In re Jones

• Decision Date: 22 April 2010
• Docket Number: Nos. DK-09-09415,Nos. DK 09-03268,s. DK-09-09415,s. DK 09-03268
• Citation: 428 B.R. 720
• Parties: In re Dorothy Ann JONES, Debtor. In re Steven M. Schafer, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Michigan

428 B.R. 720

In re Dorothy Ann JONES, Debtor. In re Steven M. Schafer, Debtor.

Nos. DK-09-09415, DK 09-03268.

United States Bankruptcy Court, W.D. Michigan.

April 22, 2010.

Kerry D. Hettinger, Hettinger & Hettinger PC, Portage, MI, for Debtor.

Thomas R. Tibble, Kalamazoo, MI, Trustee.

OPINION AND ORDER REGARDING CONSTITUTIONALITY OF EXEMPTION STATUTE

SCOTT W. DALES, Bankruptcy Judge.

I. INTRODUCTION AND JURISDICTION

In separate cases, Chapter 7 debtors Dorothy Ann Jones and Steven M. Schafer (the "Debtors") each claimed exemptions pursuant to 11 U.S.C. § 522(bX3) and M.C.L. § 600.5451 on Schedule C. Their respective bankruptcy trustees (the "Trustees") each filed independent objections to the claimed exemptions,¹ arguing that M.C.L. § 600.5451 violates the United States Constitution's Bankruptcy Clause ² and Supremacy Clause ³ by providing exemptions only to those debtors who have sought protection under the United States Bankruptcy Code.⁴

The Honorable James D. Gregg and the Honorable Jeffrey R. Hughes, both from this district, have already invalidated the statute on these same grounds. See In re Pontius, 421 B.R. 814 (Bankr.W.D.Mich.2009) (Gregg, J.); In re Wallace, 347 B.R. 626 (Bankr.W.D.Mich.2006) (Hughes, J.). In a bench ruling last October, however, this court upheld the constitutionality of M.C.L. § 600.5451 after analyzing the statute under the Supremacy Clause rather than the Bankruptcy Clause. See Transcript of Hearing Held Oct 14, 2009 in In re Bratsburg, Case No. 09-06721 (Bankr.W.D. Mich. Oct 14, 2009).

The court has jurisdiction to decide these contested matters under 28 U.S.C. § 1334. Each proceeding is a "core proceeding" under 28 U.S.C. § 157(b)(2)(B), within the District Court's automatic referral under 28 U.S.C. § 157(a) and L. Civ. R. 83.2(a).

Each Trustee, as the objecting party, "has the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr.P. 4003(c). In addition, the court must indulge every presumption that the State's enactment comports with the United States Constitution. Pontius, 421 B.R. at 820; Wallace, 347 B.R. at 634.

Despite the weighty arguments advanced by the Trustees' counsel in writing and at oral argument on March 11, 2010 in Kalamazoo, Michigan, and notwithstanding the thoughtful analysis articulated in the opinions published by Judges Gregg and Hughes, this court adheres to its bench ruling in Bratsburg and finds M.C.L. § 600.5451 to be constitutional. For the reasons that follow, the court finds the Trustees have failed to show the Debtors' bankruptcy-specific exemptions "are not properly claimed."

II. FACTUAL BACKGROUND

In 11 U.S.C. § 522(b), Congress provided that a state may choose the exemptionscheme available to any debtor filing for bankruptcy relief within its borders. For example, debtors filing bankruptcy petitions in Ohio and Tennessee are not eligible to claim the federal exemptions enumerated in § 522(d) because the state law applicable to those debtors specifically "does not so authorize." See 11 U.S.C. § 522(b)(2); Ohio R.C. § 2329.662; T.CA. § 26-2-112. In other words, those states and many others have "opted out" of the federal exemption scheme.

Michigan, on the other hand, has not opted out When Michigan debtors file bankruptcy petitions they can choose to exempt property under the federal exemption scheme found in 11 U.S.C. § 522(b)(2) and (d), or under the state exemption scheme of 11 U.S.C. § 522(b)(3). Should Michigan debtors choose the so-called "state exemptions," they then have a choice to select exemptions under M.C.L. § 600.6023, which are generally applicable to all judgment debtors, or exemptions under M.C.L. § 600.5451, which are available only to debtors in bankruptcy.

Dorothy Ann Jones filed a voluntary petition under Chapter 7 on August 7, 2009, and elected the state exemptions under M.C.L. § 600.5451, claiming $30,000.00 in value attributable to a long-term real estate leasehold in Grand Junction, Michigan. See M.C.L. § 600.5451(1)(n). Steven Schafer commenced his Chapter 7 bankruptcy case on March 23, 2009, and also elected the state exemptions under M.C.L. § 600.5451(1)(n), claiming $44,695.00 in value attributable to his interest in his residence in Marshall, Michigan.

