Megal Development Corp. v. Shadof

• Decision Date: 08 November 2005
• Docket Number: No. 2004AP1594-FT.,2004AP1594-FT.
• Citation: 705 N.W.2d 645,2005 WI 151
• Parties: MEGAL DEVELOPMENT CORPORATION, Plaintiff-Respondent, v. Craig SHADOF, d/b/a Spectrum Investments, and Susan Shadof, Defendants-Appellants.
• Court: Wisconsin Supreme Court

Page 645

705 N.W.2d 645

2005 WI 151

MEGAL DEVELOPMENT CORPORATION, Plaintiff-Respondent, v. Craig SHADOF, d/b/a Spectrum Investments, and Susan Shadof, Defendants-Appellants.

No. 2004AP1594-FT.

Supreme Court of Wisconsin.

Argued September 7, 2005.

Decided November 8, 2005.

For the defendants-appellants there were briefs by Todd C. Esser and Todd C. Esser & Associates, Milwaukee; and Henry E. Koltz and Schmidt, Darling & Erwin, Milwaukee, and oral argument by Todd C. Esser.

For the plaintiff-respondent there was a brief by O. Thomas Armstrong, Roy L. Prange, Jr., Valerie L. Bailey-Rihn, Patrick J. Schoen and Quarles & Brady LLP, Milwaukee, and oral argument by Valerie L. Bailey-Rihn.

An amicus curiae brief was filed by J. Bushnell Nielsen, Daniel Kelly, Krista J. Ebbens, and Reinhart Boerner Van Deuren S.C., Waukesha, on behalf of the Wisconsin Land Title Association.

ON CERTIFICATION FROM THE COURT OF APPEALS

¶ 1 N. PATRICK CROOKS, J

This appeal is before the court on certification from the court of appeals, pursuant to Wis. Stat. § 809.61 (Rule) (2003-04).¹ Defendants Craig and Susan Shadof (Shadofs) appeal an order of the circuit court denying their application for satisfaction of a judgment and a judgment lien under Wis. Stat. § 806.19(4), where the underlying judgment had been discharged in bankruptcy. The Shadofs appealed, and the court of appeals certified the issue of whether § 806.19(4) requires the satisfaction of a judgment debt against a homestead, where the underlying judgment has been discharged in bankruptcy, yet the debtor's homestead equity exceeds the allowable homestead exemption, and where the debtor failed to seek avoidance of the judgment lien in the bankruptcy court. The court of appeals further raised the issue of whether, if § 806.19(4) does require the satisfaction of a judgment debt when the underlying judgment has been discharged in bankruptcy, the statute is in conflict with, and therefore preempted by, federal bankruptcy law.

¶ 2 We conclude that the circuit court erred in refusing to satisfy the judgment debt pursuant to Wis. Stat. § 806.19(4). The plain language of the statute unambiguously provides that when a proper application is received by the clerk and submitted to the judge for signature, the only thing required for satisfaction of a judgment debt and cessation of an associated judgment lien is that the underlying judgment has been discharged in bankruptcy. Further supporting our conclusion is the legislative history of the statute, as well as persuasive precedent discussed herein. We also conclude that § 806.19(4) is not in conflict with, and therefore not preempted by, federal bankruptcy law.

I

¶ 3 The relevant facts are not in dispute. On May 18, 1994, Megal Development Corporation (Megal) obtained a small claims judgment for eviction and money damages against the Shadofs in the amount of $52,713.78. Pursuant to Wis. Stat. §§ 806.10(1), 806.15(1) and 815.20(1), the judgment subsequently became a lien upon the Shadofs' homestead property located in Waukesha County, Wisconsin.

¶ 4 In February 2003 the Shadofs filed for Chapter 7 bankruptcy relief in the United States Bankruptcy Court for the Eastern District of Wisconsin. They included the Megal judgment as a dischargeable debt on Schedule D of their bankruptcy forms. On June 12, 2003, 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 in bankruptcy found that after subtracting the first and second mortgages, the homestead exemption, and the judgment lien from the value of the homestead, there was no money left in the estate to pay unsecured creditors. Therefore, the Trustee 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.

¶ 5 During the bankruptcy proceeding, Megal filed an Objection to Debtor's Claim for Exemption on May 22, 2003, arguing that the Shadofs had equity in their homestead 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 bankruptcy court order specified that Megal retained the right to challenge any subsequent lien avoidance motion brought under 11 U.S.C. § 522(f)(2004).

¶ 6 On June 16, 2003, the Shadofs filed an application with the Waukesha County Circuit Court seeking an order satisfying the Megal judgment and the judgment lien pursuant to Wis. Stat. § 806.19(4). Circuit Court Judge Donald J. Hassin, Jr. signed an order satisfying Megal's judgment and associated judgment lien on June 20, 2003. That same day, Megal filed an objection to the Shadofs' application based upon the position that § 806.19(4) only permits satisfaction of judgments, and judgment liens, which have been discharged in bankruptcy. As a result, the circuit court vacated its previous order and scheduled the matter for further proceedings.

