UNITED STATES v. SECURITY INDUSTRIAL BANK
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
ORAL ARGUMENT OF ALAN I. HOROWITZ, ESQ., ON BEHALF OF THE APPELLANT
Chief Justice Burger: We will hear arguments next in United States against Security Industrial Bank.
Mr. Horowitz, I think you may proceed when you are ready.
Mr. Horowitz: Thank you, Mr. Chief Justice, and may it please the Court:
The issue before the Court here is whether the invocation by the various debtors in these consolidated cases of Section 522(f)(2) of the new Bankruptcy Code violates the Fifth Amendment.
Using as an example the cases of one of these debtors, the relevant facts are as follows.
On April 14, 1978, Richard and Sharon Hunter took out a small loan from appellee Beneficial Finance Company.
The total amount financed was $2,459.
The Hunters executed a printed security agreement in connection with this loan in which by the typing of an X in the appropriate box they pledged as security for the loan, and I quote,
"all household goods, excluding motor vehicles but including household furniture, television sets, electrical appliances, stereo phonographs, furnishings, carpets, draperies, chinaware and other household goods of every kind owned by them and located in or about their residence. "
Unidentified Justice: Does it include after-acquired property?
Mr. Horowitz: It includes substitutes for the property, and I believe it includes after-acquired property.
I'm not sure.
The Hunters estimated the replacement value of these goods... that is, the value that it would... the amount that it would cost them to go out and acquire the goods again... at $2,500, approximately the value of the loan.
They retained possession of all of these goods.
None of them were turned over to the finance company as a pledge.
Shortly after the entry of this loan in November 1978 the President signed into law the Bankruptcy Reform Act of 1978 which became effective almost a year later on October the 1st, 1979.
Some time after that October 1979 date when the Act became effective, which is about one... at least one and a half years after the loan was entered into... the Hunters, unable to pay their debts, filed a petition and bankruptcy.
To prevent Beneficial Finance from seizing all of their household goods pursuant to this boilerplate security agreement, the Hunters invoked Section 522(f)(2) of the new Bankruptcy Code to avoid the fixing of a lien on those goods that came within the debtors' exemptions provided by the Code.
Now, to briefly explain the operation of Section 522(f)(2), it is a limited provision enacted by Congress that is an integral part of Congress' reform that was specifically directed at the specific problems of consumer debtors.
Unidentified Justice: Much like the Fraser-Lempke Act?
Mr. Horowitz: Very different from the Fraser-Lempke Act, Justice Rehnquist.
The Fraser-Lempke Act was a one-time bailout of the farmers there who were unable to continue paying the mortgages on their farms because of the Depression.
But there was no real amendment of the Bankruptcy Code there.
In fact, the amendment in the Fraser-Lempke Act was retroactive only.
It would have had no effect at all on future mortgages that were entered into.
The law remained the same.
Here there was a wholesale change essentially in the Bankruptcy Code, and this was a provision set up for the way the new Bankruptcy Code would operate.
The issue in this case is sort of the incidental effect of that change in the Code as it applies to security interests that were entered into before the act was passed.
In order to guarantee bankrupt debtors a fresh start, which this Court has repeatedly recognized as one of the key reasons for bankruptcy, Congress established a set of federal exemptions with specific dollar limitations on certain goods that if deemed to be necessary for the debtors to continue after bankruptcy... items such as household goods, tools of the debtor's trade, and the home.
Congress found, however, that similar exemptions in the past provided under state law had proven ineffective in guaranteeing the debtors this fresh start because, as in this case, consumer finance companies had obtained blanket liens in all the debtor's household goods, thus enabling these creditors to levy on the exempt property or to use the threat of repossession of the exempt property to compel the debtor to reaffirm the debt after bankruptcy.
To safeguard these exemptions and make them effective, Congress enacted Section 522(f)(2) which enables the debtor in the bankruptcy proceeding to avoid the fixing of the liens on certain of the exempt property.
This avoidance provision is fairly limited.
It applies only to certain kinds of liens... nonpossessory, nonpurchase money, security interests.
It applies to only certain categories of the exemptions that were provided by Congress; for example, liens on motor vehicles or liens on a home are not included within the avoidance provision.
And finally it is limited by the dollar limitations on the value of the exempt property.
Valuable property cannot be subject to avoidance under these provisions.
This is the provision that the Hunters invoked enabling them to emerge from bankruptcy in unencumbered possession of their furniture, silverware and other household goods.
And the appellees challenged the Hunter's invocation of this section as violative of the Fifth Amendment.
Now, despite the fact that the Court of Appeals found... did not challenge the Congress... the need for this legislation and the fact that it was important to achieve the congressional purposes, the court found that the application to the security interest involved in this case in fact violated the Fifth Amendment.
The Court of Appeals relied exclusively on this Court's decision in Louisville Joint Stock Land Bank v. Radford, decided in 1935, and it felt itself bound by that decision.
Unidentified Justice: Mr. Horowitz, I suppose the problem of the Fifth Amendment question could have been avoided if it had been determined that the provision was not intended to be retroactive, right?
Mr. Horowitz: Yeah.
Well, one of the--
Unidentified Justice: What leads... what leads you to believe that Congress intended retroactive application of this section?
Mr. Horowitz: --Well, there's nothing at all in the legislative history in the statute that suggests that the section wouldn't be retroactive.
The act as a whole seems to apply retroactively.
There's a savings clause that makes clear that bankruptcy proceedings that were begun before the effective date of the act are to be decided under the old act; that all bankruptcy proceedings commenced after October 1979 are to be heard under the provisions of the new act.
