition on claiming an exemption against a consensual lien makes Zimmel inapposite. Zimmel, on which the Ehlen courts relied, concluded that Minnesota exemption law did not prohibit the avoidance of consensual liens for purposes of 11 U.S.C. §522(f)(3)(B). 185 B.R. at 792-95. Zimmel explained that under Minnesota law "exemptions apply only to a debtor's interest in the property" and "do not apply to consensual liens." Id. at 792-93 (discussing Moyer v. Int'l Bank, 404 N.W.2d 274 (Minn. 1987)). Zimmel further explained that Minnesota exemption "law is silent regarding avoidance of consensual liens on property otherwise eligible to be claimed as exempt property." Id. at 793. In contrast, Wisconsin exemption law vests exemptions in property owned by the debtor without regard to whether it is encumbered by a lien: "The debtor's interest in or right to receive the following property is exempt". Wis. Stat. §815.18(3). And, as explained above, §815.18(12) of Wisconsin exemption law provides that a debtor cannot employ an exemption in property to defeat a consensual lien.
B
1. The appeal involves an important Bankruptcy Code issue. According to debtor's experienced counsel, the Ehlen decisions effectively have served as the governing "law" on avoiding liens impairing Wisconsin exemptions under §522(f)(3). Debtor's counsel reported that creditors with a non-purchase money, non-possessory security interest in property subject to a state exemption typically capitulate and allow debtors to subordinate those creditors' interests to the full exemption amount when shown the Ehlen decisions. CM-ECF Doc. No. 61, at 8:15-:29 (audio file). As counsel remarked at argument, "I've done many of these [lien] avoidance motions and . . . [creditors have] never . . . raised [the §522(f)(3) cap] as an issue." CM-ECF Doc. No. 97, at 19:24-20:1 (transcript).
2. The appeal presents an appropriate vehicle for the court of appeals to afford debtors and lenders needed certainty about the extent to which debtors can use §522(f)(1) to avoid liens up to the full Wisconsin exemption amount. The court's decision in this case has likely created uncertainty for debtors and secured lenders in Wisconsin. That uncertainty may at least in part motivate the appeal from this court's decision—an appeal filed on the debtor's behalf by one of the leading debtor-side bankruptcy firms in Wisconsin.
This uncertainty is unlikely to be remedied by a district-court decision. A decision by the district court will simply change a 2-2 split in non-precedential decisions about how to apply 11 U.S.C. §522(f) to Wisconsin law to a 3-2 split. If the district court affirms, there will be contradictory decisions in Wisconsin's two federal districts about whether Wisconsin exemption law triggers the Bankruptcy Code's lien-avoidance cap. And, regardless of which way the district court decides the appeal, the decision will not yield precedent controlling how bankruptcy and district court judges must rule in the future.
Additionally, another case presenting the issue is unlikely to reach the court of appeals soon. The small stakes that are at issue in each individual lien-avoidance dispute in comparison to litigating an appeal will likely lead most lienholders to compromise or capitulate rather than contest the matter through multiple courts. The difference between the debtor's ability to avoid the lien up to the full $15,000 exemption and the $6,425 cap only arises when the debtor has equity in the encumbered assets in excess of $6,425. And, if the value of the collateral far exceeds $15,000, the lienholder may be content with foregoing the dispute over the cap's application and avoiding the litigation costs of that exercise. In either instance, one expects that the litigation costs of pursuing a precedential ruling will typically far exceed the amount in dispute.
Creditors who can expect to encounter the issue repeatedly might conclude that a definitive ruling justifies the cost of pursuing it. But any particular case is unlikely to reach the court of appeals unless both parties have sufficiently strong institutional or personal stakes to suffer the long road from Milwaukee or Madison to Chicago. Apparently, since 1997, when Ehlen disagreed with Parrish, no case before this one has yielded both a trial-court opinion and an appeal. This should not leave one sanguine about cases reaching the court of appeals after having to stop in the district court.
Yet this case presents an important question about the Bankruptcy Code's interaction with Wisconsin law that likely has practical effects that far exceed the number of adjudicated disputes. The question, therefore, would be better answered by the court of appeals. And, because these parties' dispute is limited solely to the legal question of whether the use of Wisconsin exemptions triggers §522(f)(3)'s cap on lien avoidance, this case presents an optimal vehicle for providing an answer.
