Summary
explaining that pursuant to § 2329.662, Ohio is an opt-out state
Summary of this case from In re GokayOpinion
No. 13–31398.
2014-05-14
In re Traci L. KYLE, Debtor.
Brian E. Lusardi, Xenia, OH, Wayne P. Novick, Centerville, OH, Harry B. Zornow, Hamilton, OH, for Debtor. John Paul Rieser, Dayton, OH, Trustee.
Brian E. Lusardi, Xenia, OH, Wayne P. Novick, Centerville, OH, Harry B. Zornow, Hamilton, OH, for Debtor. John Paul Rieser, Dayton, OH, Trustee.
DECISION AND ORDER OVERRULING TRUSTEE'S OBJECTIONS TO DEBTOR'S CLAIMED EXEMPTION IN REAL ESTATE (docs. 18, 21)
LAWRENCE S. WALTER, Bankruptcy Judge.
On March 27, 2013, approximately a week before Debtor Traci Kyle (“Debtor”) filed her Chapter 7 bankruptcy case, Ohio House Bill 479 went into effect thereby amending Ohio Rev.Code § 2329.66(A)(1) to increase the Ohio homestead exemption from $21,625.00 to $125,000.00. Following the Debtor's bankruptcy filing, Chapter 7 Trustee John Rieser (“Trustee”), objected to Debtor's claimed homestead exemption in the amount of $125,000.00 (now $132,900.00 due to a statutory inflation adjustment) arguing that the Debtor is only entitled to the $21,625.00 (plus inflation adjustment) exemption afforded prior to the amendment. Because uncodified language governing the effective date of the recent amendment is ambiguous and because another section of the Ohio exemption statute and federal bankruptcy policies favor application of the amended exemption, the court overrules the Trustee's objection, as more fully discussed below.
This matter is before the court on the Trustee's Objection to Debtor's Claimed Exemption in Real Estate (doc. 18), the Debtor's Response (doc. 21), the Trustee's Second Objection to Debtor's Claimed Exemption in Real Estate (doc. 24), and the Debtor's Response (doc. 26). By order dated June 26, 2013 (doc. 28), the court set a deadline for the parties to request a hearing or additional briefing. A hearing was not requested, but a briefing schedule was set by an Agreed Order dated July 10, 2013 (doc. 32) resulting in Stipulations of Fact (doc. 37), a brief by the Trustee (doc. 38), a responsive brief by the Debtor (doc. 43), and a reply brief by the Trustee (doc. 44).
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).
FACTUAL BACKGROUND
Unless otherwise stated, these facts are derived from the parties' Stipulations of Fact (doc. 37). The Debtor filed her Chapter 7 bankruptcy on April 5, 2013. She owns residential real estate located at 3789 Kyle Road, Cedarville, Ohio (“Real Estate”). The Real Estate has been appraised at a value of $139,000.00 (doc. 8). She acquired the Real Estate by inheritance evidenced by a Certificate of Transfer recorded on January 28, 2010. There are no liens on the Real Estate.
At the time of filing, the Debtor had no secured debt and only five unsecured debts. The following is a list of the Debtor's debts:
| Name of Creditor | Amount due Per Sched F | Date Acct Opened | Acct Status 1 |
| Asset Acceptance LLC | $32,000.00 2 | June 2008 | Open; In Collection |
| Midland Funding 3 | $5,828.00 | August 2010/May 1, 1995 4 | Open; In Collection |
| Citibank–Shell | $2,448.00 | June 2002 | Closed |
| Target, N.B. | $2,247.00 | November 2003 | Closed |
| GECRB/JCP | $0.00/$1,360.00 5 | October 1988 | Closed |
QUESTIONS PRESENTED
There are no issues of fact presented to the court and the primary legal questions are the following:
A. Is the Debtor entitled to benefit from the Amended Ohio Homestead Exemption, codified at Ohio Rev.Code § 2329.66(A)(1), because the amendment's effective date was prior to the bankruptcy filing or does uncodified language enacted with the amendment apply in bankruptcy to prevent the application of the Amended Ohio Homestead Exemption to creditor claims that “accrued” before the effective date?
