An Analysis of In re Middleton – The Bankruptcy Court For The Southern District Of Alabama’s Attempt To Incorporate The 2015 State Of Alabama Amendments To The Exemption Statutes Into The U.S. Bankruptcy Code

Presented By
G. John Dezenberg, Jr.
& Brandon N. Smith

Scene From The Film "Ghostbusters" (1984)

Dr. Peter Venkman: This City is headed for a disaster of biblical proportions!

Mayor: What do you mean "biblical"?

Dr. Ray Stantz: What he means is Old Testament, Mr. Mayor, real "Wrath of God" type stuff.

Dr. Peter Venkman: Exactly!

Dr. Ray Stantz: Fire and Brimstone coming down from the skies! Rivers and Seas boiling!

Dr. Egon Spengler: Forty-years of Darkness! Earthquakes! Volcanoes!

Winston Zeddemore: The Dead rising from the Grave!

Dr. Peter Venkman: Human Sacrifice! Dogs and Cats living together....Mass Hysteria!

When I read the U.S. Bankruptcy Court For The Southern District of Alabama's Opinion of In re Middleton, 15-01879, et al., I am reminded of the above scene from one of the all-time great movies, "Ghostbusters" (the 1984 edition, not the 2016 remake which I am certain will rank with "Karate Kid" or "Arthur" as one of the worst remakes of all time). The Court begins its analysis by citing the "binding authority" of First National Bank v. Norris, 701 F.2d 902 (11th Cir. 1983), where the 11th Circuit applied amended Alabama exemptions only to debts incurred after the onset date of the new exemptions statute, then cites the Antonin Scalia authored U.S. Supreme Court case of Owen v. Owen, 111 S.Ct. 1833 (1991), which eloquently discusses why the Norris case is wrong (because the United States Bankruptcy Code overrides State Statutes that conflict with the Code), discusses the "Dogs and Cats living together" consequences from trying to apply what will be four different exemption amounts (due to Alabama Code § 6-10-12 automatically adjusting exemption amounts every three years) to differing debts in Bankruptcy cases to be filed 9 or 10 years hence, but then says that Owen v. Owen is not controlling and does not overrule Norris because it is a "lien avoidance" case, and further rules that Alabama Code § 6-10-12 hasn't supplanted § 6-10-1 "yet" because it will not "take effect until April 2018".

The Southern District Bankruptcy Court decides that you cannot apply different exemptions amounts to different debts that fall within the same class under the Bankruptcy Code, because to do so would clearly violate § 726 (b). They thus rule that if all of the Debt in a Bankruptcy Case was incurred prior to June 11, 2015, then you would apply the old Alabama Exemption Statutes to the debts listed in the Bankruptcy Case. If you have any debt incurred after June 11, 2015, then you apply the new Alabama Exemption Amounts to all debts listed in the Bankruptcy Case. It appears to me that any Bankruptcy Attorney approached by a client with all of their debt incurred prior to June 11, 2015, would be committing malpractice not to advise such a client to make some small charge on a credit card or to get a small payday loan in order to take advantage of the $15,0000.00 homestead exemption and $7500.00 personal property exemption (remember, Congress only forbid attorneys from advising their clients to incur secured debt in order to qualify to file Chapter 7 under the means test created under BAPCPA. The Bankruptcy Code is silent as to incurring debt to increase your exemption amounts.)

It appears to me that the Southern District Bankruptcy Court had all of the pieces to make a correct decision in In re Middleton, but somehow wasn't able to put those pieces together correctly. Starting the opinion with the conclusion that the 11th Circuit case of Norris was "binding authority" is where the opinion starts going south. The Bankruptcy Court in addressing an issue of statutory law is beginning its analysis with a "controlling" 11th Circuit Court opinion. Let us go back to those glorious days of law school, by remembering some basic "rules" for which I shall not provide any supporting citations:

  • RULE ONE: FEDERAL LAW OVERRIDES ANY INCONSISTENT STATE LAW.
  • RULE TWO: THE U.S. BANKRUPTCY CODE IS A FEDERAL STATUTORY LAW.
  • RULE THREE: WHEN DEALING WITH STATUTORY LAW, YOU ONLY LOOK TO CASE LAW IF THE STATUTE IS VAGUE OR UNCLEAR.
  • RULE FOUR: WHEN RESEARCHING CASE LAW, YOU BEGIN WITH U.S. SUPREME COURT PRECEDENTS, THEN 11TH CIRCUIT PRECEDENTS, AND THEN FINALLY FEDERAL DISTRICT COURT OR BANKRUPTCY COURT PRECEDENTS.

The Bankruptcy Court for the Southern District of Alabama in In re Middleton did not begin its analysis by looking at § 522 of the Bankruptcy Code. The pertinent section, § 522 (b) (3) (A), was part of BAPCPA enacted in 2005:

  • (A) subject to subsections (o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition to the place in which the debtor's domicile has been located for the 730 days immediately preceding the date of the filing of the petition...

The Bankruptcy Code is not vague or unclear here. It is not incorporating every provision of State Exemption Laws into the Bankruptcy Code to be utilized by the Bankruptcy Court. It is specifically rejecting use of the Exemption Laws for the state where the Debtor is domiciled on the date of the filing of the Bankruptcy Petition. Instead, it is mandating that the Exemptions Laws for the State where the Debtor was domiciled 730 days prior to the filing of the petition are to be used. It is further stating that you utilize "State or local law that is applicable on the date of the filing of the petition."

Ah, but Jeff Cook says § 6-10-1 prescribes that you use "the law in force when the debt or demand was created" and § 6-10-1 was applicable on the date of filing the petition. Yes, but Owen v. Owen states that the Bankruptcy Code overrides State Exemption Laws that restrict exemptions to which the Debtor would "otherwise be entitled" and since Owen v. Owen and In re Middleton mandate that you use the exemptions in effect at the time of the filing of the Bankruptcy Petition for purposes of lien avoidance, it would be inconsistent to use the exemption laws in effect when the debts were incurred for Debtors Claim of Exemptions and the Claims Allowance Process if all of the debts were incurred prior to June 11, 2015. Also, Ala. Code § 6-10-1 appears to be clearly inconsistent with § 522 of the Bankruptcy Code.

In re Middleton, despite citing Owen v. Owen and discussing how Bankruptcy Laws override inconsistent State Exemption laws, has somehow reached the wrong conclusion in failing to recognize that the "controlling" 11th Circuit Court opinion of Norris was either overridden by Owen v. Owen, or, that it is not applicable to the BAPCPA version of the Bankruptcy Code, especially where to uphold Norris would result in one set of exemptions being applied for Lien Avoidances, and another to Debtor's Claim Of Exemptions and to the Claims Allowance Process.

In re Middleton is flawed. Owen v. Owen overrode Norris, or Norris was incorrect to begin with. Clearly, the Bankruptcy Court under § 522 of the Bankruptcy Code should use the exemptions for the State where Debtors resided 730 days prior to the date of the filing of the Petition, and should use the Exemptions in effect for that State as of the date of the filing of the petition for all purposes, not just for purposes of lien avoidance. To do otherwise would violate § 726 (b) of the Bankruptcy

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