In re Regevig

• Decision Date: 24 June 2008
• Docket Number: No. 2:08-BK-02547-RJH.,2:08-BK-02547-RJH.
• Citation: 389 B.R. 736
• Parties: In re Matthew G. REGEVIG and Angelia M. Regevig, Debtors.
• Court: U.S. Bankruptcy Court — District of Arizona

389 B.R. 736

In re Matthew G. REGEVIG and Angelia M. Regevig, Debtors.

No. 2:08-BK-02547-RJH.

United States Bankruptcy Court, D. Arizona.

June 24, 2008.

Charles M. Leftwich, Esq., Clark Law Office, Scottsdale, AZ, for Debtors.

Terry A. Dake, Esq., Terry A. Dake, Ltd., Phoenix, AZ, for Ch 7 Trustee Jill Ford.

OPINION RE CONSTITUTIONALITY OF CALIFORNIA'S BANKRUPTCY-SPECIFIC EXEMPTION STATUTE

RANDOLPH J. HAINES, Bankruptcy Judge.

This issue here is whether a State may adopt an exemption statute that becomes available only when the debtor files a bankruptcy case. The Court concludes this is impermissible under the Supremacy Clause.

Background Facts.

California statutes provide two sets of exemptions. One of them, California Code of Civil Procedure § 704, may be asserted by any judgment debtor to protect property from an attaching creditor. The other, C.C.P. § 703.140(b), may only be claimed by a debtor who has filed a bankruptcy petition.¹ California has opted out of the exemption scheme provided by the Bankruptcy Code,² as it is permitted to do so by Bankruptcy Code³ § 522(b)(2), but the § 703.140(b) exemption scheme is virtually identical to the current bankruptcy exemptions.

The Debtors are currently Arizona residents but apparently were not Arizona residents for all of the 730 days preceding the filing of this case. They were California residents for the majority of the six months prior to that 730 day period, so Bankruptcy Code § 522(b)(3)(A) requires them to claim exemptions pursuant to California law.

The Debtors do not claim any homestead, and therefore have elected to claim exemptions pursuant to C.C.P. § 703.140(b). They have claimed one motor vehicle (a 1995 Chevy Suburban, to the extent of the exempt value of $3,300) pursuant to C.C.P. § 703.140(b)(2), and they have claimed four motor vehicles (a Kawasaki, an inoperable 1970 Chevy Nova, and two quads) having a total value of less than $6,000 pursuant to the "wild card" exemption⁴ provided by C.C.P. § 703.140(b)(5). If they had elected the other general set of exemptions the motor vehicle exemption would be limited to a value of $2,550, and there would be no "wild card" exemption available to exempt the other motor vehicles.

Analysis

The Trustee here objects to the Debtors' election of the § 703.140 exemptions, contending that a State's attempt to create exemptions that are applicable only in a bankruptcy case is an unconstitutional violation of either the Supremacy Clause⁵ or the Uniformity Clause,⁶ or both. The argument certainly has some merit and support because Bankruptcy Judge Jaroslovsky of the Northern District of California expressly so concluded in Lennen.⁷ And although several subsequent decisions by the Ninth Circuit and the Ninth Circuit BAP have considered the California exemption scheme and some have even upheld debtors' claims of exemption under C.C.P. § 703.140(b), none of them seems to have expressly or directly rejected the analysis and holding of Lennen⁸

Lennen explains the history of the confusing California statutory scheme. When the Bankruptcy Code was first enacted, it apparently permitted joint debtors in nonopt-out states to "stack" exemptions by having one of them claim the state exemptions and the other the Bankruptcy Code exemptions. California sought to prohibit that by a statute in 1981, but it was invalidated as violating the Supremacy Clause.⁹ In 1983, California sought to achieve the same result by opting out of the bankruptcy exemptions but providing that debtors could select bankruptcy exemptions so long as they did not "stack" them with state exemptions. That effort was also declared unconstitutional.¹⁰ Finally, in what the Lennen opinion aptly describes as a "comedy of errors," in June of 1984 California adopted § 703.140, which provided a new set of state-law exemptions that were virtually identical to the bankruptcy exemptions, which could be selected only by a debtor in a bankruptcy case. It was a comedy of errors for two reasons. First, the principal aim of this legislation— to preclude debtors from "stacking" exemptions—was almost simultaneously eliminated by the Bankruptcy Amendments and Federal Judgeship Act of 1984, which was enacted just one month later on July 10, 1984. It amended Bankruptcy Code § 522(b) to eliminate stacking, thus rendering the difficult California statutory structure entirely unnecessary. But it also cut the federal wildcard exemption in half, creating a significant difference between the Bankruptcy Code exemptions and California's new § 703.140, which otherwise tracked the Bankruptcy Code's exemption amounts. It was apparently this divergence that caused the Lennen court to conclude that California's § 703.140 violated both the Supremacy Clause and the Uniformity Clause.

