Opinion ID: 17230
Heading Depth: 3
Heading Rank: 1

Heading: The Meaning of “Exemption” and “Liability”

Text: Section 522(c) is not “ambiguous” as the majority contends. The plain meaning of the term “exemption,” as used in § 522 of the Bankruptcy Code, refutes the majority’s argument that the term “liable,” as used in that section, means that a debtor’s property is only subject to a judgment lien, and remains immune from seizure and sale. The Supreme Court has defined “exemption” as the “right . . . which withdraws the property from levy and sale under judicial process.” White v. Stump, 266 U.S. 310, 313 (1924) (emphasis added). This court has defined “exemption” as “the freedom of property of debtors from liability to seizure and sale under legal process for the payment of their debts.” Clark v. Nirembaum, 8 F.2d 451, 452 (5th Cir. 1925), (emphasis added) (citing 25 C.J. § 8 (now 35 C.J.S. § 1 (1960)), cert. denied, 270 U.S. 649 (1926). Similarly, bankruptcy courts have defined an “exemption” as a “‘privilege allowed by law to a judgment debtor, by which he may hold property to a certain amount or certain classes of property, free from all liability to levy and sale on execution or attachment.’” In re Komet, 104 B.R. 799, 806 (Bankr. W.D. Tex. 1989) (emphasis added) (quoting BLACK’S LAW DICTIONARY 571 (5th ed. 1979).12 See also In re Hudspeth, 92 B.R. 827, 830 (Bankr. W.D. Ark. 1988) (same); In re Pritchard, 75 B.R. 877, 878 (Bankr. D. Minn. 1987) (same). “Exemption” also has been defined as “a right given by law to a debtor to retain a portion 12 The current definition of “exemption” in Black’s Law Dictionary is “[a] privilege allowed by law to a judgment debtor, by which he may retain property to a certain amount or certain classes of property, free from all liability to levy and sale on execution, attachment, or bankruptcy.” BLACK’S LAW DICTIONARY 571 (6th ed. 1990). 31 of his personal property free from seizure and sale by his creditors under judicial process.” 31 AM. JUR. 2D Exemptions § 1 (1989). This definition of exemption is critical to an understanding of the meaning of the word “liable” in 11 U.S.C. § 522: (c) Unless the case is dismissed, property exempt 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)(5) of this title. The word “liable,” as used in the section of the Bankruptcy Code entitled “Exemptions,” means “liable to levy and sale on execution or attachment.” In re Komet, 104 B.R. at 806. More specifically, the statutory reference to “liable,” in the context of exemptions, means that property exempted by a debtor under “Federal law” or “State or local law” pursuant to § 522(b)(2)(A) is free from liability for seizure and sale by his or her creditor under judicial process unless the debt is, inter alia, a 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.” 11 U.S.C. § 523(a)(5). Because alimony and child support debts are an exception to the debtor’s privilege to exempt certain property from seizure and sale (see discussion infra of “exceptions to exemptions”), it follows that the property is liable for seizure and sale by a former spouse with a judgment for alimony and child support that is nondischargeable under § 523(a)(5). The majority asserts without any support in federal law that “liable” in § 522(c)(1) means only that an alimony and child support creditor can “perfect a judgment lien against the property. . . although it is immune from seizure.” The majority cites only Texas law for the proposition that Congress intended “liable” in § 522(c)(1) as an esoteric proxy for “nondischargeable debt” and “nonavoidable lien.”13 “Liable” taken in its usual sense and 13 See Maj. Op. at 17-18 & n.9. 32 as used in § 522, however, means “liable for seizure and sale” and not merely “liable to attachment by a nonavoidable but unenforceable lien.” Section 522(c) of the Bankruptcy Code expressly abrogates a debtor’s privilege allowed by state law by which he may hold property free from all liability to levy and sale under legal process for the payment of debts defined by § 523(a)(5). By denying the debtor this privilege of exemption for certain nondischargeable debts, § 522(c) permits the property to be seized and sold to satisfy these obligations. 