Gifford, Matter of

• Decision Date: 18 August 1982
• Docket Number: No. 81-1174,81-1174
• Citation: 688 F.2d 447,9 B.C.D. 730
• Parties: 6 Collier Bankr.Cas.2d 1441, 9 Bankr.Ct.Dec. 730 In the Matter of Willis R. GIFFORD and Jacqueline M. Gifford, Bankrupts-Appellees, Appeal of THORP FINANCE CORPORATION, Creditor-Appellant. United States of America, Intervenor-Appellee. . Re
• Court: U.S. Court of Appeals — Seventh Circuit

Page 447

688 F.2d 447

6 Collier Bankr.Cas.2d 1441, 9 Bankr.Ct.Dec. 730

In the Matter of Willis R. GIFFORD and Jacqueline M. Gifford, Bankrupts-Appellees Appeal of THORP FINANCE CORPORATION, Creditor-Appellant United States of America, Intervenor-Appellee.

No. 81-1174.

United States Court of Appeals, Seventh Circuit.

Reargued May 26, 1982.

Decided Aug. 18, 1982.

Henry F. Field, Friedman & Koven, Chicago, Ill., for creditor-appellant.

Michael J. Lund, Frisch, Dudek & Slattery, Ltd., Milwaukee, Wis., for bankrupts-appellees.

John Morland, Washington, D. C., for intervenor-appellee.

Before CUMMINGS, Chief Judge, and PELL, BAUER, WOOD, CUDAHY, ESCHBACH, POSNER and COFFEY, Circuit Judges.

CUMMINGS, Chief Judge.

This is an appeal from an order of a three-judge bankruptcy court that relied on 11 U.S.C. § 522(f)(2)(A) to discharge Thorp Finance Corporation's nonpossessory, nonpurchase-money security interest in various household goods owned by Mr. and Mrs. Gifford. Thorp's security interest attached to the household goods one month before Section 522(f) of the Bankruptcy Reform Act of 1978 was enacted, raising the issues of whether Section 522(f) applies to Thorp's security interest and if so whether that application is constitutional.

We first heard arguments on September 21, 1981, and on January 21, 1982, a majority of the hearing panel decided that Section 522(f) did not apply to Thorp's pre-enactment security interest because such application "would give rise to * * * serious constitutional questions under the Fifth Amendment." 669 F.2d 468, 470 (7th Cir.). Following a rehearing of the appeal en banc, we now hold that Section 522(f) applies to Thorp's security interest and that it is not unconstitutional under the Fifth Amendment.

I

On October 4, 1978, Thorp lent the Giffords approximately $3,000 and in return took a security interest in two television sets, a rug, a tape recorder, a washer and dryer, and several pieces of their furniture. The loan was not used to purchase any of the items of collateral, and Thorp did not take possession of the collateral. On June 9, 1980, the Giffords filed a petition in bankruptcy and then sought to avoid the security interest in their household goods and furniture under 11 U.S.C. § 522(f)(2)(A). Section 522(f) 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 (11 U.S.C. § 522(b) ), 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.

Sections 522(b) and 522(d)(3) allow the Giffords exemptions for the collateral that is subject to Thorp's security interest, not to exceed $200 for any particular item. Thus Thorp's lien "impairs an exemption to which the debtor(s) would have been entitled under (Section 522(b) )." Because each item of collateral qualifies as a household furnishing, household good, or appliance, ¹ all the requirements for application of Section 522(f)(2)(A) are satisfied. Since no item of collateral is worth more than $200, if Section 522(f) is held to apply to Thorp's pre-enactment security interest, the Giffords may avoid the security interest in its entirety.

Thorp contested avoidance of its lien before the bankruptcy court on the ground that application of Section 522(f) to pre-enactment liens would be unconstitutional. The bankruptcy court disagreed and held that Congress intended Section 522(f) to apply to pre-enactment liens and that there is no constitutional problem in doing so. 7 B.R. 814, 817-819 (Bkrtcy.). Thorp has appealed from that decision and we allowed the United States to intervene in the appeal as a respondent.

II

The first question is whether Section 522(f) was meant to apply to security interests that attached prior to its enactment. Section 522(f) was enacted as part of the Bankruptcy Reform Act of 1978 on November 6, 1978. Pub.L.No. 95-598, 92 Stat. 2578 (codified at 11 U.S.C. §§ 101 et seq.). Like the other substantive provisions of the 1978 Bankruptcy Act, however, Section 522(f) does not state when it-as opposed to the rest of the 1978 Act-is to apply. Rather, Congress placed all of its directions for the transition between the old and new bankruptcy laws in Title IV of the 1978 Act. Section 401 of Title IV provides that all former laws relating to bankruptcy are repealed. Section 402(a) states that "(e)xcept as otherwise provided in (Title IV), this Act shall take effect on October 1, 1979." The combined effect of Sections 401 and 402(a) is to provide as substantive law only the 1978 Act for cases commenced on or after October 1, 1979. See generally 1 Collier on Bankruptcy PP 7.01, 7.02 (15th ed. 1982). Because Title IV provides no exceptions for Section 522(f), that Section must apply to cases filed on or after the effective date of October 1, 1979. Since the Giffords filed for bankruptcy on June 9, 1980, Section 522(f) is applicable to the security interest in their case. ²

