In re Hammer
| Citation | 9 BR 343 |
| Decision Date | 02 March 1981 |
| Docket Number | Bankruptcy No. 80-04188,Adv. No. 80-0336. |
| Parties | In re Richard D. HAMMER, Florence L. Hammer, Debtors. Richard D. HAMMER and Florence L. Hammer, Plaintiffs, v. BENEFICIAL FINANCE CO., Defendant. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Northern District of Iowa |
Philip Dandos, Sioux City, Iowa, Mohummed Sadden, South Sioux City, Iowa, for plaintiffs.
Donald H. Molstad, Sioux City, Iowa, for defendant.
Findings of Fact, Conclusions of Law, and ORDERS, with Memorandum
The matter before the Court involves a Complaint to Avoid the Fixing of a Lien under Section 522(f)(2) of the Bankruptcy Reform Act of 1978. Attorneys Phillip S. Dandos and Mohummed Sadden represented the Plaintiffs in this adversary proceeding, and Attorney Donald H. Molstad represented the Defendant. The matter was submitted on stipulation as to the facts, and briefs regarding the legal issue were submitted by both parties. The Court, having examined the record and being fully advised, now makes the following Findings of Fact, Conclusions of Law and Orders:
FINDINGS OF FACT
1. On or about June 21, 1978, Richard D. Hammer and Florence L. Hammer obtained a loan from Beneficial Finance Company (hereinafter "Beneficial"), executed and delivered to Beneficial a promissory note and, as security for said note, a security agreement granting to Beneficial a security interest in the following described property:
2. Beneficial properly perfected said security agreement in the aforementioned household furnishings, goods, and appliances.
3. Beneficial's lien on said property was a nonpossessory, nonpurchase-money security interest in the aforementioned household items which were held primarily for the personal, family, and household use of the Debtors, Richard and Florence Hammer. Said items are exempt to the debtors in these proceedings.
4. On June 25, 1980, said Debtors filed a voluntary petition in Bankruptcy under Chapter 7 of Title 11 of the United States Code.
5. Debtors filed a Complaint to Avoid the Fixing of a Lien on the aforementioned property of the Debtors under 11 U.S.C. § 522(f)(2), alleging that Beneficial's lien on said household property impairs an exemption to which the Debtors are entitled pursuant to 11 U.S.C. § 522(b).
6. In its Answer, Beneficial raised an affirmative defense to Plaintiffs' Complaint, alleging that § 522(f)(2) is unconstitutional as applied to a security interest created prior to the enactment of the Bankruptcy Reform Act on November 6, 1978.
7. The value of Debtors' interests in any particular item of the aforementioned household furnishings, goods, and appliances does not exceed the maximum amount allowable by § 522(d). Therefore, the value of said property is not in issue.
8. Plaintiffs/Debtors and Defendant Beneficial have stipulated as to the facts.
Section 522(f)(2) of the Bankruptcy Reform Act of 1978 is unconstitutional as applied to security interests created prior to the enactment of the Act on November 6, 1978.
2. Plaintiffs' Complaint to Avoid the Fixing of a Lien under 11 U.S.C. § 522(f)(2) should be dismissed because the retroactive application of § 522(f)(2) to avoid Defendant's preenactment lien would constitute a taking of Defendant's secured property rights, effecting a deprivation of property without due process of law in violation of the Fifth Amendment to the United States Constitution.
IT IS THEREFORE ORDERED that 11 U.S.C. § 522(f)(2) cannot, consistent with the Due Process Clause of the Fifth Amendment to the United States Constitution, be applied retroactively to avoid the fixing of a nonpossessory, nonpurchase-money security interest in the Debtors' exempt household goods which was created prior to the enactment date of the Bankruptcy Reform Act of 1978, i.e., November 6, 1978.
IT IS FURTHER ORDERED that Plaintiffs' Complaint to Avoid the Fixing of a Lien under 11 U.S.C. § 522(f)(2) is denied and dismissed.
