Rhodes v. Stewart

• Decision Date: 11 April 1983
• Docket Number: No. 81-5820,81-5820
• Parties: 8 Collier Bankr.Cas.2d 451, 10 Bankr.Ct.Dec. 596, Bankr. L. Rep. P 69,140 J. Kenneth RHODES, Debtor, Plaintiff/Appellee, v. Larry STEWART, Trustee, et al., Defendants/Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 159

705 F.2d 159

8 Collier Bankr.Cas.2d 451, 10 Bankr.Ct.Dec. 596,

Bankr. L. Rep. P 69,140

J. Kenneth RHODES, Debtor, Plaintiff/Appellee, v. Larry STEWART, Trustee, et al., Defendants/Appellants.

No. 81-5820.

United States Court of Appeals, Sixth Circuit.

Argued Oct. 26, 1982.

Decided April 11, 1983.

William M. Leech, Jr., Atty. Gen. of Tenn., Kate Eyler, Asst. Atty. Gen. (argued), Jimmy C. Creecy, Deputy Atty. Gen., for plaintiff/appellee.

Larry Stewart, Nashville, Tenn., pro se.

Harry D. Lewis (argued), Nashville, Tenn., for plaintiff/appellee.

Joe B. Brown, U.S. Atty., Margaret Huff, Nashville, Tenn., for amicus curiae U.S.

William H. Smith, (Am. Bankers Assoc.) Michael F. Crotty, Washington, D.C., for amicus curiae American Bankers Ass'n Vernon L. Evans, Washington, D.C., for amicus curiae National Consumer Finance Ass'n.

James L. Roberts, Nashville, Tenn., for Third Nat. Bank in Nashville.

M. Clark Spoden, Dearborn & Ewing, Nashville, Tenn., for amicus curiae Tenn. Bankers Assoc.

Before MARTIN and KRUPANSKY, Circuit Judges, and PRATT, District Judge. ^*

KRUPANSKY, Circuit Judge.

This is a direct appeal, pursuant to 28 U.S.C. Sec. 1293(b), from a judgment of the Bankruptcy Court for the Middle District of Tennessee declaring "invalid" Tennessee's "opt-out" statute, T.C.A. Sec. 26-2-112. Rhodes v. Stewart, 14 B.R. 629 (Bkrtcy.M.D.Tenn.1981). Confronting the polestar issue of the jurisdiction of a bankruptcy court to exercise the judicial power of an Article III court, it is initially noted that Section 241(a) of the Bankruptcy Reform Act of 1978 (Act), Pub.L. No. 95-598, 28 U.S.C. Sec. 1471, which grants to bankruptcy courts jurisdiction over all "civil proceedings arising under title 11 or arising in or related to cases under title 11", was adjudged "unconstitutional" by Justices Brennan, Marshall, Blackmun and Stevens in Northern Pipeline Construction Company v. Marathon Pipe Line Company, --- U.S. ----, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). Although in Northern the Court was confronted with the bankruptcy court's jurisdiction to entertain only one type of civil proceeding "arising in or related to" a bankruptcy case, to wit, a breach of contract and warranty complaint predicated upon state law, the permissible and impermissible exercises of jurisdiction under Sec. 1471 were deemed nonseverable and the broad jurisdictional grant of Sec. 1471 was declared unconstitutional in its entirety. Justice Brennan stated:

[W]e cannot conclude that if Congress were aware that the grant of jurisdiction could not constitutionally encompass this and similar claims, it would simply remove the jurisdiction of the bankruptcy court over these matters, leaving the jurisdictional provision and adjudicatory structure intact with respect to other types of claims, and thus subject to Art. III constitutional challenge on a claim-by-claim basis. * * * We think that it is for Congress to determine the proper manner of restructuring the Bankruptcy Act of 1978 to conform to the requirements of Art. III, in the way that will best effectuate the legislative purpose.

--- U.S. at ----, 102 S.Ct. at 2880, note 40. Justice Rehnquist, with whom Justice O'Connor joined, concluded that only "so much of the Bankruptcy Act of 1978 as enables a Bankruptcy Court to entertain and decide Northern's lawsuit over Marathon's objection to be violative of Art. III", --- U.S. at ----, 102 S.Ct. at 2882, but concurred in the judgment since "this grant of authority is not readily severable from the remaining grant of authority to Bankruptcy Courts under Sec. 241(a)". Id. Accordingly, a plurality of six justices concluded that the jurisdictional grant of Sec. 1471 was unconstitutional in toto and could not be redeemed through division or severance of offending exercises of jurisdiction. See also: In re Cumberland Enterprises, Inc., 22 B.R. 626, 631 (Bkrtcy.M.D.Tenn.1982); In re Otero Mills, Inc., 21 B.R. 645, 647 (Bkrtcy.D.N.M.1982); In re Cherry Pond Coal Co., 21 B.R. 592, 593 (S.D.W.Va.1982).

