Richardson v. Schafer (In re Schafer)

• Decision Date: 20 August 2012
• Docket Number: Nos. 11–1340,11–1387.,s. 11–1340
• Citation: 689 F.3d 601
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: In re Steven M. SCHAFER, Debtor. Thomas C. Richardson, Trustee–Appellee, v. Steven M. Schafer, Debtor–Appellant (11–1340 & 11–1387), State of Michigan, Intervenor–Appellant (11–1340).

689 F.3d 601

In re Steven M. SCHAFER, Debtor.

Thomas C. Richardson, Trustee–Appellee,

v.Steven M. Schafer, Debtor–Appellant (11–1340 & 11–1387),

State of Michigan, Intervenor–Appellant (11–1340).

Nos. 11–1340, 11–1387.

United States Court of Appeals,Sixth Circuit.

Argued: June 1, 2012.

Decided and Filed: Aug. 20, 2012.

ARGUED: Daniel E. Sonneveldt, Office of the Michigan Attorney General, Lansing, Michigan, Scott P. Zochowski, Troy, Michigan for Appellants. Nicholas J. Daly, Lewis, Reed & Allen P.C., Kalamazoo, Michigan, for Appellee. ON BRIEF: Heather M.S. Durian, Office of the Michigan Attorney General, Lansing, Michigan, Scott P. Zochowski, Troy, Michigan for Appellants. Nicholas J. Daly, Lewis, Reed & Allen P.C., Kalamazoo, Michigan, for Appellee. Tara Twomey, National Association of Consumer Bankruptcy Attorneys, San Jose, California, for Amici Curiae.

Before: COLE and CLAY, Circuit Judges; MATTICE, District Judge. ^*

OPINION

COLE, Circuit Judge.

The Constitution's Bankruptcy Clause grants Congress the power to establish “uniform Laws on the subject of Bankruptcies throughout the United States[,]” U.S. Const. art. I, § 8, cl. 4, and its Supremacy Clause makes the laws that Congress passes pursuant to that power the “supreme Law of the Land[,]” U.S. Const. art. VI, cl. 2. The question before this Court is whether, in light of those provisions, a state may enact an exemption scheme that applies only to debtors in bankruptcy. The bankruptcy trustee argues that a state may not, that such a law would violate both the Bankruptcy Clause and the Supremacy Clause. The debtor and the State of Michigan disagree. They argue that the interpretation given to the phrase “uniform Laws” by both the Supreme Court and this Court permits states to act in the arena of bankruptcy exemptions even if they do so by making certain exemptions available only to debtors in bankruptcy, and that such exemptions schemes are not invalidated by the Supremacy Clause. We agree, and thus AFFIRM the judgment of the bankruptcy court and hold that Michigan's bankruptcy-specific exemption statute, Mich. Comp. Laws § 600.5451, is constitutionally sound.

I. BACKGROUND

None of the underlying facts are in dispute. In March 2009, Steven Schafer, the debtor-appellant, filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Richardson v. Schafer (In re Schafer), 455 B.R. 590, 592 (6th Cir. BAP 2011). Michigan law permits debtors in bankruptcy to choose their exemptions from those set forth in 11 U.S.C. § 522(d), from a set of general exemptions available to all Michigan residents irrespective of their bankruptcy status, Mich. Comp. Laws § 600.6023, or from a list of exemptions available solely to debtors in bankruptcy, Mich. Comp. Laws § 600.5451.

Schafer elected to claim a homestead exemption under the last of these, which permits bankruptcy debtors—and only bankruptcy debtors—to exempt up to $30,000 of the value of the home, or up to $45,000 if the debtor is over the age of 65 or disabled. Mich. Comp. Laws § 600.5451(1)(n). These figures are adjusted for inflation triennially, such that Schafer, who is disabled, claimed a total exemption of $44,695 in the value of his home. Schafer, 455 B.R. at 592;see also Mich. Dep't of Treasury, Property Debtor in Bankruptcy May Exempt from Levy or Sale Inflation Adjusted Amounts, 3961 Rev. 01–11 (Apr. 15, 2011), available at http:// www. michigan. gov/ documents/ Bankruptcy Exemptions 2005_ 141050_ 7. pdf. The homestead exemption contained in § 600.5451 is substantially more generous than either its federal counterpart ($21,625), 11 U.S.C. § 522(d)(1), or the Michigan general homestead exemption ($3,500), Mich. Comp. Laws § 600.6023(1)(h).

Thomas Richardson, the trustee-appellee (“Trustee”), subsequently filed an objection to Schafer's use of § 600.5451's exemption scheme.¹Schafer, 455 B.R. at 592. The Trustee argued that the bankruptcy-specific exemption statute violates the Bankruptcy Clause, as well as the Supremacy Clause.

The Bankruptcy Court for the Western District of Michigan held the bankruptcy-specific exemption scheme constitutional. In re Jones, 428 B.R. 720, 721 (Bankr.W.D.Mich.2010). In so doing, the bankruptcy court relied on Supreme Court and Sixth Circuit precedent, including our decision in Rhodes v. Stewart, 705 F.2d 159 (6th Cir.1983), for the proposition that states have concurrent authority to promulgate laws governing exemptions applicable in bankruptcy cases. Jones, at 428 B.R. The bankruptcy court suggested that Rhodes was at odds with another of our decisions, Hood v. Tennessee Student Assistance Corp., 319 F.3d 755 (6th Cir.2003), aff'd on other grounds,541 U.S. 440, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004), over whether Congress retained exclusive authority to implement bankruptcy laws. Jones, 428 B.R. at 727. After conducting a lengthy inquiry into the history of the “uniform Laws” language of the Constitution's Bankruptcy Clause, and taking into account the binding effect of Rhodes on our later decision in Hood, the bankruptcy court adopted the reasoning set forth in Rhodes to hold that Michigan's concurrent authority appropriately permitted § 600.5451's enactment. Id. The bankruptcy court also concluded that the law at issue here, § 600.5451(1)(n), was not in actual conflict with the system provided for by the Bankruptcy Code. Id. The bankruptcy court's decision, however, conflicted with other decisions from that district that had invalidated § 600.5451. See In re Pontius, 421 B.R. 814 (Bankr.W.D.Mich.2009); In re Wallace, 347 B.R. 626 (Bankr.W.D.Mich.2006).

The Trustee appealed to the United States Bankruptcy Appellate Panel of the Sixth Circuit (“BAP”), at which point the State of Michigan moved to intervene in support of Schafer's position. The BAP granted the motion, but nonetheless reversed the bankruptcy court and found the bankruptcy-specific exemption statute unconstitutional, Schafer, 455 B.R. at 591.

The BAP relied in part on our decision in Hood to hold that, in general, Congress has exclusive authority to promulgate bankruptcy laws. Rhodes, the BAP held, stood for the proposition that states have concurrent jurisdiction in the area of bankruptcy exemptions, but only because Congress affirmatively delegated that power; the power to create a bankruptcy-specific exemption statute was, according to the BAP, outside the scope of that delegation. Id. at 603. The BAP further held that even if such a power were within the scope of the delegation, the Constitution's Bankruptcy Clause requires “geographic uniformity” between the exemptions available to a debtor in bankruptcy and a debtor outside of bankruptcy. Id. at 606. Finding that § 600.5451 precluded such geographic uniformity, and was thus unconstitutional, the BAP declined to consider the bankruptcy court's Supremacy Clause analysis. Id. The State of Michigan timely appealed the BAP's judgment to this Court.²

II. ANALYSIS

In reviewing cases appealed from the BAP, we focus our review on the bankruptcy court's decision. Nardei v. Maughan (In re Maughan), 340 F.3d 337, 341 (6th Cir.2003). In doing so, findings of facts are reviewed for clear error, whereas conclusions of law are reviewed de novo. Nicholson v. Isaacman (In re Isaacman), 26 F.3d 629, 631 (6th Cir.1994). Where, as here, a statute is challenged as unconstitutional, we construe the statute to avoid constitutional infirmity when “fairly possible.” Eubanks v. Wilkinson, 937 F.2d 1118, 1122 (6th Cir.1991) (quoting Crowell v. Benson, 285 U.S. 22, 62, 52 S.Ct. 285, 76 L.Ed. 598 (1932)).

A. The Power to Pass Bankruptcy Legislation

As an initial matter, the parties disagree on which entities are vested with the power to pass laws directly affecting the bankruptcy process. The Trustee argues that by virtue of its application solely to debtors in bankruptcy, Michigan's bankruptcy-specific exemption statute is a “bankruptcy law.” A general exemption statute, on the other hand, is a “non-bankruptcy law” because all debtors, regardless of bankruptcy status, may take advantage of it to shield assets from creditors. The “uniform Laws” language of the Bankruptcy Clause, the Trustee contends, endows Congress with the exclusive authority to pass bankruptcy laws, and Michigan overstepped its bounds when it passed § 600.5451.³

In support of his exclusivity argument, the Trustee directs our attention to language in Hood describing the original understanding of the Bankruptcy Clause: “As it was initially understood, the Bankruptcy Clause represented the states' total grant of their power to legislate on bankruptcy.... The authority was understood to be exclusive because any lesser grant would have defeated the grant's original purpose.” Hood, 319 F.3d at 764. Such a system would permit the bankruptcy process to rise “above individual states' interests.” Id. The Trustee, as became clear during oral argument, believes that any statutory developments since the Constitution's passage may only abrogate such exclusivity if the legislative intent to do so is manifest. What the Trustee does not do, however, is provide us with a full picture of the Hood Court's analysis of such exclusive power. In the very next paragraph, we explained that “this understanding that the federal power was exclusive eventually gave way to an acceptance that states could, in the absence of federal legislation, pass laws on bankruptcy....” Id. at 765. Hood, which resolved whether Congress could properly abrogate a state's sovereign immunity pursuant to § 106 of the Bankruptcy Code, does not stand as an unyielding barrier to state action in the bankruptcy field.

The bankruptcy court, as well as the debtor in this case, calls our attention to our earlier pronouncements in Rhodes, in which we stated that “[i]t is fundamental that the state and federal legislatures share concurrent authority to promulgate bankruptcy laws....” Rhodes, 705 F.2d at 163. Unlike the bankruptcy court, we do not read Rh...