In re Barto
| Decision Date | 07 January 1981 |
| Docket Number | 80-02084 and 80-02400,Adv. Proceeding No. 800539.,80-00660,80-00356,80-00586,No. 80-00289,80-00346,80-00289 |
| Citation | 8 BR 145 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re Bethol Paulette BARTO, Debtor. SECURITY PACIFIC FINANCE CORPORATION, Plaintiff, v. Bethol Paulette BARTO, Defendant, United States of America, Intervenor. Since the Barto case was taken under advisement by the Court, the identical issue has arisen in other cases and the parties therein agreed to let the Barto decision be dispositive of them all. Those cases are In re Clifton L. ANDREWS, Debtor. In re Danny Clarence FARLEY, Debtor. In re Linda Whitehurst LASSITER, Debtor. In re Anna Louise FARLEY, Debtor. In re Deborah Ann Small PALAIMO, Debtor. In re Helen Delores Smith TYNES, Debtor. |
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George H. Heilig, Jr. of Rixey, Heilig & McKenry, Norfolk, Va., for Sec. Pac. Finance Corp.
Ronald J. Berg of Berg & Gordon, Virginia Beach, Va., for debtor.
Barbara G. O'Connor, Washington, D.C., Staff Atty. for the Executive Office for the U.S. Trustee, U.S., intervenors.
An entirely new and now highly controversial feature was placed in the Bankruptcy Code which did not appear in the prior Act. It is section 522(f), 11 U.S.C. 522(f). Its provisions would permit a debtor to avoid a non-possessory, non-purchase money security interest in certain exempt household goods.
When Barto, the debtor here, borrowed money on November 7, 1978 from Security Pacific Finance Corporation, as collateral she was required to give Security Pacific a lien in almost all she had, including the household goods. Barto now seeks to avoid this lien pursuant to section 522(f), but Security Pacific objects arguing that said section is unconstitutional in that it deprives it of property without due process of law.
The legislative history of § 522(f) makes it clear that the section was drafted to protect a debtor's exemptions. Congress thought creditors, by virtue of their vastly greater experience in the lending industry, enjoy a substantial advantage over the average consumer debtor. In lending money, creditors often take a blanket security interest in all of a debtor's personal property, which is typically comprised of household goods, furnishings and appliances. Experience indicates that this type of property has, at best, nominal resale value. However, the replacement cost of the property may be disproportionately, even disastrously, high and debtors were often coerced into paying the lienholder irrespective of bankruptcy. The policy of Congress to afford a debtor a fresh start was thwarted because some creditors took unfair advantage of consumer debtors and abused the blanket security interest. H.R.Rep.No.95-595, 95th Cong., 1st Sess. (1977) 126-27, U.S.Code Cong. & Admin.News 1978, p. 5787; 124 Cong.Rec.H. 11,095 (September 28, 1978); S. 17,412 (October 6, 1978).
To prevent this abuse and to foster the fresh start of the debtor, Congress enacted section 522(f). Adversely effected by the section, various creditors have challenged it as an unconstitutional deprivation of property without due process of law in contravention of the Fifth Amendment to the United States Constitution.
The Constitution provides that the Congress shall have the power to establish uniform laws on the subject of bankruptcies throughout the United States. Unfortunately, the term "subject of bankruptcies" is nowhere defined in that document and its precise meaning is, therefore, somewhat ambiguous.
From the earliest days of the Republic it was recognized that the bankruptcy power is intimately related to the commerce power. At the least, it is clear that a judicious use of the bankruptcy power facilitates a more orderly commercial relationship between the various actors in the marketplace. However, the grant of the bankruptcy power is not included in the same clause of the Constitution, although the two are clearly interrelated. This disparity has caused some commentators e.g. Collier on Bankruptcy, 14th ed. to conclude that the draftsmen did not intend to restrict the bankruptcy grant as had been the case with the commerce clause. It is argued that the Congress was to have an all-inclusive power to enact legislation reasonably related to the subject of bankruptcies.
The Courts have consistently held that the power of Congress to enact uniform bankruptcy legislation is plenary and not limited to past forms of such legislation either as enacted by Congress or in England prior to the adoption of the Constitution. Wright v. Union Central Life Insurance Co., 304 U.S. 502, 58 S.Ct. 1025, 82 L.Ed. 1490 (1938), reh. den. 305 U.S. 668, 59 S.Ct. 56, 83 L.Ed. 434 (1938); Campbell v. Alleghany Corporation, 75 F.2d 947 (4th Cir. 1935), cert. den. 296 U.S. 581, 56 S.Ct. 92, 80 L.Ed. 411 (1935); Bradford v. Fahey, 76 F.2d 628 (4th Cir. 1935); Coin Machine Acceptance Corp. v. O'Donnell, 192 F.2d 773 (4th Cir. 1951). The Congressional power relative to bankruptcies is a flexible tool which can be utilized to meet the exigencies of the contemporary economic environment.
