Indiana Law Review Determining the Constitutionality of the Bankruptcy Code "Opt-Out" Provision: A Critical Look at In re Sullivan I. Introduction Although every federal bankruptcy law has allowed exemptions of some kind to bankrupt debtors, 1 the Bankruptcy Reform Act of 1978 (the Code)2 represents a substantial departure from previous bankruptcy legislation regarding exemptions.3 The Code's exemption section 4 allows a debtor to choose between the specific exemptions provided in the Code5 and the exemptions allowed under state, local, and nonbankruptcy federal law,6 but the Code makes this choice sub- 'In general, exempted property is that property which the law allows a debtor to retain free from the claims of creditors. See 31 Am. Jur. 2d Exemptions § 1 (1967). 'Bankruptcy Reform Act of 1978, 11 U.S.C. §§ 101-151326 (Supp. IV 1980). The Code became effective on October 1, 1979. Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, § 402(a), 92 Stat. 2549, 2682. 3The four bankruptcy laws which preceded the Code are the Bankruptcy Act of 1898, ch. 451, 30 Stat. 544 (previously codified at 11 U.S.C. §§ 1-1255 (1976) (repealed 1978)); the Bankruptcy Act of 1867, ch. 176, 14 Stat. 517 (repealed 1879); the Bankrupt- cy Act of 1841, ch. 9, 5 Stat. 440 (repealed 1843); and the Bankruptcy Act of 1800, ch. 19, 2 Stat. 19 (repealed 1803). 4 11 U.S.C. § 522 (Supp. IV 1980). Section 522 provides in pertinent part: (b) Notwithstanding section 541 of this title, an individual debtor may ex- empt from property of the estate either — (1) property that is specified under subsection (d) of this section, unless the State law that is applicable to the debtor under paragraph (2) (A) of this subsection specifically does not so authorize; or, in the alternative, (2)(A) any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor's domicile has been located for the 180 days immediately preceding the date of the fil- ing of the petition, or for a longer portion of such 180-day period than at any other place; and (B) any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest ... is exempt from process under applicable nonbankruptcy law. Id. (emphasis added). Section 541, referred to in subsection 522(b), lists the property of the debtor which is included in the estate placed in the control of the bankruptcy trustee. Id. § 541. 5The exemptions in subsection 522(d) are based on those provided in the Uniform Exemptions Act (U.E.A.), promulgated by the National Conference of Commissioners on Uniform State Laws. H.R. Rep. No. 595, 95th Cong., 1st Sess. 361, reprinted in [1978] U.S. Code Cong. & Ad. News 5963, 6317 [hereinafter cited as House Report]. 6 11 U.S.C. § 522(b)(2)(A) (Supp. IV 1980). See note 4 supra. Examples of nonbank- ruptcy federal exemptions include: Longshoremen's and Harbor Workers' Compen- sation Act death and disability benefits, 33 U.S.C. § 916 (1976); special pensions paid to 849 850 INDIANA LAWREVIEW [Vol. 15:849 ject to one very important prohibition. Under the so-called "opt-out" provision of the Code,7 a state may deny to its domiciliaries the specific federal exemptions provided in the Code. Therefore, a debtor domiciled in a state which has opted out is limited in a federal bank- ruptcy proceeding to the exemptions allowed under state, local, and nonbankruptcy federal law.8 The opt-out provision of the Code raises two serious constitu- tional issues. The first issue raised is whether the Code satisfies the constitutional requirement that federal bankruptcy legislation must be "uniform . . . throughout the United States."9 Because the opt-out provision allows each state to decide that only the various and diverse state exemptions will be available to its domiciliaries in winners of the Congressional Medal of Honor, 38 U.S.C. § 3101(a) (1976); social security payments, 42 U.S.C. § 407 (1976); injury or death compensation payments from war risk hazards, 42 U.S.C. § 1717 (1976); federal homestead lands on debts contracted before issuance of the patent, 43 U.S.C. § 175 (1976); Railroad Retirement Act an- nuities and pensions, 45 U.S.C. § 231m (1976); veterans benefits, 45 U.S.C. § 352(e) (1976); wages of fishermen, seamen, and apprentices, 46 U.S.C. § 601 (1976). See House Report, supra note 5, at 360. 