3. The court of appeals, but not the district court, can ask the Wisconsin Supreme Court whether Wisconsin law prohibits the avoidance of consensual liens. The courts in Ehlen and Parrish both found Wisconsin Statutes §815.18(12) unclear. See Parrish, 186 B.R. at 248 (noting §815.18(12)'s "opacity and its confusing disjunctions"); Ehlen, 207 B.R. at 183 (Parrish "is correct that [Wis. Stat.] § 815.18(12) is not a model of clarity".); Ehlen, 202 B.R. at 749 ("This Court agrees [with Parrish] that the Wisconsin provision [Wis. Stat. §815.18(12)] is muddled and vague."). While this court ruled that Wisconsin Statutes §815.18(12)'s prohibition on claiming a Wisconsin exemption against consensual liens is clear from the text, §815.18(2)(h)'s definition of "exempt" to mean free from judicial liens (rather than consensual or statutory liens) serves a similar function. Even if arguably unnecessary, §815.18(12)'s statement that exemptions cannot be claimed against consensual liens can be understood as a prophylactic provision that affords lenders greater assurance that debtors cannot use exemptions to undo agreements affording those lenders rights to replevin a debtor's property for repayment of debt secured by that property.
In all events, no Wisconsin appellate court has addressed Wisconsin Statutes §815.18(12). If greater clarification about the meaning of that section would assist in answering the question presented, the court of appeals could certify the question to the Wisconsin Supreme Court. See Winebow, Inc. v. Capitol-Husting Co. Inc., 867 F.3d 862, 870 (7th Cir. 2017); see also Cir. R. 52(a). But, while the Wisconsin Supreme Court will entertain questions of Wisconsin law certified by the court of appeals, it will not similarly accept a certification from a federal district court. Wis. Stat. §821.01. This too favors direct review.
* * *
For all of these reasons, this court will enter a separate order certifying the debtor's appeal of the August 2, 2018 order for direct appeal to the court of appeals under 28 U.S.C. §158(d)(2) and Federal Rule of Bankruptcy Procedure 8006(e). August 22, 2018
/s/_________
G. Michael Halfenger
United States Bankruptcy Judge
Exhibit A
Debtor's notice of appeal with the bankruptcy court's August 2, 2018 order
NOTICE OF APPEAL AND STATEMENT OF ELECTION
Part 1: Identify the appellant
1. Name of appellant:
Stanley B. Immel
2. Position of appellant in the adversary proceeding or bankruptcy case that is the subject of this appeal:
Part 2: Identify the subject of this appealFor appeals in an adversary proceeding.
[ ] Plaintiff
[ ] Defendant
[ ] Other (describe) __________
For appeals in a bankruptcy case and not in an adversary proceeding.
[×] Debtor
[ ] Creditor
[ ] Trustee
[ ] Other (describe) __________
1. Describe the judgment, order, or decree appealed from:Part 3: Identify the other parties to the appeal List the names of all parties to the judgment, order, or decree appealed from and the names, addresses and telephone numbers of their attorneys (attach additional pages if necessary):
The Bankruptcy Court, Eastern District of Wisconsin, entered an order disallowing a provision in the Debtor's chapter 13 plan avoiding State Bank of Newburg's lien to the extent the lien avoidance exceeded $6,425.00. The order further required the Debtor to remit to State Bank of Newburg the proceeds of equipment sales that exceeded $6,425.00.
2. State the date on which the judgment, order, or decree was entered:
August 2, 2018.
| 1. Party:State Bank of Newburg | Attorneys:John M. Gallo1650 9th Avenue, PO Box 104Grafton, WI 53024-0104(262) 377-0600 |
| 2. Party:Rebecca Garcia, Chapter 13 Trustee | Attorney:Rebecca GarciaPO Box 3170Oshkosh, WI 54903-3170(920) 231-2150 |
[ ] Appellant(s) elect to have the appeal heard by the United States District Court rather than by the Bankruptcy Appellate Panel.Part 5: Sign below /s Nicholas Hahn
Nicholas Hahn, Attorney for Appellant Nicholas Hahn
Steinhilber Swanson, LLP
107 Church Avenue
Oshkosh, WI 54901
Tel: (920) 235-6690; Fax: (920) 426-5530 Date: 08/10/2018 THE FOLLOWING ORDER IS APPROVED AND ENTERED AS THE ORDER OF THIS COURT:
ORDER ON LIEN AVOIDANCE
Based on the court's August 2, 2018 decision on lien avoidance,
IT IS ORDERED that State Bank of Newburg's objection to the lien-avoidance provision of the debtor's modified plan is sustained. The debtor can only avoid the Bank's lien up to $6,425.
