In re Fishman, Bankruptcy No. 99 B 15242.
| Decision Date | 07 December 1999 |
| Docket Number | Bankruptcy No. 99 B 15242. |
| Citation | 241 BR 568 |
| Parties | In re Gerald L. FISHMAN, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Malcolm M. Gaynor, Paul J. Gaynor, Schwartz, Cooper, Greenberger & Krauss Chtd., Chicago, IL, for debtor.
Ariel Weissberg, Richard Steiner, Weissberg & Assocs., Chicago, IL, for objector.
This Chapter 11 case has come before the court on a creditor's objection to exemptions scheduled by the debtor. Illinois law defines a set of personal property exemptions, which were listed in the debtor's schedules, but an Illinois statute, 735 ILCS 5/12-1004, excludes from these exemptions claims for "wages due." The creditor contends that she holds such a wage claim against the debtor, so that his claimed exemptions are not valid. Two issues are raised by the objection: (1) the effect in bankruptcy of a state law excluding particular claims from the scope of exemptions, and (2) the nature of the claim asserted by the creditor. For the reasons set forth below, a state law excluding particular claims from the scope of exemptions should be given effect in bankruptcy, by reducing the amount of the otherwise available exemptions to the extent of any excluded claims; the property thus determined to be nonexempt would be distributed according to ordinary bankruptcy priorities. However, the claim asserted by the creditor in this case is not one for "wages due" under 735 ILCS 5/12-1004, and so her objection to exemption must be denied.
Pursuant to 28 U.S.C. § 1334(a), federal district courts have exclusive jurisdiction over bankruptcy cases. However, pursuant to 28 U.S.C. § 157(a), the district courts may refer bankruptcy cases to the bankruptcy judges for their district, and, by Internal Operating Procedure 15(a), the District Court for the Northern District of Illinois has made such a reference of the pending case. When presiding over a referred case, a bankruptcy judge has jurisdiction, under 28 U.S.C. § 157(b)(1), to enter appropriate orders and judgments as to core proceedings within the case. The allowance or disallowance of exemptions from the property of the estate is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
None of the facts relevant to the pending motion are in dispute. On January 5, 1999, after a jury trial in the United States District Court for the Northern District of Illinois, RoxAnne Rochester obtained a judgment against Gerald Fishman in the amount of $750,000. This judgment was based on allegations that Fishman engaged in sexual and other misconduct toward Rochester that interfered with her business relationship with her employer, a Chicago law firm, causing her to abandon her position as an attorney at the firm. The judgment followed the jury's verdict that included awards of $150,000 for "back pay" and $150,000 for "front pay".
On May 11, 1999, Fishman filed a voluntary Chapter 11 bankruptcy petition. In the schedules accompanying his petition, Fishman claimed certain items of personal property as exempt under Illinois law. On June 10, 1999, Rochester filed and presented an objection to this exemption claim, pursuant to Fed.R.Bankr.P. 4003. Specifically, Rochester argued (1) that Illinois law does not allow an exemption for personal property to be effective against a claim for wages; and (2) that the $300,000 portion of the district court judgment, based on front and back pay, was a wage award thus excluded from exemption.
On June 10, 1999, this court denied Rochester's objection, without prejudice, and later allowed the parties to brief the issues in connection with a motion to reconsider.
The matters in dispute. The dispute between the parties in the present case is over the effect of Illinois exemption law under the Bankruptcy Code. Illinois law is relevant here because of the Code's incorporation of state law in defining the extent of exemptions.
Section 522(b) of the Code provides two alternative sets of exemptible property. First, § 522(b)(1) allows the debtor to exempt property that is listed in the Bankruptcy Code itself — the "federal" exemptions of § 522(d). Second, § 522(b)(2) allows for "state" exemptions — "any property that is exempt under . . . State or local law," as applicable in the debtor's domicile, which, in this case, is Illinois. Section 522(b)(1) allows states to prohibit use (or "opt out") of the federal exemptions, and Illinois has done so. See 735 ILCS 5/12-1201; Clark v. Chicago Municipal Employees Credit Union, 119 F.3d 540, 543 (7th Cir.1997). Thus, only Illinois exemptions are available to debtors domiciled in this state.
