The opinion of the court was delivered by: Paul D. Borman United States District Judge
Paul D. Borman United States District Judge
Steven W. Rhodes United States Bankruptcy Judge
OPINION AND ORDER AFFIRMING THE BANKRUPTCY COURT'S SEPTEMBER 15, 2009 ORDER REGARDING TRUSTEE'S OBJECTION TO DEBTOR'S CLAIM OF EXEMPTIONS (BANKRUPTCY DKT. NO. 24)
This matter comes before the Court on the Trustee's appeal of Bankruptcy Judge Steven Rhodes' September 15, 2009 Order Regarding Trustee's Objection to Debtor's Claim of Exemptions (Bankruptcy Court Dkt. No. 24). Both the Trustee ("Appellant") and the Debtor ("Appellee") have filed briefs. The Court held a hearing on March 3, 2010. For the reasons that follow, this Court affirms the Order of the Bankruptcy Judge.
This matter arises from a Chapter 7 Bankruptcy filing and the Appellee's choice to claim the exemptions to which he is entitled under 11 U.S.C. § 522(b)(3) ("the state law exemption scheme"). The narrow issue before the Court is whether a debtor who elects the state scheme option set forth in 11 U.S.C. § 522(b)(3) can be limited to the exemptions specifically enumerated in MCL § 600.5451, which are available only to Michigan debtors in bankruptcy, and is denied entitlement to other Michigan exemptions historically available to both bankrupt and non-bankrupt debtors. In particular, the Court must determine whether Appellee is entitled to claim an exemption for certain life insurance policies, as permitted exemptions under MCL 500.2207.
The Bankruptcy Court, Judge Steven W. Rhodes, held that MCL 600.5451 was not exclusive and that the Debtor Appellee could take the exemption provided in MCL 500.2207. The Trustee appeals. This Court affirms.
A. The Federal Bankruptcy Exemptions
When a debtor files for federal bankruptcy protection, all of the debtor's property becomes the property of the estate. 11 U.S.C. § 541. The debtor is then permitted to remove certain property from the estate, protecting it from the reach of creditors, by claiming available exemptions as outlined in 11 U.S.C. § 522(d). "A fundamental component of an individual debtor's fresh start in bankruptcy is the debtor's ability to set aside certain property as exempt from the claims of creditors. Exemption of property, together with the discharge of claims, lets the debtor maintain an appropriate standard of living as he or she goes forward after the bankruptcy case." 4 Collier on Bankruptcy, ¶ 522.01 (Alan N. Resnick & Henry J. Sommer, eds., 15th ed. rev. 2009). A competing purpose, of course, is the creditor's right to collect on its debts. "Historically, one of the prime purposes of the bankruptcy law has been to bring about a ratable distribution among the creditors of a bankrupt's assets; to protect the creditors from one another." Young v. Higbee Co., 324 U.S. 204 (1945). 11 U.S.C. § 522(b) is Congress' effort to harmonize these two competing objectives.
Under §522(b), the debtor can choose among two alternative exemption schemes: "an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection." 11 U.S.C. § 522(b)(1).*fn1 Property listed in paragraph (2) is "property that is specified under [522(d)], unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize." 11 U.S.C. § 522(b)(2). Property listed in paragraph (3) is defined, in pertinent part, as follows:
(A) subject to subsections (o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition . . . ;
(B) any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirely or joint tenant is exempt from process under applicable non-bankruptcy law; and
(C) retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.
11 U.S.C. § 522 (3)(A)(B)(C).
The federal option, set forth in §522(b)(2), defines exempt property as that enumerated in §522(d), and is commonly referred to as the "opt-out" provision because, in adding the proviso "unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize," this section also gives states the option of denying their bankrupt debtors the right to claim the federal exemptions listed in §522(d) and forcing them to choose the state exemptions as outlined in §522(b)(3). "If a state exercises its opt-out power, then state law exemptions become the only exemptions available to bankrupt debtors within that jurisdiction." Joseph Lamport, The Preemption of Bankruptcy-Only Exemptions, 6 Cardozo L. Rev. 583, 584 (1985). The opt-out clause is said to have been a compromise between competing House and Senate views on exemption policy -- the House bill generally favoring "the fresh start" goal for the debtor and the Senate bill treating debtors less favorably:
The House and Senate reconciled their differences over exemption policy through the opt-out clause, which emerges for the first time as part of the last-minute compromise effort. The exemption scheme enacted in section 522 followed the House view to the extent that it enumerated federal exemptions in section 522(d).