The other Courts of Appeals that have considered whether Section 522(f) applies to pre-enactment security interests agree that it does. Rodrock v. Security Industrial Bank, 642 F.2d 1193, 1196-1197 (10th Cir. 1981) (Section 522(f)(2) applies to pre-enactment security interests), probable jurisdiction noted sub nom. United States v. Security Industrial Bank, --- U.S. ----, 102 S.Ct. 969, 71 L.Ed.2d 108, In re Ashe, 669 F.2d 105 (3d Cir. 1982) (applying Section 522(f)(1), which permits avoidance of certain judicial liens, to pre-enactment cognovit note); see also In re Webber, 674 F.2d 796, 801-802 (9th Cir. 1982) (Section 522(f)(2) applies to pre-effective date liens). At oral argument, counsel for the United States told us without contradiction that some sixty-five bankruptcy court opinions have also interpreted Section 522(f) to apply to pre-enactment liens. See, e.g., In re Morris, 12 B.R. 321 (Bkrtcy.N.D.Ill.1981); In re Giles, 9 B.R. 135 (Bkrtcy.E.D.Tenn.1981); In re Pillow, 8 B.R. 404 (Bkrtcy.D.Utah 1981). It is unnecessary to repeat here the reasoning laid out in those opinions. See also 669 F.2d at 475-478 (Cummings, C.J., dissenting). Again according to counsel, only five bankruptcy court opinions disagree.

Thorp has presented one argument that the prior cases do not address, however. A preliminary draft of the transition provisions stated that the new Bankruptcy Act "shall apply in all cases or proceedings instituted after its effective date, regardless of the date of occurrence of any of the operative facts determining legal rights, duties, or liabilities hereunder." H.R. 31 (also H.R. 32), 94th Cong., 1st Sess. § 10-103(a) (§ 11-103(a) ) (1975), reprinted in Bankruptcy Act Revision: Hearings on H.R. 31 and H.R. 32 Before the House Subcommittee on Civil and Constitutional Rights, 94th Cong., 1st Sess. App. 1 at 321 (1976). Thorp argues that because the above language was criticized by William Plumb in testimony before the House Subcommittee as an improper impairment of vested property rights and then deleted from the final version of the Act, Congress meant to preserve security interests that attached prior to enactment. See Bankruptcy Act Revision: Hearings on H.R. 31 and H.R. 32 Before the House Subcommittee on Civil and Constitutional Rights, 94th Cong., 1st Sess. 2034, 2066-2067 (1976). But Mr. Plumb was only one of many witnesses to testify before Congress and there is no indication that the language was omitted because of fear of unconstitutionality. ³ We therefore attach little weight to his concerns and construe the statute as it was finally enacted, requiring whole application of the new Act to bankruptcies filed on or after October 1, 1979, with immaterial exceptions.

III

The question presented by this appeal, then, is whether application of Section 522(f) to avoid Thorp's pre-enactment lien in the Giffords' household goods violates the Fifth Amendment. ⁴ Thorp argues primarily that Section 522(f) works an uncompensated taking of its property rights in the collateral, and alternatively, that Section 522(f) is a violation of substantive due process.

The two Courts of Appeals that have considered whether avoidance of a pre-enactment lien violates the Fifth Amendment have split on the issue. In Rodrock v. Security Industrial Bank, 642 F.2d 1193 (10th Cir. 1981), probable jurisdiction noted sub nom. United States v. Security Industrial Bank, --- U.S. ----, 102 S.Ct. 969, 71 L.Ed.2d 108, the Tenth Circuit held that "Congress may not under the bankruptcy power completely take for the benefit of a debtor rights in specific property previously acquired by a creditor." 642 F.2d at 1198. The Rodrock Court did not state whether Section 522(f) effected a taking, deprived the creditor of property without due process, or was simply beyond Congress' bankruptcy powers to enact. Instead, the Court relied completely upon the Supreme Court's decision of Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593, which invalidated relief provisions of the Frazier-Lemke Act of 1934. ⁵

To the contrary, the Third Circuit in In re Ashe, 669 F.2d 105 (3d Cir. 1982) held that application of Section 522(f) to pre-enactment judicial liens did not violate the Fifth Amendment. The Ashe Court stated, "Only if a taking for public use is found does the just compensation standard apply. Plainly Section 522(f)(1) is an economic regulation rather than...