In re Cross
| Decision Date | 02 October 2000 |
| Docket Number | No. 98-10471.,98-10471. |
| Citation | 255 BR 25 |
| Parties | In the Matter of Roger Allen CROSS, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Indiana |
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Dean A. Brown, Fort Wayne, IN, for Debtor.
James Young, Fort Wayne, IN, for trustee.
DECISION
This case is pending under Chapter 7 of the United States Bankruptcy Code. The debtor and his non-debtor spouse own real estate as tenants by the entireties. The debtor has claimed an exemption for this property, pursuant to Indiana law, which permits an exemption for:
Any interest the judgment debtor has in real estate held as a tenant by the entireties on the date of the filing of the petition for relief under the bankruptcy code, unless a joint petition for relief is filed by the judgment debtor and spouse, or individual petitions of the judgment debtor and spouse are subsequently consolidated. I.C. XX-X-XX-X(a)(5).1
The trustee has filed an objection to this exemption, arguing that the statute upon which it is based violates both the Indiana Constitution and the Constitution of the United States. The matter has been submitted to the court for a decision based upon the parties' stipulation of facts and the briefs of counsel.
Article I, Section 22 of the Indiana Constitution provides:
the privilege of the debtor to enjoy the necessary comforts of life, shall be recognized by wholesome laws, exempting a reasonable amount of property from seizure or sale for the payment of any debt or liability . . . Ind. Const. Art. I, § 22.
In In re Zumbrun, 626 N.E.2d 452 (Ind. 1993), the Indiana Supreme Court concluded that "statutes which create unlimited exemptions are inconsistent with the directive of Section 22 and the balanced policy underlying it." Id. at 455. Based on this conclusion, the court invalidated the state's exemption for assets held in retirement plans because "the statute exempted an unlimited amount of intangible assets from execution to pay legitimate debts, making it possible to closet virtually every liquid asset possessed by a debtor simply through placing the assets in some form of retirement instrument." Id. The trustee argues that I.C. XX-X-XX-X(a)(5) suffers from the same deficiency because it too exempts an unlimited amount of assets from execution; the only difference is the type of property which can be exempted.
Zumbrun established a bright line standard which required the Indiana legislature to place a limit on the amount of property that may be exempted, so that a statute which allows unlimited exemptions is facially invalid. Zumbrun was not, however, the court's last word on the subject. In Citizens Nat'l Bank v. Foster, 668 N.E.2d 1236 (Ind.1996), it revisited the issue and, in doing so, reformulated the analytical approach that is to be used. Foster abandoned the per se rule that Zumbrun announced. While the court continued to adhere to the principle that the Indiana Constitution requires some type of limit on exemptions — so that limitless exemptions are "constitutionally suspect" — it concluded that "the identification of an upper limit or lack thereof standing alone should not be dispositive." Foster, 668 N.E.2d at 1242. "Rather, courts must delve into to sic admittedly murkier waters of reasonable necessity." Id. This approach requires the claimant to demonstrate that the exemption is needed in order to provide it with "the `necessities of life.'" Id.
The significance of Foster is that, where an exemption is challenged under the Indiana Constitution, the focus of the court's inquiry has been shifted away from the validity of the statute authorizing the exemption to the propriety of the debtor's having claimed the exemption the statute creates. In other words, the court should not consider a facial challenge to the statute, but should, instead, base its decision upon the statute as applied. The issue has effectively become a question of fact, rather than a question of law.
While this court can apply the analytical framework established by Foster, it cannot follow the procedural path established by that decision. That path places the burden of proving the validity of the claimed exemption upon the debtor. The Federal Rules of Bankruptcy Procedure specifically allocate the burden of proof where a claimed exemption has been objected to and they place the burden upon the objector. "The objecting party has the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr.P. Rule 4003(c). Consequently, given the analytical framework of Foster and the procedural requirements of Bankruptcy Rule 4003(c), the trustee must prove that debtor's claimed exemption for entireties real estate is not needed in order to afford the debtor with the necessities of life. The stipulated facts do not do so.2 Accordingly, the court cannot conclude that debtor's claimed exemption for entireties real estate violates the Indiana Constitution.
The trustee advances two arguments why I.C. 34-2-28-I(a)(5) violates the United States Constitution. He first contends that it violates the Uniformity Clause of Article I, Section 8. He also argues that it is invalid under the Supremacy Clause of Article VI. The court will consider each of these arguments in turn.
