Michigan Bankruptcy Blog
The Sixth Circuit Court of Appeals recently held that Michigan's bankruptcy-specific exemption statute is constitutional under the Bankruptcy Clause and Supremacy Clause of the United States Constitution.
Historically, Michigan has allowed bankruptcy debtors to use the federal exemptions under 11 U.S.C. § 522(d), the general state exemptions under M.C.L. § 600.6023, or the state exemptions pursuant to M.C.L. § 600.5451 that are specific to debtors in bankruptcy (prior to it being declared unconstitutional).
Michigan is one of a few states that has a bankruptcy-specific exemption statute available to bankruptcy debtors only. In the Western District of Michigan, the constitutionality of the bankruptcy-specific scheme was called into doubt by the Hon. James D. Gregg in In re Pontius, 421 B.R. 814 (Bankr. W.D. Mich. 2009) and the Hon. Jeffrey R. Hughes in In re Wallace, 347 B.R. 626 (Bankr. W.D. Mich. 2006). Contrarily, the Hon. Scott W. Dales, held that the bankruptcy-scheme was constitutional in In re Schafer, 428 B.R. 720 (Bankr. W.D. Mich. 2010), pursuant to Sixth Circuit precedent and Congress' delegation of power to the states pursuant to 11 U.S.C. § 522(b) to create bankruptcy exemptions.
The trustee appealed the bankruptcy court's decision in In re Schafer, and the Bankruptcy Appellate Panel of the Sixth Circuit ("BAP") reversed the decision, and held that Michigan's bankruptcy-specific exemption statute was unconstitutional under the Bankruptcy Clause of the United States Constitution. During the appeal, the BAP allowed the State of Michigan to intervene. The State of Michigan appealed the BAP's decision to the Sixth Circuit Court of Appeals.
The issue before the Sixth Circuit was whether Michigan law was preempted by the Bankruptcy Clause and Supremacy Clause of the United States Constitution. The Sixth Circuit reasoned that 11 U.S.C. § 522(b) expressly gives states the right to enact its owns bankruptcy exemptions, and Congress "has not seen fit to restrict the authority delegated to the states by requiring that state exemptions apply equally to bankruptcy and non-bankruptcy cases." Accordingly, the Sixth Circuit stated it was "without authority to impose such a requirement."
The Sixth Circuit then turned to an analysis of the uniformity requirement of the Bankruptcy Clause of the United States Constitution. The Bankruptcy Clause grants Congress the authority to enact "uniform Laws on the subject of Bankruptcies throughout the United States." However, the Court pointed out that it has previously rejected formalistic interpretations to the uniformity requirement in bankruptcy, as such an approach overlooks the inherent flexibility in the provision. The Court, quoting the United States Supreme Court in Hanover National Bank v. Moyses,1 recognized that the general rule has long been established that the uniformity requirement is "geographical," and as a result, variations among different states are not unconstitutional. The Court stated that the uniformity requirement allows variations among the states due to dissimilarities in state law, provided the federal law applies uniformly. The Court concluded that it is not the outcome that determines uniformity, but rather, the process by which debtors and creditors are treated in a certain place. The Court noted that the Michigan bankruptcy-specific exemptions, with very limited exception, treat bankruptcy debtors uniformly. The Sixth Circuit held that the Bankruptcy Clause simply does not require geographic uniformity between bankruptcy debtors and debtors outside of bankruptcy.
Finally, the Court analyzed Michigan's bankruptcy-specific statute and the Supremacy Clause. The Court noted that Congress expressly authorized states to "preempt" the federal Bankruptcy Code, and therefore, field preemption did not apply in the area of bankruptcy exemptions. The Sixth Circuit then conducted a conflict-preemption analysis. After a review of MCL § 600.5451, the Sixth Circuit held that Michigan's statute does not conflict with the purpose of the Bankruptcy Code, which is to give debtors a fresh start, but rather, it furthers the purpose.
1 186 U.S. 181 (1902).
