In re John Richards Homes Bldg. Co., L.L.C.

• Citation: 298 B.R. 591
• Decision Date: 17 September 2003
• Docket Number: No. 02-54689-R.,02-54689-R.
• Parties: In re JOHN RICHARDS HOMES BUILDING CO., L.L.C., Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

298 B.R. 591

In re JOHN RICHARDS HOMES BUILDING CO., L.L.C., Debtor.

No. 02-54689-R.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

September 17, 2003.

COPYRIGHT MATERIAL OMITTED

Norman C. Ankers, Honigman Miller Schwartz and Cohn, Detroit, MI, for Debtor.

Ralph E. McDowell, Bodman, Longley, Detroit, MI, for Petitioning Creditors.

Opinion Regarding JRH's Motion for Miscellaneous Post-Judgment Relief

STEVEN W. RHODES, Chief Judge.

On April 25, 2003, the Court entered a judgment in favor of the alleged debtor, John Richards Homes Building Company, L.L.C., ("JRH") against the petitioning creditor, Kevin Adell, in the amount of $6,413,230.68 pursuant to 11 U.S.C. § 303(i). See In re John Richards Homes Bldg. Co., L.L.C., 291 B.R. 727 (Bankr.E.D.Mich.2003). Very shortly thereafter, Adell liquidated his assets in Michigan to purchase a $2.8 million home in Florida. Specifically, on May 5, 2003, Adell sold nine luxury and classic vehicles for $536,000. On the same day, he cashed in $1.7 million in United States Treasury bills. He also withdrew $300,000 from his account at Standard Federal Bank. Finally, Adell's father approved a $300,000 loan from his corporations, where Adell is employed. Adell signed the purchase agreement for the home on May 6, 2003, and closed on the purchase of the home on May 8, 2003.

On May 21, 2003, JRH filed this motion for miscellaneous post-judgment relief, seeking the aid of the Court to collect on its judgment. Specifically, JRH asserts that because Adell used the proceeds of his Michigan assets to purchase the Florida home immediately after the judgment was entered, Adell should be ordered to sell that home and remit the proceeds in partial satisfaction of the judgment. Also JRH requests an order requiring Adell to turn over certain personal property to the United States Marshal. Finally, JRH seeks an order requiring the Michigan Secretary of State to record liens on several specified vehicles in favor of JRH.

Adell opposes the relief sought by JRH. Specifically, he argues that his Florida home is protected by Florida's homestead exemption, that JRH should employ the established procedures under state law to execute on personal property and that he no longer owns any vehicles on which the Michigan Secretary of State can record liens.

In reply, JRH asserts that in the unique circumstances of this case, 11 U.S.C. § 303(i) preempts the Florida homestead law and that in any event, because Adell is not a Florida resident, he cannot properly claim the Florida homestead exemption.

The Court conducted an evidentiary hearing, in part, to determine whether Adell is entitled to claim the Florida homestead exemption. The Court now concludes that in this case 11 U.S.C. § 303(i) does preempt the Florida homestead law. In the alternative, the Court concludes that Adell is not a Florida resident entitled to claim this exemption. Accordingly, the Court concludes that JRH is entitled to the relief that it seeks. In addition, under M.C.L. § 600.6104(5), the Court concludes that with certain exceptions, JRH is entitled to the turnover order that it seeks, as well as an order requiring the Michigan Secretary of State to record liens in favor of JRH on vehicles still titled in Adell's name.

I.

When the bankruptcy court dismisses an involuntary petition, 11 U.S.C. § 303(i) permits the court to enter a judgment against the petitioner and in favor of the alleged debtor for costs and attorney fees. In addition, if the court finds the petition was filed in bad faith, the court can award compensatory and punitive damages.

The narrow question raised in this case is whether a Michigan resident, who files an involuntary petition in bad faith and against whom a substantial judgment has been entered under § 303(i), can avoid the effect of that judgment by subsequently liquidating his Michigan assets and purchasing a home in a state with an unlimited homestead exemption. In this case, Adell contends that he can; JRH asserts otherwise.

The Court concludes that in enacting 11 U.S.C. § 303(i), Congress must have intended that a judgment under 11 U.S.C. § 303(i) would give the alleged debtor an opportunity for a real remedy for its losses and thus something more than a one-way ticket to Florida for the petitioner. Accordingly, in this case, the Court concludes that 11 U.S.C. § 303(i) preempts the Florida homestead law and that therefore JRH is entitled to the relief it seeks as to Adell's new home in Florida.

