In re Pelter
| Decision Date | 12 September 1986 |
| Docket Number | Bankruptcy No. 85-1064-B. |
| Citation | 64 BR 492 |
| Parties | In re Charles Howard PELTER and Jeannie Lee Pelter, Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Oklahoma |
Kay M. DeGroat and W. Rogers Abbott, II, Oklahoma City, Okl., for debtors.
J. David Ezzell, McKnight & Gasaway, P.C., Enid, Okl. for First Agricultural Credit Corp. of Enid.
Patricia M. Gerrity and Michael C. Turpen, Office of the Atty. Gen. of Okl., Oklahoma City, Okl. for the State of Oklahoma.
Debtors, Charles Howard Pelter and Jeannie Lee Pelter, have moved to avoid a non-purchase money, non-possessory security interest lien in certain agricultural equipment pursuant to 11 U.S.C. § 522(f)(2)(B) (1979) and also challenge the constitutionality of an Oklahoma Statute affecting a limit on the value of the claimed exemption. Okla.Stat. tit. 31, § 1.C. (Supp. 1986). The value of the equipment exceeds that limit. The holder of the security interest, The First Agricultural Credit Corporation of Enid, Inc. ("First"), has objected.
The Attorney General for the State of Oklahoma, in response to our certification under Fed.R.Civ.P. 24(a)(1) and 28 U.S.C. § 2403(b) has intervened on behalf of the State of Oklahoma. First has provided us with three amicus curiae briefs of the Oklahoma Bankers Association addressing the issue in a case pending before the Bankruptcy Court, Northern District of Oklahoma.
Debtors filed for chapter 11 bankruptcy protection in March, 1985. The case was converted to chapter 7 liquidation in July, 1985. A review of the Debtors' Statement of Affairs reveals that Debtors have been in the farming and ranching business since 1955. Debtors contend that farming and ranching is their trade and that the equipment is used in that trade. This is uncontested.
Whether the agricultural equipment qualifies as exempt property under Okla.Stat. tit. 31, § 1.A.5. is not an issue in this case. Debtors assert a exemption claim which First does not contest. It is our understanding of Central National Bank and Trust Co. of Enid v. Liming (In re Liming), 797 F.2d 895 (10th Cir.1986), aff'g 22 B.R. 740 (Bankr.W.D.Okla.1982), that the equipment is exempt under the Oklahoma statute.
Our decision today determines the constitutional validity of a state statute, Okla. Stat. tit. 31, § 1.C., which affects a limitation on the exemption of encumbered property for purposes of lien avoidance pursuant to 11 U.S.C. § 522(f).
Debtors contend that the state statute is an attempt to limit the power of the court to avoid a lien and therefore violates the Supremacy Clause of the U.S. Constitution. The State of Oklahoma, First, and the Oklahoma Bankers' Association (collectively referred to as "State") contend that the effect and intent of the statute is merely to set a value limit on a state exemption.
As each state ratified the Constitution of the United States they accepted the balance of powers it prescribes. The Constitution documents this balance. This balance not only involves the familiar "checks and balances" among the separate branches of the federal government but also the granting of specified powers to the federal government and retention of all other powers in the states. Each state granted the federal government authority to enact uniform laws of bankruptcy:
U.S. Const. art. I, § 8, cls. 1, 4 ("Bankruptcy Clause"); and the power to implement such laws:
U.S. Const. art. I, § 8, cls. 1, 18.
Where Congress exercises its authority the resulting law is superior to the law of any state that touches the area. This principle is set forth in the Supremacy Clause:
2 This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any state to the Contrary notwithstanding.
U.S. Const. art. VI, cl. 2 ("Supremacy Clause").
The Supremacy Clause prevents a state from enacting bankruptcy legislation that conflicts with an area acted upon by Congress. Where both Congress and a state assert power in the same area the state legislation is suspended to the extent it frustrates or burdens the federal purpose. Jones v. Roth Packing Co., 430 U.S. 519, 97 S.Ct. 1305, 51 L.Ed.2d 604 (1977); Texaco, Inc. v. Liberty National Bank & Trust Co. of Okla. City, 464 F.2d 389 (10th Cir.1972); In re George Rodman, Inc., 50 B.R. 313 (Bankr.W.D.Okla.1985).
