Court Opinion

ID: 9698359
Source: CourtListenerOpinion
Date Created: 2023-08-25 19:48:29.074328+00
Date Added: 2024-06-11T18:20:40.345981
License: Public Domain

HUGHES, Bankruptcy Judge,
dissenting:
I dissent.
Since I believe that the Bankruptcy Code does not permit Mr. and Mrs. Ageton to be accorded a $27,500 exemption in their home, I would reach the same practical result as the trial court — limiting the total exemption to $20,000 — but for different reasons.
I
This appeal presents questions relating to (1) the rights of joint debtors to elect different exemption systems under 11 U.S.C. § 522(b) and (2) the effect of different exemption claims to the same property. The panel and I agree that each spouse may elect a different exemption system, whether state or federal, and that each spouse may make a separate claim of exemption to the same property. We part company as to the effect, not the propriety, of the separate claims.
As I read the Code, each debtor is limited to exempting property from his or her estate, the Agetons’ community property home is property of each debtor’s estate, and Mrs. Ageton’s selection of the $7500 federal exemption instead of the $20,000 state exemption she is entitled to assert gives her trustee in bankruptcy a $12,500 windfall. I would therefore join the trial judge in permitting her to change to the state exemption.
The panel concludes that the effect of the separate exemptions is to add Mrs. Ageton’s $7500 on top of Mr. Ageton’s $20,000.
In my opinion, the panel reaches this conclusion by failing to give adequate consideration to the new relationship between exemptions and property of the estate under the Code. Sec. II C, below.
II
Federal law is supreme over state law under Art. VI, cl. 2 of the Constitution and therefore controls the allowance of exemptions from bankruptcy estates. The provisions of the Bankruptcy Code, rather than state law, determine not only what property may be exempted from the bankruptcy estate but how those exemptions are asserted. The entire significance of state exemptions in a bankruptcy context (except for § 522(b)(2)(B), which is not relevant here) is found in the following language:
“11 U.S.C. § 522(b). Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate—

