In re Middleton
| Decision Date | 19 June 1980 |
| Docket Number | Bankruptcy No. 80-02099A. |
| Citation | 7 BR 3 |
| Parties | In re James Lee MIDDLETON, Jo Alice Middleton, Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
Paul C. Parker, Decatur, Ga., for petitioner.
H. Dennis Panter, Atlanta, Ga., for respondent.
On June 19, 1980, the above-referenced debtors filed a joint petition for relief under Chapter 7 of the Bankruptcy Code. The debtors claimed as exempt assets with a total value of $4,000.00 including general household items with a total value of $2,000.00. On July 28, 1980, the debtors filed a complaint to avoid, pursuant to 11 U.S.C. § 522(f), a lien in the aforementioned household goods held by Liberty Loan Corporation which arose out of a judgment of the State Court of Clayton County, Georgia, in the amount of $2,500.00. The judgment was based upon a debt secured by a nonpurchase money interest in household goods created April 25, 1978.
On August 15, 1980, Liberty Loan Corporation (hereinafter "Liberty") filed its answer alleging that the secured interest was perfected prior to the enactment of the Bankruptcy Reform Act of 1978 on November 6, 1978. It further alleged that at the time of perfection the security interest was valid and enforceable even in a bankruptcy proceeding and that application of 11 U.S.C. § 522(f) to destroy this interest is a deprivation of property in violation of the Due Process Clause of the Fifth Amendment.
The only issue raised by the parties is an issue of law: whether the application of 11 U.S.C. § 522(f) to avoid a security interest created prior to November 6, 1978 is an unconstitutional deprivation of property without due process. The issue has been squarely faced by several Bankruptcy Courts with inconsistent results.1 The reason for this inconsistency is clearly that resolution requires a determination of the limits placed upon the Bankruptcy Clause, Art. 1 § 8, by the Due Process Clause of the Fifth Amendment.
The scope of the bankruptcy power has been defined as In re Klein, 14 F. 716, 718 (C.C. D.Mo. 1843).
In aid of this power, the Supreme Court upheld the voiding of judicial liens against exempt property, in preference actions, as early as 1913. Chicago, B. & Q.R. Co. v. Hall, 229 U.S. 511, 33 S.Ct. 885, 57 L.Ed. 1306 (1913). It is obvious that all property and contract rights, the subject matter of due process protection, are subject to the bankruptcy laws which exist when those rights are created. The question remains as to what extent Congress may exercise the bankruptcy power to effect pre-existing property rights.
The Supreme Court last addressed this question in response to two attempts by Congress to alter retroactively rights of mortgagees in property of bankrupt farmers. Louisville Joint Stock Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1935) (hereinafter "Radford"); Wright v. Vinton Branch of the Mountain Trust Bank of Roanoke, 300 U.S. 440, 57 S.Ct. 556, 81 L.Ed. 736 (1936) (hereinafter "Wright"). The Court overturned the first attempt and upheld the second. The significance of these two cases is that in neither of these cases did Congress attempt an absolute destruction of a pre-existing property right. In Radford the Court overturned a statute which voided a mortgagee's lien upon payment by the mortgagor of the appraised value of the property but without allowing the mortgagee to bid in that amount. Radford argued that "the changes in the mortgagee's rights in the property, even is substantial, were not arbitrary and unreasonable, because they were made for a permissible public purpose." Radford at 598, 55 S.Ct. at 867. In rejecting this argument, Mr. Justice Brandeis stated:
Id. at 602, 55 S.Ct. at 869.
Radford has never been overruled and it has been applied to protect a vested security interest from retroactive destruction as recently as Armstrong v. United States, 364 U.S. 40, 80 S.Ct. 1563, 4 L.Ed.2d 1554 (1960).
On the other hand, it is undoubted that due process analysis has been altered dramatically since the late 1930's.2 Moreover, it is argued that the substantive due process analysis of Radford should apply only to the taking of a valuable substantive property right. The debtor contends that Congress recognized that the property interest in highly depreciable household goods is valuable, not intrinsically, but as a lever to obtain payment. H.R.Rep.No. 95-595, p. 127, U.S. Code Cong. & Admin. News 1978, pp. 5787, 6088. The interest of the creditor in these goods is contended to be more nearly a contract right than a substantive property interest, because unlike a mortgagee of real estate, the creditor is under no illusion that the collateral may have the value of the loan. If the security interest is thus viewed as a state created remedy for pursuing an underlying claim rather than a substantive property interest, then no due process problems are created by § 522(f). See Wright, supra. As the Supreme court has stated:
"Our cases are clear that legislation readjusting...
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