George Burciaga v. Alex Moglia

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 19-2246
IN THE MATTER OF:
GEORGE BURCIAGA,
Debtor-Appellant.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 18 CV 5293 — Manish S. Shah, Judge.
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ARGUED DECEMBER 2, 2019 — DECIDED DECEMBER 13, 2019
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Before BAUER, EASTERBROOK, and SYKES, Circuit Judges.
EASTERBROOK, Circuit Judge. George Burciaga lost his job
in May 2018 and filed for bankruptcy a week later. On the
date the bankruptcy proceeding began, Burciaga’s former
employer owed him approximately $24,000 for unused vaca-
tion time. Illinois, where Burciaga lives, treats vacation pay
as a form of wages. 735 ILCS 5/12-801 (final paragraph, de-
fining “wages” to include all compensation that an employer
owes to an employee). Exemptions for debtors in Illinois rest
on state law, for it has exercised its right under 11 U.S.C.
§522(b)(2) to make local exemptions exclusive. See 735 ILCS
5/12-1201. Burciaga asked the district court to treat 85% of
2 No. 19-2246
the vacation pay as exempt from creditors’ claims. (Illinois
permits creditors to reach 15% of unpaid wages but forbids
debt collection from the rest. 735 ILCS 5/12-803.) Alex
Moglia, the Chapter 7 Trustee, objected to this request. Both
a bankruptcy judge and a district judge sided with the Trus-
tee. 602 B.R. 675 (N.D. Ill. 2019).
The district judge concluded that unpaid wages are not
exempt in bankruptcy. That’s not because of anything in the
federal statute, which points to state law as a source of ex-
emptions. Nor is it because of anything in Illinois law, which
exempts 85% of unpaid wages from all forms of collection
authorized by state law. Rather, the district judge stated, it is
because Illinois did not “intend” to exempt vacation pay
from creditors’ claims in bankruptcy, as exemplified by the
fact that the state’s statutes do not specifically mention bank-
ruptcy law. The only intent the district judge could find was
to exempt vacation pay (and other employment-related
compensation) from creditors’ claims in state court, through
garnishment and similar proceedings.
This focus on intent, and on the fact that Illinois specifies
only how wages are treated in state-law collection proceed-
ings, is unfortunate. Section 522(b)(2) and (3)(A), which ap-
plies state-law exemptions in bankruptcy, does not ask
courts to determine what state legislators may have been
thinking or hoping would happen in federal court. The fed-
eral statute instead asks what is exempt under state law.
Whatever is exempt under state law is exempt under federal
law too. State legislators need not know about this rule; ex-
emption in bankruptcy happens as a result of §522, not as a
result of state legislators’ plans or desires or understanding.
No. 19-2246 3
True, In re Geise, 992 F.2d 651 (7th Cir. 1993), refers to leg-
islative intent when addressing another issue about an ex-
emption in bankruptcy, but the trope that the meaning of
statutory text may depend on the intent of the legislature
does not mean that state legislative intent controls the mean-
ing of a federal statute. Legislative history (and thus legisla-
tive intent) may be consulted when a statute is ambiguous,
but there’s nothing ambiguous about the text that Illinois has
enacted—nor is there any ambiguity in the rule of §522(b)(2)
and (3)(A) that what is exempt under state law is exempt in
federal bankruptcy proceedings. There’s no need for some
additional intent or enactment, at the state level, to make the
federal rule of §522 work. We observed in Geise that a state
creates an exemption when it shelters income or assets from
all forms of collection, without meaning that state law needs
to refer specifically to bankruptcy; federal law itself carries
state-law exemptions over to bankruptcy.
The question we must resolve, therefore, is whether 85%
of all unpaid wages in Illinois are exempt from creditors’
claims in state courts. The last time this court looked at that
question, it answered “no.” See Wienco, Inc. v. Scene Three,
Inc., 29 F.3d 329 (7th Cir. 1994). We observed that 735 ILCS
5/12-803 protected wages from garnishment proceedings, so
that the employer could not be ordered to hand more than
15% directly to a creditor, but that other forms of collection
remained possible. In particular, Wienco noted, 735 ILCS 5/2-
1402(c)(2) permiled a court to direct a judgment debtor to
turn assets over to a creditor, in whatever amount the court
deemed appropriate. It followed, we held, that 735 ILCS
5/12-803 was not an exemption from all creditors’ claims and
therefore did not apply in bankruptcy.
