In re Wallace

• Decision Date: 09 August 2006
• Docket Number: No. HK 05-20209.,HK 05-20209.
• Citation: 347 B.R. 626
• Parties: In re Betty A. WALLACE, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Michigan

347 B.R. 626

In re Betty A. WALLACE, Debtor.

No. HK 05-20209.

United States Bankruptcy Court, W.D. Michigan.

August 9, 2006.

Joseph C. McCully, Esq., Kalamazoo, MI, for Debtor.

Scott A. Chernich, Esq., Lansing, MI, Chapter 7 Trustee.

OPINION RE: TRUSTEE'S FEBRUARY 1, 2006 OBJECTION TO AMENDED EXEMPTIONS

JEFFREY R. HUGHES, Bankruptcy Judge.

Betty A. Wallace ("Debtor") filed a petition for relief under Chapter 7 of the Bankruptcy Code¹ on October 15, 2005. Debtor's Schedule A indicates that she owns an undivided one-half interest in real property located in Battle Creek, Michigan. That interest became property of the estate upon the filing of her petition. 11 U.S.C. § 541(a)(1).

Debtor has claimed her interest in the Battle Creek property as exempt. The basis for her claimed exemption is MICH COMP. LAWS § 600.5451(1)(n). See also, 11 U.S.C. § 522(b)(2). The value of the exemption claimed is S30,000.00.²

The Chapter 7 Trustee filed a timely objection to Debtor's claimed exemption. He contends that MICH. COMP. LAWS § 600.5451(1)(n) is unconstitutional because it violates the Supremacy Clause. U.S. CONST., art. VI, cl. 2.

DISCUSSION

Art. I, Section 8, Clause 4 of the United States Constitution empowers Congress "Rio establish ... uniform Laws on the subject of Bankruptcies." Consequently, the Bankruptcy Code and its predecessors represent "the supreme Law of the Land." U.S. CONST. art. VI, cl. 2. Individual states may not enact alternative bankruptcy codes. Nor may the individual states pass laws that either interfere with or complement the bankruptcy laws Congress has enacted.

A state is without power to make or enforce any law governing bankruptcies that impairs the obligation of contracts or extends to persons or property outside its jurisdiction or conflicts with the national bankruptcy laws.

* * * * * *

Congress did not intend to give insolvent debtors seeking discharge, or their creditors seeking to collect claims, choice between the relief provided by the Bankruptcy Act and that specified in state insolvency laws. States may not pass or enforce laws to interfere with or complement the Bankruptcy Act or to provide additional or auxiliary regulations.

International Shoe Co. v. Pinkus, 278 U.S. 261, 263-265, 49 S.Ct. 108, 73 L.Ed. 318 (emphasis added) (citations omitted).

The court in In re Cross explained why the issue of exempt property falls squarely within the bankruptcy powers granted to Congress under the Constitution.

"Bankruptcy is both a creditor's remedy and a debtor's right." In re Marchiando, 13 F.3d 1111, 1115 (7th Cir.1994). One consequence of this duality is that bankruptcy law is simultaneously pursuing two contradictory goals. On the one hand, it seeks to provide a distribution to creditors by liquidating the debtor's property. At the same time, however, it also seeks to give the debtor a "fresh start" through the bankruptcy discharge and by allowing the debtor to keep property from creditors through exemptions. See, Burlingham v. Crouse, 228 U.S. 459, 473, 33 S.Ct. 564, 568, 57 L.Ed. 920 (1913). These goals compete with one another so that as we try to increase the interests of one group we cannot avoid circumscribing the interests of the other. For example, by excepting debts from the scope of any discharge, we enhance the rights of some creditors and improve the likelihood that their debts will be paid; yet, by refusing to relieve the debtor of a portion of its debt, the value of its fresh start is diminished. Conversely, if we enhance the debtor's fresh start by allowing it to exempt more property, we undermine the interests of creditors by reducing the assets that can be liquidated to satisfy their claims. Because of this inherent tension between debtors and creditors, in crafting the current Bankruptcy Code, Congress necessarily confronted their competing interests and sought to balance them when it allocated the consequences of bankruptcy between debtors and creditors. Just how it did this is reflected throughout the Bankruptcy Code. It can be found in the sections identifying what becomes property of the bankruptcy estate and what is excluded from it, how the assets of the estate are distributed among creditors, the exemptions available to a debtor and the ways in which a debtor can deal with the property it has exempted, the circumstances under which a debtor may receive a discharge and the nature of the debts that will survive discharge, as well as many more.