B. Does application of the Amended Ohio Homestead Exemption to bankruptcy cases filed after its effective date comply with Ohio constitutional and statutory requirements prohibiting the enactment of retroactive laws?
C. Assuming that the uncodified “claims accrued” language was intended to apply, do provisions of the Bankruptcy Code preempt its use in bankruptcy?
LEGAL ANALYSIS
In bankruptcy, a debtor is able to claim certain property considered necessary for the survival of a debtor and the debtor's dependents as “exempt” thereby moving that property beyond the reach of most creditors. Menninger v. Schramm (In re Schramm), 431 B.R. 397, 400 (6th Cir. BAP 2010); In re Pursley, 2014 WL 293557, at *2 (Bankr.N.D.Ohio Jan. 23, 2014). Although the Bankruptcy Code creates a list of exempt property in 11 U.S.C. § 522(d), it also allows a state to “opt-out” of the federal list in favor of its own exemption framework. 11 U.S.C. § 522(b); Schramm, 431 B.R. at 400. Ohio is an “opt-out” state and, consequently, a debtor properly domiciled in Ohio may only take exemptions authorized under Ohio or nonbankruptcy law. Ohio Rev.Code § 2329.662. See also Schramm, 431 B.R. at 400. “In order to effectuate the goals of providing honest debtors a fresh start and affording debtors life's basic necessities, Ohio courts follow the rule that exemption statutes are to be construed liberally in favor of the debtors, and that any doubt in interpretation should be in favor of granting the exemption.” In re Wengerd, 453 B.R. 243, 247 (6th Cir. BAP 2011) (relying on Daugherty v. Central Trust. Co. of N.E. Ohio, N.A., 28 Ohio St.3d 441, 504 N.E.2d 1100, 1104 (1986)).
A. Plain Language in Federal and State Statutes Supports that the Bankruptcy Filing Date Determines State Law Exemptions
The court begins its analysis by noting that the Amended Homestead Exemption was not enacted in a vacuum. Instead, the statutory amendment was adopted in an already existing framework for the use of state law exemptions in bankruptcy created through the mutual workings of the Bankruptcy Code and state law. Within this framework, provisions in the Bankruptcy Code and the Ohio Exemption Statute address how to determine the state law exemptions that a debtor is entitled to claim. Section 522 of the Bankruptcy Code provides that it is the state exemption law applicable on the date of the bankruptcy filing that determines what property a debtor may exempt. 11 U.S.C. § 522(b)(3)(A). See also In re Jaber, 406 B.R. 756, 762 (Bankr.N.D.Ohio 2009). Furthermore, the Ohio legislature has enacted a provision in the Ohio Exemption Statute stating that the “interest” in which a bankrupt debtor may claim an exemption is to be determined as of the bankruptcy petition filing date. Ohio Rev.Code § 2329.66(D). In other words, both the Bankruptcy Code and Ohio Exemption Statute point to the bankruptcy petition filing date as the crucial date for determining a debtor's entitlement to specific exemptions, including the homestead exemption, and the appropriate amount. Wengerd, 453 B.R. at 250 (“... the Sixth Circuit Court of Appeals long ago recognized that a debtor's right to a homestead exemption under Ohio law is determined as of the date of the bankruptcy.”); Jaber, 406 B.R. at 762 (concluding that a debtor was entitled to claim the higher amount in a 2008 amendment to the Ohio homestead exemption because the effective date of the 2008 amendment was prior to the debtor's bankruptcy filing date). Even the United States Supreme Court has “long favored the petition date as the proper time to measure exemptions.” Pursley, 2014 WL 293557, at *3 (citing White v. Stump, 266 U.S. 310, 313, 45 S.Ct. 103, 69 L.Ed. 301 (1924)).