2. Section 522's “Exception to Exemptions” For Family Support Debts The Bankruptcy Code does not confer upon a debtor an absolute or unqualified right to exempt property from seizure and sale. Section 522 expressly makes nondischargeable debts for alimony, maintenance or child support an exception to the debtor’s general privilege to exempt certain property from liability for seizure and sale. Thus, property exempted under § 522 is nevertheless liable for seizure and sale to satisfy debts specified in § 523(a)(1) (tax obligations) and § 523(a)(5) (child and spousal support). See In re Citrone, 159 B.R. 144, 146 (Bankr. S.D.N.Y. 1993). The majority uses circular and obverse reasoning in an attempt to show that Texas state exemption law (by virtue of Fed. R. Civ. P. 69(a)) “reverse preempts” federal court enforcement of judgments for nondischargeable alimony and support debts under § 522(c) of the Bankruptcy Code. To the contrary, however, Congress, by the specific terms of § 522 and its constitutional power, has superseded and preempted the effect of the state exemption law upon this particular kind of debt. While the Bankruptcy Code allows a debtor to claim state exemptions, it also revokes this privilege as to the debtor’s nondischargeable child and spousal support obligations. In addition to the numerous authorities cited above, other bankruptcy scholars and practitioners interpret 11 U.S.C. § 522(c) as establishing exceptions to the exemptions provided generally under § 522(b): The bankruptcy exemptions do not apply to protect property from seizure and sale to satisfy family support obligations. See Howard N. Cayne et al., Overview of Comprehensive Thrift and Bank Fraud Prosecution Act of 1990 and the Enforcement Provisions of the Financial Institutions Reform, Recovery and Enforcement 33 Act of 1989, in CIVIL AND CRIMINAL LIABILITY OF OFFICERS, DIRECTORS, AND PROFESSIONALS: BANK & THRIFT LITIGATION IN THE 1990'S , at 545, 562-63 (PLI Comm. Law & Practice Course Handbook Series, PLI Order No. A4-4355, 1991) (“Under existing law, subsection (c) provides that the bankruptcy exemptions do not apply in the case of . . . alimony and child support payments.”); see also John K. Villa & Robert M. Krasne, A Preliminary Review of Banking Enforcement Provisions Contained in Title XXV of the Crime Control Act of 1990, in CIVIL AND CRIMINAL LIABILITY OF OFFICERS, DIRECTORS, AND PROFESSIONALS: BANK & THRIFT LITIGATION IN THE 1990'S, at 597, 616 (PLI Comm. Law & Practice Course Handbook Series, PLI Order No. A4-4355, 1991) (Section 2522 of the Crime Control Act of 1990 “amends the U.S. Bankruptcy Code, 11 U.S.C. §§ 523, 522, 365, 507 and 101, to create (i) two additional exceptions to the discharge of indebtedness, through bankruptcy, [and] (ii) a new category of obligations to which property exemptions do not apply. . . .”). Significantly, section 2522(b) of the Crime Control Act of 1990, which amended 11 U.S.C. § 522(c), is entitled “EXCEPTION TO EXEMPTIONS.” Crime Control Act of 1990, PL 101-647, 104 Stat. 4789, 4866 (Nov. 29, 1990); see also In re Colonial Realty Co., 980 F.2d 125, 133 (2d Cir. 1992) (Section 2522 “add[ed] § 522(c)(3) as an additional exception to § 522 exemption”). One commentator has declared that “[a]t present, a person with a claim for alimony, support, or maintenance has a solution under bankruptcy law. . . . If the debtor becomes insolvent, and a voluntary or involuntary petition in bankruptcy is filed, the homestead will not be exempt from this type of prebankruptcy debt.” Donna Litman Seiden, There’s No Place Like Home (Stead) in Florida -- Should It Stay That Way?, 18 NOVA L. REV. 801, 859 (Winter 1994). The author’s reasoning follows that of this dissenting opinion: Because the Bankruptcy Code has the effect of subordinating the exemption to certain debts, creditors with claims for alimony, maintenance, or support can reach exempt property, by means of a forced sale to satisfy this preferred debt, regardless of the state law exemption. Id. at 815 & n. 257. 3. Preemption 34 To decide whether the Bankruptcy Code preempts the Texas homestead exemption laws, a court must begin by comparing § 522(c) with the state homestead constitutional and statutory provisions to determine if there is a conflict. Section 522(c) provides that during or after bankruptcy, exempt property is not liable for any debt that arose prepetition, or is deemed to have so arisen under § 502, except those debts specified in subparagraphs (1) through (3). See 11 U.S.C. §§ 522(c)(1) - (3). This list includes: (1) debts for certain taxes and customs duties; (2) debts for alimony, maintenance, or support; (3) liens that cannot be avoided; (4) liens that are not void; (5) tax liens; and (6) certain nondischargeable debts owed to federal depository institutions. See id. Congress has plenary power to enact uniform federal bankruptcy laws. See U.S. CONST. art. 1, § 8, cl. 4; International Shoe, 278 U.S. at 265. Consequently, [s]tates may not pass or