In the Matter of Thomas Cullen Davis and Karen Joyce Davis, Debtors. Sandra Davis v. Thomas Cullen Davis

105 F.3d 1017, 11 Tex.Bankr.Ct.Rep. 100, 37 Collier Bankr. Cas. 2d 735, 1997 U.S. App. LEXIS 2355, 30 Bankr. Ct. Dec. (CRR) 585, 1997 WL 20734

• Court: Court of Appeals for the Fifth Circuit
• Decided: February 12, 1997
• Docket: 95-11112
• Status: Published

Opinions

DENNIS, Circuit Judge:

As a general rule the Bankruptcy Code provides that property exempted from the estate is not hable for any of the debtor’s prepetition debts. 11 USC § 522. The basic question in this case is whether § 522(c)(1) creates an exception which authorizes the seizure of exempted property to collect non-dischargeable debts owed to the debtor’s former spouse for alimony, maintenance, and child support. The bankruptcy and district courts held that a judicial hen securing such a debt against exempted property is nonavoidable but that the former spouse may not levy upon the exempted property to pay the debt. We vacate the judgments and remand the case to the bankruptcy court for further proceedings. The Bankruptcy Code provides that an individual debtor may elect to exempt from property of the estate any property that is exempt under state, local, and non-bankruptcy federal law, § 522(b); and that property so exempted is not hable during or after the case for any debt of the debtor that arose, or is treated as if it had arisen, before the commencement of the ease, except, inter alia, any debt to a former spouse for alimony, maintenance, or child support. §§ 522(c)(1) & 523(a)(5). The text, purpose and history of § 522(c)(1) indicate that it creates an exception to § 522 that enables the former spouse of a debtor to levy upon the debtor’s otherwise exempt property to enforce payment of alimony, maintenance, and child support debts.

Background

Appellant Sandra Davis (Sandra) and her former husband, Thomas Cullen Davis (Thomas), the debtor in bankruptcy, were-divorced in 1968. Pursuant to their property settlement, support and child custody agreement, and divorce judgment, Thomas agreed to make monthly payments to Sandra through January 1, 1991, and thereafter to pay her other sums subject to certain contingencies. Thomas made all payments until he filed bankruptcy in 1987. In 1979 Thomas-married Karen Joyce Davis, also a debtor in this action. In 1984 Thomas acquired the property that he claims as his homestead. The property is unencumbered and valued at $500,000. ■

Thomas and Karen filed a voluntary chapter 7 petition in 1987, which was converted to a chapter 11 case. They elected to exempt from the estate property that was exempt under the state homestead exemption laws. In an adversary bankruptcy court proceeding, Thomas sought a determination that his indebtedness pursuant to the property settlement agreement and divorce Judgment was dischargeable. Sandra counterclaimed, asserting that the indebtedness was nondis-chargeable under § 523(a)(5). In 1991 the parties compromised and acceded to a final consent judgment by the bankruptcy court declaring the debt to be for nondischargeable alimony, maintenance, and child support under § 523(a)(5) and awarding Sandra a principal sum of $250,000 plus $50,000 in attorney's fees.

Sandra moved in bankruptcy court for turnover relief ordering Thomas to execute a warranty deed conveying the homestead to her because she was otherwise unable to enforce the judgment. After a hearing, the bankruptcy court concluded that Sandra could not levy upon Thomas's exempted homestead property to collect her judgment for alimony, maintenance, and child support, holding that the Bankruptcy Code does not preempt the state constitutional homestead exemption law. In re Davis, 170 B.R. 892, 898 (Bankr.N.D.Tex.1994). The bankruptcy court also held that Sandra was not entitled to turnover relief on state law grounds. We pretermit discussion of that issue, however, because it is rendered moot by our disposition of this case. Sandra appealed. The district court affirmed. In re Davis, 188 B.R. 544 (N.D.Tex.1995). Sandra appealed to this court.

Standard of Review

This appeal presents solely legal questions which this court reviews de novo. Henderson v. Belknap (Matter of Henderson), 18 F.3d 1305, 1307 (5th Cir.) (citing Haber Oil Co. v. Swinehart (In re Haber Oil Co.), 12 F.3d 426, 434 (5th Cir.1994)), cert. denied, - U.S. -, 115 S.Ct. 578, 130 L.Ed.2d 490 (1994).

