Clark v. Chicago Mun. Emp. Credit Union

• Decision Date: 24 September 1997
• Docket Number: 96-1434 and 96-1662,Nos. 96-1326,s. 96-1326
• Parties: 38 Collier Bankr.Cas.2d 443, Bankr. L. Rep. P 77,446 In re Cynthia CLARK, Debtor-Appellee-Cross-Appellant, v. Appeal of CHICAGO MUNICIPAL EMPLOYEES CREDIT UNION, Creditor-Appellant-Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 540

119 F.3d 540

38 Collier Bankr.Cas.2d 443, Bankr. L. Rep. P 77,446

In re Cynthia CLARK, Debtor-Appellee-Cross-Appellant, v. Appeal of CHICAGO MUNICIPAL EMPLOYEES CREDIT UNION Creditor-Appellant-Cross-Appellee.

Nos. 96-1326, 96-1434 and 96-1662.

United States Court of Appeals Seventh Circuit.

Argued Dec. 9, 1996.

Decided July 11, 1997.

Rehearing and Suggestion for Rehearing En Banc Denied Sept.

24, 1997. ^*

Michele Odorizzi (argued), Michael J. Gill, Julie L. Myers, Mayer, Brown & Platt, Lauren Newman, Robert J. Walinski, Walinski & Trunkett, South Division Credit Union, Chicago, IL, for Chicago Municipal Employees Credit Union.

Jack McCullough, Office of the Trustee, Chicago, IL, pro se.

David E. Linde (argued), Chicago, IL, for Debtor-Appellee.

Before COFFEY, MANION, and EVANS, Circuit Judges.

COFFEY, Circuit Judge.

Cynthia Clark filed a Chapter 13 Bankruptcy petition. The Chicago Municipal Employees Credit Union ("Credit Union") filed proof of a fully secured claim for $15,465.06, which represented the entire balance due on a car loan, signature loan, and revolving line of credit (Visa credit card) that Clark had entered into with the Credit Union. Each of these agreements was secured by a grant of a security interest in any rebate or refund which Clark might receive from her retirement fund. The bankruptcy court denied Clark's objection to the Credit Union's proof and found that the entire balance on all three agreements was secured. On appeal, the district court affirmed in part and reversed in part, finding that advances on a revolving line of credit could not be deemed a loan under 40 ILCS 5/8-244(2), the Illinois statute permitting Credit Union members to pledge municipal pension refunds payable upon separation from service as security for a loan. The Credit Union appeals arguing that the district court incorrectly determined that a revolving line of credit could not be considered a secured loan under Illinois law. Clark cross-appeals asserting that a credit union cannot encumber a member's pension refund because of the Bankruptcy Code's clear directive that a debtor must be left with enough post-petition property to ensure a "fresh start." We affirm.

I. BACKGROUND

Cynthia Clark worked for the City of Chicago as a meter maid for 28 years. During this period of employment she became a member of the Chicago Municipal Employees Credit Union. Clark entered into three different loan agreements with the Credit Union. She received a cash advance on a signature loan, a financing agreement to buy a Buick LeSabre automobile, and a Visa credit card from the Credit Union. Each of these agreements were secured by a grant of a security interest in any rebate or refund which may become payable to Clark from her retirement fund. There were outstanding balances on all three agreements when Clark suffered a stroke that left her unable to continue her employment as a meter maid and resulted in a subsequent reduction of income. Following her stroke, she began to receive $920 per month from the city in the form of disability payments. On April 3, 1995, Clark filed for bankruptcy relief under Chapter 13 of the Bankruptcy Code. The plan she proposed would have repaid 100% of the fair market value of her car, which was evaluated to be $9,392, to the Credit Union. However, her plan would have treated the remaining balances on her personal loan and on her revolving line of credit as unsecured debts that would have only been repaid at 10% of their value. On May 30, 1995, the Credit Union filed a proof of claim listing Clark's outstanding balances in the amount of $15,465.06 as debts secured by any refund Clark might receive from her pension upon her termination of employment with the city. Clark subsequently filed an objection to the Credit Union's proof of claim asserting that Illinois law, which allows a municipal credit union to encumber a person's pension refund, contravenes the congressional intent of enacting the Bankruptcy Code, which clearly directs that debtors who go through bankruptcy must be left with enough post-petition property to ensure a "fresh start." In re Szekely, 936 F.2d 897, 901 (7th Cir.1991); In re Smith, 848 F.2d 813, 817 (7th Cir.1988). She additionally argued that credit card debts are not within the scope of the Illinois statute at issue and, therefore, may not be secured by a person's pension fund.