There's no special exception for any provisions of the act, and it wouldn't make any sense for Congress... it would just leave a gap essentially in the statute.
There would be no law to apply if the new law didn't apply.
Now, the Court of Appeals rejected this, this contention.
They also found there was no evidence for it.
The appellees have briefly argued that the statute should be read to be not retroactive; but they're also unable to find anything directive of Section 522(f).
Essentially their position is that the entire Bankruptcy Code should not be applied to any security interests or any other claims that arose before the enactment date of the act.
And that would just leave chaos essentially.
It would postpone the effective date of the act for many years.
And there's just simply no evidence of that.
So I think we're pretty much stuck with the fact that Congress made the statute retroactive, and we'll have to address the constitutional question.
Unidentified Justice: Is the exemption... is the amount that's involved... isn't the exemption limited to $200?
Mr. Horowitz: Well, it's limited to $200 in--
Unidentified Justice: With respect to household goods?
Mr. Horowitz: --Yeah.
Well, $200 in each item.
So it's conceivable that the total can be more than $200.
Unidentified Justice: As to each item.
Mr. Horowitz: Yeah.
Chief Justice Burger: On quite a large house if that's the application, you could have quite a large exemption... one of the Rockefeller homes, for example.
Two hundred for each item is--
Mr. Horowitz: Any household good is exempt up to a value of $200 on that item.
The idea of the exemptions is that these items aren't really... used silverware, used chairs, things like that don't have much of a resale value; they're not worth very much to other parties.
They are worth something to the debtor who has to go out and replace them.
I think $200 was meant to make sure that real luxury items that were worth a lot of money didn't come in under this exemption.
So if you have, for example, an expensive stereo, that would be worth more than $200, and that wouldn't be exempt; but most items probably will fall under that.
And the idea is for the debtor to be able to retain essentially his living room furniture and his bedroom furniture, things like that.
If the $200 is an aggregate, probably everything... most people own a total of things that are worth more than $200.
The reasoning of the Court of Appeals is that these blanket security interests in household goods must be characterized as property under the Fifth Amendment, and hence, avoidance of these security interests under Section 522(f) necessarily must be a taking without just compensation in violation of the Fifth Amendment.
But this superficial analysis utterly fails to address the peculiar nature of the property interest that is involved here, and it is only on that property interest that Congress narrowly and exclusively focused its attention.
Unlike the traditional type of property interest, and certainly unlike the real estate mortgage that was involved in Radford, the creditor here has no interest in actual physical possession of the subject property or in applying that property to satisfy the debt, even if the debtor defaults.
Congress found that the used household goods secured by these blanket liens are generally of negligible resale value such that it does not pay for the creditor to physically repossess them.
Rather, the value of the liens to the--
Unidentified Justice: Well, the bankrupt should never worry then.
Mr. Horowitz: --Well, he has to worry because the creditor can use it as a lever in order for him to pay his debt.
Unidentified Justice: Oh, no.
Mr. Horowitz: That's one--
Unidentified Justice: If it's true, if he... all he'd have to know is what Congress' finding was, that there was no interest in repossessing.
Mr. Horowitz: --Well, Congress' finding is that it's not worth it in dollar terms.
Chief Justice Burger: --We'll resume at 1:00.
You may continue, Mr. Horowitz.
ORAL ARGUMENT OF ALAN I. HOROWITZ, ESQ., ON BEHALF OF THE APPELLANT -- Resumed
Mr. Horowitz: Thank you, Mr. Chief Justice, and may it please the Court:
Before the break I was discussing the congressional findings here that the used household goods secured by these liens are in fact of no resale value, and therefore, the creditor has no interest in possession of them.
Rather, the value of the liens to the creditor is when the property remains in the possession of the debtor.
It is the threat of repossession of the goods which gives the debtor a powerful incentive to agree to various demands of the creditor... for example, to reaffirm the debt... that provides the creditor's interest in the lien, because the replacement value of these goods to the debtor is so high that he cannot afford to have them repossessed.
Justice White asked me whether in fact the individual debtor didn't really have to worry about this because of the congressional findings, but, of course, I think the debtor is in no position to call the creditor's bluff and--
Unidentified Justice: But I think that there are repossessions in--
Mr. Horowitz: --Well, there certainly--
Unidentified Justice: --In enough cases to make the threat real.
Mr. Horowitz: --There certainly would be repossessions just for the very sake of making the threat credible.
Unidentified Justice: Well, and not only that but they repossess them when their debt isn't very much.
Mr. Horowitz: When it's not... to reaffirm the debt.
That can happen, yes, sir.
Unidentified Justice: They can collect their $600 by repossessing the household goods, and they do.
Mr. Horowitz: Well, depending on how much the transaction costs are for having to repossess the items and hold a garage sale to sell them.
It may be worth the creditor's while.
In the vast majority of cases they're used as a threat.
Unidentified Justice: Mr. Horowitz, is there anything illegitimate about using liens to encourage payment, and isn't that really the normal function of a lien?
Mr. Horowitz: Well, there's certainly nothing illegitimate about it.
It's one of the normal functions of a lien, most liens, most security interests, at least the kind that this Court has dealt with in the past in takings cases have a second purpose, and that is that the creditor takes the security with the expectation that he will take the collateral in lieu of the debt if in fact there's default on the debt.
That was certainly the case in Radford.
That aspect is absent here.
Here the creditor, for example, does not value the property in determining how much money he's going to lend to the debtor.