Discussion

The commencement of a voluntary bankruptcy case creates an estate comprised of legal and equitable interests of the debtor in property, wherever located and by whomever held. § 541. Generally, an individual debtor may exempt property from the estate that falls within one of two exemptible categories referred to by the Bankruptcy Code in § 522(b): (1) a category of eleven classes of property specified by the Bankruptcy Code itself in § 522(d); and (2) a category comprised of "any property that is exempt under [nonbankruptcy] Federal law ... or State or local law. . . . ". § 522(b)(2)(A). In exempting property from the estate, the debtor must use either the first, or in the alternative, the second category. If the state law that is applicable to the debtor specifically does not authorize this election, however, that state "opts out" of the § 522(d) list. When a state opts out, its debtors are limited to the exemptions provided by the second category, ie., by nonbankruptcy federal, state and local law. See Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 1835, 114 L.Ed.2d 350 (1991). In the present case, Thomas and Karen, his present co-debtor spouse, chose to have the homestead property exempted from the estate under the second category, which uses state, local and nonbankruptcy federal law to identify and quantify the property to be exempted, § 522(b)(2)(A).

Property that is properly exempted under § 522 is, as a general rule, immunized by § 522(c) against liabifity for prebankrupt-cy debts. Owen v. Owen, Id. There are, however, several significant exceptions. Section 522(c) reads, in pertinent part, as follows:

(c) Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose, or that is determined under section 502 of this title as if .such debt had arisen, before the commencement of the case, except-

(1) a debt of a kind specified in section 523(a)(1) or 523(a)(5) of this title;

(2) a debt secured by. a lien that is-

(A)(i) [ & ii] [not avoided or void under specified provisions of this titlel; or

(B) a tax lien, notice of which is properly filed; or

(3) a debt of a kind specified in section 523(a)(4) or 523(a)(6) of this title owed by an institution affiliated party of an insured depository institution to a Federal depository institutions regulatory agency acting in its capacity as conservator, receiver, or liquidating agent for such institution.

The debts excepted from the protection of § 522(e), for which exempted property remains liable, are: (1) nondischargeable debts for alimony, maintenance, and child support, § 523(a)(5), and taxes, § 523(a)(1); (2) valid liens that may not be avoided under the trustee’s powers and certain tax liens in exempt property that are not affected by the bankruptcy; and (3) nondischargeable debts for fraud and willful injury owed to a federal depository institutions regulatory agency acting as a conservator, receiver, or liquidating agent under §§ 523(a)(4) & (6). The debt at issue in the present case is a debt of a kind specified in § 523(a)(5), which makes nondischargeable any debt “to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record ... or property settlement agreement_” Id. Accordingly, property that is exempted under § 522 and therefore immune from all other liability, nonetheless remains liable for and may be seized to pay alimony,- maintenance, and child support debts and other obligations excepted from § 522(c) protection. See Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 1835, 114 L.Ed.2d 350 (1991) (“Property that is properly exempted under § 522 is (with some exceptions) immunized against liability for prebankruptcy debts.”) (emphasis added); Walters v. U.S. Nat. Bank of Johnstown, 879 F.2d 95, 97 (3d Cir.1989) (tax and alimony and child support debts “are neither dis-chargeable nor exemptible.”); Resnick, Weintraub & Resnick Bankruptcy Law Manual ¶4.08 at 4r-54 (4th ed. 1996) (“Exempt property may be seized to pay nondischargeable tax liabilities and obligations to pay alimony, maintenance, or support.”); Epstein et. al., Bankruptcy, § 8-1 n. 17 (1992) (“Exemptions are not effective, however, with respect to two types of nondischargeable debts: tax debts and debts for alimony, maintenance, or child support.”); Campbell et al, Creditors’ Rights Handbook, A Guide to the Debtor-Creditor Relationship, § 20.03[4] (1993) (“Exempt property may be used to satisfy certain tax debts or for obligations for child support or alimony.”); Epstein & Nickles, Debt, Bankruptcy, Article 9 and Related Laws, 759 (1994) (“After bankruptcy, creditors with domestic claims excepted from discharge by section 523(a)(5) will have recourse to exempt property.”).

This reading is in accord with the legislative history of § 522(c). Referring to that section the Senate report, with which the House report is virtually identical, reads:

Subsection (c) .insulates exempt property from prepetition claims other than tax claims (whether or not dischargeable), and other than alimony, maintenance, or support claims that are excepted from discharge. The rule of Long v. Bullard, 117 U.S. 617 [6 S.Ct. 917, 29 L.Ed. 1004] (1886), is accepted with respect to the enforcement of valid liens on nonexempt property as well as on exempt property.

S.Rep. No. 95-989, 95th Cong., 2nd Sess. 76, reprinted in 1978 U.S.C.C.A.N. 5787, 5862; see H.R.Rep. No. 95-595, 95th Cong.-, 2nd Sess. 361, reprinted in 1978 U.S.C.C.A.N. 6317.