IT IS FURTHER ORDERED that the debtor must turn over all equipment sale proceeds in excess of $6,425 to State Bank of Newburg within 14 days of the date of this order. DATED: August 2, 2018
/s/_________
G. Michael Halfenger
United States Bankruptcy Judge
#####
Exhibit B
The bankruptcy court's August 2, 2018 decision on lien avoidance
DECISION ON LIEN AVOIDANCE
Section 522(f) of the Bankruptcy Code authorizes debtors to avoid most liens on certain types of exempt property, including a "nonpossessory, nonpurchase-money security interest in" implements and tools of the trade of the debtor. 11 U.S.C. §522(f)(1)(B)(ii). The Code cabins that authority when a debtor uses state-law exemptions. If a debtor elects state-law exemptions for implements and tools of the trade under the law of a state that "prohibits avoidance of a consensual lien on property otherwise eligible to be claimed as exempt", then the debtor may not avoid the lien "to the extent the value of such implements . . . [and] tools of the trade . . . exceeds $6,425." 11 U.S.C. §522(f)(3). The question presented is whether Wisconsin law "prohibits avoidance of a consensual lien on property" for purposes of §522(f)(3)'s lien-avoidance cap.
I
The debtor has claimed certain farm equipment as exempt under Wisconsin statute §815.18(3)(b). CM-ECF Doc. No. 1 at 19; see also Wis. Stat. §815.18(3)(b) (allowing a debtor to exempt up to $15,000 for "[e]quipment, inventory, farm products, and professional books used in the business of the debtor"). The debtor filed a modified chapter 13 plan proposing to sell farm equipment in which he has claimed the $15,000 equipment exemption under Wisconsin law. CM-ECF Doc. No. 55. Under the proposed modified plan, the debtor will retain the first $15,000 of the net sale proceeds and avoid State Bank of Newburg's lien on the equipment up to the $15,000 exemption. CM-ECF Doc. No. 55 at 2. The Bank objects, contending that the debtor can only avoid its lien up to §522(f)(3)'s $6,425 cap. CM-ECF Doc. No. 56.
The court, with the parties' agreement, approved the plan modification subject to a later determination of the extent to which §522(f) authorizes avoidance of the Bank's lien. The court directed the debtor to hold the first $15,000 of net proceeds in his attorney's client trust account pending this court's resolution of that issue. CM-ECF Doc. No. 67-2.
The debtor does not dispute that the Bank has a perfected, first-priority security interest in substantially all of the debtor's personal property, including the debtor's farm equipment. And the Bank does not contest the debtor's claim to a $15,000 exemption in the farm equipment under Wisconsin statute §815.18(3)(b). CM-ECF Doc. No. 1 at 19. Also, neither party disputes that the farm equipment constitutes "implements" or "tools of the trade" of the debtor for purposes of §522(f)(3). The parties only disagree about the application of §522(f)(3)'s $6,425 cap.
II
A
The §522(f)(3) cap on lien avoidance applies when state exemption law prohibits the debtor from avoiding "a consensual lien on property otherwise eligible to be claimed as exempt property". 11 U.S.C. §522(f)(3)(B). Wisconsin exemption law expressly limits a debtor's use of an exemption against a consensual or statutory lien: " No property otherwise exempt may be claimed as exempt in any proceeding brought by any person to recover the whole or part of the purchase price of the property or against the claim or interest of a holder of a security interest , land contract, condominium or homeowners association assessment or maintenance lien or both, mortgage or any consensual or statutory lien ." Wis. Stat. §815.18(12) (emphasis added). This limitation on using an exemption "against . . . a holder of . . . a consensual . . . lien" prohibits a debtor from using Wisconsin exemptions to avoid or otherwise defeat a consensual lien.
Section 522(f)(3) of title 11 provides as follows (with added emphasis):
In a case in which State law that is applicable to the debtor —
(A) permits a person to voluntarily waive a right to claim exemptions under subsection (d) or prohibits a debtor from claiming exemptions under subsection (d); and
(B) either permits the debtor to claim exemptions under State law without limitation in amount, except to the extent that the debtor has permitted the fixing of a consensual lien on any property[,] or prohibits avoidance of a consensual lien on property otherwise eligible to be claimed as exempt property ;
the debtor may not avoid the fixing of a lien on an interest of the debtor or a dependent of the debtor in property if the lien is a nonpossessory, nonpurchase-money security interest in implements, professional books, or tools of the trade of the debtor or a dependent of the debtor or farm animals or crops of the debtor or a dependent of the debtor to the extent the value of such implements, professional books, tools of the trade, animals, and crops exceeds $6 , 425.--------
Wisconsin law thus satisfies §522(f)(3)(B), and the debtor can only use §522(f) to avoid the Bank's consensual lien up to $6,425. The Bank is therefore entitled to receive all equipment-sale proceeds in excess of that amount. See In re Parrish, 186 B.R. 246 (Bankr. W.D. Wis. 1995).
