In re Urban

• Decision Date: 31 January 2007
• Docket Number: No. 06-60045-13.,06-60045-13.
• Citation: 361 B.R. 910
• Parties: In re Stanley Vincent URBAN, Debtor.
• Court: U.S. Bankruptcy Court — District of Montana

361 B.R. 910

In re Stanley Vincent URBAN, Debtor.

No. 06-60045-13.

United States Bankruptcy Court, D. Montana.

January 31, 2007.

Stuart R. Whitehair, Bozeman, MT, for Debtor.

MEMORANDUM of DECISION

RALPH B. KIRSCHER, Bankruptcy Judge.

In this Chapter 13 bankruptcy proceeding, the Chapter 13 Trustee, Robert G. Drummond, filed an Objection to Property Claimed as Exempt and a Motion for Certification of Claim of Unconstitutionality on March 27, 2006, challenging the constitutionality of 11 U.S.C. § 522(b)(3). The Trustee's motion for certification of claim of unconstitutionality was granted by Order entered April 11, 2006. Subsequently, the United States of America, by and through the United States Department of Justice ("United States"), filed an uncontested motion to intervene on June 29, 2006, which motion was granted by Order entered that same date. The Chapter 13 Trustee and Matthew J. Troy, attorney for the United States, proceeded to file a stipulation on July 3, 2006, setting forth the following agreed facts:

1. The Debtor, Stanley Vincent Urban, filed his Chapter 13 Bankruptcy in the District of Montana on February 14, 2006.

2. Concurrently with the filing of his Bankruptcy Petition, the Debtor filed bankruptcy schedules. The Debtor's Schedule C listed property claimed as exempt under Montana Law. The Debtor's exemptions were listed on Schedule C as follows:

Household Goods $600.00

Wearing Apparel $600.00

Jewelry $600.00

Retirement Account $3,522.87

Guns and Sporting Goods $600.00

Motor Vehicle — 2005 Dodge Stratus $2,500.00

Homestead Declaration $100,000.00

Interest in Insurance Policy $4,000.00

3. On March 16, 2006, the Chapter 13 Trustee filed an objection to the Debtor's claim of exemptions (Docket No. 11). The Trustee's objection alleged that 11 U.S.C. § 522(b)(3) required that the Debtor claim exemptions under the California law because he had not been domiciled within the State of Montana for the entire 730-day period preceding the date of the filing of his Bankruptcy Petition.

4. In response to the objection filed by the Trustee, the Debtor filed a Notice of Amendment, amending Schedule C to claim his exemptions under California law (Docket No. 12). The Debtor's Amended Schedule C claimed exemptions as follows:

Household Goods $450.00

Wearing Apparel $450.00

Jewelry $1,150.00

Retirement Account $3,522.87

Guns and Sporting Goods $925.00

Motor Vehicle-2005 Dodge Stratus $2,755.00

Homestead Declaration $50,000.00

Interest in Insurance Policy $9,300.00

5. The parties stipulate and agree that the Debtor properly claimed his exemptions under California law as required by 11 U.S.C. § 522(b)(3).

6. On March 27, 2006, the Trustee filed another objection to the claim of exemptions (Docket No. 15). The Trustee's objection alleged that the statute requiring that the Debtor claim California exemptions violated the uniformity requirement appearing in the United States Constitution at Article 1, Section 8, Clause 4 (Docket No. 15).

7. Contemporaneous with the filing of his objection to exemptions, the Trustee filed a Motion for Certification of Claim of Unconstitutionality as required by 28 U.S.C. § 2403 and Montana LBR 9013-5.

8. The Trustee's Motion for Certification was granted by this Court on April 11, 2006 (Docket No. 22). The matter was certified to Alberto Gonzales, Attorney General of the United States and William Mercer, United States Attorney for the District of Montana the same day (Docket No. 23).

9. The matter was set for hearing on July 6, 2006, in Butte, Montana. The parties stipulate that the Court shall use these stipulated facts as the factual basis underlying the Trustee's constitutional challenge to 11 U.S.C. § 522(b)(3).

10. The parties stipulate and agree that this Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Venue is appropriate pursuant to 28 U.S.C. § 1408.

Both the Trustee and the United States filed briefs in support of their respective positions on July 13, 2006, and August 1, 2006, respectively, and the Trustee filed a supplemental response to the United State's brief on August 9, 2006. The matter is thus ready for decision and for the reasons set forth in this Memorandum of Decision, the Court finds that the Trustee's constitutional challenge lacks merit and that as drafted, the 730-day residency period set forth in 11 U.S.C. § 522(b)(3) is constitutional.