At oral argument, the Debtors' attorneys explained that their clients claimed exemptions under M.C.L. § 600.5451 because that statute provides a much more generous homestead allowance than any alternative. Because both Debtors are either older than sixty-five years of age or disabled, they may claim up to $51,650.00 in homestead value under M.C.L. § 600.5451(1)(n). Had they taken exemptions under M.CL. § 600.6023(1)(h), they could claim only $3,500.00 in their homestead. Likewise, the federal exemption available to these Debtors on account of their residential real estate is capped at $20,200.00.

III. THE STATUTE UNDER REVIEW: M.C.L § 600.5451

Section 522(b)(3)(A) authorizes debtors to exempt "any property that is exempt under ... State or local law that is applicable on the date of the filing of the petition at the place in which the debtor's domicile has been located ..." Although M.C.L. § 600.5451(1)(n) qualifies as a State law applicable on the Debtors' respective petition dates, it is not generally applicable to all debtors, but only debtors who file for bankruptcy protection:

(1) A debtor in bankruptcy under the bankruptcy code, 11 USC 101 to 1330, may exempt from property of the estate property that is exempt under federal law or, under 11 USC 522(b)(2) ⁵ [sic], the following property:

...

(n) The interest of the debtor ... not to exceed $30,000.00 in value or, if the debtor or a dependent of the debtor at the time of the filing of the bankruptcy petition is 65 years of age or older or disabled, not to exceed $45,000.00 in value, in a homestead.

M.C.L. § 600.5451(1)(n).⁶

The Trustees contend, and the Wallace and Pontius courts agree, that the Michiganlegislature exceeded its authority in enacting M.C.L. § 600.5451 because the statute applies only to debtors in bankruptcy. The argument depends upon the premise that the United States Constitution, specifically the Bankruptcy Clause, divested the states of legislative authority to enact bankruptcy laws, reserving that power exclusively for Congress. Because Congress cannot delegate its own legislative authority back to the states, Michigan's enactment of its own bankruptcy-specific exemption is not an exercise of its own legislative authority, but instead an exercise of a Congressional prerogative, and therefore violates the United States Constitution.

In view of these arguments, the first step in determining the constitutionality of this statute is to examine whether, under our republican form of government, Michigan's legislature retains concurrent authority in the area of bankruptcy exemptions, notwithstanding the Bankruptcy Clause and Congress's enactment of the Bankruptcy Code. If Michigan retains such authority, the question becomes whether its bankruptcy-specific exemption statute conflicts with federal law, and must yield under the Supremacy Clause.

A. Concurrent v. Exclusive Legislative Authority

To support the view that Michigan lacks authority to enact a bankruptcy-specific exemption, the Trustees rely heavily on the decisions in Wallace and Pontius, which in turn rely on Hood v. Tennessee Student Assistance Corp., 319 F.3d 755 (6th Cir.2003), aff'd on other grounds, 541 U.S. 440, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004).

The Wallace and Pontius opinions construed the Bankruptcy Clause, and its uniformity requirement, as an express delegation of exclusive legislative power from the states to the federal legislature—a constitutional delegation divesting the states of their own legislative authority in this area. This view, however, is at odds with the Sixth Circuit's earlier analysis in Rhodes v. Stewart, 705 F.2d 159 (6th Cir.), cert. denied. 464 U.S. 983, 104 S.Ct. 427, 78 L.Ed.2d 361 (1983), which recognized concurrent state legislative authority to adopt exemptions applicable in bankruptcy. Neither Hood nor Rhodes, however, considered whether a state, consistent with the United States Constitution, may enact exemptions that apply only in cases under Title 11.

In Rhodes, the Sixth Circuit reversed a bankruptcy court decision that invalidated the statute pursuant to which Tennessee "opted out" of the federal bankruptcy exemptions. Thirteen years later, the Sixth Circuit in In re Storer, 58 F.3d 1125 (6th Cir.1995). cited Rhodes approvingly when an Ohio debtor sought to exempt property under 11 U.S.C. § 522(d). despite his state's decision to opt-out of the federal exemption scheme. Even though Rhodes and Storer were not considering exemptions that apply only in bankruptcy cases, the court's rationale expressed a broad view of concurrent state and federal legislative authority in the area of bankruptcy exemption legislation:

It is fundamental that the state and federal legislatures share concurrent authority to promulgate bankruptcy laws. Sturges v. Crowninshield, 17 U.S. (4 Wheat) 122, 4 L.Ed. 529 (1819). and that the Supremacy Clause and the doctrine of preemption will serve to invalidate state promulgations to the extent they are inconsistent with or contrary to federal laws. Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233.402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971). It is equally axiomatic, that Congress has not preempted state legislation that it has expressly and concurrently authorized, such as the opt-out In such instance, rather than preempting the area, Congress expressly authorizes the states to "preempt" the federal legislation.

Rhodes, 705 F.2d at 163; Storer, 58 F.3d at 1128-29. Indeed, the Sixth Circuit specifically noted that 11 U.S.C. § 522(b)(1) is "not an unconstitutional delegation of federal power, but rather is merely a recognition of the concurrent legislative power of the state legislatures to enact laws governing bankruptcy exemptions." Stor...