That's really irrelevant to it.
He just looks at the debtor's income prospects.
And so you have cases like this one in fact that I mentioned with the Hunters where the amount of the loan at the beginning is in fact in excess of the value of the collateral.
Unidentified Justice: Well, that may make it a poor loan, but that doesn't mean that the people might not want to foreclose the security and get what they could out of it, even though it doesn't pay off the debt.
Mr. Horowitz: --Well, but in fact the goods are of such negligible value that it's usually just not worth the creditor's while to foreclose.
There may be exceptions, but it's usually not worth his while to try to collect these goods and have a fire sale and try to get $25 or whatever they're worth.
Unidentified Justice: Mr. Horowitz, does the term "appliance" in this section include refrigerators, deep freezers, television sets, video equipment?
Mr. Horowitz: --Well, it hasn't really been litigated in this case as to exactly what items are covered by that definition.
It's a little broad.
Unidentified Justice: Is there any reason to think--
Mr. Horowitz: I think "appliances" certainly was meant to cover things like refrigerators and dryers.
TV sets... many courts have held, I think, that TV sets are covered by that language.
Unidentified Justice: --Are covered?
Mr. Horowitz: Yes.
Unidentified Justice: But you wouldn't suggest, would you, or have you already said that you regarded them as having little value on resale?
Mr. Horowitz: Well, it varies.
As I said, there is this limitation of $200 all together; that this section wouldn't even cover if there was, in fact... so the goods by definition here have a resale value of less than $200.
Now, you could have a case where the debtor had a lot of goods that were worth $199, and it might be worth it for the creditor to go in.
Unidentified Justice: It isn't right that the good has a value of less than $200, just that the interest involved is only to the extent of $200.
You could have a $500 refrigerator, but the exemption would only cover $200.
Mr. Horowitz: That's right.
And then if you had a $500 refrigerator, then I don't think the debtor could use Section 522(f)(2) to protect against the creditor repossessing the refrigerator because--
Unidentified Justice: He'd just get $200 out of the proceeds of resale.
Mr. Horowitz: --I think that's right, yes.
Now, getting back to what Justice O'Connor asked me, it is true that the security interest here is as a means of... is to encourage the debtor to repay his debt, and that is a legitimate purpose of a security interest.
But what you have here because--
Unidentified Justice: Well, he... excuse me.
He would use his... he would use his... he uses the section.
If he gets $200 back, he uses the section, because the lien then is removed from the $200.
Mr. Horowitz: --Yeah, exactly.
But it doesn't--
Unidentified Justice: Provided he... or if they repossess a television set, the lien would give them the $500 if it's worth $500.
Mr. Horowitz: --Right.
That would reduce the value of the security interest.
Unidentified Justice: --Exactly.
Mr. Horowitz: But it doesn't completely--
Unidentified Justice: Well, it reduces it by enough to get it down to $200.
It protects $200 worth of interest in the television set.
Mr. Horowitz: --Right.
But the argument that's been made here by the Tenth Circuit and by the appellees is that there's no value left to the security interest at all, and that's in fact not true.
Unidentified Justice: Well, I suppose when Congress enacted these provisions they had some information about the average secondhand value of most household items and then arrived at this $200 figure.
Mr. Horowitz: Yeah.
Well, they did.
There was a study done by the FTC which investigated these kind of practices and found that usually it was not... I think the $200 figure, I don't know if that was based on a study or just on Congress' perception of what it was fair to leave the debtor with and what would be a luxury item otherwise.
I think what is significant about these security interests is that their only use is as a means of compelling the debtor to repay, and therefore, you don't really have an independent property interest here, as the Tenth Circuit found; but the security interest here cannot as a practical matter be separated from the debtor's personal obligation.
Now, of course, the creditor ordinarily has a right to have the debtor satisfy his personal obligation.
But here you have a debtor in bankruptcy, and the whole point of bankruptcy is to discharge the debtor's personal obligation and to allow him to have a fresh start unencumbered by prior debt.
So the question here is why should these debtors who have the security interests but that are in fact are no different from the personal obligation, why should they be in any better position than the unsecured creditor to also--
Unidentified Justice: Well, are you saying that a debtor who has given a chattel mortgage on his personal property the way it happened here is no different than a debtor who simply is given an unsecured obligation?
Mr. Horowitz: --It's not that he's no different, but for the purposes of the Fifth Amendment the question is whether such a sharp line should be drawn between the kind of paper security interest that you have here where in fact there's no actual interest in taking the property or in reselling--
Unidentified Justice: Well, but there is... there is a property interest created under the laws of most states by that sort of security.
And for you to say that there isn't really any just begs the question.
There certainly is an interest.
Mr. Horowitz: --But for the purposes of the takings clause of the Fifth Amendment it's important to focus on the type of property interest you have here.
I think this question is discussed well in the Seventh Circuit's recent 7 to 1 en banc decision in the Gifford case on this exact question.
The fact is that there is very little in the sense of Fifth Amendment property that is being taken away from the debtor here.
What's being taken away is his expectation of repayment by the debtor, and that's the same thing that is always taken away in bankruptcy from unsecured creditors and from everyone else.
Unidentified Justice: Mr. Horowitz, under your arguments what type of destruction of liens, if any, would be compensable under the Fifth Amendment takings clause?
Mr. Horowitz: What kind of destruction of these liens, these kinds--
Unidentified Justice: Of any liens, if not these.
Mr. Horowitz: --Well, I mean, for example, in the Armstrong case the Court held that the destruction of the liens there was compensable.