7 11 U.S.C. § 522(b)(1) (Supp. IV 1980). See note 4 supra. 8To date, thirty-two states have taken this step. See Ala. Code § 6-10-11 (Supp. 1981); Ariz. Rev. Stat. Ann. § 33-1133 (Supp. 1982); Ark. Stat. Ann. § 36-210 (Supp. 1981); Colo. Rev. Stat. § 13-54-107 (Supp. 1981); Del. Code Ann. tit. 10, § 4914 (Supp. 1981); Fla. Stat. Ann. § 222.20 (West Supp. 1981); Ga. Code Ann. § 51-1601 (Supp. 1981); Idaho Code § 11-609 (Supp. 1981); III. Ann. Stat. ch. 52, § 101 (Smith-Hurd Supp. 1981); Ind. Code § 34-2-28-0.5 (Supp. 1981); Iowa Code § 627.10 (Supp. 1982); Kan. Stat. Ann. § 60-2312 (Supp. 1981); Ky. Rev. Stat. § 427.170 (Supp. 1980); La. Rev. Stat. Ann. § 13:388KB) (West Supp. 1981); Act of June 5, 1981, ch. 431, § 2, 1981 Me. Legis. Serv. No. 3 at 886 (to be codified at Me. Rev. Stat. Ann. tit. 7, § 4421); Md. Cts. & Jud. Proc. Code Ann. § ll-504(g) (Supp. 1981); H.B. 495, 1981 Mont. Laws (ef- fective Oct. 1, 1981); Neb. Rev. Stat. § 25-15, 105 (Supp. 1980); Nev. Rev. Stat. § 21.090(3) (1982); N.H. Rev. Stat. Ann. § 511:2-a (Supp. 1981); Act of June 2, 1981, ch. 490, § 1, 1981 N.C. Adv. Legis. Serv. No. 6 at 20 (to be codified at N.C. Gen. Stat. § IC 1601(f)); N.D. Cent. Code § 28-22-17 (Supp. 1981); Ohio Rev. Code Ann. § 2329.662 (Page 1981) (repealed effective Sept. 28, 1983, unless reenacted by subsequent legisla- tion); Okla. Stat. Ann. tit. 31, § KB) (West Supp. 1981); Or. Rev. Stat. § 23.305 (1981); S.C. Code § 15-41-425 (Supp. 1981); S.D. Codified Laws Ann. § 43-45-13 (Supp. 1981); Tenn. Code Ann. § 26-2-112 (1980); Utah Code Ann. § 78-23-15 (Supp. 1981); Va. Code § 34-3.1 (Supp. 1981); W. Va. Code § 38-10-4 (Supp. 1981); Wyo. Stat. § 1-20-109 (Supp. 1981). In addition, California has used its opt-out authority to restrict a husband and wife to the same exemption provisions (either state or federal) in a joint case. Cal. Civ. Proc. Code § 690(b) (West Supp. 1981). Illinois and Tennessee have had their opt-out statutes invalidated because they conflict with section 522 of the Code and therefore are void under the supremacy clause of the Constitution. Bradshaw v. Beneficial Fin. Co. (In re Balgemann), 16 Bankr. 780 (Bankr. N.D. 111. 1982); Rhodes v. Stewart (In re Rhodes), 14 Bankr. 629 (Bankr. M.D. Tenn. 1981). These cases are discussed in the text accompanying notes 166-72 infra. 9 U.S. Const, art. I, § 8, cl. 4. "The Congress shall have Power . . . [t]o establish . . . uniform Laws on the subject of Bankruptcies throughout the United States." Id. 1982] BANKRUPTCY CODE 851 bankruptcy, the Code's satisfaction of the uniformity requirement has been challenged in numerous bankruptcy and district court cases. 10 The second issue raised by the opt-out provision is the ques- tion of unlawful delegation. The Constitution prohibits Congress from delegating to the states its essential legislative functions.11 Because the opt-out provision specifically authorizes the states to decide whether to prohibit the federal exemptions, the opt-out provi- sion has been attacked as an unlawful delegation by Congress of its power to enact bankruptcy laws.12 In In re Sullivan, 13 decided May 19, 1982, the Court of Appeals for the Seventh Circuit became the first appellate court to address these two constitutional issues. In Sullivan, the appellate court con- sidered two consolidated appeals. 14 In both cases, the debtors had at- tempted to claim the specific exemptions provided in the Code. 15 The trustees objected because the Illinois opt-out statute 16 restricted the debtors to the exemptions provided by Illinois law. 17 The bankruptcy judges sustained the trustees' objections, and the debtors appealed. On appeal, the debtors argued that the opt-out provision violates the uniformity requirement of the bankruptcy clause of the Constitution and constitutes an unlawful delegation by Congress of its bankrupt- cy power to the states.18 The appellate court rejected both arguments and affirmed the lower courts' decisions. 