(2)(A) any property that is exempt under ... state or local law...; ”
Thus, while federal law permits the debt- or in bankruptcy to exempt from the estate “any property that is exempt under ... state or local law,” it does not incorporate state procedures for determining how exemptions are claimed in bankruptcy nor how property is removed from “property of the estate.”
Those procedures involve three basic steps under the Code.
*838Step one is an election between two separate exemption schedules, one state and one federal. 11 U.S.C. § 522(b). Step two is the listing of specific property (or interests) that are claimed exempt. 11 U.S.C. § 522(7 ). Step three is application of those exemption claims to property of the estate. 11 U.S.C. § 541(a).
A. STEP ONE
Looking only at federal law, which we must, there can be no doubt that each individual debtor is free to elect whichever exemption schedule he or she may desire. In general, § 522(b) provides that “an individual debtor may” elect either the state or federal exemption schedules. This right is not lost if spouses file a joint case pursuant to 11 U.S.C. § 302. Accord: In re Ancira, 5 B.R. 673, 6 BCD 864 (Bkrtcy.N.D.Cal.1980, Abrahams BJ). 11 U.S.C. § 522(m) provides: “This section shall apply separately with respect to each debtor in a joint case.” Therefore, “each debtor is entitled to the federal exemptions provided under this section or to the state exemption, whichever the debtor chooses.” House Report No. 95-595, 95th Cong., 1st Sess. (1977) 363, U.S. Code Cong. & Admin.News 1978, p. 6319.
The trial judge erred in construing subsection (m) so as to deny Mrs. Ageton the right to elect the exemption schedule of her choice.
B. STEP TWO
Each debtor must also claim specific property exempt according to the schedule that has been elected. 11 U.S.C. § 522(7). In re Smith, 640 F.2d 888 (7th Cir. 1981). Mr. Ageton claimed the home exempt to the extent of $20,000 under state law and Mrs. Ageton claimed the home exempt to the extent of $7500 under federal law.
State law does, of course, control the nature and extent of any exemption claimed under its provisions. But it is not contended that Mr. Ageton’s claim under state law is faulty. On the other hand, because of the supremacy clause, state law cannot affect the amount of Mrs. Ageton’s federal exemption claim. Mr. Ageton is entitled to make his $20,000 claim and Mrs. Ageton to make her $7500 claim.
C.STEP THREE
The final step requires application of the exemptions claimed to property of each debtor’s estate. As provided by 11 U.S.C. § 522(b), the exemptions are “from property of the estate. .. ”
1.
Under the Code, unlike the former Act, all property (even if subject to being claimed exempt) is property of the estate. House Report No. 95-595, 95th Cong. 1st Sess. (1977) 360. In re Smith, 640 F.2d 888 (7th Cir. 1981). Property of the estate is subject to administration for the benefit of creditors unless it is exempted by the debt- or, 11 U.S.C. § 522(b), or abandoned by the trustee, 11 U.S.C. § 554. Property that qualifies as exempt is not withdrawn from the estate until expressly claimed by the debtor, or by a dependent of the debtor, who makes the claim on behalf of the debt- or. 11 U.S.C. § 522(7). ' “If a debtor does not claim property as exempt, as provided for in section 522(7), it is not exempt and the trustee may dispose of it as he sees fit.” In re Smith, supra.
2.
Property of the estate is defined in 11 U.S.C. § 541(a), which provides that the “commencement of a case . .. creates an estate” and that the “estate is comprised of” specified property interests. For our purposes, the definition found in § 541(a)(2) is critical. It places in the debtor’s estate “all interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is under the sole, equal or joint management and control of the debtor. .. ” 11 U.S.C. § 541(a)(2)(A).
Arizona law provides that each spouse has equal or joint management and control of the community property. Ariz.Stat.Ann. §§ 25-214B, C (1976). It was stipulated that the house is community property. Thus, whether Mrs. Ageton filed bankruptcy or not, the home was property of Mr. Ageton’s estate. For the same reason, it was also property of Mrs. Ageton’s estate.
*8393.
Applying Mr. Ageton’s $20,000 claim, it follows that the home was exempt to the extent of $20,000 from his estate. Applying Mrs. Ageton’s $7500 exemption, it also follows that the home was exempt to the extent of $7500 from her estate. But it also follows that Mrs. Ageton’s failure to assert the $20,000 state homestead exemption would leave the difference (namely $12,500) in her estate for the benefit of creditors. In re Smith, supra. 11 U.S.C. § 726(c).
Put in different terms, Mr. Ageton’s estate is comprised of the community property home, which has an equity of $27,240 except for the Cervenkas’ lien of $27,193. Except for the lien, Mr. Ageton would have an exemption of $20,000. Accordingly, the Cervenkas’ judicial lien is avoided to the extent of $20,000. 11 U.S.C. § 522(f)(1).
Mrs. Ageton’s estate also is comprised of the community property home. 11 U.S.C. § 541(a)(2)(A). The Cervenkas’ lien having been avoided to the extent of $20,000, the home now has an equity of $20,000 and the Cervenkas have a lien of $7193. Whether Mrs. Ageton claims an exemption of $7500 or $20,000, it applies to the equity of $20,000 that exceeds the Cervenkas’ lien. The Cer-venkas’ lien therefore does not impair Mrs. Ageton’s exemption and no further avoidance of the Cervenka lien is indicated.
Ill
The foregoing analysis demonstrates that the Agetons’ home may be exempted from both Mr. Ageton’s estate and from Mrs. Ageton’s estate, but only to the extent and value asserted by each debtor. The analysis depends on there being separate estates for both debtors.
The fact that Mr. and Mrs. Ageton filed a joint petition as permitted by 11 U.S.C. § 302(a) does not affect the analysis. Neither would an order of consolidation change the result.
A.
Section 302(a) provides that a husband and wife may file a single, joint petition. The purpose of a joint petition, as explained by Congress, is convenience: “[T]he cost of administration will be reduced, and there will be only one filing fee.” House Report No. 95-595, 95th Cong. 1st Sess. (1977) 321, U.S.Code Cong. & Admin.News 1978, p. 6277.
A joint case creates two separate estates, however, and “the court shall determine the extent, if any, to which the debtors’ estates shall be consolidated” in a joint case. 11 U.S.C. § 302(b). Thus, in the absence of such an order, a joint case — just as separate eases — consists of a separate estate for each spouse.
B.
Although 11 U.S.C. § 302(b) permits the court to order consolidation of estates in a joint case, it does not establish standards nor suggest the effect of consolidation. The legislative reports, on the other hand, do. Consolidation is defined as ordering the “assets and liabilities combined in a single pool to pay creditors.” House Report, supra, 321, U.S.Code Cong. & Admin.News 1978, p. 6278. Standards are also suggested: “Factors that will be relevant ... include the extent of jointly held property and the amount of jointly owed debts.” Ibid.
Were this all, it is arguable that an order consolidating the two estates, if otherwise appropriate, would create one estate subject to the Agetons’ combined exemptions of $27,500. But this is not all. The House Report adds:
“That section of course, is not a license to consolidate in order to avoid other provisions of the title to the detriment of either the debtors or their creditors. It is designed mainly for ease of administration.”
Thus, 11 U.S.C. § 302 permits only procedural consolidation, and does not permit or effect any change in substantive rights. It follows that the Agetons’ exemption rights are the same whether or not they filed a joint petition under 11 U.S.C. § 302(a), and whether or not their separate estates were ordered consolidated under 11 U.S.C. § 302(b).
*840IV
Appellants also urge that the Arizona statute unconstitutionally denies equal protection to married couples. The statute limits a married couple to one $20,000 exemption in the same property while, they assert, each unmarried tenant is entitled to a separate $20,000 exemption, a total of $40,000. While I join the panel in declining to consider this issue, I believe an explanation is in order.
Even if the issue had been ruled on by the trial judge, which does not appear from the record on appeal, notice was not given to the Arizona attorney general as required by 28 U.S.C. § 2403.
V
The trial court’s judgment voided the defendants’ judicial lien to the extent of the plaintiffs’ exemption, which was held to be either $20,000 or $15,000, depending on the debtors’ election of the same exemption system. I would remand and direct that judgment be entered validating the judicial lien to the extent of $7193 and voiding the $20,000 balance of the lien. I would also permit Mrs. Ageton to change her choice of exemptions, should she be so disposed.