And this Court--
Unidentified Justice: You agree with that?
Mr. Horowitz: --Yes, I'd agree with the Armstrong case.
This Court has said many times that these takings cases have to be decided on an ad hoc basis by looking at all the factors.
You have to balance what the government interest was here.
In a case like Radford where Congress essentially just passed a bailout... it wasn't part of just a bankruptcy code kind of revision... you have much less of a government interest in that kind of thing and a commensurate lesser property interest.
Unidentified Justice: And I take it you concede that under Kansas law the liens here are liens on specific property.
Mr. Horowitz: Well, I would agree that there's a property interest created under Kansas law by these liens.
Whether they're... I disagree that they're liens in specific property in the sense that this Court used that term in Radford.
Unidentified Justice: Any difference under Colorado law, the five Colorado cases?
Mr. Horowitz: I don't know of any difference in the state laws.
Unidentified Justice: Do you know whether self-help was allowed or did they have to foreclose these liens if they wanted through court?
Can't they just go and repossess?
Mr. Horowitz: I think the security agreement provides that--
Unidentified Justice: They just go and repossess.
They drive up to the house and take the goods.
Mr. Horowitz: --The debtor has to pile all the furniture in his living room, I think, and make it ready for them, and then they can go in.
Now, what happens--
Unidentified Justice: And under the laws of both states that is permissible.
Mr. Horowitz: --I believe that's correct.
Unidentified Justice: Well, there are some practical problems in what has been described as repossessing.
It isn't really repossessing because they've never had possession.
Mr. Horowitz: That was addressed there.
Repossession is used--
Unidentified Justice: And this isn't like repossessing an automobile which has a license number and a serial number and is readily identified.
This is an amorphous mass of material, some of which might belong to the son-in-law or mother-in-law or what not.
Mr. Horowitz: --Yeah.
Well, the debtor--
Unidentified Justice: Does that enter into creating some problems here?
Mr. Horowitz: --The debtor is usually required to make a list of some of the property he has, so--
Unidentified Justice: At the time--
Mr. Horowitz: --I suppose... at the time he enters into the loan.
Unidentified Justice: --The lien is--
Mr. Horowitz: Yes.
Unidentified Justice: --At the time the lien attaches.
Mr. Horowitz: Right.
The lien is not restricted to that property, but that gives the creditor something.
Unidentified Justice: All the new property coming in.
Mr. Horowitz: Yes.
Unidentified Justice: But there are some practical problems with respect to the after-acquired property, aren't there?
Mr. Horowitz: Well, I'm not sure how the after-acquired property is handled under the laws of these various states.
There could be litigation, I suppose, over whether particular property is covered by the lien.
But on the other hand, the language I read from the lien says all property in a house, so that well may cover all after-acquired property.
I think the real defect in the Court of Appeals' reasoning here is that it simply found that because these liens could be construed as a property interest and because their value is undoubtedly impaired by the invocation of Section 522(f), the court concluded that there must be a taking here; that in fact the court has repeatedly recognized in recent years... the Penn Central case, for example... that you have to look at both the investment-backed expectations of the creditor and the nature of the government action to determine whether there is a taking.
Since my time is short, I think I'll refer to the brief pretty much for that statement.
But I think if you look at the Penn Central test, there is in fact... in view of the limited expectation of the creditors here there is in fact no taking.
I'd like to reserve the remainder of my time.
Chief Justice Burger: Mr. Field.
ORAL ARGUMENT OF HENRY F. FIELD, ESQ., ON BEHALF OF THE APPELLEE
Mr. Field: Mr. Chief Justice, and may it please the Court:
We have two grounds that we are presenting today upon which we believe the judgment below should be affirmed, and I'd like to discuss them in turn.
The first ground is that the 1978 Bankruptcy Act may not be applied in this situation because of its unconstitutionality, because of the integral nature of the judiciary provisions which have been held unconstitutional already.
I will address that after we first respond to the Government with respect to the retroactive application of 522(f).
As this Court noted in the questionings of the Government, the real vice here is not whether Congress can decide for the future that the policy of the federal government in bankruptcy will be that certain kinds of interests are or are not protectable.
The question is whether Congress or committees of Congress or testimony before Congress can be used to decide whether the transaction in existence at that time between A and B is in fact void because unconscionable, because a subject of overreaching, because the interest was only used for threat purposes, et cetera... whatever the justifications are.
The real vice in this statute is that it usurps the judicial function of deciding cases between existing parties and decides as a matter of legislative policy, at least as interpreted by the Solicitor General, that A's contract with B was unconscionable.
Now, in the record of this case before this Court there's not a trace of suggestion that these transactions are in fact unconscionable, the subject of overreaching, the property is held by these creditors only for threat purposes, et cetera.
I think each of these justifications would be, as we pointed out, true... at least the threat justification... true with respect to all creditors.
As Justice O'Connor has pointed out, there is no difference.
And the principle upon which the Government is urging this Court to destroy or permit the destruction retroactively of vested property rights admits of no real distinction between myself here--
Unidentified Justice: Well, the Government's position just isn't threats or overreaching or anything.
It's saying that whatever interest a creditor has is de minimis in the property; that it's just not a reality.
They have a lien, but it's a paper lien.
It's just not worth anything.
At least it can't be worth enough to be called a taking.
Mr. Field: --I think that's--
Unidentified Justice: It's just... it's just... has no substance.
Mr. Field: --I think that's their argument, Your Honor.
