Opinion
Bankruptcy No. 81 B 05870 K.
April 6, 1982.
Milnor H. Senior, III, Denver, Colo., for debtor.
MEMORANDUM OPINION AND ORDER
This matter came on for hearing upon the objection to confirmation filed by the Standing Chapter 13 Trustee. Even though the Attorney General for the State of Colorado was properly notified that a state statute was being challenged as unconstitutional, he made no appearance and did not file a brief. The Standing Chapter 13 Trustee also made no appearance and did not file a brief in support of her written objection.
The written objection filed by the Trustee gave as the bases for the objection the following:
(1) The debtor owns residential real property in Colorado appraised as $63,000.00 which is subject to a lien of $59,000.00.
(2) The petition herein was filed December 16, 1981, and therefore the debtor is restricted to the State of Colorado exemptions because Colorado has chosen to "opt-out" under 11 U.S.C. § 522(b)(1) when it passed Senate Bill 369 (effective July 1, 1981). See C.R.S. 13-54-107.
(3) The debtor does not live in the subject property and therefore is not entitled to claim the Colorado Homestead Exemption provided for in C.R.S. 38-41-201.
(4) The debtor has wrongfully claimed the equity in the subject property to be exempt pursuant to 11 U.S.C. § 522(d)(1).
(5) Therefore, since under the plan unsecured creditors are to be paid 1% of their claims, and this 1% is less than they would receive in a Chapter 7 liquidation in view of the non-exempt equity in the subject property, the plan should not be confirmed.
The debtor claims that the Colorado "opt-out" statute, C.R.S. 13-54-107, is unconstitutional because it conflicts with Article I, Section 8 of the United States Constitution, which section grants Congress the power to establish uniform bankruptcy laws; and that this statute, and the underlying Colorado scheme of exemptions, are in conflict with the Bankruptcy Code and therefore violate the supremacy clause (Article VI, Clause 2) of the United States Constitution.
At the outset, it is necessary to state what this case does not involve. Contrary to the assertions in the debtor's brief, it does not involve the question of whether or not Colorado exceeded its authority in establishing its scheme of exemptions by discriminating in favor of homeowners by providing a Homestead Exemption to them with no comparable exemption to non-homeowners. That issue was decided in the case of In re Hellman, 474 F. Supp. 348 (D. of Colo. 1979), where the Court held that ". . . property occupied and used by husband and wife as their home is entitled to a homestead exemption, whether occupied by the husband and wife under a lease for a term of years or by virtue of ownership of fee simple title". 474 F. Supp. at 350. Thus, the homestead exemption in Colorado is available to homeowners and to non-homeowners alike.
The facts necessary to determine the constitutionality of the Colorado "opt-out" statute, and its underlying scheme of exemptions, are not in dispute. From the petition it appears that the debtor owns a residential dwelling in Colorado and has an equity of approximately $3,670.00. The debtor does not occupy this dwelling, but rather rents it to someone else for $550.00 per month and pays $556.00 per month to the holder of a mortgage on the property.
If the debtor were allowed to claim the federal exemptions, specifically the $7,900.00 "floating" exemption provided for in 11 U.S.C. § 522(d)(1) and (d)(5), she could protect her $3,670.00 equity in the subject real property, and the refrigerator ($75.00), stove ($25.00) and dishwasher ($35.00) located in the subject real property. If the debtor is not allowed to claim these federal exemptions, i.e., if she can only claim the Colorado exemptions, then she cannot protect this equity because she does not reside in the subject real property.
The Colorado statutes involved provide as follows:
13-54-107. Exemptions in bankruptcy. The exemptions provided in section 522(d) of the federal bankruptcy code of 1978 (Title 11 of the United States Code), as amended, are denied to residents of this state. Exemptions authorized to be claimed by residents of this state shall be limited to those exemptions expressly provided by the statutes of this state. 38-41-201. Homestead exemption. Every homestead in the state of Colorado occupied as a home by the owner thereof or his family shall be exempt from execution and attachment arising from any debt, contract, or civil obligation not exceeding in value the sum of twenty thousand dollars in actual cash value in excess of any liens or encumbrances on the homesteaded property in existence at the time of any levy of execution thereon.