However, along with the most recent amendment to the homestead exemption in H.B. 479, the Ohio General Assembly adopted certain uncodified language in Section 3 (the “uncodified language”) which, read in its entirety with the significant sentences underlined and italicized, provides:
The amendments made by this act to section 1336.04 of the Revised Code shall apply to transfers made on or after the effective date of this act. The amendments made by this act to sections 2329.66 and 2329.661 of the Revised Code shall apply to claims accruing on or after the effective date of this act. The amendments made by this act to section 5815.36 of the Revised Code shall apply to disclaimers made on or after the effective date of this act. Section 5815.37 of the Revised Code as enacted by this act shall apply to conveyances made on or after the effective date of this act. The application of the amendments made by this act to section 2131.08 of the Revised Code is provided [for] in division (F) of section 2131.08 of the Revised Code as amended by this act. The application of the amendments made by this act to section 2131.09 of the Revised Code is provided for in divisions (C) and (E) of section 2131.09 of the Revised Code as amended by this act. The application of the sections of Chapter 5816. of the Revised Code as enacted by this act is provided for in section 5816.14 of the Revised Code as enacted by this act. Sections 1319.07 to 1319.09 of the Revised Code, as enacted by this act, apply to the enforcement and interpretation of all nonrecourse loan documents in existence on, or entered into on or after, the effective date of this act. This act is not intended to impair any secured or unsecured creditors' claims that accrue prior to the effective date of this act.
Ohio Sub. H.B. 479 at Section 3 (129th Ohio Gen. Assembly). The uncodified language, according to the Trustee, changes the crucial date to determine a debtor's entitlement to the Amended Homestead Exemption from the bankruptcy filing date to the date when each creditor's “claim accrues.”
The court's view of the language is not nearly as clear as the Trustee would suggest. The uncodified language is silent as to its application in bankruptcy cases nor does it state that it was intended to modify the preexisting framework pinpointing the bankruptcy filing date as the date to determine a debtor's exemption rights. The omission is significant because the primary use of the Ohio Exemption Statute outside of bankruptcy is in judicial processes involving a singular or discrete number of often secured creditors such as executions, garnishments, attachments, or sales to satisfy a judgment order. Bankruptcy, on the other hand, brings with it a need to determine the relative rights of the totality of a debtor's secured and unsecured creditors. See J & M Securities, LLC v. Moore (In re Moore), 495 B.R. 1, 5 (8th Cir. BAP 2013) (noting that “[i]n a bankruptcy case, exemption is an issue between the debtor and the creditor body as a whole, represented by the trustee, not between the debtor and a single creditor”). Determining the “accrual dates” for every creditor claim, secured and unsecured, and how that impacts a debtor's exemptions in bankruptcy is unexplained by the uncodified language. In other words, the omission of how the uncodified language impactsbankruptcy suggests that it was not considered by the General Assembly nor was it intended to apply in bankruptcy when the language was enacted. Because the Ohio Supreme Court has not addressed the interpretation of the uncodified language and its potential application in bankruptcy, this remains an undecided question of state law requiring this court to predict how the state's highest court would interpret the ambiguities in the uncodified language. Katz v. Fidelity Nat'l Title Ins. Co., 685 F.3d 588, 596 (6th Cir.2012); In re Depascale, 496 B.R. 860, 869 (Bankr.N.D.Ohio 2013).
“ ‘In the construction of [Ohio] statutes the purpose in every instance is to ascertain and give effect to the legislative intent....’ ” Katz, 685 F.3d at 596 (further citation omitted). In order to determine legislative intent, the court must begin by looking to the language of the statute itself. Id.; Depascale, 496 B.R. at 869. If the statutory language is clear, the inquiry ends and the court must apply the plain language. Katz, 685 F.3d at 596;Depascale, 496 B.R. at 869–70. If the language is ambiguous, the court may determine the intent of the legislature from other sources including the object sought to be obtained by the legislation, legislative history, former statutory provisions and common law, and the consequences of a particular interpretation. Katz, 685 F.3d at 596. As noted before, the uncodified language is ambiguous with respect to its application in bankruptcy leaving the court to determine legislative intent from other sources.
