Arizona Judge Declares California Exemption Scheme Unconstitutional

In re Regevig, 389 B.R. 736 (Bkrtcy, Ariz, Haines J, June, 2008)

Issue:   May an Arizona debtor claim California exemptions, otherwise appropriate under Section 522(b)(3)(A)?                   

Holding:    Not under California CCP 703.140(b).   

Judge Randall Haines

The debtor, an Arizona resident when the chapter 7 was filed, was required to use California exemptions because she had moved recently from California to AZ.  She claimed exemptions under the California “Wildcard,” i.e., CCP 703.140(b)(5).  The trustee objected saying the exemptions under 703.140(b) were unconstitutional because they apply only to bankruptcy cases and thus violate the Supremacy Clause.  Judge Haines agreed.  He acknowledged that what the debtors exempted would have been exempted under Section 522 if California had not opted out but that no showing of prejudice was required.

The opinion gives a little historical background and says that California instituted the “two sets of exemptions” system in 1984 to prevent stacking of exemptions by husbands and wives.  Since that is no longer allowed anyway, the two systems serve no purpose today.  In any event, California cannot pass a law whose only function is to prevent the bankruptcy trustee from doing his job.  This is especially so since the California wildcard is twice the federal wildcard.  He cites In re Kanter, 505 F.2d 228, 230 (9th Cir. 1974) which he says invalidates “under the Supremacy Clause, a California law attempting to preclude trustees and other assignees by operation of law from reaching a debtor’s cause of action, but not exempting it from the reach of other judgment creditors.”

Although there is little analysis in the opinion of the Supremacy Clause, Haines says,

"Here, Congress has pervasively defined the exemptions that a state may permit a debtor to claim only in a bankruptcy case, even if they are not generally exempt from creditors outside of bankruptcy.  Those are the exemptions defined by Bankruptcy Code § 522(d).  And Congress further specified exactly how a state may make those bankruptcy-specific exemptions available – by not opting out pursuant to Code § 522(b)(2).  Where Congress has already defined both the substantive law and the procedure, in a pervasive federal scheme that generally pre-empts State legislation, Congress has occupied the field.  There simply is no room for states to adopt their own bankruptcy-specific exemptions by a procedure other than that provided by the Code, i.e., not opting out of the Bankruptcy Code’s exemptions.”

I think he has a point although don't tell anyone - I'll be hounded out of the debtor's bankruptcy bar.  703.140(b) is called the "Federal Exemptions" in California.  It says something like, "if a person files bankruptcy, the person may use the exemptions in this list instead of any other exemtpions."  The list is very similar to Section 522(d).  One exception is that the wildcard is double 522(d).  But clearly there is no wildcard under California law unless the person files bankruptcy.