Smith, Matter of
| Decision Date | 17 February 1981 |
| Docket Number | Nos. 80-2033,s. 80-2033 |
| Citation | 640 F.2d 888 |
| Parties | 3 Collier Bankr.Cas.2d 827, 7 Bankr.Ct.Dec. 419, Bankr. L. Rep. P 67,833 In the Matter of Philip A. SMITH, Jr., Jeffery Stephen Pierce and Mary Kathryn Pierce and Jerry L. Montie Lamb and Claire Barnstead Lamb, Debtors-Appellants. to 80-2035. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Barry Barash, Galesburg, Ill., for debtors-appellants.
James Brannon, Peoria, Ill., for appellee.
Before SWYGERT and CUMMINGS, Circuit Judges, and BROWN, Senior District Judge. 1
These appeals present a question of first impression among the circuits which arises under the new Bankruptcy Code: whether a debtor's cause of action for violations of the Truth in Lending Act and similar state statutes is "property" that may be claimed as exempt under the exemption provision of the Code, 11 U.S.C. §§ 522(d)(1) and (5). The district court held that the rights of action may not be claimed as exempt. We hold that they may be claimed, and we reverse.
The facts in these three cases are not in dispute; nor are they significant to our holding which decides a pure question of law. In each case, the debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code. 2 Each petition was filed after October 1, 1979, and is therefore governed by the Code rather than the former Bankruptcy Act of 1898. Each debtor disclosed that he or she had a claim against a lender for violations of the federal Truth in Lending Act, 15 U.S.C. §§ 1601 et seq., or the Illinois Consumer Installment Loan Act, IRS, ch. 74, §§ 51 et seq. No claim exceeded the $7,900 total amount a debtor is permitted to claim as exempt under 11 U.S.C. §§ 522(d)(1) and (5). 3 The bankruptcy court for the Central District of Illinois ruled that such rights of action were not "property" within the meaning of section 522(d) (5). The district court, deciding the three cases together, affirmed. In re Smith, 5 B.R. 500 (C.D.Ill.1980).
The product of eight years of study and debate, the Bankruptcy Reform Act of 1978 represented the first major revision of bankruptcy law in forty years. 4 The Bankruptcy Act of 1898 had not been overhauled since 1938, when consumer credit was virtually nonexistent and commercial credit bore no resemblance to the modern exigencies of the Uniform Commercial Code. Because of these and other developments in debtor/creditor relationships, Congress in 1970 created the Commission on the Bankruptcy Laws of the United States to study and recommend changes in the bankruptcy laws. In 1973, the Commission issued its report, which contained a draft of a bill to implement its recommendations. 5 The National Conference of Bankruptcy Judges submitted an alternative draft bill. The 94th Congress held hearings on both bills from May 1975 to May 1976. 6 Both houses of Congress then began the process of drafting and redrafting which led eventually to the Bankruptcy Reform Act of 1978. 7
No section of the 1898 Act was left untouched. The Reform Act establishes a new system of bankruptcy courts parallel to but independent of federal district courts to become operational April 1, 1984 8 and it enacted a new Bankruptcy Code repealing entirely the former code. 9 Every bankruptcy case after October 1, 1979, is to be filed under one of the four operative chapters of the new Code: Chapter 7 (liquidation), Chapter 9 (), Chapter 11 (reorganization), and Chapter 13 (). The three other chapters of the Code apply generally to all such cases: Chapter 1 offers general provisions such as definitions and rules of construction; Chapter 3 concerns case administration; and Chapter 5 defines the rights and responsibilities of creditors and debtors and the scope of the estate. It is this last chapter which we must interpret here.
