In re Morrell

• Decision Date: 14 August 2008
• Docket Number: No. 08-519.,08-519.
• Citation: 394 B.R. 405
• Court: U.S. Bankruptcy Court — Northern District of West Virginia
• Parties: In re Danny G. MORRELL, Jr., and Raquel L. Morrell, Debtors.

Page 405

394 B.R. 405

In re Danny G. MORRELL, Jr., and Raquel L. Morrell, Debtors.

No. 08-519.

United States Bankruptcy Court, N.D. West Virginia.

August 14, 2008.

MEMORANDUM OPINION

PATRICK M. FLATLEY, Bankruptcy Judge.

As authorized by Congress, West Virginia chose not to allow its residents to use the federal bankruptcy exemptions in 11 U.S.C. § 522(d). Instead, West Virginia has created its own scheme of bankruptcy exemptions in W. Va.Code § 38-10-4, which are different from the exemptions available to residents who are not in bankruptcy.

Martin P. Sheehan, the Chapter 7 trustee (the "Trustee") for Danny and Raquel Morrell (the "Debtors"), objects to the Debtors' claim of exemptions under § 38-10-4 on the grounds that West Virginia's bankruptcy only exemption scheme violates the Supremacy Clause of the United States Constitution.¹ For the reasons stated herein, the court will overrule the Trustee's objection.²

I. BACKGROUND

The Debtors value their principal residence at $56,000, and it is subject to a deed of trust securing a note in the approximate amount of $38,000. On Schedule C, the Debtors claim an $18,000 exemption in the property pursuant to W. Va.Code § 38-10-4(a), which allows each Debtor to exempt up to $25,000 in real property that the Debtor uses as a residence. The Trustee argues that the Debtors should be limited to the non-bankruptcy state law homestead exemption in § 38-9-1, which would allow each debtor to claim $5,000 in equity as exempt from their creditors.

If the Debtors are allowed to use West Virginia's bankruptcy only exemption for their residence, then the Trustee will abandon their home and declare that no assets exist to administer in their case. If the Trustee is successful, then the Trustee may elect to sell the Debtors' home and distribute any non-exempt proceeds to the Debtors' pre-petition creditors.

II. DISCUSSION

The Trustee argues that West Virginia has created a bankruptcy law that conflicts with the federal Bankruptcy Code by creating a scheme of exemptions only available to debtors that have filed a bankruptcy petition. According to the Trustee, Congress has already enacted bankruptcy only exemptions, which are those listed in 11 U.S.C. § 522(d). In the Trustee's view, West Virginia's choice to opt out of the federal exemption scheme is permissible, but creating bankruptcy only exemptions that are different from the exemptions allowed debtors in State court is impermissible.

The Debtors, and the West Virginia Attorney General, contend that West Virginia's bankruptcy only exemptions are authorized by Congress, and, therefore, cannot conflict with federal law. Moreover, they argue, no Supremacy Clause violation has occurred on the basis that West Virginia's bankruptcy only exemptions do not frustrate any federal bankruptcy policy.

To resolve the issue of whether W. Va. Code § 38-10-4 is preempted by the Bankruptcy Code, the court will examine: (A) the extent of concurrent federal and State authority to pass bankruptcy laws and the effect of federal supremacy; (B) the scheme of federal bankruptcy exemptions; (C) the scheme of West Virginia's bankruptcy and non-bankruptcy exemptions; and (D) whether West Virginia's bankruptcy only exemption scheme conflicts with the Bankruptcy Code so as to be preempted under the Supremacy Clause of the United States Constitution.

A. Concurrent Authority & the Supremacy Clause

Article I, Section 8 of the United States Constitution provides that "Congress shall have the Power ... To establish ... uniform Laws on the subject of Bankruptcies throughout the United States...." As explained by the Supreme Court, this power is not exclusive to Congress; individual States also have the power to pass bankruptcy laws:

[I]t must be recollected that, previous to the formation of the new constitution, we were divided into independent States, united for some purposes, but, in most respects, sovereign. These States could exercise almost every legislative power, and, among others, that of passing bankrupt laws. When the American people created a national legislature, with certain enumerated powers, it was neither necessary nor proper to define the powers retained by the States. These powers proceed, not from the people of America, but from the people of the several States; and remain, after the adoption of the constitution, what they were before, except so far as they may be abridged by that instrument.

Sturges v. Crowninshield, 17 U.S. (4 Wheat.) 122, 192-93, 4 L.Ed. 529 (1819).

