Sarazin v. Sternat
Filing
8
ORDER RE BANKRUPTCY APPEAL signed by Judge J.P. Stadtmueller on 1/18/2017 REVERSING order of bankruptcy court under review and REMANDING matter to bankruptcy court for further proceedings consistent with this order. (cc: all counsel)(jm)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
REBECCA SARAZIN,
Appellant,
v.
Case No. 16-CV-1117-JPS
Bankruptcy Case No. 15-21681
SHAWN STERNAT,
Appellee.
ORDER
On August 19, 2016, this appeal was taken by the appellant Rebecca
Sarazin (“Sarazin”) from an August 5, 2016 order of the bankruptcy court in
bankruptcy case number 15-21681. (Docket #1). The order overruled Sarazin’s
objection to appellee Shawn Sternat’s (“Sternat”) homestead exemption and
granted Sternat’s motion to avoid Sarazin’s judicial lien. (Docket #1-2). The
appeal is now fully briefed. (Docket #5, #6, and #7). For the reasons explained
below, the Court will reverse and remand this matter to the bankruptcy court
for further proceedings.
1.
JURISDICTION AND STANDARD OF REVIEW
Sarazin timely filed her Notice of Appeal on August 19, 2016, fourteen
days after the bankruptcy court’s order (Docket #1-2). Bankr. R. 8002(a)(1).
This Court has jurisdiction of this appeal because the underlying order
conclusively determined the status of Sarazin’s claim. Schaumburg Bank &
Trust Co., N.A. v. Alsterda, 815 F.3d 306, 313 (7th Cir. 2016). The Court reviews
the bankruptcy court’s findings of fact for clear error and its legal conclusions
de novo. In re Marcus-Rehtmeyer, 784 F.3d 430, 436 (7th Cir. 2015).
2.
FACTS
The relevant facts are brief and undisputed.1 Sternat and Sarazin filed
for divorce in state court in 2012. In September 2014 the circuit court, inter
alia, divided the marital assets and liabilities via a judgment of divorce (the
“Divorce Judgment”). (Docket #5-1 at 64-77). The Divorce Judgment granted
Sternat the marital home (the “Home”), the primary asset of value between
them, and assigned most of the marital debts to Sarazin. Id. at 75-76. To
remedy this imbalance, the court ordered that Sternat make an equalization
payment to Sarazin. Id. at 76. The Divorce Judgment described the payment
as follows:
Equalization. Based on the above division, the court
orders that to equalize the division of assets and debts,
[Sternat] is to pay to [Sarazin] an equalization payment of
$178,923.00, which judgment is hereby granted in favor of
[Sarazin] and against [Sternat].
The court finds that the IRS, WI Dept. of Revenue, and
Loans from Shirley Wiedemeier debts [sic] described above are
all marital debts.
Because the marital residence is the only remaining asset
of value, it is hereby ordered to be sold to pay these debts as an
equalizing payment from [Sternat] to [Sarazin], as soon as
reasonably practical.
Id.
Sternat did not sell the Home or make the equalization payment. He
instead filed for Chapter 13 bankruptcy protection. Sarazin filed a claim for
the equalization payment. She objected to Sternat’s attempt to apply the
homestead exception to the Home, and Sternat filed a motion to avoid
1
These facts are drawn from the bankruptcy court’s memorandum opinion
(Docket #5-1 at 53-60) unless otherwise noted.
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Sarazin’s lien. The bankruptcy court order under review resolved both issues
simultaneously. (Docket #1-2).
3.
ANALYSIS
Before the bankruptcy court, Sarazin argued that the Divorce
Judgment had awarded her a mortgage lien, rather than a judicial lien.
(Docket #5-1 at 47-49). The bankruptcy court found that Divorce Judgment
was merely a judicial lien, concluding that Sarazin had conceded the point.
Id. at 55.2 This is a question of law, which the Court reviews de novo, and it
concludes that this finding was erroneous. The Divorce Judgment awarded
Sarazin a mortgage under Wisconsin law.