19 This Note criticizes the Sullivan court's reliance on the Supreme "See, e.g., Kosto v. Lausch (In re Lausch), 16 Bankr. 162 (M.D. Fla. 1981); In re Vasko, 6 Bankr. 317 (Bankr. N.D. Ohio 1980). uThe Supreme Court has determined that two constitutional provisions, taken together, require this prohibition. Article I, section 1 of the United States Constitution provides that, "All legislative Powers herein granted shall be vested in a Congress of the United States . . . ." Article I, section 8, clause 18 of the United States Constitu- tion states that Congress is authorized "[t]o make all Laws which shall be necessary and proper for carrying into Execution" its general powers. See Schechter Poultry Corp. v. United States, 295 U.S. 495, 529 (1935); Panama Refining Co. v. Ryan, 293 U.S. 388, 421 (1934). 12 See, e.g., Kosto v. Lausch {In re Lausch), 16 Bankr. 162 (M.D. Fla. 1981); Rhodes v. Stewart (In re Rhodes), 14 Bankr. 629 (Bankr. M.D. Tenn. 1981). 13680 F.2d 1131 (7th Cir. 1982). uThe decision of the Bankruptcy Court for the Central District of Illinois in In re Sullivan, 11 Bankr. 432 (Bankr. CD. 111. 1981), was appealed directly to the court of ap- peals under an agreement with the United States pursuant to 28 U.S.C. § 1293(b). 680 F.2d at 1132. The other case, In re West, No. 81-1084 (CD. 111. 1981), was appealed from the District Court for the Central District of Illinois, which had affirmed, without opinion, the decision of the bankruptcy court. 680 F.2d at 1132. "See 680 F.2d at 1132. 18 Ill. Ann. Stat. ch. 52, § 101 (Smith-Hurd 1981). 17680 F.2d at 1132. "Id. at 1131-32. "Id. at 1138. 852 INDIANA LAWREVIEW [Vol. 15:849 Court's decision in Hanover National Bank v. Moyses20 to find that the Code meets the constitutional requirement of uniformity. In Sullivan, the court interpreted Moyses as adopting the nondiscrimi- nation test of uniformity which was enunciated in earlier Supreme Court cases construing the revenue clause of the Constitution.21 This Note argues that Moyses did not adopt the nondiscrimination test of uniformity, but adopted a uniformity test requiring equality of ex- emptions in and out of bankruptcy. Further, this Note argues that although the opt-out provision of the Code satisfies the non- discrimination test of uniformity, it does not satisfy the test requir- ing equality of exemptions in and out of bankruptcy. Therefore, if Moyses is controlling as to the issue of the Code's uniformity, then the opt-out provision must be held unconstitutional. This Note also criticizes the Sullivan court's resolution of the unlawful delegation issue. This Note argues that the unlawful dele- gation issue should be resolved by the application of a two-step analysis. The courts must determine first whether a delegation ex- ists. If so, the courts must then determine whether the delegation is lawful. When this two-step analysis is applied to the opt-out provi- sion, this Note concludes that the opt-out provision should be con- strued as a lawful delegation of bankruptcy power by Congress to the states. Finally, this Note briefly discusses the consequences of the del- egation issue for the constitutionality of state exemption laws under the supremacy clause. II. Background A full understanding of the opt-out provision and the attendant constitutional questions it raises necessitates an examination of the history of the Code and the policy considerations which prompted its enactment. The Code's predecessor, the Bankruptcy Act of 1898,22 allowed debtors in bankruptcy proceedings the exemptions prescribed by the laws of their domiciliary states.23 By allowing the debtor to claim 20186 U.S. 181 (1902). 