OWEN v. OWEN
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Argument of Robert L. Fishell
Chief Justice Rehnquist: We'll hear argument now in No. 89-1008, Dwight H. Owen v. Helen Owen.
Mr. Fishell, you may proceed whenever you are ready.
Mr. Fishell: Mr. Chief Justice, and may it please the Court:
The issue involved in this case is the--
Unknown Speaker: I can't hear you.
Could you speak up, please?
Mr. Fishell: --The scope and effect of section 522(f) of the Bankruptcy Code, the lien avoidance provision.
Unknown Speaker: You can... crank up that, and maybe you'll... the other way.
You may be closer to the microphone.
Mr. Fishell: The issue in this case is the, is the scope and effect of 522(f) of the Bankruptcy Code, the lien avoidance provision.
Now, the... that provision allows for the avoidance of certain liens on exempt property that a debtor may retain through the bankruptcy proceedings.
In the facts of this case the debtor sought to exempt homestead property in Florida at the time of the filing of his bankruptcy petition.
Under Florida law, however, the property was not immune by reason of the exemption to the attachment of a lien which they attached to the property prior to the time that the exemption was obtained.
Now each of the cases, each of the decisions below, the bankruptcy court, the district court, and the court of appeals concluded essentially that the lien was not avoidable because the property was not exempt in the sense that the lien, having attached prior to the time of the exemption right, rendered the property an exception to the homestead exemption.
Unknown Speaker: That was the way South Carolina law treated it, wasn't it?
Mr. Fishell: That is Florida law.
Unknown Speaker: Oh, I am sorry, Florida law.
Mr. Fishell: That's purely an expression of the way Florida law treated it.
As you will note in the bankruptcy court decision, the critical part of the holding there asserts or states virtually the precise application of Florida law without any effect being given to 522(f).
The court of appeals' decision specifically stated that, that the property was specifically subject to this exception, meaning a lien attaching prior to the right of the homestead remained subject to that lien and could be enforced despite the later acquisition in the homestead right.
Now that leads us to the central issue involved in this case.
If, whether or not it is permissible for State law to define as an exception to the exemption a property encumbered by the lien.
In other words, the only reason the property is defeated as to the exemption is by virtue of the attachment of the lien.
Now the lien is--
Unknown Speaker: Well, Mr. Fishell, could, could a State decide that it wasn't going to allow an exemption at all for homesteads?
Mr. Fishell: --I see nothing wrong, I see nothing wrong with that conclusion.
In other words, I don't believe that it would be impermissible for a state to determine that it was not going to allow the homestead exemption, period.
Unknown Speaker: And if it did that, then there wouldn't be any relief available under 522(f)?
Mr. Fishell: Absolutely.
It wouldn't come into play at all, because there would be no exemption upon which this particular judicial lien had attached.
Consequently the lien avoidance would not come into play, and this case would not be here.
The fact of the matter is that Florida law provides for the homestead exemption.
On the date that this debtor filed his petition he was entitled to assert that exemption.
Unknown Speaker: Well, that Florida law... Florida law at the time this bankruptcy was filed provided that this homestead was not exempt.
It provided that it was subject to a lien.
So you can't say that it was just totally exempt.
Mr. Fishell: Well--
Unknown Speaker: Wasn't that true under Florida law?
That lien was enforceable despite the homestead exception?
Mr. Fishell: --The lien... yes, Your Honor.
The lien remains enforceable as to a preexisting judicial lien under State law.
Unknown Speaker: Well, to that extent the... this property was not exempt.
Mr. Fishell: But only to that extent was it not exempt, only as to this particular creditor.
The attachment of a lien does not have the effect of rendering the homestead exemption unavailable for all purposes to a debtor who later qualifies for the homestead, even if the property already has a lien attached.
Unknown Speaker: You think, then, you think a State couldn't say, well, we grant a homestead exemption, but, except that all mechanics liens will be good against the homestead?
Mr. Fishell: Well--
Unknown Speaker: Yes or no?
Mr. Fishell: --I think they could.
I am not, I am not suggesting--
Unknown Speaker: So they could say, they could say sure, we have a homestead exemption that is good against all liens except mechanics liens?