This result is dictated by the Wisconsin Court of Appeals opinion in
Klemme. There, a husband (Robert) and wife (Patricia) were granted a
judgment of divorce. Klemme v. Schoneman, 477 N.W.2d 77, 77 (Wis. Ct. App.
1991). The judgment incorporated a stipulation concerning division of marital
property. Id. at 78. With respect to the marital home, it provided as follows:
[Robert] shall be awarded all right, title and interest in
the real property located at 2716 Michigan Avenue, Sheboygan,
Wisconsin, [legal description omitted] and [Patricia] shall be
divested of all right, title and interest therein subject to the
following cash settlement which shall remain as a lien against
said property until paid:
[Robert] shall pay [Patricia] the sum of Five Thousand
Eight Hundred ($5,800.00) Dollars payable in the following
manner: $1,500.00 to be paid within thirty (30) days of the
2
Sarazin’s position is admittedly unclear in her brief submitted to the
bankruptcy court. The bankruptcy court cited her “concession” in the first page of
her brief, where she argued in favor of a “judicial and equitable lien,” without
mentioning a mortgage lien. (Docket #5-1 at 38, 55). The vast majority of the brief,
and the conclusion, are also silent on the mortgage issue. See id. at 38-46, 49-52.
Nevertheless, the mortgage issue is mentioned and appears to be properly before
the Court (Sternat has not argued, for instance, that the point was waived).
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divorce hearing; $1,500.00 bearing interest at 12% per annum
from the date of the divorce hearing to be paid nine (9) months
from the date of the hearing; $1,500.00 bearing interest at 12%
per annum from the date of the divorce hearing to be paid
twelve (12) months from the date of the hearing; $1,300.00
bearing interest at 12% per annum from the date of the divorce
hearing to be paid fifteen (15) months from the date of the
divorce hearing. Upon payment of the final installment
[Patricia] shall execute such documents of title as necessary to
terminate her lien against the real estate.
Id. at 78 n.2.
Robert failed to pay the entire settlement amount and filed for
bankruptcy, listing Patricia’s lien as a debt to be discharged. Id. He obtained
discharge. Id. After some further filings in the family court, Patricia
attempted to foreclose her lien on the marital home. Id. Robert argued that
the lien was non-existent as it had been discharged in bankruptcy. The trial
court ruled in Patricia’s favor, finding that the lien was a mortgage which
could not have been discharged. Id.
The appellate court upheld that ruling. Id. at 81. It relied heavily on the
Wisconsin Supreme Court’s Wozniak decision. Wozniak held that divorce
judgments could create mortgage, rather than judicial, liens, depending on
the characteristics of the judgment. Wozniak v. Wozniak, 359 N.W.2d 147, 150
(Wis. 1984). The characteristics to be considered include: 1) whether the
subject interest is expressed as a lien, 2) whether the lien is attached to a
particular piece of property, 3) whether the lien is meant to guarantee
payment of a particular sum of money, 4) whether the underlying debt
accrues interest, and 5) whether the debt is due on a particular date. Klemme,
477 N.W.2d at 80. Wozniak further observed that no particular characteristic
is essential, but that the critical inquiry is the intention behind the lien:
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“Whatever be the form of the transaction, if intended as
a security for money, it is a mortgage and the right of
redemption attaches to it. . . . The purpose of the instrument is
the controlling feature under all circumstances. If that is
security . . . the instrument is treated as a mortgage and
nothing else.”
Id. at 80-81 (quoting Wozniak, 359 N.W.2d at 150).
Applying the Wozniak factors, Klemme found that the divorce judgment
constituted a mortgage lien. Id. at 80. Although it did not include language
permitting Patricia to foreclose her lien, the omission was not dispositive. Id.