21See notes 42-57 infra and accompanying text. "Bankruptcy Act of 1898, ch. 541, 30 Stat. 544 (repealed 1978). "Section 6 of the 1898 Act provided: This Act shall not affect the allowance to bankrupts of the exemptions which are prescribed by the laws of the United States or by the State laws in force at the time of the filing of the petition in the State wherein they have had their domicile for the six months immediately preceding the filing of the peti- tion, or for a longer portion of such six months in any other State. Id. § 6, as amended by Chandler Act, ch. 575, § 6, 52 Stat. 840, 847 (1938). 1982] BANKRUPTCY CODE 853 exemptions and by discharging the debtor from his financial obliga- tions, the 1898 Act sought to grant the debtor an economic fresh start. 24 In the years following the enactment of the 1898 Act, the United States changed from a predominately rural to a more urban society. Many states' exemption statutes, however, failed to change with the times. As a result, the efficacy of the generally static state exemptions to provide a realistic economic fresh start, particularly to urban dwellers, dwindled.25 In addition, there were vast dif- ferences among the states' exemption statutes. While some states provided very generous exemptions to their domiciliaries, other states allowed debtors only a meager allowance with which to begin anew.26 By 1960, legal commentators were advocating reform; some favored the revision of state exemption statutes,27 and others sup- ported the enactment of exclusive federal exemptions.28 In response to these criticisms, Congress formed the Commis- sion on the Bankrupty Laws of the United States in 1970.29 The Com- mission filed a report of its findings with Congress on July 30, 1973, 30 along with a draft of its proposed new federal bankruptcy act. 31 As introduced in the House, the proposed act provided a set of exclusive federal exemptions and eliminated the use of state exemp- tions in bankruptcy proceedings.32 The National Conference of Bankruptcy Judges, however, was opposed to the use of exclusive federal exemptions and decided to draft its own reform legislation. The so-called Judges' Bill33 gave bankrupts a choice between the list of federal exemptions set out in 2iSee Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934); Williams v. United States Fidelity & Guaranty Co., 236 U.S. 549, 554-55 (1915); Wetmore v. Markoe, 196 U.S. 68, 77 (1904). 25For example, one well-known bankruptcy authority noted that, as late as 1976, Connecticut's exemption law provided debtors with only a meager set of exemptions including "two cords of wood, two tons of hay, five bushels each of potatoes and tur- nips, [and] ten bushels each of Indian corn and rye." The statute had not been changed since 1821. Countryman, Consumers in Bankruptcy Cases, 18 Washburn L.J. 1, 2 (1978) (citing Conn. Gen. Stat. Ann. § 52-352 (West 1976)). 26Western states typically were much more generous to debtors in granting ex- emptions than were eastern states. See generally Note, Bankruptcy Exemptions: Cri- tique and Suggestions, 68 Yale L.J. 1459, 1468-69 (1959). "See, e.g., Kennedy, Limitations of Exemptions in Bankruptcy, 45 Iowa L. Rev. 445 (1959). 2 *See, e.g., Countryman, For a New Exemption Policy in Bankruptcy, 14 Rut. L. Rev. 678 (1960); Note, supra note 26. '"Act of July 24, 1970, Pub. L. No. 91-354, 84 Stat. 468. 30Report of the Commission on the Bankruptcy Laws of the United States, H.R. Doc. No. 137, 93d Cong., 1st Sess., pt. I (1973). n Id., pt. II. 32H.R. 10792, 93d Cong., 1st Sess. § 4-503 (1973). 33H.R. 32, 94th Cong., 1st Sess. (1975). 