North Side Bank v. Gentile

• Decision Date: 16 April 1986
• Docket Number: No. 85-0822,85-0822
• Citation: 385 N.W.2d 133,129 Wis.2d 208
• Parties: , 54 USLW 2550 NORTH SIDE BANK, Heritage Bank and Trust, and Henry S. Dorman, Trustee in Bankruptcy, Plaintiffs-Respondents, v. Frederick C. GENTILE, Defendant-Appellant.
• Court: Wisconsin Supreme Court

Page 133

385 N.W.2d 133

129 Wis.2d 208, 54 USLW 2550

NORTH SIDE BANK, Heritage Bank and Trust, and Henry S Dorman, Trustee in Bankruptcy, Plaintiffs-Respondents, v. Frederick C. GENTILE, Defendant-Appellant.

No. 85-0822.

Supreme Court of Wisconsin.

Argued March 4, 1986.

Opinion Filed April 16, 1986.

Robert L. Swanson (argued) and DeMark, Kolbe & Brodek, S.C., Racine, for defendant-appellant.

Robert J. Grady (argued) and Fetek & Grady, S.C. Racine, for plaintiffs-respondents.

DAY, Justice.

This appeal is before this court on bypass of the court of appeals, pursuant to Section 809.60, Stats. The appeal is from an order and amended judgment of the circuit court for Racine county, Honorable Dennis J. Flynn, circuit judge, holding that Section 815.18(31), Stats., 1983-1984, ¹ exempting employee pension plans from execution, is contrary to article I, Section 17 of the Wisconsin Constitution because it is "unreasonable." ² The trial court held that North Side Bank, Heritage Bank and Trust, and Henry S. Dorman, Trustee in Bankruptcy (Plaintiffs) may pursue the funds in the Frederick C. Gentile, D.D.S. Pension Trust (Pension Trust) to satisfy their claims against the bankruptcy estate of Frederick C. Gentile (Defendant). The enforcement of the judgment was stayed pending final disposition of the matter.

The following issues are raised on appeal: (1) Must all creditors of the bankrupt be named as parties in a declaratory judgment action challenging the constitutionality of an exemption statute?; (2) Does Section 815.18(31), Stats., which exempts qualified pension plans from seizure by creditors, violate art. I, Section 17 of the Wisconsin Constitution which gives the legislature the power to create laws that exempt a "reasonable amount of property" from seizure by creditors?; and, (3) If we hold that Section 815.18(31), is unconstitutional, should this ruling be applied prospectively only?

We hold: (1) that the bankruptcy trustee was acting in the interest of the bankrupt's creditors and may therefore pursue a declaratory judgment without all of the creditors being named as parties; (2) that Section 815.18(31), Stats., is constitutional; and (3) that because we hold the statute constitutional, we need not address the third issue.

On March 29, 1984, Defendant, a sixty-two year old dentist, and his wife filed a joint bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Wisconsin requesting relief under 11 U.S.C. Chapter 7 of the United States Bankruptcy Code. The bankrupt Defendant had a choice under the Federal Bankruptcy Act to follow the exemption provisions of the Federal Bankruptcy Act or the exemptions provided by state law. 11 U.S.C. Section 522(b). The Defendant elected to claim the exemptions provided by the State of Wisconsin. Under Section 815.18(31), Stats., Defendant claimed as exempt his entire interest in his Pension Trust, amounting to $191,787.98. ³ North Side Bank, a creditor, filed an objection to the exemption of these funds in the bankruptcy court, Honorable D.E. Ihlenfeldt presiding, claiming that Section 815.18(31), was unconstitutional because it failed to place any limits on the amount of the exemption. ⁴ Judge Ihlenfeldt ordered that the exemption question remain open and directed the creditors to file a declaratory judgment action in a Wisconsin state court.

Plaintiffs then filed a declaratory judgment action in the circuit court for Racine county seeking a declaration that Section 815.18(31), Stats., is unconstitutional and that they may pursue the funds in the Pension Trust to satisfy their claims against the Defendant. Defendant moved to dismiss the action claiming, among other things, that there was a defect in the parties because numerous creditors were necessary parties under Section 806.04(11), and had not been named. Subsequently, Defendant moved for summary judgment in his favor. The circuit court denied the Defendant's motions and held that Section 815.18(31), "is unreasonable discrimination and arbitrary and therefore contrary to the provisions of Article I, Section 17 of the Wisconsin Constitution...." Further, the court concluded that the Plaintiffs could pursue the funds in the Pension Trust to satisfy their claims against the Defendant, but it prohibited all attempts at collection pending final disposition of this matter.