B
In arguing to the contrary, the debtor relies on decisions issued by the district court and bankruptcy court in In re Ehlen. Both Ehlen decisions conclude that Wisconsin exemption law does not prohibit avoidance of consensual liens for purposes of §522(f)(3)'s lien-avoidance cap. United States v. Ehlen (In re Ehlen), 207 B.R. 179 (W.D. Wis. 1997), aff'g In re Ehlen, 202 B.R. 742 (Bankr. W.D. Wis. 1996).
The Ehlen decisions reason that to trigger §522(f)(3)(B)'s prohibits-avoidance provision a state law must "do more than limit what property can be claimed as exempt; it must prohibit lien avoidance explicitly". 207 B.R. at 184; 202 B.R. at 749-50. They read Wisconsin statute §815.18(12) as "simply provid[ing] that property subject to a consensual lien may not be claimed as exempt." 207 B.R. at 184 (quoting 202 B.R. at 749) (internal quotation marks omitted).
The Ehlen courts' reading of §815.18(12) ignores its full text and the context provided by other sections of the exemption statute, contrary to Wisconsin Supreme Court teaching on interpreting Wisconsin statutory law. See State ex rel. Kala v. Circuit Court for Dane Cty., 681 N.W.2d 110, 123-24 (Wis. 2004). In addition to the fact that §815.18(12) provides that property cannot be claimed as exempt "against" the holder of a consensual lien, §815.18(2)(h)'s definition of "exempt" does what the Ehlen courts attribute to §815.18(12): "'Exempt' means free from any lien obtained by judicial proceedings and is not liable to seizure or sale on execution or on any provisional or final process issued from any court, or any proceedings in aid of court process." Wis. Stat. §815.18(2)(h). Again, §815.18(12) by its terms goes further. It prohibits claiming an exemption in property that is "otherwise exempt"—that is, exempt from judicial process as stated in §815.18(2)(h)—"against . . . any consensual . . . lien." Wis. Stat. §815.18(12). So, contrary to the Ehlen courts' conclusions, §815.18(12) does not "'simply provide[] that property subject to a consensual lien may not be claimed as exempt.'" 207 B.R. at 184 (quoting 202 B.R. at 749). Section 815.18(12) prohibits using an exemption either defensively against a creditor collecting on a consensual lien or offensively to avoid a consensual lien on exempt property.
The Ehlen decisions do not propose a different understanding of how Wisconsin exemption law operates. Instead, those decisions suggest that only state laws that use the term "lien avoidance" or some similar phrase satisfy §522(f)(3)(B)'s prohibits-avoidance provision. The Ehlen courts base this conclusion on an inference of congressional intent. They divine this intent from a written statement submitted by the American Bankers Association to the House of Representatives Judiciary Committee's Subcommittee on Economic and Commercial Law when the subcommittee was considering what became the Bankruptcy Reform Act of 1994, which added §522(f)(3)(B) to title 11. In re Ehlen, 202 B.R. at 748-49 (discussing Bankruptcy Reform: Hearing Before the Subcomm. on Econ. and Commercial Law of the H. Comm. on the Judiciary, 103d Cong. (1994) (statement of Philip S. Corwin, Dir. and Counsel, Operations and Retail Banking, Am. Bankers Ass'n) ("Am. Bankers Ass'n Statement")); see also 207 B.R. at 185 (explaining the bankruptcy court's conclusion that §522(f)(3)(B) did not apply to Wisconsin based on the American Bankers Association's statement).