The drafters of the exemption section thus were aware that exempt property would be protected against some, but not all, nondis-chargeable debts. See Walters v. U.S. Nat. Bank of Johnstown, 879 F.2d 95, 97 (3d Cir.1989). Moreover, it is clear that the legislative aim was to preserve fully a former spouse’s legally vested right to alimony, maintenance, and child support on an equal footing with a creditor’s valid lien that was obtained before bankruptcy on exempted property, including exempted homestead property. See Farrey v. Sanderfoot, 500 U.S. 291, 297, 111 S.Ct. 1825, 1829, 114 L.Ed.2d 337 (1991) (“Congress generally preserved [the Long v. Bullard ] principle [that valid liens obtained before bankruptcy could be enforced on exempt property, including otherwise exempt homestead property] when it comprehensively revised bankruptcy law with the Bankruptcy Reform Act of 1978, ... 11 U.S.C. § 522(c)(2)(A)(i).”); Owen v. Owen, 500 U.S. 305, 309, 111 S.Ct. 1833, 1835-36, 114 L.Ed.2d 350 (1991) (“[T]he rule of Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886) [was] codified in § 522.”).

Our interpretation of § 522(c) is confirmed by the legislative history of § 522(c)(3), the third exception added by the Crime Control Act of 1990, Pub.L. No. 101-647, relating to the enforcement of certain nondischargeable debts owed to a federal depository institutions regulatory agency acting as a conservator, receiver, or liquidating agent. Referring to that new exception, the section by section analysis pursuant to the remarks of Representative Charles Schuman on the Banking Law Enforcement section of the Crime Control Act of 1990 provides:

Currently, section 522(c) provides that the property exemptions described elsewhere in section 522 do not apply in the case of tax obligations, alimony and child support responsibilities, or security agreements in which the otherwise exempt property is pledged as collateral. The new exception would apply to certain debts owed by institution-affiliated parties to federal depositary institutions regulatory agencies acting in their capacity as receiver, conservator, or liquidating agent. Specifically, the debts covered are debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny, as described in section 523(a)(4); and for willful and malicious injury to another entity or to the property of another entity, as described in section 523(a)(6). These acts represent the highest form of financial criminality against a federally insured depositary institution by a person entrusted under the law with the care and safekeeping of the institution.

136 Cong.Ree. E3687 (Nov. 2, 1990). Also, Senator Biden, Chairman of the Senate Judiciary Committee, remarked:

I accepted changes drafted by the House only because they maintained the core Senate-passed bankruptcy language that prevents all S & L wrongdoers from discharging their debts by filing for bankruptcy. The final language specifically preempts State homestead laws, which would otherwise allow S & L crooks to retain lavish homes through the excessive protections in some State bankruptcy laws.

Mr. President_[ujnder the bill, major S & L offenders will spend time behind bars. Their assets will be seized. And every possible dollar will be recovered for depositors and taxpayers.

136 Cong.Ree. S17602 (Oct. 27,1990).

Bankruptcy courts have consistently interpreted the tax and tax lien provisions of §§ 522(c)(1) & (2), correlative to the alimony provision of § 522(c)(1), to authorize creditors and lienholders to reach the exempted property of the debtor to satisfy tax liabilities. E.g., In re Holl, 35 B.R. 206 (Bankr.D.Haw.1983) (IRS was able to levy on exempted proceeds of sale of homestead to satisfy a debt for a tax nondischargeable under § 523(a)(1)); In re Hebermehl, 132-B.R. 651 (Bankr.D.Colo.1991) (same as to exempted wages); In re Braddock, 149 B.R. 636 (Bankr.D.Mont.1992) (tax lien took priority over homestead exemption as to exempt proceeds derived from sale of homestead). Accord: Davenport v. U.S., 136 B.R. 125 (W.D.Ky.1991); Crow v. Long, 107 B.R. 184 (E.D.Mo.1989). See also In Re Reed, 127 B.R. 244 (Bankr.D.Haw.1991) (tax lien could be enforced against exempt pension plan contributions).

Section 522(c)(1) was not intended, as the debtor argues and the bankruptcy and district courts concluded, merely to preserve judgments and judicial liens securing alimony, maintenance, and child support debts against exempted property. That purpose is effectuated by § 522(f)(1), which excepts from the debtor’s § 522 right to avoid the impairment of the fixing of liens on exempted property, inter alia, judicial liens securing alimony, maintenance, and child support debts. Section 522(f)(1), in pertinent part, provides:

(f)(1) Notwithstanding any waiver of exemptions, but subject to paragraph (3), the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been enti-tied under subsection (b) of this section, if such lien is—

(Á) a judicial lien, other than a judicial lien that secures a debt—

(i) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit, or property settlement agreement; and [to the extent that such debt is unassigned and is actually in the nature of alimony, maintenance or support.]

