In re Bernier

• Decision Date: 13 January 1995
• Docket Number: Bankruptcy No. 90-52302. Adv. No. 91-5258.
• Citation: 176 BR 976
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re Paul A. BERNIER, Debtor. Richard M. COAN, Trustee, Plaintiff, and United States of America, Plaintiff-Intervenor, v. Linda A. BERNIER, Defendant.

176 B.R. 976 (1995)

In re Paul A. BERNIER, Debtor Richard M. COAN, Trustee, Plaintiff and United States of America, Plaintiff-Intervenor, v. Linda A. BERNIER, Defendant.

Bankruptcy No. 90-52302. Adv. No. 91-5258.

United States Bankruptcy Court, D. Connecticut.

January 13, 1995.

COPYRIGHT MATERIAL OMITTED

Timothy D. Miltenberger, Coan, Lewendon and Royston, New Haven, CT, for plaintiff.

Deirdre A. Martini, Asst. U.S. Atty., Bridgeport, CT, Karen I. Meyer, J. Christopher Kohn, Tracy J. Whitaker, Shereen J. Charlick, Civ. Div., Dept. of Justice, Washington, DC, for U.S.

Carl T. Holt, Westport, CT, for defendant.

MEMORANDUM AND ORDER ON COMPLAINT TO SELL REAL PROPERTY FREE AND CLEAR OF THE INTEREST OF CO-OWNER

ALAN H.W. SHIFF, Bankruptcy Judge.

The defendant challenges the constitutionality of § 363(h) and (j) of the Bankruptcy Code. For the reasons that follow, I conclude that those subsections are constitutional.

BACKGROUND

The plaintiff is the chapter 7 trustee in this case and commenced this adversary proceeding against the defendant, the debtor's wife, seeking to sell both her and the debtor's interest in their residence located in New Canaan, Connecticut pursuant to § 363(h). See infra, p. 980. The defendant acquired an undivided one-half interest as joint tenant¹ with the debtor by an October 18, 1982 conveyance from him. See Plaintiff's Exhibit A.

The defendant's answer admitted every essential allegation of the complaint except that "the benefit to the estate of a sale of the Property free of the interest of the defendant outweighs the detriment if any, to the defendant." See Complaint at ¶ 7.c.; § 363(h)(3). Although the answer raised no affirmative defense that § 363(h) was unconstitutional, the defendant made that assertion in a pretrial memorandum filed April 10, 1992. On April 16, 1992, the defendant filed a motion for leave to file an amended answer, asserting as affirmative defenses that §§ 363(h) and (j) are unconstitutional under Article I, Section 8, clause 4 of the Constitution and the Fifth Amendment to the Constitution. See Rule 7015, Fed.R.Bankr.P. The plaintiff did not object to the inclusion of the affirmative defenses, and an order granting the motion entered on May 6, 1992. The facts relevant to those affirmative defenses are not in dispute. See Stipulation of Facts filed January 7, 1994. The constitutional issues raised by those defenses, which are the subject of this memorandum and order, were bifurcated from the trial on the issues under § 363(h)(3), which was held on April 16, 1992 and is discussed briefly infra at pp. 980-81.

Because this proceeding draws into question the constitutionality of an Act of Congress affecting the public interest, the Attorney General of the United States was notified pursuant to 28 U.S.C.A. § 2403(a) (West 1994), as implemented by Rule 16, Local Rules of Bankruptcy Procedure for this court.² The United States exercised its right to intervene under that statute, see Rule 24(a)(1), Fed.R.Civ.P., made applicable by Rule 7024, Fed.R.Bankr.P. (court must permit intervention when statute of United States confers an unconditional right to do so), and has filed a memorandum of law and presented oral argument.

DISCUSSION

This adversary proceeding "arises under title 11" and is therefore a core proceeding as to which this court may enter a dispositive order. 28 U.S.C.A. §§ 157(b)(1), (b)(2)(N), (O); 1334(b) (West 1993); Whittington v. Gilbralter Sav. & Loan Ass'n (In re Spain), 103 B.R. 286, 293 (N.D.Ala.1988).³

Section 363(h), (i) and (j) provide in pertinent part:

(h) Notwithstanding subsection (f) of this section, the trustee may sell both the estate\'s interest, under subsection (b) or (c) of this section, and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety, only if —

(1) partition in kind of such property among the estate and such co-owners is impracticable;

(2) sale of the estate\'s undivided interest in such property would realize significantly less for the estate than sale of such property free of the interests of such co-owners; and

(3) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs the detriment, if any, to such co-owners. . . .