The plurality further declared that "our decision today shall apply only prospectively", --- U.S. at ----, 102 S.Ct. at 2880, and thereupon stayed execution of the judgment, entered on June 28, 1982, until October 4, 1982. Id. The stay of execution was subsequently extended until December 24, 1982. Northern Pipeline Construction Co. v. Marathon Pipe Line Company, --- U.S. ----, 103 S.Ct. 199, 74 L.Ed.2d 160 (1982). Prospective application of Northern mandates, at a minimum, that all bankruptcy court entries of judgment prior to June 28, 1982, ¹ as predicated upon Sec. 1471 jurisdiction, are to be afforded de facto validity. In United States v. Security Industrial Bank, --- U.S. ----, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982) the Supreme Court addressed the merits of a decision entered by the Tenth Circuit wherein consolidated dispositions issued in 1980 by bankruptcy courts were reviewed. Although the underlying bankruptcy decisions, as in the case at bar, entertained the constitutionality of legislation, such exercises of jurisdiction were not retroactively subjected to the jurisdictional pronouncements of Northern:

Appellee Beneficial Finance of Kansas, Inc. asserts that the judgments should be affirmed because the Act violates Article III of the Constitution by granting judicial power to non-Article III bankruptcy judges. See Northern Pipeline Construction Co. v. Marathon Pipe Line Co., --- U.S. ----, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (plurality opinion of Brennan, J.); id., at ----, 102 S.Ct. at 2882 (Rehnquist, J., concurring in the judgment). Because our decision in Northern Pipeline is prospective only, id., at ----, 102 S.Ct. 288[o] [sic], and because we have stayed the issuance of our mandate in that case to December 24, 1982, --- U.S. ----, 103 S.Ct. [sic], 74 L.Ed.2d 160, that decision does not affect the judgment in this case.

--- U.S. at ----, 103 S.Ct. at 410, note 5. Accordingly, the bankruptcy court decision in the case at bar, as resulting from Sec. 1471 jurisdiction, entered on September 22, 1981, is to be afforded de facto bankruptcy jurisdictional validity upon appellate review.

The pertinent substantive inquiry on appeal is the constitutionality of Tennessee's opt-out statute, T.C.A. Sec. 26-2-112. The Bankruptcy Reform Act of 1978, 11 U.S.C. Sec. 101 et seq., created an express enumeration of exemptions from the bankruptcy estate. 11 U.S.C. Sec. 522(d). Included within this federal exemption scheme is the following "homestead" exemption:

(1) The debtor's aggregate interest, not to exceed $7,500 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor. (emphasis added)

11 U.S.C. Sec. 522(d)(1). Congress, however, further vested in the states the authority to "opt out" of the federal exemption scheme:

(b) Notwithstanding section 541 [which defines property of the estate] of this title, an individual debtor may exempt from property of the estate either--

(1) property that is specified under subsection (d) of this section, unless the State law that is applicable to the debtor under paragraph (2)(A) of this subsection specifically does not so authorize.

11 U.S.C. Sec. 522(b)(1) (emphasis added). Tennessee, and a significant number of other states, ² have rejected or opted-out of the federal exemption scheme embodied in 11 U.S.C. Sec. 522(d):

Sec. 26-2-112. Exemptions for the purpose of bankruptcy The personal property exemptions as provided for in this part, and the other exemptions as provided in other sections of the Tennessee Code Annotated for the citizens of Tennessee, are hereby declared adequate and the citizens of Tennessee, pursuant to section 522(b)(1), Public Law 95-598 known as the Bankruptcy Reform Act of 1978, Title 11 USC, section 522(b)(1), are not authorized to claim as exempt the property described in the Bankruptcy Reform Act of 1978, 11 U.S.C. 522(d).

T.C.A. Sec. 26-2-112. At least a section of Tennessee's statutory exemption provisions are less beneficial to a debtor than those permitted in the federal exemption provision. In particular, T.C.A. Sec. 26-2-301 establishes the following homestead exemption:

Sec. 26-2-301. Basic Exemption (a) An individual, regardless of whether he is head of a family, shall be entitled to a homestead exemption upon real property, which is owned by the individual and used by him, his spouse, or a dependent, as a principal place of residence. The aggregate value of such homestead exemption shall not exceed five thousand dollars ($5,000). (emphasis added)

Tennessee's homestead exemption is less beneficial to a debtor than its federal counterpart in terms of the value of the exemption ($5,000 versus $7,500) and in terms of restrictions; a Tennessee debtor may only exempt the homestead used "as a principal place of residence" whereas the debtor authorized to utilize the federal homestead exemption may exempt that used "as a residence".

Kenneth Rhodes (Rhodes) filed a voluntary Chapter 7 petition in bankruptcy and sought to rely upon the federal exemption scheme embodied in 11 U.S.C. Sec. 522(d) to exempt all unencumbered real property including a 6/365 interval time-sharing ownership interest in a condominium located in Florida for which a purchase price of $3,800 had been paid. Since the condominium was not his principal place of residence, it was not exempted under Tennessee's homestead provision, T.C.A. Sec. 26-2-301, although it would have been exempt were Rhodes permitted to apply the federal exemption. The trustee in bankruptcy petitioned the bankruptcy court to apply the more restrictive exemptions of Tennessee bankruptcy statutes since Tennessee had opted-out of the federal exemption scheme as permitted by 11 U.S.C. Sec. 522(b)(1). The...