The Constitution grants Congress the power to "establish . . . uniform Laws on the subject of Bankruptcies." U.S. Const. Art. I, § 8, cl. 4. The requirement of uniformity was designed to prevent arbitrary regional differences in the nation's bankruptcy laws and private bankruptcy legislation. In re Reese, 91 F.3d 37, 39 (7th Cir.1996). It does not, however, demand "perfect uniformity," Reese, 91 F.3d at 39, or "eliminating . . . any differences among the States." Railway Labor Executives' Ass'n v. Gibbons, 455 U.S. 457, 469, 102 S.Ct. 1169, 1176, 71 L.Ed.2d 335 (1982). Instead, it requires only "geographical" uniformity. Hanover Nat'l Bank v. Moyses, 186 U.S. 181, 188, 22 S.Ct. 857, 860, 46 L.Ed. 1113 (1902). Its requirements will be satisfied when the law applies "to a defined class of debtors," Gibbons, 455 U.S. at 473, 102 S.Ct. at 1178, and "when the existing obligations of a debtor are treated alike . . . regardless of where the bankruptcy court sits." Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 172, 67 S.Ct. 237, 244, 91 L.Ed. 162 (1946)( Frankfurter, J. concurring). Consequently, the Uniformity Clause does not require that all bankruptcy debtors have the same exemptions. Congress may permissibly recognize state exemptions without running afoul of its restrictions. Moyses, 186 U.S. 181, 22 S.Ct. 857, 46 L.Ed. 1113. Nor does it require that bankruptcy debtors have the same exemptions as those outside of bankruptcy. See In re Beckerford, 3 F.Cas. 26 (C.C.D.Mo.1870)(upholding the provisions of the Bankruptcy Act of 1867 which granted a debtor specified federal exemptions in addition to those allowed by state law). See also In re Deckert, 7 F.Cas. 334 (C.C.E.D.Va.1874).
The trustee's challenge to I.C. XX-X-XX-X(a)(5) fails to recognize that the Uniformity Clause is not a restriction upon the states. It is included among the powers which are granted to Congress — in this instance the authority to enact bankruptcy legislation — and it operates as a limitation on the type of bankruptcy laws Congress may enact. Gibbons, 455 U.S. at 468, 102 S.Ct. at 1176. It is difficult, if not impossible, to see how a state law can violate a restriction on the powers of the national legislature.3
Once we recognize that the Uniformity Clause does not apply to the states, that part of the trustee's objection is easily disposed of. It is either a direct challenge to a state law, based upon a constitutional provision which does not apply,4 or an indirect challenge to Congress's decision to recognize state exemptions and to permit states to opt out of the federal bankruptcy exemptions. In either event, the objection must fail. See, e.g., In re Sullivan, 680 F.2d 1131 (7th Cir.1982); In re Storer, 58 F.3d 1125 (6th Cir.1995); Rhodes v. Stewart, 705 F.2d 159 (6th Cir.1983)(upholding the provisions of § 522 which allow states to opt out of the federal bankruptcy exemptions).
The Supremacy Clause declares that the Constitution and the laws which Congress has enacted pursuant to the powers given it constitute "the supreme Law of the Land." U.S. Const., Art. VI, cl. 2. One effect of this provision is to invalidate state laws which interfere with or are contrary to federal law. Gibbons v. Ogden, 9 Wheat. 1, 22 U.S. 1, 211, 6 L.Ed. 23 (1824). The trustee contends that I.C. XX-X-XX-X(a)(5) interferes with the operation of the nation's bankruptcy laws because it prevents the trustee from administering assets that the debtor's creditors could reach outside of bankruptcy. The essence of the trustee's position is that Indiana may not legitimately create an exemption that applies only to bankruptcy proceedings.
"Any state legislation which frustrates the full effectiveness of federal law is rendered invalid by the Supremacy Clause." Perez v. Campbell, 402 U.S. 637, 652, 91 S.Ct. 1704, 1712 (1971). In Perez, the Court laid out the analytical path that should be followed in determining whether state law is invalidated. "Deciding whether a state statute is in conflict with a federal statute and hence invalid under the Supremacy Clause is essentially a two-step process of first ascertaining the construction of the two statutes and then determining the constitutional question whether they are in conflict." Perez, 402 U.S. at 644, 91 S.Ct. at 1708. Applying this analysis to Indiana's bankruptcy exemption for entireties property leads to the conclusion that it frustrates the full effectiveness of federal bankruptcy law in two ways. It changes the way Congress...
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