At that same time, the Senate view prevailed to the extent that the opt-out clause enabled states to make the federal exemptions unavailable to their residents. Thus, the Bankruptcy Code both includes and potentially excludes federal exemptions. Lamport, supra at 596-97 (footnotes omitted). The clause is reported to have received very little debate and has been criticized as "ill-considered if not unconsidered." Id. at 597. Not surprisingly, the provision has "spawned extensive litigation and debate," challenging the constitutionality of the provision itself as well as the extent to which state exemption law can or should be circumscribed by federal exemptions listed in §522(d).*fn2 Id. at 597-98.
B. The Michigan Exemption Scheme
Michigan has not exercised its power to opt-out of the federal exemption scheme and therefore Michigan debtors may choose to proceed under 11 U.S.C. § 522(b)(2) (the federal exemptions listed in §522(d)) or under 11 U.S.C. §522(b)(3) (the state exemption scheme). (Designation of Items to Be Included in the Record on Appeal, Bankr. Dkt. No. 33, Ex. 1 at 10.) Appellee in the instant matter chose to claim exemptions under 11 U.S.C. § 522(b)(3), the state exemption option. (Bankr. Dkt. No. 33, Ex. 1 at 10.) In the instant case, the Court is asked to examine the contours of the Michigan scheme under which Appellee has chosen to claim his exemptions.
Historically Michigan debtors, bankrupt and non-bankrupt alike, have been able to avail themselves of both the general exemption law as well as specific provisions of non-exemption laws which express an intent to shield debtors from levy and execution. MCL 600.6023, Michigan's general exemption statute, provides in pertinent part: "Sec. 6023. (1) The following property of the debtor and the debtor's dependents shall be exempt from levy and sale under any execution: . . ." A comprehensive list of exempt property, from family pictures to IRA's, follows.
In addition, the Michigan exemption scheme historically has included as allowable exemptions those available under other Michigan statutes, not a part of the general exemption statute, some of which specifically reference bankruptcy proceedings and others which reference only creditors in general. Examples include: the exemption for veterans' benefits, MCL 35.977 ("no claim for payment under this act shall be assignable, or subject to garnishment, attachment, or levy of execution"); the exemption for state employee retirement benefits, MCL 38.1683 ("the right of a member or retirant of a retirement system to a retirement benefit shall not be subject to execution, garnishment, attachment, the operation of bankruptcy or insolvency laws, or other process of law and shall be unassignable"); the exemption for public welfare benefits, MCL 330.1158a ("family support subsidy payments shall not be alienable by assignment, sale, garnishment, execution, or otherwise, and in the event of bankruptcy shall not pass to or through a trustee or any other person acting on behalf of creditors"); the exemption for unemployment compensation benefits, MCL 415.821 ("Benefits Inalienable. All rights to benefits shall be absolutely inalienable by any assignment, sale, garnishment, execution or otherwise, and, in case of bankruptcy, the benefits shall not pass to or through any trustees or other persons acting on behalf of creditors: Provided, That this section shall not prohibit the use of any remedy provided by law insofar as the collection of obligations incurred for necessaries furnished to the recipient of such benefits or his dependents during the time when such individual was unemployed is concerned"). The insurance provision at issue in the instant case, MCL 500.2207, was held to be available to a debtor in bankruptcy in In Re Johnson, 274 B.R. 473 (Bankr. E.D. Mich. 2002).*fn3
In 2005, the Michigan Legislature enacted MCL 600.5451, which by its terms applies only to ...