Unidentified Justice: Yeah.
Mr. Field: However, it's patently false because... and although, again, it might be permissible to make that judgment in the future, that's certainly not true of the cases that are before this Court, and it's certainly not true... there's no substance to any such suggestion of the record here.
Unidentified Justice: Well, if Congress... if Congress viewed that... took that view about these kinds of liens for the future, it certainly was a considerate judgment that these kinds of liens aren't worth very much, because they certainly didn't do it as to mortgages on real estate.
Mr. Field: Well, that may be.
Whether it's a considered judgment or not I can't tell.
It might pass due process standards if that were the attack; that is to say that if Congress can make this rule for the future, might well pass due process.
It's a rational exercise of Congress' power.
But the standard and the problem before this Court is not that.
It's the problem of the attack or the destruction of the pre-existing interests which have nothing... as to which those findings are irrelevant and constitutionally have to be because Congress cannot decide the case between A and B.
That's for this Court on review of the trial of a case to decide the question between A and B as to whether under equitable principles or state law an existing property right is or is not valid.
Unidentified Justice: Well, it isn't quite correct to say that all these property rights were destroyed as of the date of the enactment of the statute.
It only affects people who go bankrupt after the statute was passed.
Mr. Field: --That's exactly correct, Your Honor.
Unidentified Justice: So that at the time the statute was passed no rights were immediately affected by it.
Mr. Field: --That's correct.
Well, and our position is that with respect to this lien voiding, no rights would ever be vested--
Unidentified Justice: If you're right.
But just assume the statute is valid.
It still didn't of its own force invalidate any contractual relationships.
It took a subsequent act of bankruptcy, didn't it?
Mr. Field: --That's correct.
And the suggestion of that that I take--
Unidentified Justice: And it only applies to those debtors who go bankrupt.
Mr. Field: --Exactly.
So that it's a... the suggestion I take from that is that Congress certainly did not construe that these interests were of that character generally; that is, they chose only to abolish or limit them in a small context... that is, bankruptcy.
Unidentified Justice: Well, Congress can't legislate the way a state legislature could in the very broad context.
Mr. Field: That's correct.
Unidentified Justice: It was just dealing with bankruptcy.
Mr. Field: That's correct.
Unidentified Justice: Do you think it could have changed the order of priority... I don't know what the order of priority was... to make these junior to some claims to which they were previously senior in the future?
Mr. Field: No.
Unidentified Justice: See, what they've done here really, it says they'll be treated like general creditors is what--
Mr. Field: Correct.
Unidentified Justice: --But you say they couldn't even rearrange the order of priority.
Mr. Field: Well, there are principles on which such a decision could be made a court; that is, the Pepper v. Litton situation--
Unidentified Justice: Well, supposing they just said in the new act these claims will be junior to wage claims... previously it was the other way around; I don't know whether that's true or not... would that be a taking?
Mr. Field: --If it resulted in the destruction of... yes, I believe it would--
Unidentified Justice: It would result in a diminution of the value of your lien.
Mr. Field: --Yes.
I think that would be if the result was--
Unidentified Justice: And if you take any change in the order of priority it would violate the terms.
Mr. Field: --Yes.
And historically this Court has always interpreted such changes to be for the future only for that very reason.
The principle that the Government urges really does not permit this Court or anyone else to distinguish between finance companies which are here before the Court and corporate mortgage bond holders in multi, multi-million dollar, billion dollar corporate reorganizations, railroad reorganizations; that is, the bald principle put forth by the Government is that nonpossessory, nonpurchase money security interests are not property interests.
And I think you have to start with that, as this Court has already indicated.
You start with that and where you come out is I believe under the clear guidelines this Court has established that if it's a property interest recognized under state law, it is a property interest, and that's what we have here.
Unidentified Justice: What about when Congress first introduced the four-month preference period into the Bankruptcy Act... was it the act of 1898?
when a property interest perfectly good under state law was voidable in bankruptcy if it was incurred within four months of the filing of the petition.
Now, that, I suppose, is an impairment to a certain extent of that property.
Is there any reason why Congress can't apply that retroactively?
Mr. Field: --It was not done, Your Honor.
Unidentified Justice: It wasn't?
Mr. Field: No.
That was construed to apply in the Auffm'ordt case that we've cited, Auffm'ordt v. Rasin.
It was construed to apply prospectively--
Unidentified Justice: Only prospectively.
Mr. Field: --To avoid the problem we're talking about here.
So this Court and the guidelines of this Court have been very clear about what is a property interest, and the Government's argument in that regard flies smack in the face of uncontradicted cases and opinions by this Court... you can tick them off: the Radford case, the Armstrong case, many other case, the General Motors case... where liens were upheld.
So the fact that this is a nonpurchase money, nonpossessory lien is irrelevant.
Those are most liens.
The only exception perhaps is a pledge.
Unidentified Justice: You're going to comment on Penn Central.
Mr. Field: Penn Central.
The Penn Central case, the Grand Central Station case, is... was urged as a taking in that case.
The Court held that it was not a taking because although the highest... perhaps the highest use of that property was restricted, the owner of that property was nonetheless able to gain a very substantial return, the historical return, and could in fact have built a 50-story building on that property if he was able to pass through the Commission.
I don't believe the Penn Central case in any way suggests that... any analogy here.
It poses an interesting counterpoint between a regulatory act and what you have here which is a total destruction.
In the Penn Central case they said you have to be careful about how you build 50-story buildings in New York.
They took a strand out of the bundle of rights, and this Court upheld that action on that ground.
