Court Opinion

ID: 9689229
Source: CourtListenerOpinion
Date Created: 2023-08-24 18:25:36.391108+00
Date Added: 2024-06-11T18:18:46.306082
License: Public Domain

CARTER, Justice
(dissenting).
I dissent from the opinion of the court because I believe the consequences which it attaches to the automatic stay arising upon a federal bankruptcy filing violate the supremacy clause of the federal constitution. The resulting forféiture of the debtor’s redemption rights obviously provides a chilling impact on the debtor’s freedom to seek *924the protections afforded by federal law. A strong argument can be made for a supremacy clause violation even if Congress had not enacted a specific statute to prevent such forfeitures from occurring. Because Congress has enacted a specific statute to prevent such occurrences, the resulting violation of the supremacy clause is inescapably obvious.
Iowa Code section 628.3 creates a right of redemption in the judgment debtor as a property right. That right is assignable pursuant to section 628.25. Federal bankruptcy courts have recognized that the debtor’s right of redemption of real property is a legal and equitable interest in property and constitutes part of the debtor’s bankruptcy estate. Johnson v. First Nat’l Bank, 719 F.2d 270, 276 (8th Cir.1983), cert. denied, 465 U.S. 1012, 104 S.Ct. 1015, 79 L.Ed.2d 245 (1984). It is expressly provided in 11 U.S.C. section 541(c)(1) (West Supp.1988) that
an interest of the debtor in property becomes property of the estate ... notwithstanding any provision in an agreement, transfer instrument, or applicable non-bankruptcy law—
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(B) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this. title, or on the appointment of or taking possession by a trustee ... and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor’s interest in property.
(Emphasis added.) Under the opinion of the court in the present case, this property right in which the debtor holds an interest is forfeited as a result of the automatic stay arising from a federal bankruptcy filing. I submit this result violates section 541(c)(1).
Viewed from the position of the debtor, the result which the court’s majority is sanctioning significantly dilutes the benefits intended to be conferred by federal law. If the debtor takes advantage of these federally created rights prior to an execution sale of the debtor’s property, that election, under the majority’s opinion, triggers a substantial loss of rights under state law. Viewed from the point of view of the federal bankruptcy court, this forfeiture of redemption rights impacts in a negative way on the resources available to that court for purposes of achieving debtor rehabilitation.
The court’s majority advances two theories in an attempt to avoid this obvious conflict with federal law. The first theory is that the debtor could wait until after the execution sale before filing for federal bankruptcy protection and thus avoid the forfeiture. The flaw in this theory is that this forced delay is itself a circumstance that amounts to a significant restriction of the debtor’s options to invoke the federal protections. There will often be circumstances in which financial burdens which flow from transactions entirely unrelated to the mortgaged property may require the debtor to seek federal protection in advance of the execution sale.
The second theory advanced by the majority suggests that if a bankruptcy petition is filed before the execution sale takes place then no right of redemption has arisen at the time of filing. From this premise, the majority reasons that the inchoate statutory right of redemption is not a property right which falls within the restrictions provided in 11 U.S.C. section 541(c)(1). This is an overly restrictive interpretation of the latter statute which significantly frustrates its intended operation. The forfeiture which, under the majority’s opinion, occurs at the time of filing a federal bankruptcy petition clearly involves rights affecting property which will be subject to administration by the bankruptcy court. Consequently, I submit that the rights which are forfeited clearly fall within the category of interests which 11 U.S.C. section 541(c)(1) is intended to protect.
HARRIS and SCHULTZ, JJ., join this dissent.