Bankruptcy courts have exclusive jurisdiction over a debtor's property, wherever located, and over the estate. 28 U.S.C. § 1334(e). See also Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 126 S.Ct. 990, 996, 163 L.Ed.2d 945 (2006) ("Critical features of every bankruptcy proceeding are the exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a `fresh start' by releasing him, her, or it from further liability for old debts.") Moreover, it is well-settled that the commencement of a case, whether voluntary, joint or involuntary, under any of the Chapters in Title 11 of the United States Code, creates an estate which consists of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). In the context of Chapter 7 bankruptcies, once property is deemed an asset of the estate, it remains as such and may be administered by the Trustee for the benefit of the creditors unless the debtor is entitled to remove, and in fact affirmatively does remove, either a portion of the asset, or the entire asset, from the bankruptcy estate through the exemption process. In re Binns, 9 Mont. B.R. 386, 387 (Bankr.D.Mont.1991). In the context of Chapter 13 bankruptcies, the allowance or disallowance of an exemption can effect the amount a debtor must contribute to his or her Chapter 13 plan. As explained by a leading treatise on bankruptcy:

A fundamental component of an individual debtor's fresh start in bankruptcy is the debtor's ability to set aside certain property as exempt from the claims of creditors. Exemptions of property, together with the discharge of claims, lets the debtor maintain an appropriate standard of living as he or she goes forward after the bankruptcy case.

4 COLLIER ON BANKRUPTCY, ¶ 522.01, p. 522-15 (15th ed. rev.).

Allowing exemptions in bankruptcy cases serves the purpose of assisting debtors to obtain their "fresh start" after filing a bankruptcy case. As articulated by the Ninth Circuit Court of Appeals, the Bankruptcy Code attempts to balance the interests of creditors, whose debts may be discharged, and debtors, who are attempting to receive a fresh start. In re Beezley, 994 F.2d 1433 (9th Cir.1993). Astnoted in the Trustee's brief, the United States Supreme Court recognized the application of exemption law under section 522(b) when it stated:

An estate in bankruptcy consists of all the interests in property, legal and equitable, possessed by the debtor at the time of filing, as well as those interests recovered or recoverable through transfer and lien avoidance provisions. An exemption is an interest withdrawn from the estate (and hence from the creditors) for the benefit of the debtor. Section 522 determines what property a debtor may exempt. Under § 522(b), he must select between a list of federal exemptions (set forth in § 522(d)) and the exemptions provided by his State, "unless the State law that is applicable to the debtor ... specifically does not so authorize," § 522(b)(1) — that is, unless the State "opts out" of the federal list. If a State opts out, then its debtors are limited to the exemptions provided by state law. Nothing in subsection (b) (or elsewhere in the Code) limits a State's power to restrict the scope of its exemptions; indeed, it could theoretically accord no exemptions at all.

Property that is properly exempted under § 522 is (with some exceptions) immunized against liability for prebankruptcy debts. § 522(c). No property can be exempted (and thereby immunized), however, unless it first falls within the bankruptcy estate. Section 522(b) provides that the debtor may exempt certain property "from property of the estate"; obviously, then, an interest that is not possessed by the estate cannot be exempted. Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 1835, 114 L.Ed.2d 350 (1991).

As previously mentioned, the Bankruptcy Code allows the debtor to prevent the distribution of certain property by claiming it as exempt. Taylor v. Freeland & Kronz, 503 U.S. 638, 642, 112 S.Ct. 1644, 1647, 118 L.Ed.2d 280 (1992). The Bankruptcy Code provision that establishes the exemption process, and which is at the heart of the issue in this case, namely, 11 U.S.C. § 522(b)(3), reads:

[A]n individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection.

* * *

Such property is —

* * *

(3) Property listed in this paragraph is

(A) subject to subsections (o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor's domicile has been located for the 730 days immediately preceding the date of the filing of the petition or if the debtor's domicile has not been located at a single State for such 730-day period, the place in which the debtor's domicile was located for 180-days immediately preceding the 730-day period or for a longer portion of such 180-day period than in any other place[.]

Montana has opted-out of the federal exemption scheme set forth at 11 U.S.C. § 522. See 11 U.S.C. § 522(b) and MONT. CODE ANN. ("MCA") § 31-2-106. Pursuant to MCA § 31-2-106(1), an individual debtor is entitled to exempt from execution of judgment certain property,...