Mr. Fishell: --Your Honor, I'm not suggesting that the Florida--
Unknown Speaker: And then how about in bankruptcy then?
Mr. Fishell: --I am not suggesting that the Florida statute regarding... or the Florida decision law regarding homestead exemptions is in any sense invalid.
The issue here is really whether or not this is going to survive through the lien avoidance mechanism in the bankruptcy proceedings.
There is nothing wrong with Florida deciding that they are not going to allow an exemption for a particular creditor, and that is all this is.
They are not going to allow an exemption for a particular creditor to be... to deny that creditor a right against the property.
But at the same time that doesn't prevent the... the homesteader from achieving homestead status for the property, which he could protect against the wide world, other than this creditor.
Florida is perfectly, it is perfectly all right for them to allow such a protection for a given creditor.
That is not the end of the question, though.
The issue then becomes what is the effect of 522(f) once the bankruptcy petition is filed?
Now when we focus on that we note that this is a judicial lien, it has not been challenged, it is being anything other than that.
On the date that the debtor filed his petition he was entitled to the exemption generally under Florida law.
The bankruptcy court acknowledged this.
Unknown Speaker: But to say he was entitled to the exemption generally really doesn't say a whole lot, does it?
I mean, he was not entitled to have the exemption supersede the preexisting lien.
Mr. Fishell: Under State--
Unknown Speaker: Under State law.
Mr. Fishell: --Under State law, Your Honor, that is correct.
That is correct.
But the real problem here is if this State law rule carries over into bankruptcy, then we have destroyed any effectiveness of the lien avoidance provision in bankruptcy.
Because if it were permissible for Florida to say by decision law, which it has, that this particular lien is going to be enforceable despite the later acquisition of the homestead right, then that situation carried over into bankruptcy is going to defeat the effectiveness of 522(f).
Unknown Speaker: Well, I think... why didn't Congress intend that by permitting a State to opt out of the Federal scheme and specify its own exemptions?
Mr. Fishell: --Well, Your Honor--
Unknown Speaker: You would think they would have contemplated that the State could quali... could define the exemptions they were granting in any way they wanted to.
Mr. Fishell: --Well, Your Honor, they did in a sense, Congress did in a sense allow States to opt out.
But the opt out is essentially limited to the types and quantities of property that may be exempted in bankruptcy.
They allow States to choose their own.
There is no question about that.
Florida has done so, but Florida... the Florida statute, which in effect opts Florida out of the bank, of the Federal exemptions, makes no reference to attempting to opt out of the lien avoidance provision of 522(f).
It is silent on that.
Unknown Speaker: I guess that is why the case is here.
Mr. Fishell: --Yes, Your Honor, I think so.
So I don't think, I don't think we have Florida... Florida hasn't made any attempt to evade or opt out of the lien avoidance provision.
It has only opted out of the list of quantities and types of property on which an exemption may be enjoyed.
Now, if, if we have, as we do here, a situation where the exception to the exemption, which is in this case the lien encumbered... the lien, the encumbrance, if that is an exception to the exemption, then it no longer is the impairment of the exemption, was in the application of 522(f).
If it disappears as an impairment, then the, the concept of impairment disappears.
The exception takes it out of, out of the realm of property upon which the lien avoidance could be applied.
I don't think that Congress ever intended that a State would be entitled to define its exemptions in such a way that it could defeat the operation of another section of the code.
Unknown Speaker: Do you give any significance to the introductory clause of 522(f), notwithstanding any waiver of exemptions?
That is really not necessary under your view, is it, under the way you read the statute?
Mr. Fishell: Well, Your Honor, the--
Unknown Speaker: Or is it?
Am I wrong?
Mr. Fishell: --Some State statutes have, have defined their exemption laws in such a way that certain, certain acts or agreements undertaken between the creditor and the debtor have the effect of waiving an exemption or waiving a protection in bankruptcy that might be, that might be, might have been accorded the debtor in the particular property.
Unknown Speaker: Those aren't taken care of by 522(e)?
Mr. Fishell: No, Your Honor, I don't... 522(f) I think is broad enough to cover any kind of exemption that--
Unknown Speaker: But is it needed in light of 522(e), under your view, under your interpretation?
I don't, I don't see what force and effect it has.
It's a transition from the previous section.