enforce laws to interfere with or complement the Bankruptcy Act or to provide additional or auxiliary regulations. International Shoe, 278 U.S. at 265 (noting that the intent of Congress in establishing uniform bankruptcy laws necessarily excludes inconsistent state regulation). I recognize that Congress afforded significant deference to state law by allowing bankruptcy debtors to choose state exemptions and by further allowing states to opt out of the federal exemption scheme entirely. See Weinstein, 164 F.3d at 683 (citing In re Boucher, 203 B.R. 10, 12 (Bankr. D. Mass. 1996) (citing 11 U.S.C. § 522(b))). Yet, such deference does not warrant the conclusion that the detailed exceptions in § 522(c) to the general immunity from liability of the property exempted provided for by the same section must yield to or be controlled by the state exemption laws. As the Supreme Court recognized in discussing the interplay between § 522(f) and state exemption exceptions in Owen, the state's ability to define its exemptions is not absolute and must yield to conflicting policies in the Bankruptcy Code. See Owen, 500 U.S. at 313. Only by adding a heavy Texas spin to gloss over the plain words and meaning of § 522(c) is the majority able to close its eyes to the obvious conflict between the state laws that exempt homestead property from liability to seizure and sale for alimony and child support debts and § 522(c)(1), which excepts nondischargeable alimony and child support 35 debts from the effects of that exemption. The majority struggles to avoid acknowledging the conflict by theorizing that § 522(c)(1) does not mean what it says but strangely enough has a meaning that produces substantially the same result Texas courts have reached when a Texas court judgment creditor seeks to enforce her alimony and child support decree based solely on state law against the judgment debtor’s homestead: The former spouse may have her lien attached to the property but she cannot enforce it until the debtor dies or abandons his homestead.14 In fact, as we have learned during the course of this case, under Texas law, she cannot enforce it against the proceeds of his sale of the homestead if he invests them in another Texas homestead within six months of the sale.15 The conflict between the Bankruptcy Code and the Texas homestead exemption laws, however, is too sharp and too real to be covered up by any amount of ingenious judicial gloss. The state laws provide for an exemption of property from liability to seizure and sale for the owner’s alimony and child support debts. The federal bankruptcy law in § 522(c)(1) provides for an exception to that exemption of the same property from liability to seizure and sale for the debtor-owner’s alimony and child support debts. Consequently, there is a conflict between the state and federal laws. Therefore, it must be concluded that the state homestead laws are preempted by the federal Bankruptcy Code. State law is void to the extent it is in conflict with a federal statute. See Maryland v. Louisiana, 451 U.S. 725, 747 (1981) and authorities cited therein. 4. Bankruptcy Court’s Broad Enforcement Powers Under 11 U.S.C. § 105 The majority insists that the Bankruptcy Code provides no means by which federal courts can enforce a final judgment rendered by a bankruptcy court. Section 105 of the Bankruptcy Code, however, plainly states: (a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any 14 See Maj. Op. at nn.9-10. 15 See Maj. Op. at n.10. 36 determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. 11 U.S.C. § 105(a).16 This court has declared that “[t]he language of this provision is unambiguous. Reading it under its plain meaning, we conclude that a bankruptcy court can issue any order. . . necessary or appropriate to carry out the provisions of the bankruptcy code.” In re Terrebonne Fuel and Lube, Inc., 108 F.3d 609, 613 (5th Cir. 1997). The Supreme Court has declared that the “statutory directives [of § 105(a)] are consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.” United States v. Energy Resources, Inc., 495 U.S. 545, 549 (1990). For example, a bankruptcy court has the authority under § 105 to void a debtor’s exemption in order to compensate the estate for damage caused by the debtor’s contempt of the court’s orders. In re Haddad, 68 B.R. at 951. One leading commentator on bankruptcy law characterizes § 105 as “an omnibus provision phrased in such general terms as to be the basis for a broad exercise of power in the administration of a bankruptcy case. The basic purpose of § 105 is to assure the bankruptcy courts power to take whatever action is appropriate or necessary in aid of the exercise of its jurisdiction.” 