In re Coleman, Bankruptcy No. 80-2-0026-L
| Decision Date | 29 April 1981 |
| Docket Number | 80-2-599-L and 80-2-0808-L,Bankruptcy No. 80-2-0026-L,80-0526 and 80-0598.,Adv. No. 80-0252 |
| Citation | 10 BR 772 |
| Parties | In re John Thomas COLEMAN and Shirley Mae Coleman, Debtors. John Thomas COLEMAN et ux., Plaintiffs, v. AMERICAN FINANCE CORP. et al., Defendants. In re Priscilla A. DIXON, Debtor. Priscilla A. DIXON, Plaintiff, v. AVCO FINANCIAL SERVICES OF GLEN BURNIE, INC., et al., Defendants. In re William F. HUEBLER and Theresa L. Huebler, Debtors. BENEFICIAL FINANCE CO. OF MARYLAND, Plaintiff, v. William F. HUEBLER et ux., Defendants. |
| Court | U.S. Bankruptcy Court — District of Maryland |
David M. Thomas, Baltimore, Md., for John and Shirley Coleman.
Emory E. Tamplin, Jr., Cambridge, Md., for American Finance Co.
Robert C. Brown, Ellicott City, Md., for Priscilla A. Dixon.
Howard M. Heneson, trustee.
Josef E. Rosenblatt, Baltimore, Md., for William and Theresa Huebler.
Murray I. Resnick and John Carroll Broderick, Baltimore, Md., Donald E. Manger, Catonville, Md., for Beneficial Finance Co.
These cases, consolidated for the purposes of this opinion, call upon this Court to consider for the first time the constitutionality of the avoidance provisions of § 522(f) of the Bankruptcy Code1 with respect to avoidance under § 522(f)(2) of security interests created prior to the effective date of the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2683 (1978). Thus, the Court is now summoned to rule on an issue analogous to that expressly reserved in In re Butler, 5 B.R. 360, 361, 6 B.C.D. 768, 769 (Bkrtcy., D.Md.1980).2 In this instance, however, the legal issues have been properly raised, briefed, and fully argued by counsel in open court.
The issue here is one requiring the resolution of conflicting Constitutional mandates. On the one hand, the Constitution provides that, "The Congress shall have Power . . . to establish . . . uniform Laws on the subject of Bankruptcies throughout the United States." U.S.Const. Art. I, § 8. But on the other, it sets out the limitation that, "No person shall . . . be deprived of life, liberty, or property, without due process of law." U.S.Const. Amend. V. Whether Congressional adoption of § 522(f) may have in some instances extended the Bankruptcy Clause beyond the limits imposed by the Fifth Amendment, is an inquiry not lightly to be undertaken. In reaching a decision in this case, the Court has been mindful of both the presumption of constitutionality that should quite properly be afforded Congressional action, Thompson v. United States, 148 F.Supp. 910, 914 n. 8 (E.D.Pa.1957), and the wisdom of the proposition that a "trial court should not annul an Act of Congress, unless it is in conflict with some plain mandate of the Constitution, and the determination of constitutionality should generally be left to the appellate courts." United States v. Smith, 62 F.Supp. 594, 596 (W.D.Mich.1945). The volume of the reported litigation of this issue before the Bankruptcy Courts and the District Courts,3 however, is convincing evidence that the question should be decided on its merits rather than on traditional theories of trial level deference to acts of Congress.
On March 12, 1981, these cases came on for hearing before the Court.4 At that time counsel stipulated to facts and presented oral argument based upon pre-filed memoranda of law. The Attorney General of the United States was invited to intervene in accordance with 28 U.S.C. § 2403 (1976) in the case of Coleman v. American Finance Corp., Adv. No. 80-0252. Although the Attorney General elected not to intervene formally, the U.S. Attorney filed the government's brief in the appeal then pending before the Tenth Circuit in In re Rodrock, 642 F.2d 1195, 7 B.C.D. 344 (10th Cir. 1981). The facts in each case are set out below. In each case it has not been contested that the Bankruptcy Reform Act of 1978 was signed by the President on November 6, 1978, and that it became effective on October 1, 1979, as provided in § 503(a) of the Act. Throughout this opinion, the time span between November 6, 1978 and October 1, 1979 will for the sake of convenience be referred to as the "gap period." In addition, the time after October 1, 1979 will be referred to as the "post-effective date period." Likewise, reference to the period before November 6, 1978 will be referred to as the "pre-enactment date period."