In the past Congress has `radically' altered the nature of bankruptcy law on at least several occasions. For example, the Act of 1841 opened voluntary proceedings to all debtors. This was unsuccessfully attacked as unconstitutional. Since that time voluntary proceedings have become, by far, the norm rather than the exception. Another example may be found in the Chandler Act Bankruptcy Act of 1938 which substituted Chapters X, XI, XII, XIII, XIV for the composition and extension and corporate reorganization provisions of the Bankruptcy Act of 1898. The nefarious "cram-down" provisions appeared as a result of that legislation and were unsuccessfully challenged. See e.g., In re Pine Gate Associates, Ltd., 2 B.C.D. 1478 (N.D.Ga. 1978) and cases cited therein.
As stated above, the courts have consistently expanded the conceptual scope of the bankruptcy power. In fact, the Supreme Court has found the exercise of the bankruptcy power beyond the Constitutional grant on only one occasion — Ashton v. Cameron County Water Improvement Dist. No. One, 298 U.S. 513, 56 S.Ct. 892, 80 L.Ed. 1309 (1936).
In Ashton, the Supreme Court analyzed section 80 of the May 24, 1934, amendments to the Bankruptcy Act of 1898. 11 U.S.C. 303. Section 80 provided the mode and conditions under which a municipality or other political subdivision of any State unable to pay its debts could effect a readjustment. The Supreme Court found this legislation an unconstitutional incursion into the affairs of the state and thus beyond the scope of the bankruptcy power. In a clear expression of deference to and concern for the federal system, the Court held that the right of a state to control its fiscal affairs could not be abrogated by congressional mandate.
Since it is the only case holding that Congress had exceeded the scope of the bankruptcy power, several observations relative to Ashton are appropriate. Chapter XI of the Bankruptcy Act was subsequently drafted. Congress was especially careful to avoid the objection that the exercise of the federal bankruptcy power encroached upon the sovereignty of the states. See United States v. Bekins, 304 U.S. 27, 58 S.Ct. 811, 82 L.Ed. 1137 (1938). Too, the Congress has consistently afforded maximum flexibility for the states in solving the debt problems of their subdivisions and solutions short of the drastic remedy of bankruptcy are encouraged. Cf. National League of Cities v. Usery, 426 U.S. 833, 96 S.Ct. 2465, 49 L.Ed.2d 245 (1976).
Except for Ashton, the case law is devoid of any example of the Congress overstepping its authority relative to the subject of bankruptcies. Thus, although the parameters of the power are neither spelled out in the Constitution nor specifically delineated by the case law, it is clear that Congress has extremely broad power in the realm of bankruptcy legislation. Given the predilection of the Courts and the historical expansion of the power, conceptually and legislatively, the conclusion all other things being equal must be that the legislation is within the scope of the constitutional grant. Even a superficial analysis shows that protecting the debtor's fresh start certainly relates to the subject of bankruptcies.
The great substantive powers of Congress are all subject in their operation to the guaranties of due process contained in the Fifth Amendment. Despite the extensive scope of the Congressional powers over bankruptcy, its exercise is nevertheless subject to the strictures of the Fifth Amendment. Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1935), reh. den. 296 U.S. 611 (1935); Kuehner v. Irving Trust Co., 299 U.S. 455, 57 S.Ct. 298, 81 L.Ed. 340 (1937); Wright v. Vinton Branch of the Mountain Trust Bank of Roanoke, 300 U.S. 440, 57 S.Ct. 556, 81 L.Ed. 736 (1937).
The guaranty of due process of law is one of the most important to be found in the Federal Constitution. It is certainly central in the principle of ordered justice and is essential to the basic American concept of private property. The due process clause protects property rights by making it impossible for the government to take or destroy property without just recompense.
A wealth of case law has made it abundantly clear that Congress may legitimately alter or impair contractual obligations in the exercise of its bankruptcy power. Wright v. Union Central Life Insurance Co., 311 U.S. 273, 61 S.Ct. 196, 85 L.Ed. 184 (1940), reh. den. 312 U.S. 711, 61 S.Ct. 445, 85 L.Ed. 1142 (1941); Continental Illinois National Bank & Trust Co. of Chicago v. Chicago, Rock Island & Pacific Railway Company, 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110 (1934); United States National Bank of Omaha, Nebraska v. Pamp, 83 F.2d 493 (8th Cir. 1936); Brockett v....
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