I.
In her first argument, the debtor maintains that application of the Colorado "opt-out" statute, and its underlying scheme of exemptions, violates the uniformity requirement of Article I, Section 8, U.S. Constitution.
However, Article I, Section 8 is only controlling as to the congressional exercise of power, and is, therefore, a restriction on Congress, not on the various states. See Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943).
Thus, the Colorado statutes cannot, and do not, violate the uniformity clause of Article I, Section 8, U.S. Constitution.
II.
The second argument of the debtor is that C.R.S. 13-54-107 and Colorado's underlying schedule of exemptions (most of which appear in C.R.S. 13-54-102 and 38-41-201) conflict with the Bankruptcy Code, and therefore violate the Supremacy Clause, Article VI, Clause 2, U.S. Constitution.
In Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971), the Supreme Court set forth the test to determine if there is a conflict between state law and bankruptcy law. ". . . [T]he test calls for a two-step process of first ascertaining the construction of the two statutes and then determining the constitutional question whether they are in conflict". 402 U.S. at 644, 91 S.Ct. at 1708.
Judge Krasniewski in In re Vasko, 6 B.R. 317 (Bkrtcy.N.D.Ohio, 1980), extensively analyzed the purpose of the Bankruptcy Code. After reviewing the legislative history of the Code, he concluded:
The purpose of Congress in passing the new Bankruptcy Code was to give debtors a "fresh start". Being highly concerned with the inadequacy of existing state exemption laws, Congress formulated federal exemptions. In a compromise between the House and the Senate, the states were allowed to `opt out' under Section 522(b)(1) from the federal exemption scheme. However, as the legislative history indicates, Congress had hoped that the states would update and revamp the existing laws, bringing them closer into line with the federal exemptions. 6 B.R. at 322.
I agree with both his analysis and conclusions. And, like Judge Krasniewski, this Court is faced with a situation where the state statute has no legislative history. Nor are there any reported state court cases interpreting C.R.S. 13-54-102, 107 or 38-41-201, as they have recently been amended.
But even if there is not legislative history to tell the purpose of the state legislature when it revised Colorado exemption schedules in 1981, we can, and must under Perez, look to the effect of the now existing state law.
When Colorado decided to opt-out in 1981, it greatly revised its exemption schedules. As examples of these revisions, Colorado increased the homestead exemption from $7,500.00 to $20,000.00; the wearing apparel exemption increased from $400.00 to $750.00; jewelry went from $100.00 to $500.00; household goods went from $400.00 to $1,500.00, etc. Colorado also added certain types of property to its exemption list, e.g., professionally prescribed health aids and awards under crime victims reparation laws. It is obvious that when Colorado revised its exemption schedules it sought to meet congressional criticism that "most [of the state exemption laws] are outmoded, designed for more rural times, and hopelessly inadequate to serve the needs of and provide a fresh start for modern urban debtors". H.Rep. No. 95-595, 95th Cong., 1st Sess. 126-127 (1977), U.S. Code Cong. Admin. News 1978, 5787, p. 6087.
If a comparison is made between the federal exemptions and the Colorado exemptions (see the Appendix attached hereto which is an outline of these exemptions), it is obvious, that, although not an exact duplicate of the federal exemptions, the Colorado law is in conformity with the federal legislative intent to provide the "fresh start" to debtors that Congress intended. In some categories of assets, the exemptions allowed by Colorado are lower than those allowed by the Code. But in other areas, e.g., the homestead exemption and the exemptions for tools of the trade or professional libraries, Colorado is more liberal.
