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In re Applebaum

December 18, 2009

IN RE: DAVID MICHAEL APPLEBAUM AND LAURA MICHELLE FINLEY, DEBTORS.
RONALD R. STICKA, CHAPTER 7 TRUSTEE, APPELLANT,
v.
DAVID MICHAEL APPLEBAUM AND LAURA MICHELLE FINLEY, APPELLEES,
STATE OF CALIFORNIA, INTERVENOR.



Appeal from the United States Bankruptcy Court for the District of Oregon Honorable Frank R. Alley III, Bankruptcy Judge, Presiding, Bk. No. 08-63391.

The opinion of the court was delivered by: Hollowell, Bankruptcy Judge

ORDERED PUBLISHED

OPINION

Submitted Without Oral Argument on September 25, 2009

Before: HOLLOWELL, PAPPAS and MARKELL, Bankruptcy Judges.

Debtors David Applebaum and Laura Finley ("Debtors") filed a petition under chapter 7 of the Bankruptcy Code*fn1 and claimed exemptions under the California exemption statute, which is applicable only to debtors in bankruptcy. See Cal. Civ. Proc. Code ("C.C.P.") § 703.140. The trustee Ronald R. Sticka ("Trustee") objected to the exemptions and argued that California's bankruptcy-only exemption statute violates the Supremacy Clause and the Uniformity Clause of the United States Constitution. The bankruptcy court overruled the Trustee's objections and concluded that California's exemption scheme is constitutional. We agree that California's bankruptcy-only exemption statute is not preempted by the Bankruptcy Code and does not violate the Uniformity Clause, and AFFIRM the decision of the bankruptcy court.

FACTS

Debtors resided in California between July 2004 and April 2007. In April 2007, Debtors moved to Oregon, where they currently reside. When Debtors filed their chapter 7 petition on September 5, 2008, they appropriately claimed exemptions under California law, as provided by the domiciliary provisions in § 522(b)(3)(A). Specifically, on their Schedule C, Debtors claimed exemptions under C.C.P. § 703.140(b).*fn2

The Trustee objected to Debtors' claimed exemptions. He asserted that California's bankruptcy-only exemption statute is unconstitutional, referencing In re Regevic, 389 B.R. 736 (Bankr. D. Ariz. 2008) and In re Lennen, 71 B.R. 80 (Bankr. N.D. Cal. 1987). Debtors, for their part, contended that the bankruptcy court should adopt the analysis set forth in In re Morrell, 394 B.R. 405 (Bankr. N.D. W. Va. 2008) aff'd sub nom. Sheehan v. Peveich (In re Sheehan), 574 F.3d 248 (4th Cir. 2009), which rejected these constitutional challenges to a similar bankruptcy-only state exemption statute.

Under 28 U.S.C. § 2403(b), the bankruptcy court certified the matter to the California Attorney General, but the California Attorney General declined to intervene before the bankruptcy court. The bankruptcy court thereafter issued a memorandum decision overruling the Trustee's objections. Agreeing with Morrell, the bankruptcy court concluded that § 522(b)'s opt-out provision left ample room in the field of exemptions for a state to enact bankruptcy-only exemptions and that California's bankruptcy-only exemptions did not appear to conflict with the overall scheme of the Bankruptcy Code. The bankruptcy court also rejected the Uniformity Clause challenge.

The Trustee timely appealed. During the course of this appeal, we issued our own Certification pursuant to 28 U.S.C. § 2403(b) and the California Attorney General accepted the invitation to intervene. Debtors neither filed a brief nor otherwise actively participated in this appeal.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 157(b)(1). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Is California's bankruptcy-only exemption statute, C.C.P. § 703.140, unconstitutional because it violates either the Supremacy Clause or the Uniformity Clause of the Constitution?

STANDARD OF REVIEW

We review the bankruptcy court's conclusions of law and questions of statutory interpretation de novo. Drummond v. Urban (In re Urban), 375 B.R. 882, 888 (9th Cir. BAP 2007).

DISCUSSION

I. Bankruptcy Exemptions

Upon filing a bankruptcy petition, all property of the debtor becomes property of the bankruptcy estate. 11 U.S.C. § 541. The debtor may then exempt certain property from the estate and remove that property from distribution to creditors.

11 U.S.C. § 522(d). Allowing debtors exemptions enables them to emerge from bankruptcy with adequate property to achieve the fundamental goal of the Bankruptcy Code, a financial "fresh start." See In re Vasko, 6 B.R. 317, 321 (Bankr. N.D. Ohio 1980) (citing legislative history).

A fundamental component of an individual debtor's fresh start in bankruptcy is the debtor's ability to set aside certain property as exempt from the claims of creditors. Exemption of property, together with the discharge of claims, lets the debtor maintain an appropriate ...


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