In re Applebaum

• Citation: 422 B.R. 684
• Decision Date: 18 December 2009
• Docket Number: Bankruptcy No. 08-63391.,BAP No. OR-09-1134-MkHPa.
• Parties: In re David Michael APPLEBAUM and Laura Michelle Finley, Debtors. Ronald R. Sticka, Chapter 7 Trustee, Appellant, v. David Michael Applebaum and Laura Michelle Finley, Appellees, State of California, Intervenor.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

422 B.R. 684

In re David Michael APPLEBAUM and Laura Michelle Finley, Debtors Ronald R. Sticka, Chapter 7 Trustee, Appellant, v. David Michael Applebaum and Laura Michelle Finley, Appellees State of California, Intervenor.

BAP No. OR-09-1134-MkHPa.

Bankruptcy No. 08-63391.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Submitted Without Oral Argument on September 25, 2009.

Filed December 18, 2009.

COPYRIGHT MATERIAL OMITTED

Ross Moody, Office of the Attorney General, San Francisco, CA, for State of California.

Before: HOLLOWELL, PAPPAS and MARKELL, Bankruptcy Judges.

OPINION

HOLLOWELL, Bankruptcy Judge.

Debtors David Applebaum and Laura Finley ("Debtors") filed a petition under chapter 7 of the Bankruptcy Code¹ and claimed exemptions under the California exemption statute, which is applicable only to debtors in bankruptcy. See Cal.Civ. Proc.Code ("C.C.P.") § 703.140. The trustee Ronald R. Sticka ("Trustee") objected to the exemptions and argued that California's bankruptcy-only exemption statute violates the Supremacy Clause and the Uniformity Clause of the United States Constitution. The bankruptcy court overruled the Trustee's objections and concluded that California's exemption scheme is constitutional. We agree that California's bankruptcy-only exemption statute is not preempted by the Bankruptcy Code and does not violate the Uniformity Clause, and AFFIRM the decision of the bankruptcy court.

FACTS

Debtors resided in California between July 2004 and April 2007. In April 2007, Debtors moved to Oregon, where they currently reside. When Debtors filed their chapter 7 petition on September 5, 2008, they appropriately claimed exemptions under California law, as provided by the domiciliary provisions in § 522(b)(3)(A). Specifically, on their Schedule C, Debtors claimed exemptions under C.C.P. § 703.140(b).²

The Trustee objected to Debtors' claimed exemptions. He asserted that California's bankruptcy-only exemption statute is unconstitutional, referencing In re Regevig, 389 B.R. 736 (Bankr.D.Ariz. 2008) and In re Lennen, 71 B.R. 80 (Bankr.N.D.Cal.1987). Debtors, for their part, contended that the bankruptcy court should adopt the analysis set forth in In re Morrell, 394 B.R. 405 (Bankr.N.D.W.Va. 2008) aff'd sub nom. Sheehan v. Peveich (In re Sheehan), 574 F.3d 248 (4th Cir. 2009), which rejected these constitutional challenges to a similar bankruptcy-only state exemption statute.

Under 28 U.S.C. § 2403(b), the bankruptcy court certified the matter to the California Attorney General, but the California Attorney General declined to intervene before the bankruptcy court. The bankruptcy court thereafter issued a memorandum decision overruling the Trustee's objections. Agreeing with Morrell, the bankruptcy court concluded that § 522(b)'s opt-out provision left ample room in the field of exemptions for a state to enact bankruptcy-only exemptions and that California's bankruptcy-only exemptions did not appear to conflict with the overall scheme of the Bankruptcy Code. The bankruptcy court also rejected the Uniformity Clause challenge.

The Trustee timely appealed. During the course of this appeal, we issued our own Certification pursuant to 28 U.S.C. § 2403(b) and the California Attorney General accepted the invitation to intervene. Debtors neither filed a brief nor otherwise actively participated in this appeal.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 157(b)(1). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Is California's bankruptcy-only exemption statute, C.C.P. § 703.140, unconstitutional because it violates either the Supremacy Clause or the Uniformity Clause of the Constitution?

STANDARD OF REVIEW

We review the bankruptcy court's conclusions of law and questions of statutory interpretation de novo. Drummond v. Urban (In re Urban), 375 B.R. 882, 888 (9th Cir.BAP2007).

DISCUSSION

I. Bankruptcy Exemptions

Upon filing a bankruptcy petition, all property of the debtor becomes property of the bankruptcy estate. 11 U.S.C. § 541. The debtor may then exempt certain property from the estate and remove that property from distribution to creditors. 11 U.S.C. § 522(d). Allowing debtors exemptions enables them to emerge from bankruptcy with adequate property to achieve the fundamental goal of the Bankruptcy Code, a financial "fresh start." See In re Vasko, 6 B.R. 317, 321 (Bankr. N.D.Ohio 1980) (citing legislative history).

