Golden v. Flagship Factor Corp. (In Re Golden)

16 B.R. 585 (1981)

In re David Alan GOLDEN and Barbara Rebekah Golden, Debtors.
David Alan GOLDEN and Barbara Rebekah Golden, Plaintiffs,
v.
FLAGSHIP FACTOR CORPORATION, Defendant.

Bankruptcy No. 80-01313-BKC-SMW, Adv. No. 81-0292-BKC-SMW-A.

United States Bankruptcy Court, S.D. Florida.

October 14, 1981.

Susan Walker Schehr, Myers, Kaplan, Levinson, Kenin & Richards, Miami, Fla., for defendant.

Joseph Easthope, Houston, Faircloth, Easthope & Traver, Fort Lauderdale, Fla., for plaintiff.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SIDNEY M. WEAVER, Bankruptcy Judge.

This Cause having come on to be heard upon plaintiffs' Complaint to Avoid a Judicial Lien under 11 U.S.C. Section 522(f) filed herein; and the Court, having examined the facts as stipulated to by the parties; having considered the arguments of counsel, and being otherwise fully advised in the premises; does hereby make the following findings of fact and conclusions of law:

The Court has jurisdiction of the parties and the subject matter.

The facts are undisputed. A judicial lien was entered on October 25, 1977 on the homestead property of the plaintiffs, David Alan and Barbara Rebekah Golden (the Debtors) in the amount of Forty-Seven Thousand, Nine Hundred Fifty-Eight and 26/100 Dollars ($47,958.26) in favor of Flagship Factor Corporation (the Bank) and recorded October 27, 1977 in Broward County, Florida. This lien predates the enactment of the Bankruptcy Code of 1978 in effect at the time the bankruptcy petition was filed in this case. The money owed to the Bank was not a purchase money mortgage on the property in question. The Debtors allege that the Bank's lien on the homestead property of the Debtors impairs the exemption to which the Debtors would be entitled under 11 U.S.C. Section 522(f) and Florida Statute 222.01 et seq.

In making an analysis of the constitutionality of a statute, certain presumptions come to bear. Any Congressional act coming before this Court comes with the presumption of constitutionality. It is the burden of the party challenging the statute to overcome this presumption. In re Stump, 8 B.R. 516 (Bkrtcy. 1981); Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 96 S. Ct. 2882, 49 L. Ed. 2d 752 (1976) [hereinafter cited as Usery]. Absent a clear showing of a violation of a constitutionally protected right or privilege, a trial court should resolve any question of constitutionality in favor of the act. Goldblatt v. Hempstead, 369 U.S. 590, 82 S. Ct. 987, 8 L. Ed. 2d 130 (1962). The Court proceeds with its analysis of the Bank's Fifth Amendment assertions against this background of the presumptive constitutionality of 11 U.S.C. 522(f).

The Bank's Fifth Amendment challenge raises three basic issues: (1) whether Section 522(f) involves a taking of private property for public purposes without just compensation; (2) whether retroactive application of Section 522(f) involves a deprivation of property without procedural due process and (3) whether Section 522(f) violates substantive due process. In re Pillow, 8 B.R. 404 (Bkrtcy.D.Utah, 1981).

In order for Section 522(f) to fall under the "taking" provision of the Fifth Amendment, it is necessary that the taking of property be the direct or indirect result of an actual appropriation of property "by the government for public use." Matter of Joyner, 7 B.R. 596 (Bkrtcy.M.D.Georgia 1980) [hereinafter referred to as Matter of Joyner]. While there may be an appropriation of property involved in the facts presented here, it is not appropriated for public use. It is the opinion of the Court that the avoidance of a pre-enactment judicial lien under Section 522(f), while possibly depriving the Bank of an interest in property, is not the type of "taking" prohibited by the final section of the Fifth Amendment.

The due process issue consists of two elements, procedural and substantive. Procedural due process concerns the notice necessary to provide a property owner an opportunity to contest the validity of an action to deprive him of his property and serves the purpose of preventing arbitrary, or unfair deprivations. Fuentes v. Shevin, 407 U.S. 67, 92 S. Ct. 1983, 32 L. Ed. 2d 556 (1972) as cited in Matter of Joyner. The test for substantive due process, on the other hand, is whether the challenged act is "unreasonable, arbitrary or capricious and (whether it has) a real and substantial relationship to a permissible legislative objective." Matter of Joyner. To prove a Fifth Amendment procedural due process violation, the Bank must show that its property right in the judicial lien is being invaded without an opportunity to object or contest the matter in Court. Rainbow Valley Citrus Corp. v. Federal Crop. Insurance Corp., 506 F.2d 467 (9th Cir. 1974). The Court finds that the Bank has had ample opportunity to be heard in this matter. Notice of this action to avoid the Bank's judicial lien was served on June 23, 1981; answer was filed by the Bank on July 17, 1981. The Court not only heard oral argument on August 5, 1981 but also reviewed memorandums of law submitted by the attorneys for the parties. The Court finds no violation of procedural due process in this matter.

The retroactive application of a law raises the issue of whether creditors had "notice" of the law when credit was given to the Debtors. The Bank argues that the retroactive avoidance of a judicial lien which vested prior to the enactment of the Bankruptcy Code of 1978 is unconstitutional. It is widely recognized that bankruptcy legislation is the subject of broad, express constitutional power. This bankruptcy power is inherently retroactive in that it "necessarily . . . impairs the obligation of contracts" which may have been entered into prior to filing bankruptcy. In re Prima Co., 88 F.2d 785, 788 (7th Cir. 1937).