Mr. Fishell: --Well, in other words, even a voluntary relinquishment of a protection that the debtor might have under State law wouldn't preclude him from asserting his exemption rights once bankruptcy is filed and lien avoidance is sought.
Unknown Speaker: All right.
Mr. Fishell: That--
Unknown Speaker: How critical is the language in the statute 522(f) that refers to an exemption to which the debtor would have been entitled?
Mr. Fishell: --Well, I think that is significant if you look at it from the point of view that there must be some reason for the lien avoidance remedy that Congress enacted.
That is probably a recognition that there are reasons, liens arising under State law which would impair exemptions... there might, there would be some reason why the State law would have the effect of denying a debtor the right to use the exemption and protect his exemption through bankruptcy, and thus deny him the full benefit and meaning of his fresh start.
I think the... I think both the Senate and House versions with respect to the legislative history indicate that the lien was, the lien could be avoided, and that it was intended to operate where the debtor could have enjoyed an exemption in the absence of the lien.
It was a recognition that a lien normally or otherwise unaffected by the bankruptcy discharge would pass through and remain attached to the exempt property, and it would frustrate the debtor's fresh start.
It was, I believe under the bankruptcy act, there was essentially no remedy for avoidance of liens that attached to property prior to bankruptcy.
In other words, the bankruptcy discharge had no effect on liens.
They passed through, the creditor was free to assert his rights as a secured creditor following bankruptcy, and the fresh start was less than fresh.
I think that is, I think if, if we permit, if we permit or fail to independently apply the lien avoidance provision to the State exemption definitions, that we will run the risk of having the result that we have here.
The State specifically excepts from its exemption as to this creditor a lien attaching... if lien avoidance is not independently applied to the State exemption scheme, then the exception to the exemption, as noted by the court of appeals in this case, they concluded it was an exception to the exemption, if the lien is the exception to the exemption, then it is taken out of the application of lien avoidance, because the exception makes it impossible to assert the exemption.
Unknown Speaker: Mr. Fishell, do you, do you give any weight to the fact that 522(f) does not say notwithstanding any waiver or exemption that the debtor may avoid a lien on the interest of the debtor?
It says the debtor may avoid the fixing of a lien.
Is, is that at all a suggestion that it's only talking about, it is not referring to liens that have attached earlier, before the bankruptcy proceeding?
Mr. Fishell: No, Your Honor, I don't, I don't think that that... I don't think that that refers to a situation where a lien... if it, if it is in essence a prospective fixing of the lien, this may in many ways be an unrealistic view in the sense that if a debt is discharged it may not constitute a lien postpetition.
In other words, I am sure that the lien attaches at some point.
If it attaches prepetition, then it can constitute an impairment to the exemption.
Does that answer your question, Your Honor?
Unknown Speaker: Yes, I think... I think I, I think I... I understand what you are saying, but I don't under... I don't understand why the, why the statute is phrased the way it is.
One would have thought they would have just said the debtor may avoid a lien on the interest of the debtor, but it doesn't.
It says, may avoid the fixing of a lien.
It's sort of a strange phrase.
Maybe it means nothing, which is essentially what you say, it doesn't mean anything.
Mr. Fishell: Well, I don't... all I am suggesting is that I don't, I don't think that it had to have referred to a situation where the Congress contemplated the fixing of a lien at some time postpetition.
In other words, 522(f) wouldn't apply until--
Unknown Speaker: Um hum.
Mr. Fishell: --a bankruptcy petition is filed.
And if it was only prospective in its application, I don't think that's, I don't think that's what Congress had in mind.
Unknown Speaker: What did they have in mind?
Do you have any other meaning for the fixing of... or are you just... I mean, maybe it doesn't have any--
Mr. Fishell: Well, I don't think, I don't think that it necessarily cannot... I don't think it's a situation where it could not be read to apply to liens attaching prior to bankruptcy.
I don't see the significance of reading it in such a limited fashion.
Unknown Speaker: --May I ask you another question just referring to the language of 522(f).
The avoidances of the lien or the fixing of the lien, to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b).
Now as I understand it, in this case the property was exempt from the claims of general creditors under subsection (b), which was, isn't... didn't it in effect keep the property out of the estate for administration of bankruptcy purposes?
