Patterson, Matter of

Decision Date30 July 1987
Docket Number86-2167,Nos. 86-2107,s. 86-2107
Citation825 F.2d 1140
Parties, 17 Collier Bankr.Cas.2d 339, 16 Bankr.Ct.Dec. 607, Bankr. L. Rep. P 71,935 In the Matter of Ronald and Marjorie PATTERSON, Debtors. Appeal of ABBOTSFORD STATE BANK.
CourtU.S. Court of Appeals — Seventh Circuit

Frank L. Nikolay, Nikolay, Jensen, Scott & Gamoke, S.C., Colby, Wis., for appellant.

Bruce Evan Zito, Mart W. Swenson, S.C., Eau Claire, Wis., for appellees.

Before POSNER and COFFEY, Circuit Judges, and GRANT, Senior District Judge. *

POSNER, Circuit Judge.

This farm bankruptcy case raises questions of interpretation under 11 U.S.C. Sec. 522, the statute that governs the bankrupt's right to take some of his property out of the bankrupt estate and thus keep it after he is discharged from bankruptcy.

Mr. and Mrs. Patterson were engaged in dairy farming in Wisconsin. They rented rather than owned the farmland and buildings (including the house they lived in), but owned the cows and farm equipment, primarily a tractor. Like many midwestern farmers they fell on hard times in the 1980s, and in October 1983 they filed a petition for protection under Chapter 11 of the Bankruptcy Code, which authorizes reorganization under the protection of the bankruptcy court. In December 1985, having decided to quit farming because they couldn't afford feed for their cows, they converted their petition into one for liquidation under Chapter 7. See 11 U.S.C. Sec. 348. They continued to live on the farm they had rented, and a neighboring farmer gave Mr. Patterson a part-time job as a dairy hand.

A month after the conversion, the Pattersons' cows and tractor were auctioned off. The auction netted $24,600, of which 51 cows accounted for $20,300 and the tractor for the rest. Among their debts, the Pattersons owed the Abbotsford State Bank some $82,000. The bank had a non-purchase-money, nonpossessory lien in the cows and tractor, which it wanted to enforce against the proceeds of the auction. However, the Pattersons' petition to convert their bankruptcy from Chapter 11 to Chapter 7 had asked the bankruptcy judge to exempt all property to which they might be entitled by virtue of section 522(d), and now they moved to set aside the bank's lien to the extent of $17,300 of the proceeds of the auction. The judge granted the petition and motion, thereby entitling the Pattersons to retain this money free of the bank's claim.

The district judge affirmed this ruling except with respect to the cows, which he thought were not tools of the debtors' trade. 64 B.R. 120 (W.D.Wis.1986). The bank has appealed, and the Pattersons have cross-appealed on the matter of the cows. The bank raises a procedural point that is insubstantial, and a constitutional point that was forfeited by not being argued to the district judge (or to the bankruptcy judge, for that matter).

The substantial issues involve the interpretation of 11 U.S.C. Secs. 522(d) and (f). Subsection (d), when read in conjunction with (b)(1), allows the debtor to exempt from bankruptcy (i.e., keep out of the hands of the trustee in bankruptcy), the following property:

(1) The debtor's aggregate interest, not to exceed $7,500 in value, in real property or personal property that the debtor or a 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.

(2) The debtor's interest, not to exceed $1,200 in value, in one motor vehicle.

(3) The debtor's interest, not to exceed $200 in value in any particular item, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.

(4) The debtor's aggregate interest, not to exceed $500 in value, in jewelry held primarily for the personal, family, or household use of 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.

(6) The debtor's aggregate interest, not to exceed $750 in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.

(7) Any unmatured life insurance contract owned by the debtor, other than a credit life insurance contract.

(8) The debtor's aggregate interest, not to exceed in value $4,000 less any amount of property of the estate transferred in the manner specified in section 542(d) of this title, in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent.

(9) Professionally prescribed health aids for the debtor or a dependent of the debtor....

Standing alone, subsection (d) would not affect the right of a secured lender, such as the Abbotsford State Bank, to enforce its lien, but subsection (d) does not stand alone. It is complemented by subsection (f), which provides:

Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is--

(1) a judicial lien; or (2) a nonpossessory, nonpurchase-money security interest in any--

(A) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;

(B) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor; or

(C) professionally prescribed health aids for the debtor or a dependent of the debtor.

The Pattersons seek to use the statute as follows. They start with the premise that both the tractor and the cows are "tools of the trade." They go to section 522(d)(6), which exempts the debtor's interest "in any implements, professional books, or tools, of the trade of the debtor," though only up to $750. (Congress recently lowered some of the exemption ceilings discussed in this opinion, by amendment to the Bankruptcy Code, but the amendment is not applicable to this proceeding.) Since both Pattersons are debtors, and they owned the cows and tractor jointly, each claims the $750 exemption, for a total of $1,500. The Pattersons then go to subsection (d)(5), which exempts the debtor's "interest, not to exceed in value $400 plus any unused amount of the exemption provided" by subsection (d)(1), "in any property." This is the so called "wild card" exemption, because it isn't tied to a particular form of property. Right off the bat it gives the Pattersons (they contend) another $800. They then go to subsection (d)(1), to which (d)(5) refers. Since the Pattersons did not own their residence, the unused amount of their (d)(1) exemption is $15,000 for the two of them together, and they want to add that to the $800, to produce a total wild-card exemption of $15,800. This amount, when added to the tools of the trade exemption, would yield the grand total of exemptions that they seek of $17,300. Finally, they want to use the lien-avoidance provision of the statute (section 522(f)) to avoid the bank's lien in the proceeds of the auction, and thereby keep the full $17,300 out of the hands of both their secured and unsecured creditors, the latter being represented by the trustee in bankruptcy.

As the bank and the Wisconsin Bankers Association, which filed a brief as amicus curiae, point out, the Pattersons' claim has far-reaching implications for farm credit. If accepted it would allow the farmer who does not own his own home to keep a substantial amount of his farm assets from being used to satisfy his debts, even though he had pledged the assets as security for those debts. We add that while winning this case might be a boon to the Pattersons (but might not, in the long run, for it might make it harder for them to convince another bank to finance their return to farming), it would not help farmers as a group; it would raise the cost of credit to them. Because a person who fits the Bankruptcy Code's definition of "farmer" can't be forced into bankruptcy, see In re Wagner, 808 F.2d 542 (7th Cir.1986), but can declare bankruptcy if he wants, he controls the timing of bankruptcy and can use it to take maximum advantage of the exemptions. Knowing this makes lenders even more reluctant to lend money to farmers at interest rates that farmers can afford to pay. A law that grants farmers advantages in bankruptcy helps some farmers when the law is passed but may hurt more of them by making farm credit more expensive in the future. (Of course, neither this point nor section 522 itself is limited to farmers.) This point does not entitle us to construe the exemption and lien-avoidance provisions of the Bankruptcy Code narrowly, but, by showing that a broad construction might hurt the very class sought to be benefited, it argues against construing the provisions broadly, without evidence--of which we can find none--that Congress wanted us to do so.

The bank's first two arguments against the district court's decision are closely related. The first is that since the Pattersons were about to quit dairy farming when they filed their petition to convert the bankruptcy from Chapter 11 (reorganization) to Chapter 7 (liquidation), and since they had indeed quit farming by the time they filed their motion to avoid the bank's lien, they cannot use the tools of the trade exemption at all. The second argument is that the exemption cannot be used for proceeds, as distinct from the...

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