In re Schafer

• Decision Date: 24 February 2011
• Docket Number: BAP Nos. 10–8030,10–8031.
• Citation: 455 B.R. 590
• Parties: In re Steven M. SCHAFER, Debtor.Thomas C. Richardson, Trustee–Appellant,v.Steven M. Schafer, Appellee.In re Dorothy Ann Jones, Debtor.Thomas R. Tibble, Trustee–Appellant,v.Dorothy Ann Jones, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

455 B.R. 590

In re Steven M. SCHAFER, Debtor.Thomas C. Richardson, Trustee–Appellant,

v.Steven M. Schafer, Appellee.In re Dorothy Ann Jones, Debtor.Thomas R. Tibble, Trustee–Appellant,

v.Dorothy Ann Jones, Appellee.

BAP Nos. 10–8030

10–8031.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: Nov. 9, 2010.Decided and Filed: Feb. 24, 2011.

OPINION TEXT STARTS HERE Held UnconstitutionalM.C.L.A. § 600.5451ARGUED: Nicholas J. Daly, Lewis Reed & Allen, P.C., Kalamazoo, MI, for Appellants. Scott P. Zochowski, Zochowski Law, Royal Oak, MI, for Appellees. Heather M.S. Durian, Office of the Michigan Attorney General, Lansing, MI, for Intervenor. ON BRIEF: Nicholas J. Daly, Lewis Reed & Allen, P.C., Kalamazoo, MI, for Appellants. Scott P. Zochowski, Zochowski Law, Royal Oak, MI, Kerry D. Hettinger, Hettinger & Hettinger, P.C., Portage, MI, for Appellees. Heather M.S. Durian, Office of the Michigan Attorney General, Lansing, MI, for Intervenor.Before: FULTON, McIVOR, and SHEA–STONUM, Bankruptcy Appellate Panel Judges.

AMENDED OPINION

MARCI B. McIVOR, Bankruptcy Judge.

This is a consolidated appeal of two individual Chapter 7 bankruptcy cases involving two unrelated debtors, Steven M. Schafer and Dorothy Ann Jones. In these consolidated appeals, the Chapter 7 Trustees, Thomas C. Richardson and Thomas R. Tibble, appeal the bankruptcy court's orders denying the Trustees' motions objecting to the Debtors' claim of exemptions under 11 U.S.C. § 522. The bankruptcy court held that Michigan's bankruptcy-specific exemption statute (Mich. Comp. Laws § 600.5451) is constitutional under the Supremacy Clause of the United States Constitution, art. VI, cl. 2. For the reasons set forth below, the Panel REVERSES the bankruptcy court's orders.

STATEMENT OF ISSUE

The issue on appeal is whether Michigan's bankruptcy-specific exemption statute (Mich. Comp. Laws § 600.5451) is unconstitutional under either the Bankruptcy Clause (art. I, § 8, cl. 4); or the Supremacy Clause (art. VI, cl. 2) of the United States Constitution.

JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Western District of Michigan has authorized appeals to the Panel, and none of the parties has timely elected to have these appeals heard by the district court. 28 U.S.C. § 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.’ ” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citation omitted). A bankruptcy court's order denying a claim of exemption is a final, appealable order. Menninger v. Schramm ( In re Schramm ), 431 B.R. 397, 399 (6th Cir. BAP 2010); see also 9 Collier on Bankruptcy, ¶ 4003.03[2] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2009).

The bankruptcy court's legal conclusions are reviewed de novo. Therefore, a bankruptcy court's decision that relies on or interprets state law and the Bankruptcy Code is reviewed de novo. In re Schramm, 431 B.R. at 399; Lebovitz v. Hagemeyer ( In re Lebovitz ), 360 B.R. 612 (6th Cir. BAP 2007) (reviewing bankruptcy court's interpretation of state's exemption statute de novo because it involves a question of law). Whether a state statute violates the United States Constitution is also subject to de novo review. United States v. Sawyers, 409 F.3d 732, 735 (6th Cir.2005) (citation omitted). “De novo means that the appellate court determines the law independently of the trial court's determination.” Treinish v. Norwest Bank Minn., N.A. ( In re Periandri ), 266 B.R. 651, 653 (6th Cir. BAP 2001) (citation omitted).

FACTS

Steven M. Schafer (B.A.P. Case No. 10–8030)

On March 23, 2009, Steven M. Schafer (“Schafer”) filed a voluntary petition under Chapter 7 of the Bankruptcy Code.

On Schedule C, Schafer claimed an exemption in the equity of his residence totaling $44,695. The home is estimated to have a fair market value of $160,000. The home is encumbered by two mortgages and a tax lien totaling $99,305. Schafer claims the state homestead exemption under Mich. Comp. Laws § 600.5451(1)(n). Under Mich. Comp. Laws § 600.5451(1)(n), Schafer, a disabled debtor, may claim a maximum exemption of $51,650 in the value of his home.

Thomas C. Richardson (“Trustee”) was appointed the Chapter 7 Trustee.

On October 30, 2009, the Trustee filed an objection to Schafer's claim of exemptions and a brief in support of the Trustee's objection. The Trustee argued that the Michigan exemption statute violates the Bankruptcy Clause (art. I, § 8, cl. 4) and the Supremacy Clause (art. VI, cl. 2) of the United States Constitution.