Mr. Fishell: That's, that is correct, Your Honor, the bankruptcy.
Unknown Speaker: So that there was no impairment of the exemption.
Even if the lien survived and the only remedy of the creditors, the secured creditors' only remedy is a, perhaps a State lawsuit or a postbankruptcy enforcement of the lien, but the property was, you retain the entire exemption from the bankruptcy proceedings.
Mr. Fishell: Your Honor, the bankruptcy court decision on that issue specifically did not determine--
Unknown Speaker: --I understand.
Mr. Fishell: --this particular creditor's rights with respect to the property.
Unknown Speaker: But it did hold, as I understand it, that the property was exempt from, it didn't have to be listed, or whatever you do, as an asset of the estate.
Mr. Fishell: That's, that's correct.
It allowed it as a general exemption--
Unknown Speaker: Which is, it seems to me... that's the complete exemption to which you are entitled if the property was exempt.
It was exempt from the claims of general creditors and it couldn't be charged for the costs of administration or anything like that.
So it seems to me under the language of it, I don't quite understand how you, how you can say that the lien impaired the exemption.
You got the exemption.
Mr. Fishell: --Well, the impairment exists because under State law this property remains subject to this particular creditor's lien.
Unknown Speaker: Right.
But that's independently of the bankruptcy proceeding.
The property is exempt from any bankruptcy remedy.
Mr. Fishell: Well--
Unknown Speaker: Maybe I, maybe I missed something in that language.
Mr. Fishell: --The lien avoidance provision is specifically designed to avoid liens that impair exemptions.
Now the bankruptcy court determined that the debtor was entitled to this exemption, this lien remains enforceable under nonbankruptcy law following discharge unless this lien is avoided.
522(f) gives that relief.
It, the lien is... or, the exemption is impaired because the property remains subject to the lien, and the lien is enforceable.
Therefore, if the lien is not avoidable under 522(f), the creditor executes on the property and the debtor has lost his homestead.
Unknown Speaker: But not in the bankruptcy proceeding.
Mr. Fishell: No, sir.
The... if the lien is, if for some reason the lien were not avoided, the creditor would be able to proceed in State court and execute on the property.
But the lien avoidance is a Federal bankruptcy remedy to preserve exemptions.
Under the... I think the legislative history of these sections of the code, and as early as the Commission on Bankruptcy Laws in 1973, there was a great deal of concern about, about property, exempt property, if you will, being lost following bankruptcy because liens were not avoided, exemptions of themselves didn't have the effect of insulating the property from, from preexisting liens.
There was no lien avoidance remedy prior to the code.
I think the lien avoidance was a specific Federal remedy designed to enhance the debtor's fresh start, and to assure that the property, if it was exempt and for some reason remains subject to a lien, a lien could be avoided.
Now, the lien avoidance remedy applies to only very specific kinds of liens, (f)(1) and (f)(2).
The (f)(1) is the nonconsensual judicial lien.
(f)(2) is a more limited remedy.
I think, I think that if this Court does not recognize that this lien is impaired, or this exemption is not impaired, it is only not impaired because the court of appeals has concluded that there is an exception for lien encumbered property.
If it is lien encumbered property that falls within the confines of (f)(1), where, where will (f)(1) apply if State law or State legislatures can create exceptions to the exemption schemes which include definitions that take the property out of the operation of 522(f).
(f) would be rendered a useless and meaningless remedy if the definitions could include exceptions for lien encumbrances.
I'd like to reserve the rest of my time, Your Honor.
Unknown Speaker: Very well, Mr. Fishell.
Mr. Dyk, we'll hear now from you.
Argument of Timothy B. Dyk
Mr. Dyk: Mr. Chief Justice, and may it please the Court:
Florida is known in the bankruptcy parlance as a debtors State, and it is called that because it is unusually generous in terms of the exemptions that it grants.
Under the Federal scheme of exemptions in 522(d), only 20, only $7,500 would be available for a homestead exemption.
In Florida there is an acreage limitation, but the amount is unlimited.
Now, essentially what the petitioner in this case is suggesting is that Congress, in section 522(f), was intending to force the States to be more generous than they decided to be.
