On Its Way to the Supreme Court: Sixth Circuit BAP Rules MI Exemptions Unconstitutional
by: Brett Border
Schneiderman and Sherman PC; Farmington Hills, Mich.
The Sixth Circuit Bankruptcy Appellate Panel (BAP) recently ruled in the consolidated appeals of In re Schafer and In re Jones [1] that Michigan’s bankruptcy-exemption statute was unconstitutional, setting off what is likely to become a contested issue within Michigan and other states, and eventually a petition for certiorari to the Supreme Court. In Shafer/Jones, both debtors claimed an exemption in the equity of their residences under Mich. Comp. Laws § 600.5451(1)(n). The chapter 7 trustee filed objections to the exemptions and challenges to the constitutionality of the exemption statute, and the attorney general did not file a response nor appear. The bankruptcy court consolidated the hearings and ruled that the statute did not violate the Supremacy Clause of the U.S. Constitution.
The BAP began its analysis with the Bankruptcy Clause of the U.S. Constitution. [2] The BAP noted that the bankruptcy clause gave Congress the authority “to establish uniform laws…on the subject of Bankruptcies throughout the United States.” [3] The BAP weaved through the different Bankruptcy Acts and debated on whether Congress’ power was “exclusive” or “concurrent” in nature and also, reviewed the evolution of the bankruptcy-exemption scheme.
Reviewing the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the BAP further reviewed that debtors are able to elect either the federal exemption scheme or a state scheme that prohibits debtors form utilizing the federal scheme. The BAP noted that there are currently 35 states that prohibit debtors from electing the federal exemption scheme.
Turning to Michigan’s bankruptcy-exemption statute, the BAP noted that Michigan has not elected to opt out of the federal scheme. Noting that debtors residing in Michigan enjoy the choice of the federal exemptions or exemptions under State law. Michigan has two different state exemption statutes, Mich. Comp. Laws § 600.6023, available to all residents, and Mich. Comp. Laws § 600.5451, only available to residents who have filed for bankruptcy. The latter has more generous homestead exemption than the former and the federal scheme. The BAP then reviewed the case law from across the nation and found that the courts were split on whether state specific bankruptcy statutes were unconstitutional, either under the Bankruptcy Clause or Supremacy Clause. [4]
The bankruptcy court in these decisions opined that the state exemption statute did not run afoul of the Constitution due to the Bankruptcy Clause not applying to state enactments. The BAP disagreed with the bankruptcy court, indicating that the purpose of the Bankruptcy Clause was to “replace the hodgepodge of bankruptcy relief” within the U.S. and that when the states adopted the Constitution, the states gave up their power to legislate bankruptcy statutes, citing Hood v. Tenn. Student Assist. Corp. (In re Hood). [5] The BAP also noted that the states have “concurrent” jurisdiction, which enables them to “opt-out” of the federal scheme and allow residents of a specific state to enjoy that legislative bodies’ enactment but it does not allow the state to enact exemption schemes only for residents who file for bankruptcy. The court noted:
This argument conflates two different rights: that is, the debtor’s right to exempt property under applicable state law, with the states’ right to enact legislation which must satisfy Constitutional requirements. Certainly a Michigan resident who files for bankruptcy is permitted under § 522(b)(3) to exempt property under any existing “State or local law,” but that language does not logically lead to the conclusion that the state has a right to pass a law which violates the United States Constitution. If it is determined that a state law violates the Constitution, that law will no longer be available to Michigan residents. Section 522(b)(3) does not delegate to the states the power to legislate exemptions which apply only to debtor in bankruptcy. The states’ “concurrent jurisdiction” is limited to “opting-out” or passing laws which apply to all state residents. [6]
The court reasoned that Michigan could opt-out or elect to have their residents use the federal exemptions, but that the state may not enact its own bankruptcy laws. The BAP indicated that it will not reach the Supremacy Clause issue as to avoid further unnecessary constitutional questions.
Conclusion
This holding will surely spark the debate of the constitutionality of state enactments regarding exemptions. As trustees attempt to provide a distribution to creditors, many will look to invalidate state enactments in order to be able to liquidate the debtor’s assets. It will not be long before the Supreme Court decides this issue.
1. 2011 FED App. 002P (6th Cir.).
2. Art. I, § 8, Cl. 4.
3. U.S. Const., Art. I, § 8, cl. 4.
4. See Sticka v. Applebaum (In re Applebaum), 422 B.R. 684 (9th Cir. B.A.P. 2009), Sheehan v. Peveich (In re Peveich), 574 F.3d 248 (4th Cir. 2009), and compare to Kanter v. Moneymaker (In re Kanter), 505 F.2d 228 (9th Cir. 1974), In re Regevig, 389 B.R. 736 (Bankr. N.D. Ariz. 2008).
5. 319 F.3d 755 (6th Cir. 2003), aff’d, 541 U.S. 440, 124 S.Ct. 1905 (2004).
6.5 Schafer at 12.