(i) Before the consummation of a sale of property to which subsection . . . (h) of this section applies . . . the debtor\'s spouse . . . may purchase such property at the price at which such sale is to be consummated.

(j) After a sale of property to which subsection . . . (h) of this section applies, the trustee shall distribute to the debtor\'s spouse . . . and to the estate, the proceeds of such sale, less the costs and expenses, not including any compensation of the trustee, of such sale, according to the interests of such spouse . . . and of the estate.

Article I, Section 8, clause 4 of the United States Constitution provides in relevant part:

The Congress shall have the Power . . . to establish . . . uniform Laws on the subject of Bankruptcies throughout the United States (the "Bankruptcy Clause").

The Fifth Amendment to the United States Constitution provides in relevant part:

. . . nor shall private property be taken for public use, without just compensation (the "Takings Clause").

Section 363(h), (i), and (j) were enacted as part of the Bankruptcy Reform Act of 1978, effective October 1, 1979.⁴ Thus, those subsections were in effect at the time the defendant acquired her interest in the residence.

I.

BALANCING UNDER § 363(h)(3)

As noted, the balancing test under § 363(h)(3) was the subject of an earlier proceeding, which was decided on the record in the plaintiff's favor. I include a reference to that issue here so that the procedural context of the constitutional issue will be clarified.⁵

An analysis under § 363(h)(3) requires the consideration of both economic factors, such as the valuation of the nondebtor spouse's interest, available tax exemptions, etc., and non-economic factors, including the prospects for acquiring a new home, handicaps, and the existence of minor children. See Community Nat'l Bank and Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15, 21 (2d Cir.1989). See Price v. Harris (In re Harris), 155 B.R. 948, 950-51 (Bankr.E.D.Va.1993); Polliard v. Polliard (In re Polliard), 152 B.R. 51, 56 (Bankr.W.D.Pa.1993); Maiona v. Vassilowitch (In re Vassilowitch), 72 B.R. 803, 807 (Bankr.D.Mass.1987) (sale authorized under § 363(h) where as here that was the only source of funds for the estate, notwithstanding substantial hardship to spouse and children).

The essentially uncontroverted evidence adduced at the April 16, 1992, trial demonstrated that the value of the residence was between $260,000 and $280,000. Using the $260,000 figure, the net sale proceeds would be approximately $192,800, of which $96,400 would go to each co-owner.⁶ Taking into account tax consequences of approximately $21,000 to each interest, the net proceeds would be approximately $75,000 to the defendant and the estate. As to the detriment to the defendant, the substantial equity in the property, together with the defendant's income as disclosed at trial, would give her an adequate option of obtaining alternative housing or financing so that she could exercise her right of first refusal under § 363(i). While the defendant testified as to some degree of emotional stress, there was no evidence that that stress was entirely or even substantially due to the possibility of moving, and not due to other factors. There was no evidence of undue hardship to the defendant's one child. In sharp contrast, the trustee would have no funds for distribution without a sale of the property under § 363(h). It is therefore apparent that the benefit to the estate outweighs the alleged detriment to the defendant. Accordingly, the § 363(h)(3) test has been satisfied.

II.

CONSTITUTIONALITY OF § 363(h)

The issue addressed here is whether the trustee's sale of the defendant's interest in the residence under § 363(h), (i) and (j) would exceed the scope of the Bankruptcy Clause, or would constitute a taking of private property prohibited by the Fifth Amendment to the United States Constitution, even assuming that § 363(j) provides for the payment of "just compensation" within the meaning of the Fifth Amendment.⁷

Acts of Congress are presumed to be constitutional, so the defendant bears the burden of proving her claim that § 363(h) is constitutionally flawed. Heller v. Doe By Doe, ___ U.S. ___, ___, 113 S.Ct. 2637, 2643 (1993); Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 729, 104 S.Ct. 2709, 2717, 81 L.Ed.2d 601 (1984). "The bankruptcy power is subject to the Fifth Amendment's prohibition against taking private property without compensation." United States v. Security Indus. Bank, 459 U.S. 70, 75, 103 S.Ct. 407, 410, 74 L.Ed.2d 235 (1982). Therefore, in order to determine whether § 363(h) is constitutional in the context of this proceeding,⁸ it must first be determined whether the Bankruptcy Clause authorizes that statute. If it does, it must then be determined whether the Takings Clause prohibits the application of § 363(h) in this case. The answer to each of those questions to a large extent depends upon what property rights the defendant has in the residence under applicable Connecticut law. Put another way, the defendant's attempt to prevent the trustee from selling her interest in the residence depends upon whether that interest is protected by Connecticut law. "Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979); accord ...