Recently, a bankruptcy judge from the Northern District of Ohio relied on these statutory construction principals to address the proper interpretation of the uncodified language and whether it applies to exemptions in bankruptcy. In re Depascale, 496 B.R. 860 (Bankr.N.D.Ohio 2013) (J. Woods). In Depascale, the bankruptcy court rejected the Trustee's position that the uncodified language applies in bankruptcy and ultimately determined that the bankruptcy filing date remains the crucial date for determining a debtor's homestead exemption rights. Id. at 874.
The court began by noting that the codified language of the Ohio Exemption Statute, even following the H.B. 479 amendments, remains plain and clear. Id. at 870. While H.B. 479 changed the amount of the “interest” in a residential property that a debtor can claim as exempt, raising it to $125,000.00, the date that the “interest” is to be determined remained the bankruptcy petition filing date per Ohio Rev.Code § 2329.66(D). Id. “Thus, the express language of [Ohio Rev.Code] § 2329.66 makes clear that a debtor's interest in the exempted property is determined as of the petition date....” Id.
On the other hand, the meaning of the uncodified language is unclear. Id. at 871. No mention is made in the uncodified provision of its application to bankruptcy or any intent to change the long established policy in Ohio Rev.Code § 2329.66(D), 11 U.S.C. § 522 and supporting case law pinpointing the bankruptcy filing date as the date to determine exemption rights.
Furthermore, if applicable in bankruptcy, the lack of definitions for relevant terms, particularly the term “accrues,” adds to the ambiguity making it difficult if not unworkable in the context of a bankruptcy case. Id. at 870–71 (pondering how to determine when an unsecured creditor claim accrues for purposes of determining the applicable exemption). The Trustee asserts that an unsecured creditor's claim “accrues” when a contract is breached, pointing to Ohio Rev.Code § 1302.98(B). However, not all creditor claims, like those sounding in tort, involve a breach of contract. The definition provided by Black's Dictionary is somewhat broader defining “accrue” as “[t]o come into existence as an enforceable claim or right; to arise[.]” Black's Law Dictionary at 23 (8th Ed. 2004); Depascale, 496 B.R. at 871 n. 14. Under this definition, the accrual date of a creditor's claim remains hazy: when does a claim accrue if it is really a composite debt for ongoing treatments of a chronic medical condition—the date of each treatment, the date each bill is sent out, or the date of a delinquency in payment (and what if a debtor is delinquent on more than one payment while continuing to receive more treatments)? What about grace periods, waivers and when a claim is accelerated—do these effect when a claim accrues?
B. Applying the Amended Homestead Exemption to Bankruptcy Cases Filed After the Effective Date Complies with Ohio Constitutional and Statutory Requirements
Next, the Trustee argues that the application of the Amended Homestead Exemption to all bankruptcy cases filed after the effective date regardless of when the claims accrued will violate Ohio constitutional and statutory provisions prohibiting retroactive laws. The Debtor disagrees asserting that applying the Amended Homestead Exemption to bankruptcies filed after the effective date is prospective and, moreover, is how amendments to the Ohio Exemption Statute have always been applied in bankruptcy cases. Even if the application of the Amended Homestead Exemption had a retroactive impact, the Debtor argues, that impact is not prohibited because the Amended Homestead Exemption did nothing more than raise the amount of an already existing exemption, a change that is considered remedial in nature. The court agrees with the Debtor that applying the Amended Homestead Exemption in bankruptcy cases filed after the amended exemption's effective date complies with Ohio Constitutional and statutory requirements.
It is well settled Ohio law that “[a] statute is presumed to be prospective in its operation unless expressly made retrospective.” Ohio Rev.Code § 1.48; State v. Consilio, 114 Ohio St.3d 295, 871 N.E.2d 1167, 1171–72 (2007) (noting that a statute must clearly proclaim its own retroactivity to overcome of the presumption of prospective application). In addition, the Ohio General Assembly does not possess an absolute right to adopt retroactive statutes. Consilio, 871 N.E.2d at 1171.Section 28, Article II of the Ohio Constitution prohibits the retroactive impairment of vested substantive rights. Id. However, “the General Assembly may make retroactive any legislation that is merely remedial in nature.” Id.