Thus, "until the power to pass uniform laws on the subject of bankruptcies be exercised by Congress, the States are not forbidden to pass a bankrupt law...." Id. at 196. When Congress does pass a bankruptcy law, however, State laws on the same subject are "suspended." Id. Of course, a law enacted by Congress is "the supreme Law of the Land, ... any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." U.S. Const. art. VI, cl. 2; see also International Shoe v. Pinkus, 278 U.S. 261, 265, 49 S.Ct. 108, 73 L.Ed. 318 (1929) (holding that "intolerable inconsistencies and confusion would result" if an Arkansas insolvency law was given effect while the National Bankruptcy Act was in force); Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 211, 6 L.Ed. 23 (1824). ("[A]cts of the State Legislatures ... [which] interfere with, or are contrary to the laws of Congress, made in pursuance of the constitution," are invalid under the Supremacy Clause). Only those State laws "which conflict with the bankruptcy laws of Congress ... are suspended; those which are in aid of the Bankruptcy Act can stand."³ Stellwagen v. Clum, 245 U.S. 605, 615, 38 S.Ct. 215, 62 L.Ed. 507 (1918). Indeed, as stated in Stellwagen, "Congress may recognize the laws of State in certain particulars.... For example, the Bankruptcy Act recognizes and enforces the laws of the Sates affecting dower, exemptions, the validity of mortgages, priorities of payment and the like. Such recognition in the application of state laws does not affect the constitutionality of the Bankruptcy Act...." Id. at 613.

Accordingly, in the absence of any federal law on the same subject, a State is free to pass its own bankruptcy laws. Thus, West Virginia has the authority to enact a bankruptcy only statute; the issue is whether West Virginia's bankruptcy only exemption statute conflicts with the Bankruptcy Code.

Determining whether a State's statute is in conflict with a federal bankruptcy law, and thus is invalid under the Supremacy Clause of the United States Constitution is essentially a two step process. Perez v. Campbell, 402 U.S. 637, 644, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971). The court must ascertain "the construction of the two statutes and then determin[e] the constitutional question whether they are in conflict". Id.

B. The Federal Bankruptcy Exemption Scheme

Federal bankruptcy law serves two essential purposes. First, as often stated, the purpose of bankruptcy is to give debtors "a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). Second, "[b]ankruptcy law, at its core, is debt-collection law." Thomas H. Jackson, The Logic and Limits of Bankruptcy Law, p. 3 (Harvard University Press, 1986), reprinted by Beard Books (2001); see also Young v. Higbee Co., 324 U.S. 204, 210, 65 S.Ct. 594, 89 L.Ed. 890 (1945) ("[H]istorically, one of the prime purposes of the bankruptcy law has been to bring about a ratable distribution among creditors of a bankrupt's assets; to protect the creditors from one another."). Balancing a debtor's right to a fresh start against the rights of the debtor's creditors to collect on pre-petition debts is endemic to bankruptcy law. This tension is perhaps best witnessed in 11 U.S.C. § 522, which helps determine what assets are available for the payment of the debtor's creditors, and what assets a debtor will be able to shield from those creditors to effectuate the debtor's financial fresh start.

In making this determination, all of a Chapter 7 debtor's legal and equitable interests in property become property of the debtor's bankruptcy estate on the filing of the bankruptcy petition. 11 U.S.C. § 541(a)(1). That property is then subject to administration for the benefit of the debtor's creditors by the debtor's Chapter 7 trustee. § 704(a)(1). To ensure the debtor's fresh start, however, § 522(b) of the Bankruptcy Code allows a debtor to exempt certain property from being property of the estate, and, thus, excludes that property from administration by the trustee. 11 U.S.C. § 522(b)(1). Sometimes the property exemption is based on value, and sometimes the exemption consists of the property itself, regardless of its value. E.g., § 522(d)(1), (9) (allowing up to $20,200 in equity to be exempted in a homestead, but allowing any home health aid to be exempted regardless of value).

To determine what exemptions are available to a debtor in bankruptcy, Congress allows a debtor to make one of two choices regarding the applicable exemption scheme. The first choice is in § 522(b)(2), which allows debtors to choose from the federal list of exemptions listed in paragraph (d)—unless the debtors' state of residence elects to foreclose that option. The second choice is in § 522(b)(3), which allows debtor to choose from the federal exemptions other than those listed in paragraph (d), and any property that is exempt under State or local law. In the event that a State has opted out of the federal exemptions listed in § 522(d), then the debtor may only use the exemptions listed in § 522(b)(3). Congress's stated reason for allowing States this option is set forth in the 1978 Act's legislative history:

Under current law, what property is exempt is determined under State law. However, some State exemption laws have not been revised in this...