In re Law
| Citation | 37 BR 501 |
| Decision Date | 24 February 1984 |
| Docket Number | Bankruptcy No. 2-83-03621. |
| Parties | In re Foster W. (William) LAW, Rosemary (NMN) Law, Debtor(s). |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio |
Mitchel D. Cohen, Columbus, Ohio, for debtors.
D.L. Mains, Jr., Columbus, Ohio, for creditor.
The matter before the Court is the question of the availability of the lien avoidance provisions of 11 U.S.C. § 522(f) to Ohio debtors. This Court must follow the binding precedent supplied by the United States Sixth Circuit Court of Appeals in the case of Pine/Giles v. Credithrift of America, 717 F.2d 281, 10 B.C.D. 1467 (6th Cir.1983), holding that states such as Ohio may preclude the use of 11 U.S.C. § 522(f) by adopting "exemption" statutes to that effect. Consequently, the Court must reluctantly deny the debtors' application for lien avoidance.
The debtors have granted a creditor nonpossessory, nonpurchase-money security interests in property which, absent the consensual lien encumbrances, would be exempt under Ohio law. The debtors herein have sought relief under Chapter 7 of the Bankruptcy Code and have filed an application to avoid the lien, pursuant to 11 U.S.C. § 522(f). The application was filed after the effective date of the Pine/Giles decision.
This matter concerns the interrelation of two subsections of § 522 of the Bankruptcy Code. Subsection (b) allows the states to "opt out" of the federal exemptions listed in subsection (d) of § 522. It states that:
Subsection (f) provides a mechanism to protect the debtors' exemptions by allowing them to avoid improvidently granted liens on otherwise exempt property. It reads as follows:
As mentioned above, § 522(b) allows a state to prohibit debtors residing within its borders from utilizing the federal exemptions set out in § 522(d) and to force them to utilize the state exemptions. Ohio has chosen to "opt out" of the federal exemptions and has enacted § 2329.662 of the Ohio Revised Code to make manifest this decision. This statute states that:
Pursuant to the "Bankruptcy Reform Act of 1978," 92 Stat. 2549, 11 U.S.C. 522(b)(1), this state specifically does not authorize debtors who are domiciled in this state to exempt the property specified in the "Bankruptcy Reform Act of 1978," 92 Stat. 2549, 11 U.S.C. 522(c).
Consequently, debtors filing for bankruptcy in Ohio must rely on the exemptions set out in Chapter 2329 of the Ohio Revised Code. After listing these exemptions, the Revised Code imposes a major limitation on the availability of these exemptions in § 2329.661(C), which reads as follows:
(C) Section 2329.66 of the Revised Code does not affect or invalidate any sale, contract of sale, conditional sale, security interest, or pledge of any personal property, or any lien created thereby.
As a result of § 2329.661(C) of the Revised Code, Ohio debtors are denied exemptions in property that would otherwise be exempt if they had allowed a properly perfected security interest to attach to the property before filing their bankruptcy petition.
The United States Court of Appeals for the Sixth Circuit has ruled, in the case of Pine/Giles v. Credithrift of America, Inc., supra, that states may effectively "opt out" of the lien avoidance provisions of 11 U.S.C. § 522(f) by drafting their exemption statutes very narrowly and denying their resident debtors the opportunity to use the more generous federal exemptions set out in 11 U.S.C. § 522(d). Since Ohio has attempted to do just that, this case is directly on point. Therefore, a close examination of this case is in order.
The Pine/Giles case is, in actuality, two cases which were apparently consolidated on the circuit level, pursuant to Rule 3(b) of the Federal Rules of Appellate Procedure. The basic factual patterns of these cases are virtually identical. In each case, the debtors granted Credithrift nonpossessory, nonpurchase-money security interests in certain household goods. Both couples subsequently filed voluntary petitions for relief under Chapter 7 of the Bankruptcy Code, pursuant to 11 U.S.C. § 302. In the Giles case, the debtors' domiciliary, for purposes of § 522, was Georgia. The Pines, on the other hand, were domiciled in the state of Tennessee.1 Both cases were filed in the Eastern District of Tennessee in 1980.
Although there were inconsequential procedural differences between the manner in which the issues arose in the two cases, the arguments raised by Credithrift in opposition to the debtors' attempts to avoid the above described liens were identical. Credithrift advanced the following arguments:2
The Bankruptcy Court rejected each of these arguments. The Bankruptcy Court found that the first argument, in regard to the prevention of the fixing of liens as opposed to voiding preexisting liens, was not well taken because such a construction would deny the vitality and effect of the statute. The intended purpose of § 522(f) is to provide the debtor with a fresh start and to prevent overreaching creditors from diluting this fresh start through unfavorable reaffirmations on debts that were secured by otherwise exempt property. See In re Giles, supra, at 136, 137 and In re Pine, supra, at 600-605. The Court also noted that the language of § 522(f), while perhaps the result of careless drafting, could also be explained by the unique nature of the avoidance powers of § 522(f), as compared with the other avoidance provisions of the Code such as 11 U.S.C. §§ 544, 545, 547, 548, 549 and 724(a).
The Bankruptcy Court also rejected Credithrift's argument that since the debtors had granted it a security interest in the property, they no longer had an interest in the property within the meaning of § 522(f) and that, therefore, its avoidance provisions were not applicable. The Court correctly stated that while the granting of a security interest in property is indeed a conveyance of a portion of the debtors' rights in the property, it does not totally divest the debtor of any interest in the property. See In re Pine, supra, at 138.
The Court similarly rejected Credithrift's third argument. Basing its conclusion on a substantial amount of legislative history, the Court held that Congress intended § 522(f) to operate to avoid liens on property that would have been exempt under the statutes made applicable by § 522(b) if no lien had attached. The Bankruptcy Court stated that Congress recognized that most exemption statutes only allow debtors to claim exemptions out of their equity in encumbered property, and enacted § 522(f) to allow debtors to create equity in property that would have been exempt but for the lien. The Court found that the purpose of the...
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