On November 2, 2009, the Trustee filed a Notice of Constitutional Challenge to Schafer's homestead exemption, in accordance with Fed.R.Civ.P. 5.1, made applicable in bankruptcy under Fed. R. Bankr.P. 9005.1. On November 3, 2009, the court clerk filed a certificate under 28 U.S.C. § 2403(b), certifying to Michael A. Cox, the Attorney General of the State of Michigan, that the constitutionality of § 600.5451(1)(n) of the Michigan exemption statute had been challenged. The Attorney General did not file an appearance in the Schafer case, nor respond to the Trustee's objection.

Dorothy Ann Jones (B.A.P. Case No. 10–8031)

On August 7, 2009, Dorothy Ann Jones (“Jones”) filed a voluntary petition under Chapter 7 of the Bankruptcy Code.

On Schedule C, Jones claimed an exemption in the equity of a residence she owns. Jones leases the real estate on which the residence is located from a local church campground. The home is estimated to have a fair market value of $30,000. The property is not encumbered by any security interests. Jones claims the state homestead exemption under Mich. Comp. Laws § 600.5451(1)(n). Under Mich. Comp. Laws § 600.5451(1)(n), Jones claims an exemption in the equity of the residence in the amount of $30,000.

Thomas R. Tibble (“Trustee”) was appointed the Chapter 7 Trustee.

On October 20, 2009, the Trustee filed an objection to the claim of exemptions filed by Jones and a brief in support of the Trustee's objection. The Trustee argued that the Michigan exemption statute violates the Bankruptcy Clause (art. I, § 8, cl. 4) and the Supremacy Clause (art. VI, cl. 2) of the United States Constitution.

On October 23, 2009, the Trustee filed a Notice of Constitutional Challenge to Jones' homestead exemption, in accordance with Fed.R.Civ.P. 5.1, made applicable in bankruptcy by Fed. R. Bankr.P. 9005.1. On October 23, 2009, the court clerk filed a certificate under 28 U.S.C. § 2403(b), certifying to Michael A. Cox, the Attorney General of the State of Michigan, that the constitutionality of § 600.5451(1)(n) of the Michigan exemption statute had been challenged. The Attorney General did not file an appearance in the Jones case, nor respond to Trustee's objection.

The bankruptcy court consolidated the hearings in the Schafer and Jones bankruptcy cases for purposes of argument and decision.

The Trustees filed briefs and Schafer and Jones (hereinafter referred to jointly as “Debtors”) had an opportunity to respond to the issues raised by the Trustees in their respective cases. On March 11, 2010, a joint hearing was held.

On April 22, 2010, the court entered an opinion and order in each case overruling the Trustees' objections to the Debtors' exemptions and concluding that Michigan's bankruptcy-specific exemption statute, Mich. Comp. Laws § 600.5451(1)(n), is constitutional under the Supremacy Clause of the United States Constitution.

On May 6, 2010, the Trustees filed their Notices of Appeal.

On July 21, 2010, the State of Michigan filed a motion for leave to intervene as a party under 28 U.S.C. § 2403(b) for the purpose of defending the constitutionality of the Michigan exemption statute § 600.5451 in the pending appeals. The motion was accompanied by a brief. The Panel granted the motion to intervene on August 24, 2010.

On July 22, 2010, the National Association of Consumer Bankruptcy Attorneys, National Consumer Law Center, Legal Services Association of Michigan, Michigan Poverty Law Program, and the Council of the Consumer Law Section of the State Bar of Michigan filed a joint motion for leave to file an amicus curiae brief in the pending appeals. The motion was accompanied by a brief. The Panel granted the motion to file an amicus curiae brief on August 24, 2010.

DISCUSSION

I. Congressional Power under the Bankruptcy Clause

Congressional power to enact bankruptcy laws is derived from the Bankruptcy Clause of the United States Constitution. The Bankruptcy Clause grants Congress the authority to establish “uniform laws ... on the subject of Bankruptcies throughout the United States.” ¹ U.S. Const. art. I, § 8, cl. 4. The framers of the Constitution drafted the Bankruptcy Clause, in part, in response to the states' harsh treatment of debtors. “A debtor could languish in prison for years unless he indentured himself or a friend or relative redeemed his obligations. Indeed, in England, a debtor could be put to death.” In re Wallace, 347 B.R. 626, 631 (Bankr.W.D.Mich.2006) (citing Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 364–71, 126 S.Ct. 990, 997–1000, 163 L.Ed.2d 945 (2006)). In fact, “debtors often fared worse than common criminals in prison; unfortunate insolvents, unlike criminals, were forced to provide their own food, fuel, and clothing while behind bars.” Cent. Va. Cmty. Coll., 546 U.S. at 365, 126 S.Ct. at 997 (citing B. Mann, Republic of Debtors: Bankruptcy in the Age of the American Independence, 78–108 (2002)).

The Bankruptcy Clause was also adopted in order to resolve the difficulties posed by state-to-state variations in bankruptcy laws. The American Colonies, and later some States, had their own distinct...