Looking at the act codifying the Amended Homestead Exemption, the court agrees with the Trustee that it contains no express intent on the part of the General Assembly to apply the amended exemption retroactively and, consequently, the amended exemption is presumed to operate prospectively. If anything, the Trustee argues, the uncodified language expresses an intent for it to be applied prospectively to “claims accruing” after the effective date. However, as noted in the prior section, what is missing from the uncodified language is any expression of whether or how the “claims accruing” language applies in bankruptcy. Also omitted is any suggestion that the language was intended to modify the preexisting framework pinpointing the bankruptcy filing date as the date to determine exemption rights. This court concluded in the prior section that the General Assembly did not intend the uncodified language to apply in bankruptcy leaving intact the pre-existing framework determining a debtor's right to the Amended Homestead Exemption based on the bankruptcy filing date and not when creditor claims accrued. Thus, the question to be addressed is whether this pre-existing framework for determining a debtor's exemption rights is, itself, unconstitutionally retroactive. The court concludes it is not.
As noted by Judge Kendig in Pursley, applying the Amended Homestead Exemption to bankruptcy cases filed after its effective date is, in fact, a prospective application of the amendment. 2014 WL 293557, at *10. Indeed, the Ohio Exemption Statute has been amended periodically over the years and bankruptcy courts have had no constitutional problems applying the exemption amounts in effect on the bankruptcy filing date. Pursley, 2014 WL 293557, at *12;Depascale, 496 B.R. at 867–68;Simon v. Citimortgage, Inc. (In re Doubov), 423 B.R. 505, 514 (Bankr.N.D.Ohio 2010); Jaber, 406 B.R. at 762;In re Guikema, 329 B.R. 607, 619 n. 8 (Bankr.S.D.Ohio 2005).
C. The Bankruptcy Code Preempts Application of the Uncodified Language in Bankruptcy
CONCLUSION
For the reasons stated above, the Chapter 7 Trustee's Objections to Debtor's Claimed Exemption in Real Estate (docs. 18, 24) are OVERRULED.
SO ORDERED.
According to the Stipulations of Fact, account status is determined based on a Credit Report dated March 19, 2013.
There is a small variance between the amount scheduled on Schedule F, $32,000.00, and that reported on the March 19, 2013 creditor report of $31,809.00.
Midland Funding is listed as the collection agent for Citibank.
The March 19, 2013 Credit Report lists the Midland Funding account as being opened in August of 2010, but the creditor's proof of claim (POC # 2) states that the account was opened on May 1, 1995.
The differing amounts reflect a discrepancy between Schedule F (showing $0.00 owed to this creditor) and the March 19, 2013 Credit Report reflecting a $1,360.00 balance owed.
Although the parties stipulated that the Target account was not in arrears at the bankruptcy filing date, the account is also listed as being closed as of March 19, 2013 with $2,247.00 due.
Both parties acknowledge that these numbers are adjusted for inflation pursuant to O.R.C. § 2329.66(B) such that Debtor's claimed homestead exemption is $132,900.00.
Even after a definition for accrual is set and a determination is made of when each and every creditor claim in a bankruptcy case accrued, there would be more questions to answer. Assuming that the debtor is left with a pool of unsecured claims accruing before the effective date of the Amended Homestead Exemption and some accruing after, what is the appropriate basis for a separate distribution to these two pools that would otherwise be in the same class of general unsecured creditors? See 11 U.S.C. § 726; Specker Motor Sales v. Eisen, 393 F.3d 659, 662 (6th Cir.2004) (noting that “11 U.S.C. § 726(b) plainly mandates pro rata distribution of assets among creditors in the same statutory class”). This issue will be discussed more thoroughly in the preemption analysis.
For purposes of this analysis, the court uses the Trustee's definition of “accrual” meaning breach of contract or delinquency.
The parties' Stipulations of Fact document shows only the date each creditor account was opened and does not provide any date of accrual for each creditor claim. However, given the age of the accounts dating back to 1988, 1995, 2002, 2003 and 2008, it is likely that at least some of them “accrued” prior to the date the Debtor inherited the residential property in 2010 [doc. 37]. It is telling, perhaps, that the Trustee argues that calculating accrual dates involves a “simple factual determination,” yet fails to calculate those dates with respect to the creditor claims at issue in this case.