A fundamental component of an individual debtor's fresh start in bankruptcy is the debtor's ability to set aside certain property as exempt from the claims of creditors. Exemption of property, together with the discharge of claims, lets the debtor maintain an appropriate standard of living as he or she goes forward after the bankruptcy case.

4 Collier on Bankruptcy, ¶ 522.01 (Alan N. Resnick & Henry J. Sommer, eds., 15th ed. rev.2009).

In exempting property from the estate, a debtor chooses between exempting the property protected by state or local law, or, exempting the property specified in § 522(d). 11 U.S.C. § 522(b)(1). A debtor cannot pick or choose among these options: he or she must elect the exemptions authorized by state law, or elect those afforded in § 522(d). However, a state may "opt out" of the federal exemption scheme and deny the debtor the option of taking the exemptions under § 522(d). 11 U.S.C. § 522(b)(2). Thirty-four states, including California, have opted out of the bankruptcy exemptions provided under § 522(d). See C.C.P. § 703.140; 4 Collier on Bankruptcy, ¶ 522.01[1]. Thus, a California debtor may claim only those exemptions provided by California law. Id.

Like several other states, California has two exemption statutes: one provides exemptions that apply to judgment debtors generally and the other applies only to debtors in bankruptcy proceedings. California's bankruptcy-only exemptions are similar but not identical to the federal bankruptcy exemptions. C.C.P. § 703.140(b); 11 U.S.C. 522(d). Among other things, California's bankruptcy-only exemptions include a "wildcard" exemption that is nearly double the wildcard provided in the Bankruptcy Code's exemptions. Compare C.C.P. § 703.140(b)(5) with 11 U.S.C. § 522(d)(5).

The Trustee contends, and the dissent agrees, that a state exemption statute that applies only in bankruptcy cases conflicts with the Bankruptcy Code and is, therefore, rendered invalid by the Supremacy Clause. Furthermore, the Trustee argues the separate scheme of exemptions applicable only to debtors in bankruptcy proceedings (and not generally available to all state residents) violates the Uniformity Clause.

II. The Supremacy Clause and Preemption Doctrine

The Supremacy Clause provides that the "Constitution and the Laws of the United States which shall be made in Pursuance thereof ... shall be the supreme Law of the Land ... any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." U.S. Const. art. VI, cl. 2. The Supremacy Clause and the doctrine of preemption, which implements it, operate to invalidate state statutes to the extent they are inconsistent with, or contrary to, the purposes or objectives of federal law. Perez v. Campbell, 402 U.S. 637, 652, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971) ("[A]ny state legislation which frustrates the full effectiveness of federal law is rendered invalid by the Supremacy Clause."). A state law may be preempted when federal legislation expressly declares its intent to do so; when Congress has legislated comprehensively so as to "occupy the field" of regulation leaving no room for states to supplement federal law; or, when the state law actually conflicts with federal law. La. Pub. Serv. Comm'n v. F.C.C., 476 U.S. 355, 368-69, 106 S.Ct. 1890, 90 L.Ed.2d 369 (1986).

Congress has expressly authorized states to create bankruptcy exemptions when it empowered states to "opt out" of the federal exemption scheme under § 522(b)(1). 11 U.S.C. § 522(b)(1). Even so, "[a]bsent explicit preemptive language, Congress' intent to supercede state law altogether may be found from a `scheme of federal regulation so pervasive as to make reasonable the inference that Congress left no room to supplement it.'" Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm'n, 461 U.S. 190, 204, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983) (quoting Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982)).

While federal bankruptcy law is pervasive and there is a strong federal interest in bankruptcy, particularly in light of its enumeration in the Constitution as an area where Congress has been granted plenary power to legislate, federal bankruptcy law is not so pervasive, nor is the federal interest so dominant, as to wholly preclude state legislation in the area.

Indeed, there are many instances in the Bankruptcy Code where Congress either has deferred to state law or has expressly and affirmatively incorporated state law into the bankruptcy scheme. See Sherwood Partners Inc. v. Lycos, Inc., 394 F.3d 1198, 1201 (9th Cir.2005) (listing examples). Notably, states had their own insolvency and bankruptcy laws in the 19th Century, when Congress elected not to enact a federal bankruptcy statute. See generally Sturges v. Crowninshield, 4 Wheat. 122, 17 U.S. 122, 195-97, 4 L.Ed. 529 (1819) (holding that states were not precluded by the Constitution from passing bankruptcy and insolvency laws so long as Congress had not exercised its power to enact uniform bankruptcy laws). States, therefore, have retained the power to enact bankruptcy laws so long as they do not conflict with federal bankruptcy legislation. Rhodes v. Stewart, 705 F.2d 159, 163 (6th Cir.1983); Matter of Sullivan, 680 F.2d 1131, 1137 (7th Cir.1982). As a result, Congress has not occupied the field of bankruptcy regulation to the point of preempting state exemption statutes.

Therefore, the California bankruptcy-only exemption statute must ...