* * * * * *

Controlling the distribution of assets between a debtor and its creditors goes to the heart of the bankruptcy process.

In re Cross, 255 B.R. 25, 32-34 (Bankr. N.D.Ind.2000).

Therefore, at first blush, Michigan's recently enacted exemption statute would appear to be unconstitutional. Congress has clearly established an exemption scheme for debtors to use in conjunction with the Bankruptcy Code it has enacted. See 11 U.S.C. § 522(d).

It is equally clear that the exemptions Michigan now permits under Mice. COMP. LAWS § 600.5451(1) compete with the Section 522(d) exemptions. Indeed, the exemptions permitted under Mar. COMP. LAWS § 600.5451(1) are more generous than those permitted under Section 522(d). For example, the Michigan statute allows a bankrupt debtor to exempt up to $2,000.00 in farm animals, crops, and feed, and up to $500.00 in a computer and its accessories, MICH. COMP. LAWS § 600.5451(1)(e) and (h), whereas Section 522(d) does not offer any comparable exemption. More to the point, the Michigan statute permits a bankrupt debtor to exempt $30,000.00 and perhaps even $45,000.00 of the equity in the debtor's "homestead," MICA COMP. LAWS § 600.5451(1)(n), whereas Section 522(d) limits the debtor's exemption of the equity in his or her residence to $19,425.00. 11 U.S.C. § 522(d)(1) and (5).

Why, then, would the Michigan legislature have the temerity to enact a statute that so clearly interferes with Congress' own pronouncements regarding an issue that, as the court in Cross put it, lies "at the heart of the bankruptcy process?" Id. Wasn't the Michigan legislature aware of International Shoe's prohibition against states passing laws that interfere with or complement the Bankruptcy Code?

The explanation for this apparently rash behavior is found in Section 522 itself, for that section offers a second set of exemptions from which the debtor may choose. 11 U.S.C. § 522(b). These exemptions, which are often referred to as the "state exemptions," are set forth in Section 522(b)(2).

(2) (A) 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 180 days immediately preceding the date of the filing of the petition, or for a longer portion of such 180-day period than in any other place; and

(B) any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law.

11 U.S.C. § 522(b)(2) (emphasis added).

The Michigan legislature undoubtedly seized upon the general reference in Section 522(b)(2)(A) to state-recognized exemptions as its justification for fashioning bankruptcy specific exemptions of its own. Indeed, MICH. COMP. LAWS § 600.5451(1) actually references Section 522(b)(2).³

Therefore, the question presented in this instance is less about the constitutionality of MICH. COMP. LAWS § 600.5451 and more about the proper interpretation of Section 522(b)(2). In other words, has Congress, through the enactment of Section 522(b)(2), empowered the Michigan legislature to create a customized set of bankruptcy exemptions for its residents? If Congress has in fact properly given each state legislature the authority to customize its own set of bankruptcy exemptions for that state's residents, then the constitutional concerns about their interference with the bankruptcy laws evaporate. On the other hand, if Section 522(b)(2) does not grant states this authority, then there is no question that MICH. COMP. LAWS § 600.5451 is in violation of the Supremacy Clause and, therefore, it cannot stand. International Shoe, 278 U.S. at 265, 49 S.Ct. 108.

Whether Section 522(b)(2) actually gives state legislatures this authority is ambiguous. On the one hand, Section 522(b)(2)(A)'s inclusion of only "non-bankruptcy" federal exemptions within its ambit suggests that the state exemptions that it also includes are only the general exemptions offered to all debtors under that state's debt enforcement laws. Put differently, if Congress limited Section 522(b)(2)(A)'s scope to only those exemptions that are generally recognized under federal law (i.e., only those federal exemptions that are recognized outside of the Bankruptcy Code), then it is reasonable to conclude that Congress similarly limited the scope of the state exemptions under that section to only those exemptions recognized under that state's general debt enforcement laws.

On the other hand, Section 522(b)(2)(A) can also be interpreted as permitting states to design their own bankruptcy specific exemptions. Section 522(b)(2)(A) certainly does not explicitly prohibit such an enactment. Moreover, Congress's exclusion of bankruptcy specific exemptions from the federal exemptions permitted under Section 522(b)(2)(A) is as likely an effort by Congress to prevent an overreaching debtor from adding the separate Section 522(d) exemptions to the federal exemptions claimed under Section 522(b)(2)(A) as it is an expression by Congress of its intention to limit what the states may offer as their own exemption scheme under that section.

The court in Cross apparently agreed that Section 522(b)(2)(A) is ambiguous, for it relied heavily on the legislative history...