Richardson v. Schafer (In re Schafer)

Summarized by Michael Coury , Glankler Brown, PLLC
15 years 2 weeks ago

Citation:

2011 Fed. App. 0002P(6th Cir BAP 2011)

Tag(s):

6th Circuit

Ruling:

Michigan's bankruptcy specific exemption statute (Mich. Comp. Laws Section 600.5451) is unconstitutional under the Bankruptcy Clause of the United States Constitution (Article I, sec. 8, cl.4). Judgment of the bankrutpcy court is reversed. The Court found that since Michigan had not opted out of the federal exemption statute established under 11 U.S.C. Sec. 522(d), Michigan debtors could elect either state or federal exemptions. Michigan state law provides for two alternate exemption statutes, one for all Michigan residents and one for Michigan residents that file bankruptcy (the "bankruptcy specific exemption"). Michigan's bankruptcy specific homestead exemption is substantially more generous than Michigan's general homestead exemption or the federal homestead exemption. Noting prior Michigan bankruptcy court decisions which had found the bankruptcy specific exemptions unconstitutional, and a split among other jurisdictions as to whether similar statutes were unconstitutional, the BAP concluded that Michigan's statute violated the Bankruptcy Clause of the Constitution since a state exemption statute which applies only to state residents that file bankruptcy violates Congress's exclusive authority to establish uniform laws on bankruptcy. The court found that the "opt out" provision of sec. 522(b)(2) authorized states to prohibit their residents from utilizing federal bankruptcy exemptions but did not authorize the states to pass exemption statutes that only applied to debtors in bankruptcy. The court further found that a two tier state exemption scheme (one for bankruptcy debtors and one for non-debtors) violated the uniformity requirement of the Bankruptcy Clause and was unconstitutional since the statutory scheme afforded greater rights to creditors of non-bankrupt debtors vs. a bankruptcy trustee's rights against a bankrupt debtor. Because the Court found that the statute was unconstitutional under the Bankruptcy Clause, the Court did not reach the question of whether the statute also violated the Supremacy Clause.

Procedural context:

Chapter 7 trustees in unrelated cases filed objections to their respective debtors homestead exemptions on the grounds that Michigan's bankruptcy specific exemption statute violated the U.S. Constitution. The bankruptcy court denied the trustees' objections and found the statute constitutional under the Supremacy Clause of the Constitution. The trustees appealed to the 6th Circuit Bankruptcy Appellate Panel.

Facts:

Two Chapter 7 debtors in unrelated cases claimed homestead exemptions under Michigan's bankruptcy specific exemption statute which applied only to debtors who filed bankruptcy. Their Chapter 7 trustees objected to the exemptions on grounds that the bankruptcy specific exemption statute was unconstitutional. Under Michigan law, non-bankruptcy debtors were limited to a homestead exemption of $3500 whereas under the bankruptcy specific statute, bankrupt debtors could claim a homestead exemption of $30,000 or, if age 65 or older or disabled, up to $45,000.

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