Unidentified Justice: So it's a matter of degree.
Mr. Field: No, not completely.
I think what you have here is a different concept.
You've got a lien that's on the goods, and in this case the goods are all specific items which are, if the lien is upheld, the value of those items resorts to the creditor; if the lien is not upheld, it completely eliminates... it's completely eliminated.
So that it's not a question here of a degree.
There is either a lien which is valid and a creditor gets security and value for the security that he held, or the lien is invalid and the creditor gets nothing.
Unidentified Justice: Well, that's not true, is it, if the items are worth more than the $200?
Mr. Field: Well, that's true, Your Honor, in... I was referring only to the cases before this Court.
It is certainly conceivable, as Justice White pointed out earlier, that you'll have cases where the property is worth more than the lien, and therefore you'd have a voiding of the lien only in part.
Unidentified Justice: There would be a voiding of the lien.
Mr. Field: --Yes.
And... and with respect to that part, the lien voiding is total; that is, it's unlike Penn Central in the sense that where Penn Central could nonetheless build a 50-story building, to the extent of the destruction here, the destruction is... to the extent of the lien voiding, the destruction is total.
There is nothing left.
There is no strands left for the owner of the property.
It's not like a regulation where one of the strands is removed.
There's no strand left at all.
It's a different concept, and in that sense it's even further than the Loretto case, Gene Loretto's case this Court had just before the break in the term, where in a much less dramatic fashion the cable TV company was allowed to intrude onto the physical property.
In this case... in a limited extent, and that was deemed a taking without further reference to purported justifications.
In this case you have a more dramatic, more extreme situation.
You've got, to the extent of the lien, the property affected by the statute is totally destroyed.
It's not just that somebody can put... can restrain our interest, can prevent us from selling under certain circumstances, can otherwise regulate our conduct.
We have no property.
Unidentified Justice: Mr. Field, if the Auffm'ordt case, which you mentioned or implied by a question I asked, is rightly decided, that sounds like it's fairly good precedent for saying that an act like this applies only prospectively, and that you pick out simply a section of the act that may raise these kind of problems and say it applies only prospectively.
Mr. Field: I think that's true, Your Honor.
Unidentified Justice: But do you make that argument?
Mr. Field: Yes.
We affirm that argument, Your Honor.
Unidentified Justice: You don't really cover it in your brief.
Mr. Field: I think that's correct, but that was the argument made, and it has been an argument we have made, and we do affirm it in this case.
We do believe that it is possible to do that; that is, that the constitutional problem of retroactivity could be avoided by construing this section to only apply to the future.
There's support in the legislative history for that.
We've cited that in our brief.
And the normal canon of avoiding constitutional questions would serve to operate to effectuate the results.
Unidentified Justice: Is there also some support in the language of Section 522(f) itself where it says that the debtor may avoid the fixing of a lien on an interest of the debtor and property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) by saying he wouldn't have been entitled to an exemption prior to the effective date--
Mr. Field: I think that's a--
Unidentified Justice: --Of the act.
Mr. Field: --Possible construction, although I myself have never really been happy or able to understand completely why that phraseology was written that way.
In any event, what we have here is, I would urge, a different bird than this Court has seen in many of its regulation cases, including the case that Justice Blackmun suggested.
We've got really a simple problem, not a complex problem.
The Government has made it elaborately complex.
They have used impermissible congressional findings to try to attack pre-existing situations.
They've called the liens here weak.
But when you come to the bottom line, the Constitution protects all liens, all property interests that are recognized by state law.
Now, there's no dollar sign on the Fifth Amendment.
This Court has reaffirmed that many times.
So that the de minimis aspect of this situation is not really relevant.
Whether it's de minimis or not to the Government, it's extremely important to this industry because there are many, many millions of dollars of property and value involved in the aggregate.
The way this statute works, for example, as Chief Justice Burger was asking earlier, $200 in each item can cumulate to quite an enormous total.
Unidentified Justice: Well, what about the... what about the suggestion, though, of the Government and apparently of Congress that there's hardly ever a repossession, and hence, the property interest is just de minimis?
Mr. Field: That, again, could be a point for the future, but how they can say that could possibly bear on or be relevant to A's interest... does A get a chance to testify to the contrary?
A says I want my property... I loaned so-and-so $5,000 on this security: B, C, D, E, F, these items.
Unidentified Justice: Well, do you think congressional judgment is infirm, that there's hardly ever a repossession on this kind of a lien, and hence, it's of negligible value?
Is that judgment just wrong?
Mr. Field: --Yes.
I think that... well, in my personal opinion that judgment--
Unidentified Justice: Fine.
Mr. Field: --Is wrong.
But that's not really before the Court.
Unidentified Justice: Well, I don't know.
I think it... I think that... that it is before the Court.
Mr. Field: Okay.
Then I think that that judgment has to be looked at a little differently than the taking question I would see as being a retroactive aspect.
Unidentified Justice: You do agree that you're entitled to win even if the Congress is quite right just because you have a property interest, pure and simple, whether you use it or not.
Mr. Field: That's correct.
Whether you choose to use it, whether you choose to repossess.
That's absolutely correct, Your Honor.
Unidentified Justice: He's the only one who can waive it.
Mr. Field: That's correct.
Unidentified Justice: Congress can't waive it for him.
Mr. Field: Precisely, Your Honor.
He has the interest, and it would be shocking, and it really creates an irrebuttable presumption of a past fact; that is, that you, the litigant, don't want to do something, but you don't have... you're deprived of your opportunity to say otherwise.