The Court will first review the most recent Supreme Court precedent on the general application of the preemption doctrine. Then the Court will review the Supreme Court and Sixth Circuit bankruptcy precedents that have applied the preemption doctrine. The Court will then examine cases holding that 11 U.S.C. § 303(i) preempts other state laws, as well as other cases holding that other federal laws preempt state homestead laws. Finally, the Court will apply these precedents to this case and explain why 11 U.S.C § 303(i) preempts the Florida homestead law in this case.

A.

The Supreme Court summarized the operation of the Supremacy Clause of the Constitution in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 30, 116 S.Ct. 1103, 1107, 134 L.Ed.2d 237 (1996):

This question is basically one of congressional intent. Did Congress, in enacting the Federal Statute, intend to exercise its constitutionally delegated authority to set aside the laws of a State? If so, the Supremacy Clause requires courts to follow federal, not state, law. U.S. Const., Art. VI, cl. 2; see California Fed. Sav. & Loan Assn. v. Guerra, 479 U.S. 272, 280-281, 107 S.Ct. 683, 689-690, 93 L.Ed.2d 613 (1987) (reviewing pre-emption doctrine).

Sometimes courts, when facing the pre-emption question, find language in the federal statute that reveals an explicit congressional intent to pre-empt state law. E.g., Jones v. Rath Packing Co., 430 U.S. 519, 525, 530-531, 97 S.Ct. 1305, 1309-1310, 1312-1313, 51 L.Ed.2d 604 (1977). More often, explicit pre-emption language does not appear, or does not directly answer the question. In that event, courts must consider whether the federal statute's "structure and purpose," or nonspecific statutory language, nonetheless reveal a clear, but implicit, pre-emptive intent. Id., at 525, 97 S.Ct. at 1309-1310; Fidelity Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 152-153, 102 S.Ct. 3014, 3022, 73 L.Ed.2d 664 (1982). A federal statute, for example, may create a scheme of federal regulation "so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it." Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447 (1947). Alternatively, federal law may be in "irreconcilable conflict" with state law. Rice v. Norman Williams Co., 458 U.S. 654, 659, 102 S.Ct. 3294, 3298-3299, 73 L.Ed.2d 1042 (1982). Compliance with both statutes, for example, may be a "physical impossibility," Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-143, 83 S.Ct. 1210, 1217-1218, 10 L.Ed.2d 248 (1963); or, the state law may "stan[d] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941).

Id., 517 U.S. at 30-31, 116 S.Ct. at 1107-08. See also Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 137-38, 111 S.Ct. 478, 482, 112 L.Ed.2d 474 (1990) ("[T]he question whether a certain state action is pre-empted by federal law is one of congressional intent." (internal quotation marks and citation omitted)); FMC Corp. v. Holliday, 498 U.S. 52, 56, 111 S.Ct. 403, 407, 112 L.Ed.2d 356 (1990) ("In determining whether federal law pre-empts a state statute, we look to congressional intent.").

Moreover, the Supreme Court's decision in Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975) is particularly applicable in this case because part of this Court's judgment against Adell was for JRH's attorney fees. In Alyeska Pipeline, the Supreme Court reversed an award of fees based on the court of appeals' equitable power. Although not grounded in the doctrine of preemption, the decision is significant in the present case because the Supreme Court stressed the authority of Congress to regulate attorney fee awards in the federal courts. The Supreme Court stated:

What Congress has done, however, while fully recognizing and accepting the [American] rule, is to make specific and explicit provisions for the allowance of attorneys' fees under selected statutes granting or protecting various federal rights.... Under this scheme of things it is apparent that the circumstances under which attorneys' fees are to be awarded and the range of discretion of the courts in making those awards are matters for Congress to determine.

Id. at 260-62, 95 S.Ct. at 1623-24 (citations and footnotes omitted) (emphasis added). See also Taylor v. Freeland & Kronz, 503 U.S. 638, 645-46, 112 S.Ct. 1644, 1648-49, 118 L.Ed.2d 280 (1992) (To the extent that existing federal remedies do not deter bad-faith behavior in bankruptcy proceedings, "Congress may enact comparable provisions" to address the difficulties.) (emphasis added).

B.

Both the Supreme Court and the Sixth Circuit have decided cases addressing whether the Bankruptcy Code preempts state laws.

For example, in Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971), an unpaid judgment resulted in the suspension of the debtor's driving privileges under the Arizona Motor Vehicle Safety Responsibility Act, even though the judgment debt had been discharged in bankruptcy. In beginning its analysis of the preemption question, the Supreme Court stated, "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...