On September 20, 1995, the bankruptcy court overruled Clark's objections to the Credit Union's proof of claim, thereby allowing the entirety of her outstanding balances to the Union to stand as secured debts. Clark appealed to the district court arguing that the Illinois statute allowing credit unions the power to encumber pension refunds of their members as security for loans violated the purpose of the federal Bankruptcy Code to allow debtors a "fresh start." She additionally argues that if the Credit Union was allowed to receive a security interest in loans, the amount of her outstanding debt to the Credit Union with respect to the line of credit on her Visa card could not be considered a "loan" under the Illinois statute.

The district court affirmed in part and reversed in part the decision of the bankruptcy court. The district court rejected Clark's general challenge to the enforceability of such pension refund encumbrances, but agreed that the Illinois statute did not permit a municipal credit union to place a lien on a refund on the basis of credit card debt. Both the Credit Union and Clark appealed the district court's ruling and these appeals have been consolidated for decision.

The Credit Union argues that the entirety of Clark's outstanding balances be considered secured debt, and that the district court's distinction between a "loan" and a "line of credit" is a misinterpretation of the relevant Illinois statute. Clark contends that her entire outstanding balance is unsecured because the Illinois statute allowing municipal credit unions to encumber the pension refunds of their members violates the federal Bankruptcy Code's requirement that debtors be left enough post-petition property to ensure a "fresh start."

II. DISCUSSION

A. Municipal Credit Union's Security Interest in Member's Pension Refunds

Clark argues that a municipal credit union cannot encumber a member's pension refund due to the Bankruptcy Code's clear directive stating that a debtor must be left with enough post-petition property to ensure a "fresh start" after filing for bankruptcy. The district court determined that 40 ILCS 5/8-244 did not conflict with the Bankruptcy Code and that the Credit Union had enforceable liens on Clark's pension for the signature and car loans. Because the trial court's ruling was based solely on its interpretation of the law, we review its decision de novo. Triad Assoc. v. Robinson, 10 F.3d 492, 495 (7th Cir.1993); In re Yonikus, 996 F.2d 866, 868 (7th Cir.1993).

The Illinois law at issue in this case is 40 ILCS 5/8-244, which in relevant part states:

No annuitant, pensioner, refund applicant, or other beneficiary shall have any right to transfer or assign his annuity, refund or disability benefit or any part thereof by way of mortgage or otherwise, except that:

....

(2) in the case of refunds, a participant may pledge by assignment, power of attorney, or otherwise, as security for a loan from a legally operating credit union making loans only to participants in certain public employee pension funds described in the Illinois Pension Code, all or part of any refund which may become payable to him in the event of his separation from service;....

"A refund is the return to the employee of all [her] contributions into the [retirement and disability] Fund upon [her] termination of employment where the employee is not fully vested in the Fund at [her] termination." In re Davis, 86 B.R. 556, 557 (N.D.Ill.1988). It is important to recognize that this statute does not allow the Credit Union to encumber a member's pension, but only any refund of a debtor's contribution to her retirement fund that she elects to take upon her termination of employment with the city. Should Clark elect to not take a refund and wait for her retirement to receive her pension, the Credit Union will not be able to take any of her pension money.

The Bankruptcy Code provides that an individual debtor can retain certain exempt property while the debtor's non-exempt property may be used to satisfy creditors' claims. 11 U.S.C. § 522. Clark acknowledges that 11 U.S.C. § 522(b)(1) of the Bankruptcy Code allows states to "opt out" of the federal exemptions enacted by Congress and enumerated in § 522(d). Illinois is one of numerous states that have chosen to "opt out" of the federal bankruptcy exemptions and enact its own exemption scheme pursuant to § 522(b)(1). Therefore, residents of Illinois are not permitted to use the federal exemptions provided in § 522(d) "except as may otherwise be permitted under the laws of Illinois." 735 ILCS 5/12-1201; see Yonikus, 996 F.2d at 870.

The unambiguous language of Sec. 522(b) implicitly indicates a state may exempt the same property included in 522(d), more property than that included in 522(d), or less property than that. In fact, states may also prescribe their own requirements for exemptions which may either circumscribe or enlarge the list of exempt property.

In re Goering, 23 B.R. 1010, 1013 (Bankr.N.D.Ill.1982) (citing In re McManus, 681 F.2d 353 (5th Cir.1982)).

Clark relies on Davis, 86 B.R. 556 (N.D.Ill.1988), where the court held that the Credit Union did not have a valid lien attaching to Davis's pension refund. However, subsequent to the Davis decision, 40 ILCS 5/8-244 was amended in 1991 to explicitly allow the assignment of refunds as security for a loan from a credit union meeting certain requirements. In the case before us, the district court explained that the validity of § 8-244 has been directly upheld by the Illinois appellate court in Wright v....