I think there is--
Unknown Speaker: Mr. Dyk, is the Florida homestead allowance, is it of a specific dollar amount or is it of a, is it of a piece of property?
Mr. Dyk: --It's a piece of property.
In rural areas it's 160 acres, in urban areas it's a half an acre.
And what you have here with respect to the first argument that we make in this case, and that is that there is no exemption on which 522(f) can operate, is an agreement between the petitioner and respondent that to the extent that this property is covered by a lien it is simply not exempt by virtue of section 522(b).
There is no exemption to the extent that the property is covered by a lien.
And our suggestion is that 522(f) simply has nothing on which to operate under these circumstances, because it only applies when it would impair an exemption to which the debtor is otherwise entitled.
There isn't any exemption--
Unknown Speaker: Wasn't there a, didn't the bankruptcy court decide that there wasn't a exemption?
I suppose when you file here you have to file the schedule of your property and you have to make a specific claim about, that some property is exempt.
Mr. Dyk: --The, the bankruptcy court--
Unknown Speaker: Yes, yes, yes.
And didn't your client object to this claim?
Mr. Dyk: --Yes.
Unknown Speaker: And the bankruptcy court rejected that.
Mr. Dyk: No, not quite--
Unknown Speaker: Well--
Mr. Dyk: --What the bankruptcy--
Unknown Speaker: --Well, you objected to it, but you didn't win.
Mr. Dyk: --No.
Well, what, what the bankruptcy court did, and I am not sure that this opinion of the bankruptcy court is in the appendix to the petition, but what the bankruptcy court said was this property is exempt from the claims of unsecured creditors, and I am not going to decide initially--
Unknown Speaker: Well, that's right, but that's... I know the lien avoidance was not at issue at that time.
Mr. Dyk: --Yes, it was.
Unknown Speaker: Well, he didn't decide it, anyway.
Mr. Dyk: He didn't--
Unknown Speaker: He said that, he said that this property was exempt under Florida law in this bankruptcy proceeding from the claims of general creditors, and was not subject to the general administration of the trustee.
Mr. Dyk: --That's correct.
And what happened was when the exemption was claimed, the respondent filed an objection to that exemption on the very ground that we are talking about now.
The respondent said there is no exemption available here to the extent that this property is subject to the lien, because that is the way Florida law defines the exemption.
And the bankruptcy court, in our view, didn't quite look at it correctly.
It said well, I am going to rule that there is an exemption, but I am not going to decide the lien question.
In our view--
Unknown Speaker: We didn't appeal that order, I guess?
Mr. Dyk: --I don't think it was appealable, because it wasn't an adverse judgment against us.
He hadn't decided the lien question.
There wasn't a final judgment that would have been appealable.
Unknown Speaker: Well, literally he cited against you by saying that there was an exemption.
You say there wasn't an exemption.
Mr. Dyk: No, he reserved the question of whether--
Unknown Speaker: I know, but... you, you, just a while ago you said that, you said that this property just wasn't exempt.
Mr. Dyk: --That's correct.
Unknown Speaker: There wasn't anything for 522(f) to operate on.
Mr. Dyk: That's correct, and that is what we said in the bankruptcy court.
And he, and what he said was well, I am going to view this as exempt from the claims of general creditors, but I am not going to reach the question of what the effect of that is on the lien.
There wasn't... he reserved that for the future.
He didn't decide that until some future time.
Unknown Speaker: What sort of a... what phase of the bankruptcy proceedings was it that the bankruptcy judge made this particular finding?
Mr. Dyk: Very... early in the bankruptcy proceedings.
What, what happens is there is a schedule of property filed as part of the bankruptcy petition.
The condominium that is at issue here was listed there and an exemption was claimed for it.
Unknown Speaker: Right on, right on the schedule?
Mr. Dyk: Right on the schedule.
And there was an objection, as required by the rules, filed--
Unknown Speaker: By your client?
Mr. Dyk: --Yes.
There was an objection filed with respect to that exemption on the ground that there was no exemption available under Florida law to the extent of the lien.
And the bankruptcy court ultimately got around to resolving that question in a later ruling in the course of the case rather than in this earlier ruling.
Unknown Speaker: Yes, but, let me just stop you, if I may.
