640 F.2d 888 (7th Cir. 1981), 80-2033, Matter of Smith

Docket Nº:80-2033 to 80-2035.
Citation:640 F.2d 888
Party Name: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.
Case Date:February 17, 1981
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 888

640 F.2d 888 (7th Cir. 1981)

In the Matter of Philip A. SMITH, Jr., Jeffery Stephen

Pierce and Mary Kathryn Pierce and Jerry L. Montie

Lamb and Claire Barnstead Lamb,


Nos. 80-2033 to 80-2035.

United States Court of Appeals, Seventh Circuit

February 17, 1981

Argued Dec. 10, 1980.

Page 889

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

SWYGERT, Circuit Judge.

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

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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 (adjustment of debts of a municipality), Chapter 11 (reorganization), and Chapter 13 (adjustment of debts of an individual with regular income). 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

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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...

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