In re Lennen, Bankruptcy No. I-86-01649
| Decision Date | 19 February 1987 |
| Docket Number | I-86-00864,Bankruptcy No. I-86-01649,I-86-01347 and I-85-01218. |
| Citation | 71 BR 80 |
| Parties | In re Robert LENNEN and Yvonne Lennen, Debtors. In re Bruce BAIRD and Alix Baird, Debtors. In re Michael WOOD and Jami Wood, Debtors. In re Pasquale C. FERRARO and Shelly A. Ferraro, Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of California |
Douglas B. Provencher, Rohnert Park, Cal., for debtors, Pasquale and Shelly Ferraro.
Philip M. Arnot, Eureka, Cal., for Trustee, William B. Grover.
Marjorie A. Slabach, Conner, Slabach & Lawrence, Santa Rosa, Cal., for Michael and Jami Wood.
Douglas B. Provencher, for debtors, Bruce and Alix Baird.
John R. Evans, Santa Rosa, for debtors, Robert and Yvonne Lennen.
ORDER ON OBJECTION TO CLAIMS OF EXEMPTION
All of these matters involve the Trustee's objection to claims of exemption under California law. In Lennen and Wood, the issue is whether a married couple is limited to the same exemptions as a single person under California Code of Civil Procedure section 703.140(b), or whether they may double them. In Ferraro and Baird, the issue is whether one debtor may elect the exemptions under Code of Civil Procedure section 703.140(b) and his or her spouse elect the exemptions under sections 704.010 et seq. Because the court has trouble with California's statutory exemption scheme, and because a clear statement of the law is necessary in these cases and others being filed daily, the court feels compelled to examine exemption law in California as it exists today and render an opinion which, until reviewed by a higher court, will guide debtors and Trustees in determining what property may be lawfully declared as exempt.
It is impossible to understand the present state of California's exemption law without understanding the events of the last eight years. Once the past is understood, recent legislative events become clearer and a sense of the intent of the California legislature can be divined.
On October 1, 1979, the new Bankruptcy Code went into effect. It changed existing exemption law by providing a list of bankruptcy exemptions which a debtor might elect instead of the exemptions a debtor might elect outside of bankruptcy. It also provided that when a married couple filed a bankruptcy each spouse was entitled to make the election, and that each state could, by an act of its legislature, make the new bankruptcy exemptions inapplicable to residents of the state.
In California, the interplay between existing exemption law and the new bankruptcy exemptions immediately began to cause problems. Because California law gave its homestead exemption to the "head of household" instead of to a married couple together, married couples found that they could "stack" exemptions by having the husband elect the state exemptions and the wife elect the federal bankruptcy exemptions. Because of the long-standing rule that exemption laws should be interpreted liberally in favor of the debtor, courts logically held that a married couple could claim as exempt the full amount of homestead equity under state exemption law plus $7,900.00 in "wildcard" exemptions under federal bankruptcy exemption law (see, e.g., In re Emmerich (9th Cir. BAP 1982) 19 B.R. 666), or even claim $7,900.00 more than the maximum under state law in home equity as exempt by stacking the two exemptions on the same property (In re Dahdah (9th Cir. BAP 1982) 20 B.R. 665; In re Ancira (Bkrtcy.N. D.Cal.1980) 5 B.R. 673). This unintended liberality upset the California legislature, which embarked upon a series of legislative solutions.
California's first attempt to eliminate exemption stacking was the enactment of Code of Civil Procedure section 690(b) in 1981.1 That section simply provided that a married couple was barred from electing separate exemption schemes in bankruptcy. This statute was rather quickly invalidated by the bankruptcy courts as violating the supremacy clause in the U.S. Constitution. In re Lee (Bkrtcy.C.D.Cal.1982) 22 B.R. 977; In re Stacey (Bkrtcy.S.D.Cal.1982) 24 B.R. 97.
California's second attempt to eliminate stacking came in 1983, when its legislature repealed Code of Civil Procedure section 690(b) and in its place enacted section 703.130.2 That section, which went into effect on July 1, 1983, purported to first have California "opt out" of the federal bankruptcy exemptions, and then provide that, notwithstanding the opting out, the bankruptcy exemptions could still be used as long as there was no attempt by a married couple to stack state and federal exemptions. Section 703.130 was, like its predecessor, quickly declared unconstitutional in bankruptcy court. In re Garrido (Bkrtcy. S.D.Cal.1984) 43 B.R. 289.