If the property worth more... had been, I don't know what the facts are, worth more than the amount of your client's claim, so that theoretically there would be a portion available to the claims of general creditors, at least it is established that the property was that, to that extent exempt.
Mr. Dyk: Oh, absolutely.
There is not question about that.
Unknown Speaker: So then if it's, if it's at least in the category of exempt property, why, how do you get around the language of 522(f) that the only thing that, about the exemption that wasn't impaired is the lien, to the extent that such lien impairs an exemption, to which--
Mr. Dyk: Justice Stevens, I was not agreeing that it is exempt property.
The way Florida defines the exemption, it is exempt property only to the extent that it is not covered by the preexisting lien.
It is not exempt to the extent that it's covered by the preexisting lien.
What Congress did in 522 was to--
Unknown Speaker: --In other words, the condominium is treated as though it were two separate parcels.
One parcel is exempt, that is the part that the general creditors are trying to reach, and the other parcel is nonexempt.
Mr. Dyk: --Right.
And just as the... Florida could have decided to, instead of having a half-acre exemption, it could have a quarter-acre exemption, or an eighth-of-an-acre exemption.
It has decided to define this in terms of property which is subject to preexisting lien and property which isn't.
Unknown Speaker: The problem I have with that is the language of the statute refers to an interest of the debtor in property to the extent that such lien impairs an exemption, and so forth, which seems to me to assume for purposes of that language that the amount of the lien is less than the total value of the property.
Mr. Dyk: Well, I--
Unknown Speaker: It talks about to the extent of the impairment.
Mr. Dyk: --Well, I think in many cases it, the amount of the lien will be less than the total amount of the property, just apparently it doesn't happen to be the case here.
Unknown Speaker: Well, but not, not under your view, because you say there are really two kinds of property.
Mr. Dyk: --There are two kinds of property.
In this particular case it is probable that the lien was greater than the amount of the property.
So, in Justice Stevens' hypothetical, there wasn't any property which would qualify for the exemption here, because it was all subject to a lien.
In most situations the property probably would be greater in value than the amount of the lien, but that didn't happen to be the case here.
And what Congress was concerned about, the petitioner has suggested that 522(f) is meaningless if our construction is adopted.
What Congress was concerned about here was several things.
First of all, it was concerned with the rule of Long against Bullard, this ancient Supreme Court case which said that even if there is an exemption, that as a matter of Federal law, apparently, that the lien is going to be preserved.
And Congress, when it enacted 522, decided to adopt the rule of Long v. Bullard as a general matter, and you see that in 522(c), and to preserve most liens.
In particular it decided to preserve purchase money mortgages and liens, but to carve out an exception from the rule of Long against Bullard in the case of these judicial liens and nonpurchase money, nonpossessory liens.
And what it was doing in that respect was trying to serve State policy in those States that had opted out of the Federal exemptions to, where a State did not define the property in the limited way that Florida did here, it, Congress decided to assist State policy by voiding the lien.
And 522(f), of course, had other purposes also, because there is the alternative list of Federal bankruptcy exemptions.
522(f) operates with respect to that.
There are Federal nonbankruptcy exemptions.
It operates with respect to that.
And there are liens created by States outside of the debtor's domiciliary State, and 522(f) operates with respect to those also.
So it's a meaningful provision in all of these respects, if you would opt our interpretation.
Unknown Speaker: Mr. Dyk, to prevail, do you have to read the, the 522(f) language would have been entitled as is entitled?
Mr. Dyk: No.
No, Justice O'Connor.
I think it's a question of what the would is referring to.
I think it does not mean would have been entitled if Florida had been more generous in defining its exemptions.
That is not what the would means.
Would have been entitled means would have been entitled, except for the rule of Long against Bullard, in other words this Federal lien preservation policy.
So that's, that's what the meaning of the word would is in there.
And as far as Justice Scalia's question about fixing, the use of the word fixing, I don't attribute any significance to that either.
A lot of people puzzled about that.
It can't mean prospectively, because the automatic stay provision in section 362 of the code would prevent the fixing of the judicial lien after the filing of a bankruptcy petition.
So it has to be referring to past--
Unknown Speaker: Is the first phrase, notwithstanding any exemption of... any waiver of exemptions, necessary just for absolute clarity?