MEMORANDUMThe facts of this case have been stipulated. Prior to the enactment of the Bankruptcy Reform Act of 1978 (hereinafter the "Code"), Richard D. and Florence L. Hammer (hereinafter the "Debtors") borrowed money from Beneficial Finance Company (hereinafter "Beneficial") and voluntarily executed a security agreement giving a security interest in certain of their household goods, furnishings, and appliances to Beneficial. Beneficial properly perfected said security interest pursuant to Iowa law. Two years later, Debtors commenced this case by filing a voluntary petition under Chapter 7 of the Code and, pursuant to § 522(f)(2), sought to avoid Beneficial's lien on Debtors' household property.
The primary issue presented to the Court is the constitutionality of the retroactive application of § 522(f)(2) to avoid nonpossessory, nonpurchase-money security interests created prior to November 6, 1978, the enactment date of the Code. Beneficial contends that § 522(f)(2) should not be retroactively applied because Congress did not explicitly intend that its avoidance provisions be applied to security interests created prior to the Code, and, further, that such retroactive application would constitute a deprivation of private property in violation of the due process clause of the Fifth Amendment to the United States Constitution.
For the reasons stated in Division II below, this Court holds that Congress manifestly intended that § 522(f)(2) retroactively apply to security interests created prior to the enactment of the Code. For reasons stated in Division III below, this Court finds that the avoidance of preenactment security interests,1 if allowed, would amount to a retroactive taking of Beneficial's vested property rights in the Debtors' specified personal property without due process of law in violation of the Fifth Amendment to the United States Constitution.
Pursuant to § 522(f) of the Code, Plaintiffs filed a Complaint to Avoid the Fixing of a Lien on specific exempt property of the Debtors. Section 522(f)(2) provides in pertinent part that:
11 U.S.C. § 522(f).
In general, the Debtors' avoidance power under § 522(f) applies to a "lien," defined for purposes of the Code as:
11 U.S.C. § 101(28). Subsections 101(37) and 101(36) of the Code define the specific type of lien to which the Debtors' § 522(f)(2) avoidance power applies:
11 U.S.C. § 101(37), (36).
This Court must first determine whether Congress intended § 522(f) to apply retroactively to liens perfected prior to enactment of the Code. Section 522(f) itself contains no limiting restrictions upon its application. For the reasons stated below, this Court finds that both the language of the Code and its legislative history clearly and unequivocally indicate that Congress intended retroactive application of § 522(f)(2) to preenactment security interests in cases commenced on or after October 1, 1979, the effective date of the Code.
A well-settled rule of statutory construction provides that, where Congressional intent is unclear, an unconstitutional construction of the ambiguous provisions shall be avoided. In Wright v. Vinton Branch of the Mountain Trust Bank, 300 U.S. 440, 461, 57 S.Ct. 556, 561, 81 L.Ed. 736 (1936), a case construing the 1935 Frazier-Lemke amendments to the Bankruptcy Act of 1898, Mr. Justice Brandeis construed "phraseology ... lacking in clarity" with this principle of construction in mind:
If we were in doubt as to the intention of Congress, we should still be led to that construction by a well settled rule: "When the validity of an act of Congress is drawn in question, and even if a serious doubt of constitutionality is raised, it is a cardinal principle that this Court will first ascertain whether a construction of the statute is fairly possible by which the question may be avoided.
300 U.S. at 461, 57 S.Ct. at 561. Following the principle that unconstitutional constructions of ambiguous legislation should be avoided if at all possible, courts have construed amendments to the Bankruptcy Act of 1898 as prospective only to avoid the possible retroactive impairment of pre-existing vested property rights, including security interests similar to that possessed by Beneficial in this case. See, Holt v. Henley, 232 U.S. 637, 34 S.Ct. 459, 58 L.Ed. 767 (1913); Ginsberg v. Lindel, 107 F.2d 721 (8th Cir. 1939); In re Michael's Cafeteria, 52 F.Supp. 799 (D.La.1943); In re Freeze-In Mfg. Corp., 128 F.Supp. 259 (E.D.Mich. 1955); Thomas v. Gulfway Shopping Center, Inc., 320 F.Supp. 756 (S.D.Texas 1970).
There exists an important exception to this fundamental rule of construction. A statute shall be presumed to apply...
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