2 L. KING, COLLIER ON BANKRUPTCY § 105.01, at 105-3 (1996). The second sentence of § 105(a) was expressly intended to broaden the authority of bankruptcy courts to act, sua sponte, to promote the Code’s provisions. See In re Kestell, 99 F.3d 146, 148 (4th Cir. 1996) (citing 132 CONG. REC. S15074-05 (Oct. 3, 1986)). In In re Moody, 837 F.2d 719 (5th Cir. 1988), this court held that pursuant to § 105, “a district court has jurisdiction to enforce [nondischargeable] judgments against property other than property of a bankruptcy estate. . . . This jurisdiction properly extends to an order in aid of collecting valid claims and judgments of the bankruptcy trustee against the 16 Bankruptcy courts have inherent power to enforce settlement agreements between parties. In re Haddad, 68 B.R. 944, 953 (Bankr. D. Mass. 1987); In re Bienart, 48 B.R. 326, 328 (Bankr. N.D. Iowa 1985). 37 beneficiary of the trust.” Id. at 723-24. More recently, under the authority of Moody, the district court in Bass v. Denney, No. 3:97-CV-2043-P, 1998 WL 59486 (N.D. Tex. Feb. 9, 1998), held that the bankruptcy court had the power and authority under § 105 to fashion remedies to assist a judgment creditor in enforcing or collecting a nondischargeable judgment obtained against a debtor entered pursuant to 11 U.S.C. § 523. Id. at -2. The broad grant of authority conferred upon bankruptcy courts and district courts by 11 U.S.C. § 105 permits these courts to issue “any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” Therefore, § 105 provides federal courts with a means of enforcing the bankruptcy court’s judgment based on nondischargeable alimony, maintenance, and child support debts by ordering the debtor’s homestead seized and sold to satisfy this nondischargeable, nonexemptible debt. 5. Assimilation of State Practices and Procedures Federal Rule of Civil Procedure 69(a) provides that the procedure “on execution, in proceedings supplementary to and in aid of a judgment, and in proceedings on and in aid of execution shall be in accordance with the practice and procedure of the state in which the district court is held, existing at the time the remedy is sought, except that any statute of the United States governs to the extent that it is applicable.” Fed. R. Civ. P. 69(a) (emphasis added). Thus, the emphasized exception makes any applicable federal statute controlling, as well as any relevant civil rule, because those rules have the force of a statute. 12 CHARLES A. W RIGHT ET AL., FEDERAL PRACTICE & PROCEDURE §3012, at 142 (1997) (citing Gary W. v. State of La., 622 F.2d 804 (5th Cir. 1980) (district court had power to order Secretary of Louisiana Department of Health and Human Resources to pay money judgment from Department funds even though Louisiana Constitution prohibited payment of judgment against state except from funds appropriated for such purpose by legislature), cert. denied, 450 U.S. 994 (1981)). Section 105 of the Bankruptcy Code is a fitting, fully applicable, and, therefore, controlling federal statute authorizing the bankruptcy court to enforce its judgment. Consequently, Federal Rule of Civil Procedure 69(a), and state practice and procedure adopted thereby, do not prevent a federal court from using whatever means are necessary 38 to guarantee compliance with its judgments. The Fourth Circuit aptly summed up the relationship between state procedural vehicles and federal statutes as follows: Even though we look to state law to determine the practice and procedure to be followed in the execution of a judgment, we do so in furtherance of federal law, giving effect to rules entitling parties to enforce federal judgments in federal courts. Consequently, any aspects of the assimilated practices and procedures that are uniquely designed to enforce state judgments are not assimilated, nor is any aspect that may be inconsistent with the federal policy of affording judgment creditors the right to a writ of execution to enforce money judgments in federal courts. United States v. Harkins Builders, Inc., 45 F.3d 830, 833 (4th Cir. 1995) (emphasis added) (citing 12 CHARLES A. W RIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE & PROCEDURE § 3012, at 69 (1973)).17 Consequently, a debtor cannot accomplish “through the back door,” ostensibly under Rule 69(a), what cannot be accomplished under the federal Bankruptcy Code: invoking state exemption laws to immunize or protect homestead property from seizure and sale to satisfy nondischargeable, nonexemptible child and spousal support debts.