On December 22, 1977, the Colemans obtained a loan in the amount of $974.99 from the Beneficial Finance Company. In connection with the loan, the Colemans granted Beneficial a nonpossessory, nonpurchase-money security interest in a portion of their household goods and furnishings. In addition, on October 19, 1978, Mrs. Coleman obtained a loan from the American Finance Corporation in the amount of $2,389.74. To secure the loan, Mrs. Coleman granted American Finance a nonpossessory, nonpurchase-money security interest in her interest in household furniture. Thereafter, the Colemans filed a petition under Chapter 7 of the Code on January 7, 1980. The Debtor's Schedule B-4 filed January 25, 1980, reflects that exemptions have been taken under § 522(d)(3) and § 522(d)(5) sufficient to exempt all household goods and furnishings whatever their value.
This adversary proceeding was commenced by the Debtor's complaint to avoid both security interests under § 522(f)(2). Both Beneficial and American Finance filed answers. The issue of the defense of unconstitutionality, however, was raised only by Beneficial. Moreover, Beneficial was the only defendant to file a memorandum of law and to appear by counsel at the hearing.
On December 29, 1978, Priscilla Dixon obtained a $2,906.44 loan from AVCO Financial Services of Glen Burnie, Inc. secured by a nonpossessory, nonpurchase-money security interest in household goods and furnishings. After filing a petition under Chapter 7 of the Code on April 21, 1980, Ms. Dixon filed a complaint to avoid AVCO's lien on October 15, 1980. Ms. Dixon's amended Schedule B-4 filed September 2, 1980 reflects an exemption under 11 U.S.C. § 522(d)(5) of all her household goods and furnishings.
The complaint came on for hearing before the Court on March 17, 1981. AVCO was not represented by counsel, and has yet to file an answer. Because this case presented questions related to those previously argued concerning the retroactive application of § 522(f), this case was held sub curia pending submission of a memorandum of law by Debtor's counsel concerning the constitutionality of the avoidance of security interests created during the gap period. The memorandum on behalf of the Debtor was filed on March 30, 1981.
This case differs from the others in that it was originated by a creditor's complaint for relief from the stay imposed by 11 U.S.C. § 362(a). The Debtor's answer set up a counterclaim that the creditor's lien was avoidable under § 522(f)(2). The creditor asserts that such avoidance is unconstitutional. At trial, counsel for the debtors and the creditor entered into a stipulation of fact and submitted the case for decision on the legal memoranda previously filed by them and on the oral argument then presented. The trustee, although a named party defendant, has not filed an answer and did not appear at trial.
The Hueblers obtained a loan from the Beneficial Finance Company on August 17, 1978. As part of the loan agreement they gave Beneficial a nonpossessory, nonpurchase-money security interest in household goods and furnishings. The Hueblers filed a petition for relief under Chapter 7 of the Code on May 19, 1980, and are in default on the installment payments due on the loan. The Debtors' Schedule B-4 reflects that they claim an exemption under § 522(d) in all their household goods and furnishings.
In view of the number of opinions that have been reported to date on the constitutionality of § 522(f)(2), little purpose would be served by setting out an extensive analysis that merely covers ground already reviewed by other courts.5 Accordingly, to the extent that the views expressed here are in accord with legal theories already well articulated by other courts, they will be limited to concise statements of this Court's opinion.
The threshold issue concerning the application of § 522(f)(2) is whether Congress intended the section to apply retroactively to nonpossessory, nonpurchase-money security interests in existence prior to the October 1, 1979 effective date of the Code. The Bankruptcy Code taken as a whole, and §§ 401 & 402 of the Bankruptcy Reform Act of 1978 make it clear that Congress intended the remedial provisions of § 522(f)(2) to apply retroactively so long as the debtor had filed his petition under the Code rather than the Bankruptcy Act of 1898.6In re Pillow, 8 B.R. 404, 407 (Bkrtcy., D. Utah 1981); In re Sweeney, 7 B.R. 814, 3 C.B.C.2d 523, 526 (Bkrtcy., E.D. Wis. 1980); Oldham v. Beneficial Finance Co., 7 B.R. 124, 125 (Bkrtcy., D.N.M. 1980); In re Rodrock, 3 B.R. 629, 634-35 (Bkrtcy., D. Colo. 1980), aff'd 642 F.2d 1193, 7 B.C.D. 344 (10th Cir. 1981). Thus, the critical inquiry concerns whether § 522(f)(2) transgresses the rights embodied in the Fifth Amendment.
The Fifth Amendment due process clause has given rise to a significant safeguard against the abridgement of property rights by the Congress. Since the Supreme Court's decision in Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1935), it has been clear that legislation adopted under the Congressional bankruptcy powers cannot substantially impair pre-existing substantive rights in specific property. Although the government argues, and several bankruptcy courts have adopted the rationale that Radford has been modified sub silentio by Wright v. Vinton Branch of the Mountain Trust Bank, 300 U.S. 440, 57 S.Ct. 556, 81 L.Ed. 736 (1937), and by other more recent...
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