In re Pillow, Bankruptcy No. 79-00177
| Citation | 8 BR 404 |
| Decision Date | 08 January 1981 |
| Docket Number | 79-01272,80-0060 and 80-0058.,Civil Proceeding No. 80-0059,80-00188 and 80-00090,80-0061,Bankruptcy No. 79-00177 |
| Parties | In re Douglas Ray PILLOW, Jr. and Suzette L. Pillow, Debtors. Douglas Ray PILLOW, Jr., Plaintiff, v. AVCO FINANCIAL SERVICES, Defendant. In re Thomas W. GEIGLE, Debtor. Thomas W. GEIGLE, Plaintiff, v. AVCO FINANCIAL SERVICES, Defendant. In re Max W. HORTON and Toni J. Horton, Debtors. Max W. HORTON, Plaintiff, v. AVCO FINANCIAL SERVICES, Defendant. In re Fred J. REVELLO and Florence O. Revello, Debtors. Fred J. REVELLO and Florence O. Revello, Plaintiffs, v. AVCO FINANCIAL SERVICES, Defendant. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah |
Richard Calder, Salt Lake City, Utah, for plaintiffs.
Edward Wells, Salt Lake City, Utah, for defendant.
Barbara Johnsen, Salt Lake City, Utah, for intervenor, United States of America.
These cases are consolidated to determine whether the lien avoidance provisions of 11 U.S.C. Section 522(f)(2),1 if applicable to security interests created before enactment of the Code,2 are constitutionally infirm.
Debtors have filed complaints under Section 522(f) to avoid liens on personal property. Avco Financial Services (hereinafter called Avco) has moved, in essence, for dismissal of these complaints, arguing that either Section 522(f) cannot be construed to reach liens which predate enactment of the Code, or it violates the Fifth Amendment to the Constitution.
For purposes of this motion, it is assumed that all allegations of the complaints are true, and that each requirement of Section 522(f) is satisfied,3 leaving only the issues of retroactivity and constitutionality for decision. These issues will be approached by reviewing the background and purpose of Section 522(f), then determining whether it was intended to affect preenactment security interests, and finally asking whether it is constitutional. Constitutionality involves congressional power to regulate bankruptcies as well as Fifth Amendment limitations on that power. Fifth Amendment analysis involves the taking clause, retroactive due process, and substantive due process.
Exemptions under the Code have been expanded and restructured with several ends in view.4 Section 522(f)(2) was designed to avoid nonpossessory, nonpurchase-money liens to the extent they impair exemptions for certain living necessities, tools of trade, and health aids. The legislative history, see, e.g., H.R.Rep.No.95-595, 95th Cong., 1st Sess., 126-127 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787, shows that it was intended to discourage practices by creditors believed inimical to the rehabilitation of consumer debtors. Among those noted are "dragnet" security interests in household goods. Congress found that creditors, when taking such interests, neither expect nor intend to provide a hedge against default on their loans. These goods have ordinarily depreciated to "garage sale" value, if any. Administrative burdens and expenses, as well as the absence of any market, make salvage and resale impracticable. Most often, such interests would not exist but for the threat of repossession which they permit. Few debtors, fearing the loss of bedding, furniture, and clothes, and unable to afford their replacement, are willing to call the lender's bluff. Many, therefore, reshoulder liabilities once discharged in bankruptcy. Indeed, this "reaffirmation" may occur, in practical effect, without the procedural safeguards mandated in the Code.5 Congress sought to ameliorate these conditions because it felt that "adhesion contracts," id. at 127, U.S.Code Cong. & Admin.News 1978, p. 6088, often conceived in consumer ignorance, should not be allowed to hold hostage the debtor's "fresh start."
Section 522(f) should be construed, if possible, to avoid treatment of constitutional questions. See, e.g., Wright v. Vinton Branch, 300 U.S. 440, 461, 57 S.Ct. 556, 561, 81 L.Ed. 736 (1937) (hereinafter called Vinton Branch). For this reason, courts are reluctant to imply retroactivity, see, e.g., Edgar v. Fred Jones Lincoln Mercury, 524 F.2d 162, 165 (10th Cir. 1975), and Gibbons v. Pan American Petroleum Corp., 262 F.2d 852, 855 (10th Cir. 1958), although bankruptcy statutes, like other curative and remedial legislation, historically have applied to contract and property rights which predate their enactment. See, e.g., Hanover and Campbell v. Alleghany Corp., 75 F.2d 947, 950 (4th Cir. 1935).