Even if these unsecured creditors could be said to have a contractual expectation for a certain recovery, it is well known that upon the filing of a bankruptcy petition, an unsecured creditors' contractual rights may be impaired or modified. Americredit Fin. Servs. v. Nichols (In re Nichols), 440 F.3d 850, 854 (6th Cir.2006) (differentiating a contractual right to repayment of a debt from a property right obtained by way of security interest and noting that “[b]ankruptcy laws have long been construed to authorize the impairment of contractual obligations”).
The Pursley court further concluded that any hypothetical retroactive impact on creditors caused by applying the Amended Homestead Exemption to bankruptcy cases filed after the effective date would not violate the Ohio Constitution because the Amended Homestead Exemption is remedial in nature. Pursley, 2014 WL 293557, at *12. “[R]emedial laws are those affecting only the remedy provided, and include laws that merely substitute a new or more appropriate remedy for the enforcement of an existing right.” Ackison v. Anchor Packing Co., 120 Ohio St.3d 228, 897 N.E.2d 1118, 1123 (2008). See also Longbottom, 998 N.E.2d at 425 (noting that remedial laws are those that merely affect the methods and procedure by which rights are recognized, protected and enforced, and not the right themselves). This court agrees with Pursley that the Amended Homestead Exemption is remedial in nature because it simply modifies a pre-existing exemption by increasing its value. Pursley, 2014 WL 293557, at *12 (noting that “changing the value of the homestead exemption neither destroys nor eliminates the rights of creditors, but instead only changes the amount”). However, the issue is not determinative because applying the Amended Homestead Exemption to bankruptcy cases is a prospective application of the law that does not violate Ohio Constitutional requirements.
As noted before, both the old and new exemption amounts are subject to adjustment for inflation.
.Bankruptcy Code Section 522(c) provides that “property exempted under this section is not liable during or after the case for any debt of the debtor that arose ... before the commencement of the case, except”: 1) certain taxes or customs duties; 2) certain domestic obligations; 3) liens that cannot be avoided; 4) tax liens; 5) certain nondischargeable debts owed to federal depository institutions; and 6) debts in connection with fraud in the obtaining of scholarships, grants, loans or certain other types of financial assistance for higher education. See11 U.S.C. § 522(c); Weinstein, 164 F.3d at 679.
.Bankruptcy Code Section 726(b) provides that creditors of the same statutory class are entitled to “pro rata” distribution. 11 U.S.C. § 726(b). Although unsecured creditors may belong in different statutory classes for distribution purposes based on their priority status (§ 507(a)) or the timeliness of the filing of their claim (§ 726(a)), there is no basis for dividing unsecured creditors into different classes of distribution based on differing exemption rights.
The Sixth Circuit's Brooks decision followed Pine 's interpretation of § 522(f) and, consequently, is no longer good law in light of Owen. 817 F.2d 104, 1987 WL 37210 at *2–3.
The exceptions in § 522(c) include: 1) certain taxes or customs duties; 2) certain domestic obligations; 3) liens that cannot be avoided; 4) tax liens; 5) certain nondischargeable debts owed to federal depository institutions; and 6) debts in connection with fraud in the obtaining of scholarships, grants, loans or certain other types of financial assistance for higher education. 11 U.S.C. § 522(c); Weinstein, 164 F.3d at 679.
Some courts have held that the best way to give effect to a state exemption exclusion that creates multiple tiers of creditors in bankruptcy without running afoul of the pro rata disbursement requirement is to collect the funds from the debtor as if the exclusion applied (essentially reducing the exemption by the amount owed to the excluded creditors), but then disbursing the funds to all creditors pro rata according to ordinary bankruptcy priorities. See, e.g., In re Fishman, 241 B.R. 568, 574–75 and n. 2 (Bankr.N.D.Ill.1999). The court respectfully disagrees with this approach as an artificial alteration of state law that no longer complies with the language or purpose of a state exemption that excludes specified creditors from its application.