All parties to a contract are, of necessity, aware of the existence of, and subject to, the power of Congress to legislate on the subject of bankruptcies. They were and are chargeable with knowledge that their rights and remedies, in case the debtor becomes insolvent and is adjudicated a bankrupt, are effected by existing bankruptcy laws and all future lawful bankruptcy legislation which might be enacted . . . Another unavoidable conclusion is that all contracts are made with the knowledge that existing laws may be amended. [Id.]

The Prima Court recognized that Congress intended that the Bankruptcy Code, and the Bankruptcy Courts, could alter priorities and vested rights among creditors, and that this effect was constitutional.

Historically, bankruptcy statutes have effected rights which predate their enactment. In Hanover National Bank v. Moyses, 186 U.S. 181, 22 S. Ct. 556, 81 L. Ed. 736 (1902), [hereinafter cited as Hanover National Bank] decided soon after the enactment of The Bankruptcy Act of 1898, the Court found that certain provisions of that act under which the defendants were discharged from an 1892 pre-enactment judgment debt, were constitutional. The Court reiterated its position on the application of bankruptcy legislation to pre-enactment vested rights in Wright v. Vinton Branch of the Mountain Trust Bank of Roanoke, 300 U.S. 440, 57 S. Ct. 556, 81 L. Ed. 2d 736 (1937) where it upheld the constitutionality of the application of the Bankruptcy Act amendments in the Frazier-Lemke Act, which provided for a foreclosure moratorium in bankruptcy on pre-enactment liens.

A close examination of the legislative history and statutory language of the Bankruptcy Code of 1978 evidences Congressional intent to follow the traditional application of bankruptcy law to pre-enactment rights. It has been held that the Bankruptcy Code should not be construed to create a legislative gap. Wisconsin Higher Education Aids Board v. Lipke, 630 F.2d 1225 (7th Cir. 1980). If the Bank's argument is given credence, there would be no bankruptcy law governing transactions which occurred prior to the enactment of the Bankruptcy Reform Act of 1978 which of necessity would be the substance of any petition filed immediately after the effective date of the new law. Congress contemplated this possibility when it carefully drafted the repeal, the savings and the effective date provisions of the new law. Sections 401 and 402 of the Bankruptcy Code of 1978 repeals the prior Bankruptcy Act effective October 1, 1979, except to the extent that the savings provision, Section 403, provides for cases commenced under the Act shall continue under the Act. However, Section 403 does not save transactions which arose under the old law. It is obvious that in drafting the Bankruptcy Reform Act of 1978, Congress intended to apply the new law to previously accrued debts which would become the subject of a petition for discharge filed after October 1, 1978. Otherwise, it would be a number of years before a debtor could bring newly accrued debts to be discharged by the Bankruptcy Court and Congress should have created a gap in the Constitutionally mandated law. The Court finds that Congress did not intend to leave a "gap" in the law, and the Bankruptcy Code should not be so construed.

The issue of substantive due process focuses on whether the law in question is arbitrary and unreasonable or unrelated to a rational legislative purpose. The due process standard to be applied to a Congressional enactment in the field of bankruptcy was defined in Hanover National Bank, in these terms: "Congress may prescribe any regulations concerning discharge in bankruptcy that are not so grossly unreasonable as to be incompatible with fundamental law." In Usery the United States Supreme Court, in a non-bankruptcy case effecting modification of pre-enactment contract rights, pronounced the current standard for substantive due process challenges.

It is by now well established that Legislative Acts adjusting the burdens and benefits of economic life come to the Court with a presumption of constitutionality, and that the burden is on one complaining of a due process violation to establish that the legislature has acted in an arbitrary and irrational way. Usery, 428 U.S. at 15, 96 S.Ct. at 2882.

The Bank has failed to prove that the Bankruptcy Code's adjustment of the "burdens and benefits" in this case is unreasonable or arbitrary. The provisions of Section 522(f) are designed to protect the Debtors' fresh start by exempting those necessities which would encourage a successful economic recovery only to the extent that these items are exempt under state law. The Court finds that these are proper ends to be attained under Congressional power over bankruptcies, and that the provisions of Section 522(f) are rationally related to those ends. These provisions are not arbitrary when they shift the burden from debtors who need their homestead property to maintain themselves, to creditors, who have profited from those loans in the past, who calculate the risk factor into their interest rate charges and who can, in addition, offset the burden imposed by writing off the debt. To hold that these provisions providing for the avoidance of certain, specific liens is unconstitutional would impair the exemptions intended by Congress and undermine the policy and traditional effect of bankruptcy law.

The Constitutional challenge to 11 U.S.C. Section 522(f) presented here is not well taken. The fact that a person or legal entity cannot be deprived of property without due process does not mean that one can never be deprived of property lawfully. There is a deprivation of property in any bankruptcy action whereby a creditor is not paid the entire amount of its claim. In this case, the Court finds that the due process constraints have been observed. The 11 U.S.C. Section 522(f) has sufficient procedural requirements built in whereby a creditor's due process rights are protected. The Court finds further that Section 522(f) bears a rational relationship to the permissible legislative purpose of giving the Debtors a "fresh start" by protecting, through specific enumerated exemptions, the basic necessities of life, in this case the Debtors' home.

In accordance with the foregoing, the plaintiffs' Complaint for Avoidance of Judicial Lien under 11 U.S.C. Section 522(f) will be granted.

A judgment will be entered in accordance with these findings and conclusions.