Ultimately, however, the issue of prospective or retroactive construction turns on legislative intent. See, e.g., Edgar v. Fred Jones Lincoln Mercury, supra at 165, and Gibbons v. Pan American Petroleum Corp., supra at 844. Avco cites House and Senate commentaries on 11 U.S.C. Section 522(c) which emphasize that H.R.Rep.No.95-595, 95th Cong., 1st Sess., 361 (1977), U.S.Code Cong. & Admin.News 1978, p. 6317. This language, it maintains, demonstrates that lien avoidance under Section 522(f) should not be given an ex post facto reading.
This view is unpersuasive for several reasons. First, the language cited does not, by its terms, or in context, assign a temporal framework to Section 522(c). Nor does the Long case bear on this point.
Second, the language purports to interpret Section 522(c) not Section 522(f). Both the wording of Section 522(f) and legislative analysis show, not only that it sanctions lien avoidance, but also that it relates to claims existing when the Code was passed. Id. at 362, U.S.Code Cong. & Admin.News 1978, p. 6318.
Finally, this view overlooks Pub.L.No.95-598, Sections 401 and 402 which repealed the Bankruptcy Act of 1898 as amended and substituted the Code to govern cases commencing after October 1, 1979. Congress must have intended Section 522(f) to reach pre-enactment security interests, because otherwise there would be a hiatus in the coverage of the bankruptcy laws. Thus, retroactive application of Section 522(f) is inescapable.6
Because Section 522(f) is construed retrospectively, the challenge to its constitutionality must be addressed. This challenge is based on the Fifth Amendment, but is balanced through consultation with Article I, Section 8, Clause 4 which authorizes Congress to pass laws concerning the "subject of bankruptcies." First, therefore, the nature and breadth of congressional power must be examined, so that any limitations on that power may be placed in perspective. Next, the impact of three elements of the Fifth Amendment must be weighed: (1) whether Section 522(f) involves a taking of private property for public purposes without just compensation; (2) whether retroactive application of Section 522(f) involves a deprivation of property without due process; and (3) whether Section 522(f) violates substantive due process.
The inadequacy of colonial insolvency laws and the concomitant "disunity of the mercantile structure" gave impetus to a constitutional provision whereby Congress "was to have an all-inclusive power . . . to enact legislation reasonably framed and related to the subject of bankruptcies, which in turn is indissolubly linked to commerce and credit." 1 Collier on Bankruptcy, ¶ 0.02 at 4-5 (14th ed. 1974) (emphasis omitted). The result was Article I, Section 8, Clause 4 which provides that Congress shall have power "to establish . . . uniform laws on the subject of bankruptcies throughout the United States."
"All agree," wrote Chief Justice Marshall in Sturges v. Crowninshield, 17 U.S. 122, 4 Wheat. 122, 192, 4 L.Ed. 529 (1819), that "the power is both unlimited and supreme." It has been measured in part by the term "bankruptcies" which, although "incapable of final definition," Wright v. Union Central Ins. Co., 304 U.S. 502, 513, 58 S.Ct. 1025, 1031, 82 L.Ed. 1490 (1938) (hereinafter called Wright), has been interpreted "uniformly in the direction of progressive liberalization." Continental Bank v. Rock Island Ry., 294 U.S. 648, 668, 55 S.Ct. 595, 602, 79 L.Ed. 1110 (1935) (hereinafter called Continental). "Bankruptcies," for example, are not restricted to any class of persons, such as traders or merchants, but may include farmers, corporations, and municipalities. Petitions may be voluntary or involuntary. Compositions and reorganizations as well as liquidations have been allowed. The adjudication of rights not only of creditors but also of third parties, such as purchasers at judicial sales, has been permitted. The prerogatives of trustees have been enlarged.7
The fundamental and radically progressive nature of these extensions becomes apparent upon their mere statement; but all have been judicially approved or accepted as falling within the power conferred by the bankruptcy clause of the Constitution. Taken altogether, they demonstrate in a very striking way the capacity of the bankruptcy clause to meet new conditions as they have been disclosed as a result of the tremendous growth of business and development of human activities from 1800 to the present day. And these acts, far-reaching though they be, have not gone beyond the limit of congressional power; but rather have constituted extensions into a field whose boundaries may not yet be fully revealed. Continental, supra at 671, 55 S.Ct. at 604 (emphasis supplied).
This language suggests that "the constitutional grant of power over the subject of bankruptcies embraces the entire field of debtor-creditor relationships for the purpose of equitable distribution of a debtor's estate, rehabilitation of the debtor, and protection of the...
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