Among the exemption provisions of Illinois law is a statute defining several types of personal property as generally "exempt from judgment or attachment by creditors." 735 ILCS 5/12-1001. Pursuant to this statute, Gerald Fishman listed items of his personal property as exempt in his bankruptcy schedules. RoxAnne Rochester objected to these claimed exemptions on the basis of another Illinois statutory provision, 735 ILCS 5/12-1004, which states that no personal property is exempt from certain claims for "wages due."
The parties do not dispute that the personal property claimed exempt by Fishman falls within the categories defined by 735 ILCS 5/12-1001. Thus, this property is exemptible under § 522(b)(2) of the Bankruptcy Code unless (1) the "wages due" exclusion of 735 ILCS 5/12-1004 is effective to limit the exemptions otherwise available to an Illinois debtor in bankruptcy, and (2) Rochester actually holds a claim for "wages due" within the meaning of 735 ILCS 5/12-1004. These two issues are addressed in turn.
(1) The effect in bankruptcy of state laws excluding particular claims from otherwise applicable exemptions. For purposes of bankruptcy law, there are two possible ways to deal with a state law excluding particular claims from otherwise applicable exemptions. One way — ignoring the exclusion — is illustrated by the First Circuit's decision in Patriot Portfolio, LLC v. Weinstein (In re Weinstein), 164 F.3d 677 (1st Cir.1999). This case dealt with a Massachusetts homestead law, which provided a general exemption for a debtor's "estate of homestead," but which also provided (1) that this estate only came into existence upon the recording of a declaration by the owner of the homestead property; and (2) that the exemption was inapplicable to a number of claims, including "debts contracted prior to the acquisition of the estate of homestead." Id. at 679-80. For purposes of bankruptcy, the First Circuit analyzed the situation as follows: (1) the general exemption of homestead property under Massachusetts law made it exempt under § 522(b)(2) of the Code; (2) once the property was exempt, it could be liable only for those claims excluded from exemption by the Bankruptcy Code itself (in § 522(c)); and (3) because "pre-acquisition" claims are not excluded by § 522(c), the state law creating such an exclusion was preempted by the Code. Id. at 681-83. Accordingly, the court held that the existence of a claim arising prior to the debtor's acquisition of the estate of homestead had no effect on the debtor's homestead exemption in bankruptcy. It has been argued that this approach also "furthers the overall policy goals of the bankruptcy process such as ensuring uniformity under a federal distribution scheme." In re Scott, 199 B.R. 586, 593 (Bankr.E.D.Va.1996).
The contrary approach — recognizing exclusion of particular claims from exemption — is reflected in the Seventh Circuit's decision in In re Ondras, 846 F.2d 33 (7th Cir.1988). Here, Indiana provided the applicable exemption law, allowing an exemption for certain property, but limiting the exemption to debts "growing out of or founded upon a contract, express or implied." Id. at 34. The debtor scheduled exemptions based on this law, and a creditor holding a tort claim objected. The Seventh Circuit ruled that the objection had to be sustained, because Indiana's exemption law only applied to property that was not subject to tort claims: "It placed . . . property beyond the reach only of certain creditors (i.e., contract creditors) while keeping the property within the reach of other creditors such as the tort creditors here." Id. at 35-36. Hence, only such "tortfree" property could be exempted by the debtor under § 522(b)(1). Id. at 36.
This court, of course, is bound to follow the decision of the Seventh Circuit. 18 James W. Moore, et al., Moore's Federal Practice § 134.022, at 134-20 (3d ed.1998) (). However, the Ondras decision, even if it were not binding, would still present the more persuasive reading of § 522(b) of the Bankruptcy Code. As Ondras points out, § 522(b) reflects a compromise between conflicting legislative provisions, with the apparent intent of allowing states to retain wide discretion over the exemptions applicable in bankruptcy. 846 F.2d at 35 (citing In re Sullivan, 680 F.2d 1131, 1135-36 (7th Cir.), cert. denied, 459 U.S. 992, 103 S.Ct. 349, 74 L.Ed.2d 388 (1982)). It would not be consistent with this intent to simply ignore all state limitations on the scope of exemptions, with the effect of transforming any state exemption, regardless of how limited the range of claims to which it applied, into an exemption applicable to all claims. To take an unlikely example, suppose that a state law provided that all real property of a debtor was exempt against library fines. Faced with such a state law, the Weinstein approach would apparently result in a holding (1) that all real property of the debtor was exempt under § 522(b)(2), and (2) that the state law excluding claims other than library fines from the scope of the exemption would be preempted by § 522(c). Such a result cannot be reconciled...
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