RODROCK v. SECURITY INDUS. BANK

McWILLIAMS, Circuit Judge.

Each of these seven cases is a direct appeal to this Court from a judgment of a United States Bankruptcy Court, pursuant to the Bankruptcy Reform Act of 1978, Pub.L.No. 95-598, § 405(c)(1)(B), 92 Stat. 2685 (West Supp.1979), concerning the lien avoidance provisions of the Reform Act. The Reform Act of 1978 was enacted by Congress on October 6, 1978, and signed into law by the President on November 6, 1978. The effective date of the Reform Act is October 1, 1979. Five of the seven cases, Nos. 80-1549, 80-1550, 80-1551, 80-1552 and 80-1553, are direct appeals from judgments entered in the United States Bankruptcy Court for the District of Colorado.1 The remaining two, Nos. 80-2267 and 80-2268, are direct appeals from judgments entered in the United States Bankruptcy Court for the District of Kansas.2 These seven direct appeals were consolidated for hearing in this Court, as each appeal involves consideration of the same provision of the Reform Act, namely 11 U.S.C. § 522(f)(2) (Supp. III 1979). That particular statute is set forth in its entirety as an appendix to this opinion.

In each of these seven cases, creditors acquired non-possessory, non-purchase money security interests in personal property (household furnishings and appliances) from the debtors before the Reform Act was signed into law by the President on November 6, 1978, and also before the Act was passed by Congress on October 6, 1978. In each case the debtor instituted bankruptcy proceedings after the October 1, 1979, effective date of the Reform Act. In each case the debtor, pursuant to Section 522(f)(2), claimed exemptions for the various items which served as collateral in security agreements previously entered into. The secured creditors objected to such claims for exemption. Accordingly, the debtor in each instance filed a complaint in the Bankruptcy Court against his secured creditor, seeking to avoid the creditor's non-possessory, non-purchase money security interest in accordance with the provisions of Section 522(f)(2). In each case, the creditor moved to dismiss the debtor's complaint for lien avoidance.

In the two Kansas cases, the bankruptcy judge held that Congress did not intend for Section 522(f)(2) to apply to security interests which came into being before the November 6, 1978, enactment date of the Reform Act and dismissed the debtors' complaints. The debtors now appeal.

In the five Colorado cases, the bankruptcy judges held that Congress did intend that in cases filed after October 1, 1979, Section 522(f)(2) would apply to security interests which came into being before the November 6, 1978, enactment date of the Reform Act. The Colorado bankruptcy judges further held, however, that such retroactive application of the statute was unconstitutional. In each case the judge dismissed the debtor's complaint. Those debtors also appeal. To summarize, in both the Kansas and Colorado Bankruptcy Courts the secured creditors prevailed, but the basis for the respective holdings was not the same.

In all seven cases, after notice by the Bankruptcy Courts, pursuant to 28 U.S.C. § 2403(a) (1976), the United States intervened to argue in favor of the constitutionality of Section 522(f)(2). In this Court, the United States, in effect, represents the debtors. As we view these appeals, there are two issues to be resolved: first, whether Section 522(f)(2) is to be applied retroactively; and, second, if so, whether such retroactive application, under the facts of these cases, would be constitutional.3

Retroactivity

The effective date of the Reform Act was October 1, 1979. Pub.L.No. 95-598, § 402(a) 92 Stat. 2682 (West Supp.1979). The Reform Act provided that as of October 1, 1979, the former Bankruptcy Act was repealed. Pub.L.No. 95-598, § 401(a), 92 Stat. 2682 (West Supp.1979). The Reform Act further provided that a case commenced before October 1, 1979, would be governed by the old Bankruptcy Act, as opposed to the Reform Act, and that such proceedings should thereafter be conducted in accord with the Bankruptcy Act. Pub.L.No. 95-598, § 403, 92 Stat. 2683 (West Supp.1979). Cases commenced after October 1, 1979, were to be conducted in accord with the Reform Act, the old Bankruptcy Act having been repealed as of October 1, 1979.