The American Bankers Association's statement in part championed proposed changes to §522(f) intended to mitigate the effect of Owen v. Owen, 500 U.S. 305 (1991). Owen overruled lower-court decisions that had made §522(f) lien avoidance unavailable when the debtor used exemptions under state law that defined exempt property as excluding property encumbered by consensual liens. 500 U.S. at 313-14. After Owen, debtors in states with unlimited or large tools-of-the-trade exemptions (for example) could use §522(f) to avoid non-purchase-money consensual liens in amounts that far exceeded the modest exemption amounts provided under federal law. The American Bankers Association's statement observed that a proposed amendment to §522(f) that capped the avoidance amount when state law permitted an unlimited exemption would not address a perceived detrimental effect of §522(f) lien avoidance on agricultural lending in Texas, which had a large, but not unlimited, exemption. In proposing a further limitation, the American Bankers Association noted, "Texas law . . . permits preexisting lien encumbrances on otherwise exemptible property", but, as a result of Owen, "Texas lenders considering a loan application from a farmer or small business today can no longer rely on state law to preserve their lien in bankruptcy". Am. Bankers Ass'n. Statement, 103d Cong. at 220-21 (emphasis omitted). In order to protect these lenders, the statement "urge[d] the Committee to include" in the bankruptcy-reform legislation text that became the prohibits-avoidance clause of §522(f)(3)(B). Id. at 221. From this legislative-history snippet Ehlen infers that the prohibits-avoidance clause of §522(f)(3)(B) only applies to debtors similarly situated to those under Texas law because, "[t]his portion of § 522(f)(3)(B) was added specifically to benefit Texas lenders". 202 B.R. at 749; see also 207 B.R. at 184-85 (recounting the bankruptcy court's conclusion on the legislative history).
But "[s]tatutes often are written more broadly than their genesis suggests." Peterson v. Somers Dublin Ltd., 729 F.3d 741, 749 (7th Cir. 2013). And, since Ehlen, the Supreme Court has repeatedly endeavored to construe the Bankruptcy Code based on its text without resort to legislative history. See, e.g., Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004) ("The starting point in discerning congressional intent is the existing statutory text".); Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000) ("[W]hen the statute's language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms.") (internal quotations omitted); Bank of Am. Nat'l Tr. & Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 459 (1999) (Thomas, J., concurring) ("Our precedents make clear that an analysis of any statute, including the Bankruptcy Code, must not begin with external sources, but with the text itself."). In fact, the Supreme Court has "decline[d] to accord any significance to [ ] statements", like the American Bankers Association statement relied on by Ehlen, that are neither "made by a Member of Congress, nor . . . included in the official Senate and House Reports." Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 120 (2001) (quoting Kelly v. Robinson, 479 U.S. 36, 51 n.13 (1986)). In applying the Bankruptcy Code, this court must "apply the text—which both Houses of Congress approved and the President signed—not themes from a history that was neither passed by a majority of either House nor signed into law." Peterson, 729 F.3d at 749.
Section 522(f)(3)(B)'s reference to state statutes that "prohibit[] avoidance of a consensual lien on property otherwise eligible to be claimed as exempt property" is not so ambiguous as to justify Ehlen's resort to legislative history to render §522(f)(3)(B)'s prohibit-avoidance provision inapplicable to Wisconsin law. Again, neither of the Ehlen decisions suppose that Wisconsin law authorizes debtors to avoid consensual liens on exempt property. Nor do they suggest that the effect of §815.18(12) would be any different if its prohibition on using a claim of exemption "against" a consensual lien were replaced with a prohibition on using a claim of exemption "to avoid" a consensual lien.
Finally, the debtor here urges the court to adopt the Ehlen bankruptcy court's reasoning that "an expansive reading of § 522(f)(3) is not in keeping with the intent of § 522(f) itself." CM-ECF Doc. No. 70 at 7 (quoting 202 B.R. at 750). Section 522(f), reasoned the Ehlen bankruptcy court, "was adopted to further the 'fresh start' policy of the Code and to assure that debtors have a measure of financial stability as they proceed forward with their lives." 202 B.R. at 750.
"Any fresh-start policy", however, "must balance the gains from new beginnings against the costs of making it harder for lenders to collect. The more difficult collection becomes, the fewer assets are available to secure loans, the costlier is credit." In re Erickson, 815 F.2d 1090, 1094 (7th Cir. 1987). What the Seventh Circuit explained about construing the scope of Wisconsin's former exemption law applies equally to the debtor's suggestion that the Bankruptcy Code's fresh-start policy supports circumscribing §522(f)(3)(B). Section 522(f)(3)(B) reflects the balance Congress struck on allowing debtors to avoid consensual liens as part of their fresh start. Congress directed that when a state prohibits the avoidance of consensual liens on otherwise exempt property, debtors' ability to avoid consensual liens that impair exemptions under that state's law is subject to §522(f)(3)'s cap. As explained above, Wisconsin law contains that prohibition. The debtor's lien-avoidance authority is limited accordingly.
III
The court will enter a separate order that (a) sustains State Bank of Newburg's objection to the lien-avoidance provision of the plan, (b) declares that the debtor can only avoid the Bank's lien up to $6,425, and (c) directs the debtor to turn over all equipment sale proceeds in excess of that amount to State Bank of Newburg. August 2, 2018
/s/_________
G. Michael Halfenger
United States Bankruptcy Judge
Exhibit C