Section 541 of the Code reflects the policy of the reformers to include all of the property of the debtor in a bankruptcy case. 10 The bankrupt's estate is defined broadly, with some exceptions and additions, as "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 Thus there is no question, as all parties here agree, that the estate includes causes of action such as the truth-in-lending claims in these cases. 12 Section 522 allows the debtor to recover through exemptions some of that property which has become the estate. This exemption section is a significant departure from prior law. Under the former act, exemptions were treated as a matter of state law. Congress found that this practice created great disparity in treatment of debtors, and that many state statutes did not leave debtors sufficient property to begin their economic lives anew. 13 Congress therefore established for the first time a set of federal exemptions and provided that a debtor may choose between those exemptions and those to which he is entitled under state laws and under other federal laws (such as social security payments or veterans benefits). 14 Section 522 thus balances the federal interest in ensuring a fresh start with the states' interests in regulating credit within their borders. It encompasses also a recognition that local circumstances vary. 15
Section 522(d) specifies the federal exemptions available to debtors. They include, for example, up to $200 in household goods, $500 in jewelry, $750 in professional items or tools of the trade, and $1,200 in a motor vehicle. The controversy in these cases concerns two paragraphs of section 522(d): namely, the homestead exemption, section 522(d)(1), and the general exemption, section 522(d)(5). These sections provide exemptions of
(1) The debtor's aggregate interest, not to exceed $7,500 in value, in real property or personal property that the debtor or dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor.
(5) The debtor's aggregate interest, not to exceed in value $400 plus any unused amount of the exemption provided under paragraph (1) of this subsection, in any property.
11 U.S.C. § 522(d) (emphasis added). The dispute here is caused by the words "any property" in paragraph (5). The trustee contends that they refer only to other property that is specified in section 522: household goods, motor vehicles, etc. The debtors argue that they have the same broad meaning as in section 541: "all legal or equitable interests of the debtor." We agree with the debtors that Congress did not intend to distinguish between section 522 property and section 541 property. We hold that the general exemption may be applied to any property that is property of the estate including, of course, causes of action arising under the federal Truth in Lending Act or similar state statutes.
Our holding is based primarily on the legislative history of the Bankruptcy Reform Act of 1978. Congress found that "there is a Federal interest in seeing that a debtor that (sic) goes through bankruptcy comes out with adequate possessions to begin his fresh start." 16 The general exemption was intended to ensure that there was no discrimination between homeowners and non-homeowners in achieving that goal. 17 By permitting non-homeowners (or homeowners with property valued under $7,500) to exempt the unused portion of the homestead exemption, plus $400, Congress in effect gave all debtors potentially the same $7,900 stake. The draft bill submitted by the Bankruptcy Commission, which was used as a framework for the final bill, allowed the debtor to use only specific types of property to make up the deficiency in the homestead exemption. 18 In contrast, the Code as enacted permits the use of "any property." Exemption statutes are to be construed liberally. 19 In view of Congress' goal of providing a meaningful fresh start for debtors, it makes no sense to limit the type of property that may be applied to the general exemption without a clear statement of Congressional intent to do so.
The structure of sections 541 and 522 also demonstrate that we should not draw any distinction as to what constitutes property under them. Section 541 represents a major change from the old act, for all property is included in the estate even exempt property. If a debtor does not claim property as exempt, as provided for in section 522(l ), it is not exempt and the trustee may dispose of it as he sees fit. Under the old act, exempt property was exempt, no matter what the bankrupt did, because of its very nature. 20 A debtor did not have to claim affirmatively his exempt property, for by its very nature it could not be taken from him. Trustees were thus forced to petition courts to declare what property was exempt and what was not. By including even exempt property within the estate under the Code, Congress eliminated this conceptual distinction between exempt and non-exempt property. We should not re-create that distinction, as the district court does, by holding that section 522 property is different from section 541 property.
In addition, Congress obliterated in the Code the distinctions contained in the 1898 Act among various rights of action. 21 All causes of action become property of the estate under section 541. A truth-in-lending claim is no different from any other. This change and the removal of the conceptual difference between exempt and non-exempt property along with numerous other sections of the Code show that Congress intended to simplify proceedings and to prevent delays in the administration of a bankrupt's estate through the elimination of artificial distinctions that had previously led to prolonged disputes in the courts. 22
Those few courts that have considered this question all bankruptcy courts have adopted our view. In fact, the bankruptcy court and the district...
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