Instead, Klemme noted that “the purpose of Patricia’s lien was security for the
future payment of Robert’s balancing payment of the property division. It is
this [intent] aspect of Wozniak that truly controls this case.” Id. at 81. Finally,
Robert argued that Klemme’s holding would convert every divorce judgment
into a mortgage lien. Id. The court rejected the notion, holding that a factual,
case-by-case analysis is required by Wozniak. Id. It closed by stating that
“[w]hile [the Wozniak analysis] may in most cases result in a declaration of a
mortgage lien, neither Wozniak nor this case create an ironclad rule.” Id.
While not identical to Klemme, this matter shares more than enough
common features for this Court to follow Klemme’s guidance. The Wozniak
factors are present to at least some degree. Though the Divorce Judgment
does not use the words “lien” or “mortgage,” Sarazin argues that Wisconsin
courts emphasize substance over form, citing Klemme as a prime example.
The Divorce Judgment attaches the lien only to the Home, and no other
marital property, thereby distinguishing it from a judicial lien. Id. at 80 (“[A]
mortgage serves as security for a particular piece of property, while a
judgment lien ordinarily is not a lien on any specific real estate of the
judgment debtor but is a general lien on all of the debtor’s real property.”).
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Further, the lien is specifically intended to ensure that Sternat sells the home
to procure funds for the equalization payment. Though the equalization
payment does not accrue interest, the “as soon as reasonably practical”
language provides a timeliness component. (Docket #5-1 at 76). Sternat
maintains that the Divorce Judgment lacked key mortgage characteristics,
namely rights of redemption and/or foreclosure. As noted above, Klemme
found that such language would favor finding a mortgage lien, but its
absence is not conclusive in that regard. Klemme, 477 N.W.2d at 80.
The Court finds that these factors weigh in favor of finding a mortgage
lien, albeit to a lesser extent than they did in Klemme. This case appears to be
a few steps removed from Klemme; the word “lien” is not used and there is
no precise payment date or specific payment arrangements. Nevertheless,
this Court concludes, as did Klemme, that beyond an analysis of the Wozniak
characteristics, the intent question determines the outcome. The Divorce
Judgment gave the Home to Sternat. It then ordered Sternat to make the
equalization payment, and in the same breath directed that the Home be sold
to create the funds necessary to effectuate the payment. The intent was that
the Home be transferred to Sternat and immediately liquidated to fund the
payment. This intention to use the Home as security for the equalization
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payment controls, and dictates that the Divorce Judgment created a mortgage
lien. Id. at 80-81.3, 4
5.
CONCLUSION
Sarazin has a mortgage lien on the Home by virtue of the Divorce
Judgment. The bankruptcy court’s finding to the contrary was erroneous. The
bankruptcy court’s decision will, therefore, be reversed, and the matter
remanded to it for further proceedings consistent with this opinion. Sarazin
suggests that her mortgage lien is nondischargeable, but this Court will leave
that and any other bankruptcy-specific determinations to the bankruptcy
court.
Accordingly,
IT IS ORDERED that the order of the bankruptcy court under review
(Docket #1-2) be and the same is hereby REVERSED; and
IT IS FURTHER ORDERED that this matter is REMANDED to the
bankruptcy court for further proceedings consistent with this opinion.
3
Sternat may lament, as did Robert, that this ruling will convert all divorce
judgment liens into mortgage liens. As noted above, even assuming that many
such liens would be viewed as mortgages, Klemme foresaw no problems with that
result so long as the Wozniak analysis was undertaken. Klemme, 477 N.W.2d at 81.
This Court is not at liberty to disagree with Klemme’s interpretation of Wisconsin
law.
4
The Court need not reach the parties’ arguments about whether Sternat can
avoid any supposed judicial lien. Klemme, 477 N.W.2d at 79-80; see Farrey v.
Sanderfoot, 500 U.S. 291 (1991).
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Dated at Milwaukee, Wisconsin, this 18th day of January, 2017.
BY THE COURT:
J.P. Stadtmueller
U.S. District Judge
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