The second ground on which we would urge this Court to consider affirming the case below is that the Bankruptcy Reform Act of 1978 was constructed with an infirm centerpiece, as this Court has recognized in the Northern Pipeline decision, and that because of this, the bankruptcy courts, which were the sole courts intended and designed to administer the Bankruptcy Act, may not function.
In other words, the Bankruptcy Act may not be administered, and because it may not be administered, what happens is that no court can administer the 1978 act, and there is no way that those provisions can be--
Unidentified Justice: Do you read that as the Court's holding in Northern Pipeline?
Mr. Field: --No, Your Honor.
The Court's holding in Northern Pipeline was limited to the fact that the bankruptcy courts are unconstitutional... the jurisdictional grant in the 1978 act was unconstitutional in part, and it was unseverable, and that unless Congress does something, that jurisdictional grant and the court system which is behind it in 241 cannot function.
Now, as a matter of intention and as a matter of practice there's no way that the 1978 act can function apart from those courts.
Unidentified Justice: Well, this kind of claim, whether or not a debtor is entitled to an exemption, is something that could have been clearly decided by an old-fashioned referee.
It certainly wouldn't take an Article III judge to decide this kind of thing.
Mr. Field: Your Honor, that... whether that's true or not... and that's true as the matter of a referee under the prior act... but under the... the result of the Northern Pipeline opinion is that the grant of jurisdiction is unconstitutional... is inseverable and therefore inoperative.
You don't need to reach in this case the further question of whether it would be unconstitutional to... whether or not to apply that in this situation because what you have is a statute that no longer operates.
So the... what the result of that is is that the prior act revives to govern bankruptcies.
Unidentified Justice: I think you read a lot more into the Northern Pipeline case decision than I would have.
Mr. Field: Well, that may be, Your Honor, but at the minimum the Northern Pipeline decision holds that the grant of jurisdiction of the bankruptcy courts is inseverable and partly unconstitutional.
Therefore, the bankruptcy courts under the '78 Act cannot function.
And that raises the further question of well, then, who can and how does the bankruptcy... how does the bankruptcy system devised under that Act function?
Unidentified Justice: These, of course... these cases were all decided before the Northern Pipeline case.
Doesn't the case of Chico Valley Drainage District, decided after the holding that the Municipal Bankruptcy Act was unconstitutional, say that the fact that the law was unconstitutional doesn't mean that nothing happens as a result of adjudications made under it?
Mr. Field: Chico deals with the situation of a closed case and under the Linkletter doctrine that this Court has announced, in this case our clients can take advantage of the Northern Pipeline ruling and can urge the position we urge both in this case and as amicus in Northern Pipeline while other cases may not, because we had presented this issue on appeal in this Court at the same time, and under the Linkletter doctrine that allows us to take advantage of that rule... the ruling in that case... for our clients.
And the effect of that is that with respect to us the decision below was correctly decided, not because the court below lacked jurisdiction at all.
It lacked jurisdiction under the 1978 Act, but it had jurisdiction under the prior Act and under the prior Act these liens were protected so that the decision of the Court of Appeals and a decision of the referee, as we would call him now... the bankruptcy judge referee... is correct because substantively the Act that he had to guide himself by--
Unidentified Justice: Your lien is valid under State law--
Mr. Field: --Your lien is valid under State law and there is no... and you should argue... I suppose you do... that there is no bankruptcy Act to avoid them.
Absolutely, Your Honor.
Unidentified Justice: --Well, you don't need any... if this provision is invalid, it is just invalid, and--
Mr. Field: That is absolutely correct, Your Honor.
Our position is that these liens are valid under the only governing law, which is with respect to us and this case could be made prospective again so that other cases aren't affected.
With respect to us, the '78 Act is inapplicable.
The prior law applies and our liens are protected.
Unidentified Justice: --Why do you need the prior law?
Mr. Field: As an alternate ground of decision, Your Honor.
If the lien voiding provision were retroactively applied to us, we would need the prior law.
Unidentified Justice: It is the doctrine of dependent relative revocation at will, isn't it... that this bankruptcy act was no good.
The repeal of the old one wasn't any good.
Mr. Field: Absolutely.
Unidentified Justice: But you wouldn't need the old Act.
All you need is to eliminate the law that invalidates your lien.
Mr. Field: Well, you still have to ask whether the court below had jurisdiction to apply some bankruptcy law.
Unidentified Justice: Right.
Mr. Field: And the--
Unidentified Justice: You don't care whether they apply a bankruptcy law or not.
You hope they don't.
All you want's your lien.
Mr. Field: --No, but if there was jurisdiction below, we would still have to fight it out in that court as to whether our interest was valid or invalid and presumably--
Unidentified Justice: But the Court would have to have some authorization under the bankruptcy statute to invalidate your lien, which you wouldn't have.
Mr. Field: --That's correct.
Therefore, the result below was right.
The petition was frivolous.
It should have been dismissed, and it was.
Unidentified Justice: Well, it would have had jurisdiction, wouldn't it, to invalidate your lien on some entirely different theory such as unconscionability or something or other... you didn't sign the papers correctly.
Mr. Field: Precisely.
A Pepper versus Litton--
Unidentified Justice: And that kind of issue, you are saying, would be adjudicated under the old Act rather than the new Act?
Mr. Field: --Precisely.
It's a Pepper versus Litton situation.
It doesn't exist in this case, but it would have been competent for that court below to have invalidated our lien had proof established that we were insiders, that there was some monkey business in the obtaining of the lien, or some such situation.