Defendant appealed to the court of appeals. Subsequently, he petitioned this court to bypass the court of appeals. The petition was dismissed as premature because the briefs of the parties had not been filed. After the briefs were filed, both parties moved to have this court reconsider the petition for bypass. This court granted the joint reconsideration motion and granted the bypass.

The first question is whether all the necessary parties are before the court. Section 806.04(11), Stats., provides:

"806.04 Uniform declaratory judgments act.... (11) PARTIES. When declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration, and no declaration may prejudice the right of persons not parties to the proceeding...."

Defendant argues that the Plaintiffs have failed to name all the necessary parties in compliance with Section 806.04(11), because there were over twenty creditors listed in the bankruptcy petition and they were not named as parties to the declaratory judgment action. Defendant also claims that the bankruptcy trustee may not represent the other creditors. In contrast, Plaintiffs claim that the only necessary party is the trustee, who is the representative of the bankruptcy estate. See, 11 U.S.C. Section 323. We conclude that the interests of all the creditors are sufficiently represented by Henry S. Dorman in his representative capacity as trustee, and thus, Section 806.04(11), as interpreted by this court, does not require their joinder as plaintiffs.

This court has determined that Section 806.04(11), Stats., should not be construed to require that all interested parties must be joined in a declaratory judgment action seeking to adjudge the validity of a statute. Barry Laboratories, Inc. v. State Bd. of Pharm., 26 Wis.2d 505, 512, 132 N.W.2d 833 (1965). Strict application of the statute would make the statute unworkable with respect to determining the validity of a statute or ordinance. Bence v. Milwaukee, 84 Wis.2d 224, 234, 267 N.W.2d 25 (1978). Section 806.04(11), does not require the joinder of all interested parties when one party is acting "in a representative capacity in behalf of all persons having an interest in upholding the validity of the statute or ordinance under attack." White House Milk Co. v. Thomson, 275 Wis. 243, 249, 81 N.W.2d 725 (1957).

In Bence, the plaintiffs were challenging the constitutionality of a city ordinance that altered the method of determining the amount of pension to be received by retired police officers under the Policemen's Annuity and Benefit Fund. Under the ordinance, officers whose services commenced on or after May 17, 1945, and who retired after October 5, 1973, were entitled to higher benefits than those who retired prior to October 5, 1973. Plaintiffs, officers who retired prior to October 5, 1973, failed to name as defendants those officers who were receiving the increased benefits. This court relied on its White House Milk decision and concluded that because the city attorney was named as a defendant it was not necessary for the plaintiffs to join all other officers whose interests might have been affected.

"The city attorney has appeared on behalf of the City of Milwaukee and of the Policemen's Annuity and Benefit Fund. It is his duty, a duty which he has discharged to date in this action, to represent the interests of the fund and the interests of all participants in the fund whose rights might be jeopardized by the decision in the declaratory judgment action." Bence, 84 Wis.2d at 235, 267 N.W.2d 25.

In like manner, the bankruptcy trustee appeared on behalf of all the bankrupt Defendant's creditors, named and unnamed. In objecting to Defendant's claimed exemption of the Pension Trust, the trustee sought to have the $191,787.98 returned to the estate to be available to satisfy the claims of the Defendant's creditors. The interests of the creditors could not be harmed by the trustee's actions, only benefitted. By attempting to collect assets for the creditors, the trustee was acting in the interest of all the creditors.

A bankruptcy trustee possesses only those powers granted by the Bankruptcy Code. Defendant cites three cases for the proposition that the bankruptcy trustee has no authority to represent the rights of the creditors in this declaratory judgment action. These cases can be distinguished from this case because in each case the trustee lacked standing to challenge the claimed exemptions. In the In re Reynolds, 24 B.R. 344 (Bankr.S.D.Ohio 1982) case, not only was the bankruptcy trustee denied standing to question the constitutionality of the Ohio exemption statute, but all bankruptcy creditors were denied standing. The exemption discriminated against non-bankruptcy creditors, and the court held that the question of constitutionality could only be brought by the class discriminated against in a non-bankruptcy context. Id. at 347.

In the other two cases, In re Skipwith, 9 B.R. 730 (Bankr.S.D.Cal.1981), overruled in part on other grounds, 19 Bankr. 666 (Bankr. 9th Cir.1982), and In re Wilson, 4 B.R. 605 (Bankr.E.D.Wash.1980), the courts concluded that the trustee's powers under 11 U.S.C. Section 544(a) and (b), failed to give the trustee standing to raise objections to the exemption statutes. Both courts recognized the general rule that no person may challenge the constitutionality of a statute by invoking the rights of others. Section 544(a) gives the trustee the "rights and powers of a judicial lien creditor, a creditor holding an execution returned...