Today, California's bankruptcy-only wildcard exemption remains approximately double the amount of the Bankruptcy Code's wildcard exemption for individual debtors.¹¹ Most of California's other bankruptcy-only exemptions are virtually identical to the Bankruptcy Code's exemptions. For example, California's bankruptcy-only motor vehicle exemption is $3,300, whereas the Bankruptcy Code's motor vehicle exemption is $3,225. Such minor differences may be a result of § 703.150, which adjusts the exemption amounts based upon the California cost of living, whereas Bankruptcy Code § 104(b) adjusts the Bankruptcy Code's exemption amounts by changes in the national consumer price index.

This $10,000 difference between the California bankruptcy-only exemption and the Bankruptcy Code's wildcard exemption, although not significant on these facts, is certainly not de minimis. More importantly, California does not provide such a wildcard exemption to debtors generally, outside of bankruptcy. The result is that for example, outside of bankruptcy a creditor could levy on a debtor's boat worth $20,000. But if that debtor filed bankruptcy and did not claim a homestead, the debtor could exempt it from the bankruptcy estate through the California bankruptcy-only wildcard exemption. Such a result effectively discriminates against the trustee in bankruptcy as opposed to other creditors—the trustee cannot claim the boat for benefit or creditors, although creditors themselves could do so outside of bankruptcy.

Under federal bankruptcy law, States were first permitted to define their own exemptions by one of the historic compromises between the northern and the southern states that permitted the adoption of the Bankruptcy Act of 1867.¹² That recognition of state exemption laws was continued in the Bankruptcy Act of 1898. But the Ninth Circuit held that it does not give the states a "free hand to circumscribe the powers of the bankruptcy trustee" and does not permit states to render property exempt in a bankruptcy case that would not be exempt outside of bankruptcy.¹³ And although that case was decided under the 1898 Act, nothing in the Code has expanded the power of states to define bankruptcy-only exemptions. As originally adopted the Code retained essentially the same recognition of states' general exemption laws, and the BAPCPA amendments significantly restricted even that ability, albeit in ways not relevant here.¹⁴ Consequently the Ninth Circuit's Act decision that the Supremacy Clause forbids states to enact bankruptcy-specific exemption laws remains good law today.

By relying on California's bankruptcy-specific wild card exemption these particular Debtors are not exempting any more property than if California had not opted out of the Bankruptcy Exemptions, permitting debtors to choose either those exemptions or the California exemptions. If California had not opted out, these Debtors could claim all of their motor vehicles as exempt by using the Bankruptcy Code's wildcard exemption, because the values claimed do not exceed its cap of $11,200 even for an individual debtor.

But neither a Supremacy Clause nor a Uniformity Clause challenge requires a demonstration of actual prejudice arising from application of the challenged state statute in the particular case. For example, in Sherwood Partners the Ninth Circuit used an entirely hypothetical analysis to conclude that California's preference provision applicable in assignments for benefit of creditors cases violates the Supremacy Clause.¹⁵

Moreover, Sherwood Partners noted that even absent specific pre-emptive language, "Congress' intent to supersede state law altogether may be found from a 'scheme of federal regulation ... so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.'" ¹⁶ Here, Congress has pervasively defined the exemptions that a state may permit a debtor to claim only in a bankruptcy case, even if they are not generally exempt from creditors outside of bankruptcy. Those are the exemptions defined by Bankruptcy Code § 522(d). And Congress further specified exactly how a state may make those bankruptcy-specific exemptions available—by not opting out pursuant to Code § 522(b)(2). Where Congress has already defined both the substantive law and the procedure, in a pervasive federal scheme that generally pre-empts State legislation, Congress has occupied the field. There simply is no room for states to adopt their own bankruptcy-specific exemptions by a procedure other than that provided by the Code, i.e., not opting out of the Bankruptcy Code's exemptions.

Given the analysis in Urban,¹⁷ the Uniformity Clause challenge might not stand. That opinion concluded that the Uniformity Clause is not violated simply because a trustee may not be able to seize the same property creditors in that state could seize, due to BAPCPA's incorporation of another state's exemption laws. Here, the California statute means that a trustee may not always be able to seize the same property the California creditors could, not because of the domiciliary provisions of the Bankruptcy Code but because of California's...