Mr. Dyk: --Well, I think, I think what... there is a question as to whether, for example, a State would have the power to allow people to waive exemptions.
The answer to... and that is dealt with in the clause that you read and also in section 522(e)--
Unknown Speaker: (e), yes.
Mr. Dyk: --which also talks about waivers.
I think that's a rather different question than we have in this case, and a somewhat difficult one in view of some of the past Supreme Court cases dealing with the issue of waiver.
But that's a, a separate question which the Court may have to save for some other day.
But in terms of the ability of the State to define property, that's what the controversy was all about between the House and the Senate in enacting section 522.
And the Senate essentially won out and the States were given the right to define what is property for purposes of the exemption, what the exemption should be, and the effort to federalize the exemptions essentially failed.
Florida has the right to define the exemption.
It has opted out of the Federal exemption scheme.
And so it has defined the exemption not to include property to the extent of the lien, there is nothing on, which 522 can offer it.
Unknown Speaker: Could you, I know you did it already and I just didn't follow part of your discussion, could you give me an example of the avoidance of a judicial lien to which this language applies?
Mr. Dyk: Yes, Justice Stevens.
Let's suppose, for example, the State had created a $400 exemption for personal property, and the consequence there is that an individual comes into bankruptcy and he decides, he designates which $400 worth of property he would like to exempt.
Now under State law, some of that property may come into bankruptcy subject to liens.
522(f) says, under those circumstances, if the State has a $400 exemption you are going to avoid the judicial liens and nonpossessory, nonpurchase money liens in that property.
That is not a situation in which a State has made a choice, such as Florida's, to preserve the lien.
It has just been silent about it.
And that is fairly frequent.
The second part of our argument, of course, relates to this interesting question of retroactivity, which has occupied this Court in a number of occasions over the last several years.
And what we suggest is there's an alternative ground, if you need to reach it, to affirm the judgment below, and that is that Federal law should not be construed to require the retroactive application of State law.
State law here is very clear that when there is a new exemption created, as there was here for single people, that it doesn't apply to preexisting liens.
So under Florida there's a rule against retroactivity of these exemptions.
In the Security Industrial Bank case, of course, this Court determined that Federal law 522(f) should not be construed to operate retroactively.
We have suggested... and under the Kener case, Justice Holmes' opinion in the Kener case, that Federal law should not be construed as requiring that State law operate retroactively.
And that is essentially for the same reasons as this Court articulated in Holt and Security Industrial Bank, and articulated most clearly in the Kener case.
Unless there are further questions, I have nothing further.
Unknown Speaker: Thank you, Mr.--
--Well, one question, if I may.
Your interpretation does rather cut against the fresh start policy, I suppose?
Mr. Dyk: I don't, I don't think it, it really does, Justice O'Connor.
The fresh start policy is not a policy that the debtor carry all his property through bankruptcy.
It's a, it's a policy that he have a certain amount of property to begin again.
And the States are to define what that property is, and some States are very generous, the way Florida is, and some States are not so generous.
As I said at the beginning of my argument, I don't think there is any indication in the legislative history of 522 that Congress was somehow dissatisfied with Florida's generosity and felt that something more was required.
If they hadn't done that they would have enacted the mandatory Federal exemptions that were proposed, and they would have increased, vastly increased the amount of those exemptions.
Florida is giving people much more than the $7,500 Federal exemption in the vast majority of these cases.
Unknown Speaker: May I ask you another question, and along the same line?
I gather under the fresh start policy your client's claim against your opponent to the extent that it exceeded the value of this property has been discharged?
It was not a nondischargeable debt?
Mr. Dyk: That is correct.
There is no question but that there is no personal liability of the debtor here.
The sole question is whether the property is going to pass through bankruptcy with the lien intact or without the lien intact.
Unknown Speaker: And if the lien attaches, if the lien survives and the value of the property fluctuates, how do, how do we know the value of the lien when the debt has been discharged?
I am a little puzzled.
Maybe I'm just stupid about this, but I--
Mr. Dyk: Well, there's another provision of the Bankruptcy Code, 506, which deals with this, if I understand your question correctly.
And under 506(d), if the lien exceeds the value of the property at the time of the bankruptcy, that that excess amount of the lien is voided as a result of passing through bankruptcy.