The debtor here is really complaining that the Colorado statutes do not provide the debtor with a "floating" exemption as does the Bankruptcy Code so that the debtor may, at the time of filing, apportion a comparable $7,900.00 to assets of the debtor's choice, so that all debtors can protect $7,900.00 of assets. However, even under Colorado law, the debtor with $7,900.00 of assets can still gain protection for these assets by converting nonexempt property into an exempt property immediately before filing of the petition. See Collier on Bankruptcy, 15th ed., Vol. 3, ¶ 522.08[4]. It is just a matter of timing.
The debtor has apparently taken a position that every debtor is entitled to have a $7,900.00 stake for a "fresh start" and relies mainly on dicta from three cases to support this stand. See In re Smith, 640 F.2d 888 (7th Cir. 1981); Cheeseman v. Nachman, 656 F.2d 60 (4th Cir. 1981); and, In re Rhodes, 14 B.R. 629 (Bkrtcy.M.D.Tenn. 1981). That is not the requirement of the Code. Every debtor cannot have a $7,900.00 stake, as, e.g., a debtor with no assets will have no stake. There is no provision in the Code to insure that he does. All the Code demands is that debtors who have managed to accumulate some assets will be left with some portion of those assets with which to have a "fresh start". What does an able-bodied debtor need for a "fresh start"? A glance at both the federal and Colorado exemptions shows that he needs, basically, the tools of his trade or profession, some minimal food and clothing, the means to provide shelter for him and his family, and some household goods. For those less fortunate, e.g., the disabled or those receiving governmental pensions or assistance, both Colorado and Congress provide for additional exemptions, realizing that, more likely than not, these people do not have the ability to resume, or to carry on, a trade or profession whereby they can become self-sufficient.
The Court agrees with those cases cited by the debtor that state that Congress cannot delegate unfettered authority to the states to regulate bankruptcy exemptions. The states, if they decide to exercise the "opt-out" authority delegated by Congress, must provide their citizens with a scheme of bankruptcy exemptions that is not inconsistent with those of the Code. As pointed out, supra, although Colorado's scheme is not identical to 11 U.S.C. § 522(d), it is quite close. And it is the opinion of this Court that the Colorado law is in conformity with the federal legislative intent to provide the required "fresh start" to debtors in bankruptcy.
Therefore, the debtor may use only those exemptions provided for in Colorado law. Under Colorado law she may not claim as exempt the subject real property because she does not reside therein. Nor may she claim exempt the stove, refrigerator and dishwasher in the subject real property because, under C.R.S. 13-54-102(1)(e), they are not being used by her or her dependents. Thus, under the debtor's proposed plan the unsecured creditors will receive less than the amount they would be paid if the estate of the debtor were liquidated under Chapter 7. See 11 U.S.C. § 1325(a)(4).
Accordingly, the Trustee's objections are well taken and are sustained. The debtor shall have 15 days within which to amend her Chapter 13 plan, or move to convert the proceedings to Chapter 7. If the debtor does not amend or convert within that time, the petition shall be dismissed, without further notice, for failing to obtain confirmation of a plan.
APPENDIX FEDERAL BANKRUPTCY EXEMPTIONS
Source: J. Williamson, The Attorney's Handbook on Consumer Bankruptcy and Chapter 13 (6th ed. 1982).