Finally, in 1984, something of a comedy of errors resulted in the present state of the law. In June of 1984, California's governor signed Assembly Bill No. 3004 into law as Chapter 218 of the laws of 1984. This legislation, which went into effect on January 1, 1985, repealed old Code of Civil Procedure section 703.130 and replaced it with new sections 703.130 and 703.140. These new sections hardly changed anything from old section 703.130, except that instead of allowing the debtor to still choose the federal bankruptcy exemptions, California instead made a new set of state exemptions, applicable only to debtors in bankruptcy, which coincidently were worded exactly the same as the federal bankruptcy exemptions.
Since A.B. 3004 differed so little from the statute invalidated in Garrido, one would have thought that it would quickly suffer the same fate. However, unrealized by the California legislature when it passed A.B. 3004, the United States Congress itself was working to eliminate stacking and, in the Bankruptcy Amendments and Federal Judgeship Act of 1984, effective in the fall of 1984, amended 11 U.S.C. section 522(b) to eliminate stacking and further halved the federal bankruptcy wildcard exemption amount.
Suddenly, the (essentially) same statute which had been declared unconstitutional at the urging of debtors only a few months before was now a haven for debtors, as the California legislature, in attempting to mirror the federal exemptions, had instead inadvertently preserved them in their full amount.
Now, some two years later, the Trustee seeks to limit the exemptions available under section 703.140(b) by applying section 703.110 in such a way as to limit the 703.140(b) exemptions to the same amount for a married couple as for a single person. The debtors attack this application as discriminating unfairly against married debtors. This court cuts the Gordian knot by declaring A.B. 3004 just as unconstitutional as its predecessor.
It is apparent to this court that the exemption scheme embodied in California Code of Civil Procedure section 703.140 must be found to be a nullity. The court in Garrido threw out the predecessor to the statute now under review on grounds based solely on the Supremacy Clause; it held that California was not empowered under the Bankruptcy Code to do what it was trying to do. While that argument applies equally here, the doctrine of uniformity also requires that the statute be invalidated.
The United States Constitution provides that Congress may "establish uniform Laws on the subject of Bankruptcies." U.S. Const. Art. I, sec. 8, cl. 4. While this provision has never, despite urgings to the contrary, been interpreted as requiring "true uniformity" as to all debtors nationwide (Matter of Sullivan (7th Cir.1982) 680 F.2d 1131, 1133), it has been interpreted as requiring geographic uniformity. The Supreme Court noted in upholding the Bankruptcy Act of 1898 in Hanover National Bank v. Moyses (1902) 186 U.S. 181, 188, 22 S.Ct. 857, 860, 46 L.Ed. 113, that "uniformity is geographical, not personal, and we do not think that the provisions of the Act of 1898 as to exemptions is incompatible with that rule."
Measured by the geographic uniformity test, the exemption scheme of section 703.140 must fail. The exemptions made available there apply only to a debtor in federal bankruptcy court; they are not available to a next-door neighbor who has not filed a bankruptcy petition. In addition, the statutory wording of section 522(b)(2)(A) that the debtor may claim property as exempt under "State or local law that is applicable" should not, in view of constitutional considerations, be interpreted so liberally as to authorize a state exemption scheme which is applicable only in federal bankruptcy court.
Having determined that California's bankruptcy-only exemptions exceed the authority delegated to the states by Congress and violate the geographic uniformity requirement, this court must now determine whether the exemptions set forth in section 522(d) of the Bankruptcy Code are still available to debtors, or whether they must rely solely on California's nonbankruptcy exemptions. Section 522(b)(1) provides that the former are available "unless State law . . . specifically does not so authorize." California Code of Civil Procedure section 703.130, added by Chapter 218 of that state's 1984 statutes, along with section 703.140 as A.B. 3004, provides that the exemptions set forth in section 522(d) are not authorized in California. Section 681.050 of the California Code of Civil Procedure section provides that the unconstitutionality of one section does not invalidate the other sections. Therefore, it might be argued that the only exemptions left to California debtors are the ordinary state exemptions. However, for the reasons discussed below, this court does not believe that California's "opt-out" was effective.
As previously discussed, California adopted its opt-out scheme in order to prevent stacking, evidently not realizing that Congress was moving to do the same thing, as well as halve the federal exemptions. It is by no means certain...
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