The precise issue is whether Congress intended for a substantive portion of the Reform Act, such as Section 522(f)(2), to apply to security interests which were vested prior to the effective date of the Reform Act. We think Congress had such an intent. Cases filed in bankruptcy court shortly after the October 1, 1979, effective date of the Reform Act would necessarily involve creditors' interests which came into being prior to the effective date of the Reform Act. As of October 1, 1979, the old Bankruptcy Act stood repealed. So, if, in a bankruptcy case filed on or after October 1, 1979, the Reform Act does not apply to creditors' interests which came into existence prior to October 1, 1979, then there would be no bankruptcy law governing the particular matter at hand. We cannot believe that Congress intended such a statutory "gap."

Stated somewhat differently, the issue is whether, with the old Bankruptcy Act repealed as of October 1, 1979, except for cases commenced prior to that date, the provisions of the Reform Act should be applied prospectively only. If the Reform Act were applied only to those cases commenced after October 1, 1979, which involved security interests which came into existence after that date, there would be no bankruptcy law applicable to cases filed after October 1, 1979, but involving security interests which were fixed prior to October 1, 1979. We cannot believe that Congress intended such a no-man's land. Based on such reasoning, we conclude that Congress intended for substantive provisions of the Reform Act, such as Section 522(f)(2), to be given retroactive effect to the end that such statutory provisions govern security interests that came into being before the effective date of the Reform Act.

Having determined that Section 522(f)(2) should be given retroactive effect, we find nothing in the Reform Act itself to indicate that Congress intended for the Reform Act to be given only a limited retroactive effect, i. e., to a particular date, as, for example, November 6, 1978, the enactment date of the Reform Act. The Reform Act is either to be retroactively applied, or to be applied only in a prospective manner. We believe it was Congress' intent to apply the Reform Act retroactively. Accordingly, we agree with the holding of the Colorado Bankruptcy Court that Congress intended the Reform Act to be retroactively applied to the creditors' interests here involved. We are not in accord with the ruling of the Kansas Bankruptcy Court that Congress did not intend such a retroactive application of Section 522(f)(2). The fact that we do not agree with the Kansas Bankruptcy Court on the retroactivity issue does not mean, however, that its judgment must be reversed. There remains the issue of whether the provisions of Section 522(f)(2) can be constitutionally applied to a creditor's security interest which vested prior to the enactment date of the Reform Act, i. e., November 6, 1978.

Constitutionality

The Colorado Bankruptcy Court held that, under Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1935), Section 522(f)(2) could not be constitutionally applied to a creditor's security interest which came into being prior to the enactment date of the Reform Act. We agree. Radford involved an amendment to the Bankruptcy Act which preserved to a defaulting mortgagor of farm property the ownership and enjoyment of his farm and took from the mortgagee rights in specific property held as security. The Supreme Court in Radford, speaking through Justice Louis D. Brandeis, declared the amendment to the Bankruptcy Act unconstitutional under the Fifth Amendment.4 In so doing, the Court recognized that, although Congress, under the bankruptcy power, may discharge a debtor's personal obligation, because, unlike the states, Congress is not prohibited from impairing the obligation of contract, nevertheless Congress could not take for the debtor's benefit rights in specific property acquired by a creditor prior to the amendment of the Bankruptcy Act. In the instant cases, the creditors acquired rights in specific property prior to the enactment of the Reform Act, and, under Radford, these vested rights cannot be taken from the creditor for the benefit of the debtor. It should be noted that, in the instant cases, there would be a complete taking of the secured creditors' property interests.

Counsel suggests that, with the passage of time, Radford has lost its steam and that later decisions of the Supreme Court cast doubt on the continuing vitality of that decision. We disagree.5 Such cases as Wright v. Vinton Branch of the Mountain Trust Bank of Roanoke, 300 U.S. 440, 57 S.Ct. 556, 81 L.Ed. 736 (1937)6 and Kuehner v. Irving Trust Co., 299 U.S. 445, 57 S.Ct. 298, 81 L.Ed. 391 (1937)7 may well refine the rule of Radford, but they do not destroy the fundamental teaching of Radford that Congress may not under the bankruptcy power completely take for the benefit of a debtor rights in specific property previously acquired by a creditor.

Having concluded that Section 522(f)(2) cannot, under the Fifth Amendment, be applied to a creditor's security interest in specific property acquired prior to the enactment date of the Reform Act, we hereby affirm all judgments.

APPENDIX

11 U.S.C. § 522(f). Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is —

Note: The federal exemptions as to the items above listed are as follows: