WDBC splits on state exemption statute

Bankruptcy practice in the Western District of Michigan will be a bit more tricky now.

Bankruptcy judges in the Western District have issued conflicting opinions on the constitutionality of MCL 600.5451, which specifies property exemptions available to bankruptcy debtors.

Judge Scott W. Dales, in In re: Jones, says the statute passes constitutional muster. Judges James D. Gregg, in In re: Pontius and Jeffrey R. Hughes, in In re Wallace, 347 B.R. 626 (Bankr. W.D. Mich. 2006), say it doesn’t.

In his opinion, Dales provided an overview of bankruptcy exemptions:

In 11 U.S.C. § 522(b), Congress provided that a state may choose the exemption scheme available to any debtor filing for bankruptcy relief within its borders. For example, debtors filing bankruptcy petitions in Ohio and Tennessee are not eligible to claim the federal exemptions enumerated in § 522(d) because the state law applicable to those debtors specifically “does not so authorize.” See 11 U.S.C. § 522(b)(2); Ohio R.C. § 2329.662; T.C.A. § 26-2-112. In other words, those states and many others have “opted out” of the federal exemption scheme.

Michigan, on the other hand, has not opted out. When Michigan debtors file bankruptcy petitions they can choose to exempt property under the federal exemption scheme found in 11 U.S.C. § 522(b)(2) and (d), or under the state exemption scheme of 11 U.S.C. § 522(b)(3). Should Michigan debtors choose the so-called “state exemptions,” they then have a choice to select exemptions under M.C.L. § 600.6023, which are generally applicable to all judgment debtors, or exemptions under M.C.L. § 600.5451, which are available only to debtors in bankruptcy.

The sticking point is the options Michigan provides. By allowing debtors to choose between exemptions available to judgment debtors and so-called “bankruptcy specific” exemptions, Gregg maintains Congress unconstitutionally delegated its authority to enact a portion of the Bankruptcy Code:

The Constitution grants Congress the power to “establish … uniform Laws on the subject of Bankruptcies.” The Bankruptcy Clause, U.S. Const. art. I, § 8l. 4. Court opinions which uphold state “bankruptcy specific” exemptions reason that, in enacting 11 U.S.C. § 522, Congress made an “express delegation” to the states to enact laws which operate solely in bankruptcy proceedings. The downfall of this “express delegation” rationale is that it is unconstitutional.

The Supreme Court has consistently held that Congress may not constitutionally delegate its legislative power. “It does not admit of argument that [C]ongress can neither delegate its own powers, nor enlarge those of a state.” Wilkerson v. Rahrer, 140 U.S. 545, 560, 11 S.Ct. 865, 869 (1891).

Gregg also observed that Congress is required to establish uniform bankruptcy laws. And, under Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 188, 22 S. Ct. 857, 860-61 (1902), Gregg noted, “uniformity” in the bankruptcy context is geographic uniformity.

[T]he Supreme Court has given a precise holding of the interpretation of constitutional uniformity: We concur in this view, and hold that the system is, in the constitutional sense, uniform throughout the United States, when the trustee takes in each state whatever would have been available to the creditor if the bankrupt[cy] law had not been passed. Hanover, 186 U.S. at 190, 22 S.Ct. at 861 (emphasis added).

The Michigan statute, § 600.5451, and all other “bankruptcy specific” state exemption schemes, accomplishes the opposite result. Their very purpose is to ensure that the bankruptcy trustee does not take whatever property “would have been available to the creditor” outside of bankruptcy.

Dales sees things very differently.

The Wallace and Pontius opinions construed the Bankruptcy Clause, and its uniformity requirement, as an express delegation of exclusive legislative power from the states to the federal legislature — a constitutional delegation divesting the states of their own legislative authority in this area.

This view, however, is at odds with the Sixth Circuit’s earlier analysis in Rhodes v. Stewart, 705 F.2d 159 (6th Cir.), cert. denied, 464 U.S. 983 (1983), which recognized concurrent state legislative authority to adopt exemptions applicable in bankruptcy. …

By permitting the states to prescribe exemptions applicable in bankruptcy proceedings, and permitting them to opt-out of the federal bankruptcy exemptions, Congress “purposely omitted to provide” a federal rule of decision, and constitutionally deferred to the states on these issues. …

Indeed, in Hanover National Bank v. Moyses, 186 U.S. 181 (1902), the United States Supreme Court specifically upheld the decision of Congress to adopt state exemption laws as the rule of decision in bankruptcy cases under the former Bankruptcy Act, and rejected the challenge that doing so somehow constituted an improper delegation of authority. By accepting Congress’s invitation to regulate exemptions, the states are exercising their own legislative authority, authority that they retained notwithstanding the Bankruptcy Clause.

So, for now, take your pick, Dales or Gregg / Hughes.

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2 thoughts on “WDBC splits on state exemption statute

  1. The Fourth Circuit recently upheld a West Virginia statute providing for bankruptcy-specific exemptions against a challenge to its constitutionality, and the Supreme Court denied cert. Therefore, I think the Michigan statute passes muster.

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