Type of Property Amount of Exemption Statute Creating Exemption
Debtor's aggregate interest $7,500.00 11 U.S.C. § 522(d)(1) in real or personal property that the debtor or a dependent of the debtor uses as a residence; or in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence; or in a burial lot for the debtor or a dependent of the debtor
1 motor vehicle $1,200.00 11 U.S.C. § 522(d)(2)
Household furnishings, No monetary limit, 11 U.S.C. § 522(d)(3) household goods, wearing except that apparel, appliances, exemption for any books, animals, crops, particular item or musical instruments cannot exceed held primarily for the $200.00 personal, family, or household use of the debtor or a dependent of the debtor
Jewelry held primarily $500.00 11 U.S.C. § 522(d)(4) for personal, family, or household use of debtor or a dependent of the debtor
Any property selected Unused portion of 11 U.S.C. § 522(d)(5) by debtor § 522(d)(1) exemption plus $400.00
Implements, professional $750.00 11 U.S.C. § 522(d)(6) books, or tools, of the trade of debtor or a dependent of the debtor
Unmatured life insurance 100% 11 U.S.C. § 522(d)(7) contracts owned by debtor, except credit life insurance contracts
Accrued dividends or $4,000.00 less 11 U.S.C. § 522(d)(8) interest under, or loan any amounts value of, any unmatured transferred by life insurance contract insuror from cash owned by debtor in which reserve for the insured is payment of the debtor or a person premiums of whom the debtor is a dependent
Professionally prescribed 100% 11 U.S.C. § 522(d)(9) health aids of debtor and dependents
Social security, 100% 11 U.S.C. § 522(d)(10)(A) unemployment compensation, or public assistance benefits
Veterans' benefits 100% 11 U.S.C. § 522(d)(10)(B)
Disability, illness, or 100% 11 U.S.C. § 522(d)(10)(C) unemployment benefits
Alimony, support, or 100% of amount 11 U.S.C. § 522(d)(10)(D) separate maintenance reasonably necessary for support of debtor and dependents
Payments under stock 100% of amount 11 U.S.C. § 522(d)(10)(E) bonus, pension, reasonably profitsharing, annuity, or necessary for similar plan or contract support of debtor on account of illness, and dependents disability, death, age, or length of service
NOTE — Exemption does not apply if: plan or contract was established under auspices of insider that employed debtor at time plan or contract arose; such payment is on account of age or length of service; and such plan or contract does not qualify under 26 U.S.C. § 401(a), 403(a), 403(b), 408, or 409.
Crime victim's reparation 100% 11 U.S.C. § 522(d)(11)(A) law benefits or awards
Payments on account of the 100% of amount 11 U.S.C. § 522(d)(11)(B) wrongful death of reasonably individual of whom debtor necessary for was a dependent support of debtor and dependents
Payments under life 100% of amount 11 U.S.C. § 522(d)(11)(C) insurance contract insuring reasonably life of an individual of necessary for whom debtor was a support of debtor dependent and dependents
Payments on account of $7,500.00 11 U.S.C. § 522(d)(11)(D) personal bodily injury of debtor or person of whom debtor is a dependent (does not include compensation for pain and suffering or actual pecuniary loss)
Payments in compensation 100% of amount 11 U.S.C. § 522(d)(11)(E) for loss of future reasonably earnings of debtor or necessary for person of whom debtor is support of debtor a dependent and dependents
FEDERAL-NONBANKRUPTCY
Type of Property Amount of Exemption Statute Creating Exemption
Disposable earnings 75% OR 30 times * 15 U.S.C. § 1673 (earnings after deductions the federal required by law) minimum hourly wage per week.** WHICHEVER IS GREATER
Wages due masters, seamen no limit 46 U.S.C. § 601 and apprentices (does not apply to claims for maintenance and support of spouse and dependent children)
Veterans Administration no limit 38 U.S.C. § 3101(a) benefits (includes pensions, life insurance and disability benefits)