Thank you, Your Honors.
Unidentified Justice: Mr. Horowitz.
ORAL ARGUMENT OF ALAN I. HOROWITZ, ESQ., ON BEHALF OF APPELLANT -REBUTTAL
Mr. Horowitz: Thank you, Mr. Chief Justice.
I'd like to take issue with Mr. Field's statement that this Court cannot distinguish between different kinds of property.
Clearly this Court can and must distinguish between property interest like the fee simple and real property or mortgage and real property, and the kind of security interest that's involved here.
All of the takings cases that this Court has decided involve making judgments by this Court as to the character of the government action, the economic expectations.
They don't admit of a bright line rule, and certainly an important feature that the Court must consider in these cases is the nature of the property interest that hasn't been prominent in some of the Court's recent decisions because they were always dealing in these cases with a traditional real property interest.
Here we have this fairly negligible property interest that is almost indistinguishable from the right to collect on the debt, and the Court has to take that into account.
As far as whether the lien has been totally destroyed here, as the Tenth Circuit said, we have discussed in our brief the fact that it really isn't, and Justice Stevens has alluded to that.
I would just urge the Court to compare the destruction that you have here with the destruction in Anders against Allers, the Eagle feathers case, and I think that you will agree there is no more of a total destruction here.
But even assuming that there is, I think it's very instructive to look at the Armstrong case, which Justice O'Connor alluded to.
If you look at the Court's analysis in that case, the Court quickly decided that the lien involved there in fact was a compensable property interest and that the lien there was totally destroyed.
The Court then went on for several pages to decide whether in fact that was a taking.
Clearly, the fact that the property interest was destroyed was not sufficient to show as a taking, and there they found the taking only because the nature of the government action was a taking of the property for the government's own benefit in its entrepreneurial capacity and indeed three Justices dissented on that ground.
So I think here you also have to look at the taking analysis set out in Penn Central, and because this is an ordinary government regulation like the minimum wage legislation and because it does not interfere with the substantial expectation of the creditor.
Unidentified Justice: Well, you are really just saying the lien isn't worth much.
Mr. Horowitz: That's right.
It wasn't worth much as a property.
Unidentified Justice: --Eastman and Loretto or not?
The lien isn't worth much.
Mr. Horowitz: Well, it's worth even less than Eastman and Loretto because there you at least have a real property, a traditional kind of property interest, which was someone's possession of property.
Here you have--
Unidentified Justice: This is not a lien?
A chattel mortgage isn't a traditional form of a lien?
Mr. Horowitz: --Not in this context, where there's no expectation of possession.
Unidentified Justice: Well, but a non-possessor of property interest originated about the 16th Century, didn't it, in personal property?
I mean, that's no brand new type of thing.
Mr. Horowitz: Well, Justice, all I can say is that if there were no property interest here of course we wouldn't be here, because then there would be no claim of a taking at all.
But I think the Court has to take into account the fact that the property interest is weak and that it's very hard to separate the property interest here from the debtor's personal obligation, and the fact is that the whole idea of bankruptcy is to discharge the debtor's personal obligation.
Now creditors' expectations are always hurt or disappointed to some extent by bankruptcy legislation and actions of bankruptcy courts.
I think if you look at some of the cases this Court has decided... the Local Loan versus Hunt case, for example, where there was a lien in future wages that was valid under state law, and the Court held those constitutional for that lien to be invalidated.
You have to look at the nature of the lien, to some extent, and the nature of the government interest.
Unidentified Justice: Let me ask you, supposing a state passed a statute that invalidated liens like this retroactively.
Would that be valid, in your judgment, to say we will no longer hold this kind of lien to be enforceable?
Mr. Horowitz: --Well, I would state you have the additional problem of the contract clause, which forbids any impairment of contract by the state.
That's why states, I think, can't pass bankruptcy legislation to start with.
Here you do have an impairment of the property interest.
Our argument is that that impairment does not rise to the level of a Fifth Amendment taking.
So I think there would be a lot more problem with the state.
Unidentified Justice: Would you say such a state law would be invalid under the contract laws?
Mr. Horowitz: That's my immediate reaction, yes.
Unidentified Justice: I don't suppose... Congress couldn't really have thought that there never was a... never was a repossession in these kinds of cases.
Mr. Horowitz: No.
Unidentified Justice: As a matter of fact, maybe out of a hundred you would say... ten out of a hundred, one out of ten, that is probably a repossession.
Then Congress thought well, that's not enough for the future.
But it took care for the past of all of them, not only the nine, but the one too.
Mr. Horowitz: Well, I mean one problem here is that the creditor here is not seeking to enable to use his lien entirely, and that is to be able to get the debtor to reaffirm the debt... have the whole lien survive.
Unidentified Justice: That isn't the only use of the lien in every single case.
It just isn't.
Mr. Horowitz: But in passing legislation Congress has to make the general judgment as to what--
Unidentified Justice: That may be so for the future.
Mr. Horowitz: --Well, if it was only for the future, there would be no Fifth Amendment claim at all, obviously, because there wouldn't be any taking of any property if this Act was already on the books that these liens could be avoided.
That would just be ridiculous to claim the Fifth Amendment, so I mean it is only the retroactivity that raises the taking question at all.
Unidentified Justice: I agree with you.
Mr. Horowitz: And I think it's necessary to consider the nature of the regulation in doing so.
My time has expired.
Chief Justice Burger: Thank you, gentlemen.
The case is submitted.