4 No. 19-2246
The Trustee does not rely on Wienco, however, for it was
obsolete by the time it was issued. Illinois had amended its
code, effective January 1, 1994, to apply the 15%-of-wages
limit to collection under 735 ILCS 5/2-1402(c)(2). After the
amendment, §5/2-1402(c)(2) provides that “the judgment
debtor shall not be compelled to pay income which would
be considered exempt as wages under the Wage Deduction
Statute” (i.e., §5/12-801 to 819). That did not affect Wienco, for
the amendment was not retroactive and the bankruptcy
court’s exemption decision had been made in 1993. But to-
day 735 ILCS 5/12-803 seems to be comprehensive.
Still, the Trustee insists, we should not treat the state law
as effective in bankruptcy, because the exemption applies
only before wages have been paid. Once a worker has
cashed a paycheck, the money is freely available. Let us as-
sume that this is true—that state law does not try to trace the
origin of cash in a bank account. The fact remains that on the
day Burciaga filed for bankruptcy he did not have cash. He
had a claim against his former employer for unpaid wages.
What is exempt, and what is not, depends on the state of
affairs when bankruptcy begins. 11 U.S.C. §522(b)(3)(A); Ow-
en v. Owen, 500 U.S. 305, 314 n.6 (1991) (“exempt property is
determined ‘on the date of the filing of the petition’”); White
v. Stump, 266 U.S. 310, 313 (1924) (describing the time of fil-
ing as a “line of cleavage”). Like most other states, Illinois
exempts some of a home’s value and some of an auto’s val-
ue. If a person sells a car for cash and files for bankruptcy
the next day, creditors can reach the cash; the estate never
had a car that could be exempt.
Property vests in the estate on the day bankruptcy be-
gins. 11 U.S.C. §541(a)(1). This is the property available to
No. 19-2246 5
satisfy creditors’ pre-filing claims. 11 U.S.C. §522(c). If the
debtor has cash on that day, its treatment depends on how
much cash a state exempts. If the debtor has a car on that
day, its treatment depends on how much of a car’s value the
state exempts. And, if a debtor has a wage claim, how much
the creditors can reach depends on how the state treats un-
paid wages.
We must assess the legal effect of things as they were
when this bankruptcy began, not as they might have been.
That a car may be sold while bankruptcy is under way does
not make all of the proceeds available to satisfy pre-
bankruptcy claims; the debtor retains any exempted amount.
See, e.g., Brown v. Sommers, 807 F.3d 701, 708 (5th Cir. 2015);
Pasquina v. Cunningham, 513 F.3d 318, 324 (1st Cir. 2008).
That is equally true of wages collected after a bankruptcy
begins.
The Trustee maintains that treating unpaid wages as ex-
empt would be unjust to creditors. Today’s dispute concerns
$20,400 (85% of $24,000), but the sum could be bigger. What
if a corporate executive or football coach filed for bankruptcy
while owed three years’ severance pay, at a million dollars a
year? (There’s a severance-pay dispute about Burciaga too,
see 597 B.R. 426 (Bankr. N.D. Ill. 2019), though it isn’t ready
for appellate decision.) Exempting that much money might
seem inequitable—especially if the debtor times the bank-
ruptcy filing strategically—but the Bankruptcy Code is what
it is and cannot be overridden in the name of equity. Law v.
Siegel, 571 U.S. 415 (2014); In re Kmart Corp., 359 F.3d 866 (7th
Cir. 2004). Some states exempt the full value of a residence,
even a mansion worth $10 million. Residential exemptions
were enforced, no maler how inequitable they seemed, until
6 No. 19-2246
Congress amended the Bankruptcy Code to prevent exempt-
ing the full value of homes bought within a few years of the
bankruptcy, or financed with money diverted from creditors.
11 U.S.C. §522(o), (p). State-law exemptions for wages are
not subject to a similar limit, and whether one should be cre-
ated is a decision for Congress to make.
Robinson v. Hagan, 811 F.3d 267 (7th Cir. 2016), illustrates
that point. Illinois exempts one bible. 725 ILCS 5/12-1001(a).
A debtor who owned multiple bibles proposed to exempt
the most valuable of them—a first edition Book of Mormon
printed in 1830 and worth $10,000 or more. A trustee pro-
tested, arguing that the purpose of the exemption is to per-
mit a debtor to retain an heirloom containing family trees
and similar memorabilia, not to shield a collector’s item from
creditors’ hands. We replied that the exemption as wrilen
does not contain a value limit, and that whether such a limit
should be created is for legislators rather than judges to de-
cide. 811 F.3d at 270. Just so with an exemption for wages.
Because 85% of unpaid wages are exempt from creditors’
claims in Illinois, and vacation pay is a form of wages, the
decision of the district court is
REVERSED.