Congress has exercised its authority in the area of property exemptions and lien avoidance. 11 U.S.C. § 522 (1979). Since Congress has acted all state legislation in these areas would be suspended but for a limited Congressional delegation of authority to the states allowing them to specify property that may be exempt within each state. 11 U.S.C. § 522(b) (1979). Such del egation is permissible, Hanover National Bank v. Moyses, 186 U.S. 181, 22 S.Ct. 857, 46 L.Ed. 1113 (1902), Matter of Sullivan, 680 F.2d 1131 (7th Cir.1982) and does not violate the constitutional mandate for uniformity contained in the Bankruptcy Clause. Railway Labor Executives Ass'n. v. Gibbons, 455 U.S. 457, 102 S.Ct. 1169, 71 L.Ed.2d 335 (1982), reh'g denied 456 U.S. 939, 102 S.Ct. 1997, 72 L.Ed.2d 459; Stellwagon v. Clum, 245 U.S. 605, 38 S.Ct. 215, 62 L.Ed.2d 507 (1917); Hanover National Bank v. Moyses, 186 U.S. 181, 22 S.Ct. 857, 46 L.Ed. 1113 (1902).
We must determine whether the state statute stands as an obstacle to the accomplishment of the purpose and objective of Congress. Hines v. Davidowitz, 312 U.S. 52, 61 S.Ct. 399, 85 L.Ed. 581 (1941). In doing so we will resolve whether Okla.Stat. tit. 31, § 1.C. conflicts with the lien avoidance provisions of § 522(f). We follow a two step process in making this determination: First, we must ascertain the construction of the two statutes; Second, we must determine if the statutes conflict. Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971).
A review of how property rights are treated in bankruptcy is beneficial to an understanding of the construction of these statutes.
Prior to filing a petition in bankruptcy debtors are vested with legal and equitable interests in their property. Once the petition is filed essentially all of a debtor's property interests transfer to the estate. 11 U.S.C. § 541 (1984). Debtors are allowed to reclaim specified kinds and amounts of exempt property. 11 U.S.C. § 522(b) (1979). Congress specified the property that may be exempted. 11 U.S.C. § 522(d) (1979). Debtors reclaim exempt property subject to those liens that are valid in bankruptcy and creditors may enforce those liens against the property. 11 U.S.C. § 522(c)(2) (1984). Debtors may, however, avoid certain kinds of liens encumbering particular kinds of property to the extent the liens impair an exemption. 11 U.S.C. § 522(f) (1979).
The pertinent part of § 522(f) provides:
11 U.S.C. § 522(f) (1979).
The effect of this part of § 522(f) is to grant debtors title to implements of their trade free of all non-possessory, non-purchase money security interests.
States may opt out of the federally provided exemptions. 11 U.S.C. § 522(b) (1979). A state choosing to opt out may either provide an exclusive list of exempt property or allow debtors to choose between the federal and state provisions. 11 U.S.C. § 522(b)(1) (1979). Oklahoma has chosen to opt out of the federal exemptions and to provide its own listing of exempt property applicable in bankruptcy. The Oklahoma statute provides:
B. No natural person residing in this state may exempt from the property of the estate in any bankruptcy proceeding the property specified in subsection (d) of Section 522 of the Bankruptcy Reform Act of 1978, Public Law 95-598, 11 U.S.C.A. 101 et seq., except as may otherwise be expressly permitted under this title or other statutes of this state.
Okla.Stat. tit. 31, § 1.B. (Supp.1986).
Thus, debtors who file bankruptcy in Oklahoma may claim only those exemptions allowed by state law.
Oklahoma provides an exemption which includes agricultural equipment. Central National Bank and Trust Co. of Enid v. Liming (In re Liming), 797 F.2d 895 (10th Cir.1986), aff'g 22 B.R. 740 (B.R.W.D.Okla. 1982); Davis v. Wright, 194 Okla. 451, 152 P.2d 921 (1944); Nelson v. Fightmaster, 4 Okla. 38, 44 P. 213 (1896). That provision states:
Okla.Stat. tit. 31, § 1.A.5. (Supp.1986)
Subsections A.5. and B., and § 522(f) would seem to allow debtors to avoid non-possessory, non-purchase money security interests in...
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