So if we had a situation here where the property is worth $135,000 and the lien is $158,000, as a result of the bankruptcy proceeding the lien is reduced to $135,000.
Unknown Speaker: --Now the bankruptcy proceeding is over, isn't it?
Mr. Dyk: Yes.
Unknown Speaker: So has that, has the amount of the, the value of the lien been ascertained?
Mr. Dyk: I think the amount of the lien has been ascertained at $158,000.
I don't think there was any determination of the value.
The value was listed at $135,000, and I don't recall that there was any dispute about that.
Unknown Speaker: I see.
Okay, thank you.
Thank you, Mr. Dyk.
Mr. Fishell, do you have rebuttal?
Rebuttal of Robert L. Fishell
Mr. Fishell: Yes, Your Honor.
Yes, Mr. Chief Justice.
The generosity or lack thereof the State chooses to give is up to the State, and the Bankruptcy Code leaves, leaves that as it is.
But the lien avoidance remedy is something that is Federally created.
If you... both the Senate and the House versions of the legislative history make it apparent that a lien was to avoided to the extent that an exemption could be enjoyed in the absence of the lien.
If this, if this, if this debtor's property is executed on, he will be deprived of his exemption by a lone creditor.
This will not serve to benefit the general administration of his estate.
It will not serve to benefit the larger share of his, of his creditors.
This would not in, by any stretch of the imagination, pardon me... succeed in giving this debtor a fresh start.
This was a no asset case.
His lone asset is the homestead.
Florida law gives him the homestead.
This lien is the only, the only thing that takes that exemption away.
This lien is precisely within the definition of the terms and the conditions of 522(f)(1), and needs to be avoided.
If you permit State exceptions for lien encumbered property to defeat 522(f), then we will return to precode days where all liens passed through bankruptcy unavoided.
And the credi... and the debtor has no remedy, has no means of securing the exemption to himself following his discharge.
That's the reason that I believe that, that if this Court takes an independent application of 522(f) upon whatever categories, quantities, or types of property that a State has included within its list of exemptions, and makes an independent application of the lien avoidance provision above and beyond the list selected by the State, then the lien must be avoided.
If it is not, then the exemption definitions created by the State will allow States to evade the lien avoidance concept or remedy altogether.
Thank you, Your Honor.
Chief Justice Rehnquist: Thank you, Mr. Fishell.
The case is submitted.
Unknown Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.
Argument of Speaker
Mr. Speaker: The opinion of the Court in No. 89-1008, Owen against Owen will be announced by Justice Scalia.
Argument of Justice Scalia
Mr. Scalia: This case presents a problem concerning the interaction of two provisions of the Bankruptcy Code.
One of which allows individuals to exempt property from the bankruptcy estate and one of which permits them to avoid judicial liens on that exempt property.
The problem is raised because the Code permits the states to define what exemptions their citizens may take and does not limit the state's power to define these exemptions.
Thus, the question presents itself whether a state may define its exemptions so as to exclude from those exemptions property encumbered by a judicial lien thereby, in effect, nullifying the federal lien avoidance power for those state-created exemptions.
In an opinion filed with the Clerk today, we hold that a state's excepting from its exemptions property encumbered by a judicial lien will not affect the operation of the federal lien avoidance power.
The Code gives the Bankruptcy Court the power to avoid a lien to the extent that such lien impairs an exemption to which the debtor would have been entitled, and that is the crucial language, would have been entitled under the section defining the exemptions.
To make sense of the term "would have been entitled", we must ask would have been entitled but for what?
In applying the same statutory provision to federal exemptions, Bankruptcy Courts have uniformly asked whether the lien impairs an exemption to which the debtor would have been entitled but for that lien.
That is they determined first what exemption the debtor would have been entitled to without the lien at question, and then determine whether the lien impairs that exemption.
We see no reason to read the statute differently in the context of state exemptions.
Thereto, the court should ask what exemption the debtor would enjoy but for the lien in question, and then determine whether the lien impairs that exemption.
The Court of Appeals for the Eleventh Circuit though otherwise and its judgment is therefore, reversed and the case remanded for further proceedings.
Justice Stevens has filed a dissent.