¶ 7 At the hearing on application for satisfaction, Megal argued that under Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), a Chapter 7 bankruptcy proceeding discharges a person's in personam debt, but not the in rem judgment lien, which survives bankruptcy. Because the judgment lien had not been discharged, Megal maintained it was inappropriate to satisfy the lien under Wis. Stat. § 806.19(4). Megal asserted that the Shadofs could not obtain satisfaction of a debt under the statute when they possessed equity in their homestead in excess of the statutory exemption. The circuit court, Judge Mark S. Gempeler presiding, agreed with Megal. Judge Gempeler's order did three things. First, it denied satisfaction of the judgment granted to the Shadofs in bankruptcy. Second, it granted Megal's motion to extend indefinitely the judgment lien to permit Megal to execute on its judgment. Finally, it stayed Megal's right to execute the judgment during the pendency of the appeal of its decision, or the expiration of the Shadofs' appeal rights. The Shadofs appealed to the court of appeals, which certified the matter to this court.

II

¶ 8 Statutory interpretation is an issue of law which we review de novo. While the review is de novo, this court benefits from the analyses of the circuit court and the court of appeals. State v Anderson, 2005 WI 54, ¶ 23, 280 Wis.2d 104, 695 N.W.2d 731 (citing State v. Waushara County Bd. of Adjustment, 2004 WI 56, ¶ 14, 271 Wis.2d 547, 679 N.W.2d 514).

¶ 9 We address two issues in this case. First, whether under the circumstances presented, Wis. Stat. § 806.19(4) requires the satisfaction of Megal's judgment debt, including the judgment lien against the Shadofs' homestead. Second, if this court determines that § 806.19(4) does require satisfaction of the judgment debt, is that statute preempted by federal bankruptcy law. We will consider each in turn.

¶ 10 The first issue before the court is whether Wis. Stat. § 806.19(4) requires satisfaction of a judgment debt, including a judgment lien, when the underlying judgment has been discharged in bankruptcy, but the equity in the homestead to which the lien attaches exceeds the homestead exemption.²

¶ 11 Megal argues that the plain language of the statute is unambiguous, and clearly requires that in order for a judgment debt, including a judgment lien, to be satisfied under the statute, the lien itself, not simply the underlying judgment, must have been avoided in bankruptcy. Megal bases this interpretation on the distinction between in personam judgments, and in rem judgment liens (an in rem action based upon in personam liability). Bankruptcy provides a discharge of in personam liability for debts. See Dewsnup, 502 U.S. at 418, 112 S.Ct. 773. However, a bankruptcy discharge leaves a lien on real property intact. Id. (citing Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) ("Rather, a bankruptcy discharge extinguishes only one mode of enforcing a claim — namely, an action against the debtor in personam — while leaving intact another — namely, an action against the debtor in rem.")).

¶ 12 Because an in rem judgment lien survives bankruptcy, Megal urges, a debtor must pursue an 11 U.S.C. § 522(f)(2004) motion in federal court to avoid the lien. Therefore, to make Megal's in personam judgment debt and in rem judgment lien eligible for satisfaction under Wis. Stat. § 806.19(4), the Shadofs must have successfully avoided the lien under § 522(f). Having failed to avoid the lien, Megal reasons, its judgment lien was not "discharged" in bankruptcy, and is therefore ineligible for satisfaction under § 806.19(4).

¶ 13 The Shadofs also believe the statute to be unambiguous, yet in support of the opposite result. The Shadofs maintain that the plain language of Wis. Stat. § 806.19(4) clearly states that if a judgment debt is discharged in bankruptcy, the judgment shall be satisfied if a proper application is made to the court. The court of appeals seems to agree, stating in its certification "On the surface, Wis. Stat. § 806.19(4) appears to clearly and unambiguously entitle a judgment debtor to a satisfaction of a judgment debt that has been discharged in bankruptcy."

¶ 14 The Shadofs contend that the statute provides a checklist of conditions which, if met, shall lead to the satisfaction of a creditor's judgment and associated judgment lien. Wisconsin Stat. § 806.19(4) requires judgment debtors to (1) "secure[] a discharge of a judgment debt in bankruptcy"; (2) give notice to judgment creditors; and (3) make a proper application for an order of satisfaction, certifying that the judgment has been discharged in bankruptcy. The Shadofs do not dispute Megal's position that ordinarily liens survive bankruptcy. See Johnson, 501 U.S. at 84, 111 S.Ct. 2150. Nor do they question the contention that 11...