The context in which § 522(c)(1) occurs, the text of the Bankruptcy Code as a whole, including particularly § 522(b), (c) & (f) in pari materia, and the legislative history of those provisions, clearly show that § 522(c)(1) does not redundantly duplicate the lien preservation function of § 522(f)(1)(A)©.

The bankruptcy and district courts erroneously concluded that the Bankruptcy Code does not preempt the state homestead exemption laws. They failed to recognize the scope of the federal preemption of the field of bankruptcy law or the exclusivity of the federal law basis of the debtor’s qualified right to exempt property from the bankruptcy estate.

The power of Congress to establish uniform laws on the subject of bankruptcies throughout the United States is unrestricted and paramount. U.S. Constitution, Art. I, § 8, cl. 4; International Shoe Co. v. Pinkus, 278 U.S. 261, 265, 49 S.Ct. 108, 110, 73 L.Ed. 318 (1929); Pereira v. United Jersey Bank, N.A., 201 B.R. 644, 678 (S.D.N.Y.1996). Congress exercised this power by enacting national, uniform bankruptcy laws, the most recent of which is the Bankruptcy Code, that necessarily exclude or displace any conflicting state regulation. International Shoe Co. v. Pinkus, 278 U.S. 261, 265, 49 S.Ct. 108, 110, 73 L.Ed. 318 (1929). Consequently, states may not pass or enforce laws to interfere with or complement the Bankruptcy Code or to provide additional or auxiliary regulations. See id. at 266, 49 S.Ct. at 110-11.

The Bankruptcy Code provides that the commencement of a voluntary bankruptcy case creates an estate comprised of legal and equitable interests of the debtor in property, wherever located and by whomever held. § 541. Under the code; an individual debtor has a qualified right, under defined circumstances, to exempt from the estate the same property that is exempt from levy under state, local, and nonbankruptcy federal law. § 522(b)(2)(A). Property that is exempted from the estate is immunized against liability for prebankruptcy debts, subject to the exception of, inter alia, debts for alimony, maintenance, child support, taxes and other liabilities specified by the code. § 522(c). The code does not in such cases, however, preserve or effectuate the state exemption laws with all of their built in characteristics, as the bankruptcy and district courts evidently assumed. The code uses the state exemption laws only as a means of identifying and quantifying the property that the debtor may exempt under federal law from the bankruptcy estate. See Owen, 500 U.S. at 308, 111 S.Ct. at 1835 (“Property that is properly exempted under § 522 is (with some exceptions) immunized against liability for prebankruptcy debts.”) (emphasis added). See also id. at 313, 111 S.Ct. at 1838 (“[I]t is [not] inconsistent with the Bankruptcy Code’s ‘opt-out’ policy, whereby the states may define their own exemptions, to refuse to take those exemptions with all their built-in limitations.... We have no basis for pronouncing the opt out policy absolute, but must apply it along with whatever other competing or limiting policies the statute contains.”). Cf. In re Maddox, 15 F.3d 1347, 1351 (5th Cir.1994) (“[A]lthough a state may elect what property is exempt under state law, federal law determines the availability of lien avoidance under § 522(f).”) (quoting In re Kelly, 133 B.R. 811, 813 (Bankr.N.D.Tex.1991)). By the same token, federal law determines whether property is exempted and immunized against seizure and sale for prebankruptcy debts. § 522. The debtor’s qualified right to exempt property from the estate, and the relationships between the debtor, his creditors, and exempted or non-exempted property with regard to prebank-ruptcy debts, are governed exclusively by federal law. Consequently, it is clear that the state homestead exemption law has been superseded by the Bankruptcy Code, and that the state law cannot alter the obligations of a bankruptcy debtor and his creditors as provided for by federal bankruptcy law. Pinkus, 278 U.S. at 265, 49 S.Ct. at 110; See In re John Taylor Company, 935 F.2d 75, 78 (5th Cir.1991). For these reasons, we conclude that the state homestead exemption law is inoperative against the debtor’s former spouse in this case and that she is entitled under the Bankruptcy Code to proceed against the debtor’s otherwise exempted property to satisfy her alimony, maintenance, and child support judgment. Because she may do so by ordinary legal proceedings, she need not seek extraordinary relief under the Texas Turnover Statute. Accordingly, the judgments below are VACATED and the case is REMANDED to the bankruptcy court which is directed to allow the appellant to obtain a writ of execution and all other relief to which she is entitled by law in accordance with this opinion.