Social Security benefits no limit 42 U.S.C. § 407 (includes retirement, death and disability benefits)
Longshoremen and harbor no limit 33 U.S.C. § 916 workers medical, disability and death benefits
Railroad employees no limit 45 U.S.C. § 231m retirement and disability annuities
Federal civil service no limit 5 U.S.C. § 8130 disability and death benefits
Federal civil service no limit 5 U.S.C. § 8346(a) retirement benefits
Military Survivor Benefit no limit 10 U.S.C. § 1450(i) Plan annuities
Annuities paid to widows no limit 28 U.S.C. § 376(n) and dependent children of Federal Justices and Judges
Servicemen's group life no limit 38 U.S.C. § 770(g) insurance benefits
Veteran's group life no limit 38 U.S.C. § 770(g) insurance benefits
Deposits made in U.S. no limit 10 U.S.C. § 1035(a) servicemen's savings institutions by servicemen while on permanent duty assignment outside U.S. and its possessions
* USC stands for United States Code
** See 29 U.S.C. § 206(a)(1) for minimum hourly wage
Use of federal bankruptcy exemptions under 11 U.S.C. § COLORADO 522(d) not permitted in this state. See CRS 13-54-107
Type of Property Amount of Exemption Statute Creating Exemption
Homestead occupied as home $20,000 * CRS 38-41-201, 202 by owner
Necessary wearing apparel $750 CRS 13-54-102(1)(a)
Watches, jewelry and $500 CRS 13-54-102(1)(b) articles of adornment
Personal library, family $750 CRS 13-54-102(1)(c) pictures and school books
Burial sites for family 100% CRS 13-54-102(1)(d) members
Household goods $1,500 CRS 13-54-102(1)(e)
Provisions and fuel $300 CRS 13-54-102(1)(f)
Livestock and poultry of $3,000 CRS 13-54-102(1)(g) farmer
Machinery and tools of $2,000 CRS 13-54-102(1)(g) farmer
Armed Forces pension 100% CRS 13-54-102(1)(h)
Stock in trade, equipment $1,500 CRS 13-54-102(1)(i) and tools used in ** See note below occupation
Automobile used in $1,000 CRS 13-54-102(1)(j) occupation
Library of professional $1,500 CRS 13-54-102(1)(k) person ** See note below
Avails of life insurance $5,000 CRS 13-54-102(1)(l) policies
Proceeds of claim and Extent of exemption CRS 13-54-102(1)(m) avails of insurance given for the policies covering loss or lost or destroyed destruction of exempt property property
Proceeds of claim for 100% CRS 13-54-102(1)(n) personal injuries
House trailer or trailer $3,500 CRS 13-54-102(1)(o)(I) coach used as residence
Mobile home used as $6,000 CRS 13-54-102(1)(o)(II) residence
Professionally-prescribed 100% CRS 13-54-102(p) health aids
Crime victims reparation 100% CRS 13-54-102(q) law awards
Homestead sale proceeds $20,000 CRS 38-41-207 (for 1 year) (cannot be commingled)
Disposable earnings (net 75% of disposable CRS 5-5-105, 13-54-104 earnings after payroll earnings OR 30 times deductions required by the federal minimum law) hourly wage per week, WHICHEVER IS GREATER
Insurance proceeds from Same as homestead CRS 38-41-209 loss of homestead exemption
Earnings, avails of 70% for family CRS 13-54-104 health, accident or head 35% for other disability insurance and persons pension and retirement benefits
Workmen's compensation no limit CRS 8-52-107(1) benefits
Unemployment compensation no limit CRS 8-80-103 benefits
Proceeds of group life no limit CRS 10-7-205 insurance policies
Sickness and accident $200 per month and CRS 10-8-114 insurance benefits no limit on lump sum payments
Fraternal Benefit Society no limit CRS 10-14-122 benefits
Teacher's retirement no limit CRS 22-64-120 benefits
Public employees' no limit CRS 24-51-120, 219 retirement benefits
Public assistance payments no limit CRS 26-2-131
Police pension benefits no limit CRS 31-30-313, 616
Firemen's pension benefits no limit CRS 31-30-412, 518
Public employees' deferred 75% or 30 times CRS 24-52-102(4) compensation the federal minimum hourly wage per week, WHICHEVER IS GREATER
* CRS stands for Colorado Revised Statutes of 1973
** Note: may use either the exemption in CRS 13-54-102(1)(i) or the exemption in CRS 13-54-102(1)(k), but not both.