854 INDIANA LAWREVIEW [Vol. 15:849 the Commission's bill, and those exemptions provided under state, local, and nonbankruptcy federal law.34 The alternate-exemptions scheme of the Judges' Bill ultimately was adopted by the House of Representatives in section 522 of the House's version of the bankruptcy reform bill.35 In the final draft of the Senate reform bill, however, the Senate retained the 1898 Act's reference to state law and rejected the Commission's recommenda- tions and the compromise position of the Judges' and House bills.36 As the result of a hurried compromise between the House and Senate, the final enacted version of the Code retained the House's alternate-exemptions scheme, but allowed the states to opt out of the federal exemptions.37 Because little or no legislative history ex- ists to illuminate Congress intent in enacting the opt-out provision,38 the difficulty of determining the constitutionality of the provision is exacerbated. III. The Uniformity Issue Three constitutional provisions contain a uniformity require- ment: the bankruptcy clause,39 the naturalization clause,40 and the revenue clause.41 The term "uniform," as it is used in the Constitu- tion, has been interpreted to require something less than intrinsic or absolute uniformity under the bankruptcy and revenue clauses. The Supreme Court first addressed the uniformity requirement in tax cases construing the revenue clause.42 Representative of these tax cases is Knowlton v. Moore.™ In Knowlton, the executors of a will alleged that because the then cur- rent revenue act taxed different legacies at different rates based on the amount of the legacy, the act violated the uniformity require- ment of the revenue clause.44 The revenue clause provides that, "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, . . . but all Duties, Imposts and Excises shall be uniform throughout the United States."45 3iId § 4-503. 35H.R. 8200, 95th Cong., 2d Sess. § 522 (1977). 36 S. 2266, 95th Cong., 2d Sess. § 522 (1977). 37124 Cong. Rec. 32,398 (1978) (remarks of Rep. Edwards). 38Sec In re Sullivan, 680 F.2d 1131, 1136 (7th Cir. 1982). "U.S. Const, art. I, § 8, cl. 4. i0 Id. 47d, cl. 1. i2 See, e.g., Fairbank v. United States, 181 U.S. 283 (1901); Knowlton v. Moore, 178 U.S. 41 (1900); Head Money Cases, 112 U.S. 580 (1884). 43178 U.S. 41 (1900). "Id. at 83-84. 45 U.S. Const, art. I, § 8, cl. 1. 1982] BANKRUPTCY CODE 855 The executors argued that the uniformity requirement com- manded an intrinsic uniformity which required that excises, duties, and imposts must operate equally upon all persons and property.46 In rejecting this argument, the Court relied on the debates over the revenue clause at the Constitutional Convention. The Court concluded that the drafters' sole intent in imposing a uniformity requirement on congressional revenue power was to prevent the possible discrimi- nation by Congress against one or more states. 47 The Court, referring to such uniformity as "geographical uniformity," 48 found that the revenue act satisfied the uniformity requirement. 49 Therefore, the Supreme Court adopted a nondiscrimination test of uniformity under the revenue clause, such that Congress was prohibited from discrimi- nating among the states in enacting revenue laws.50 In 1902, just two years after deciding Knowlton, the Supreme Court first addressed the uniformity required by the bankruptcy clause. In the landmark case of Hanover National Bank v. Moyses,51 the Court stated, in dicta, that the uniformity required under the bankruptcy clause was "geographical and not personal."52 Because the Court in Moyses referred to the uniformity re- quired by the bankruptcy clause as geographical, the Sullivan court interpreted Moyses as adopting the same nondiscrimination test of geographical uniformity developed in Knowlton and the other early tax cases. The Sullivan court referred to "the" concept of geographical uniformity,53 and cited Moyses and the tax cases together in support of the geographical interpretation.54 It appears that the debtors in Sullivan also believed that Moyses adopted the nondiscrimination test of geographical uniformity because the deb- tors argued that Moyses was either incorrectly decided or not ap- plicable to the Code.55 Although the Sullivan court stated that, "[ajrguably the uniformity provision relating to bankruptcies had a different focus" than the uniformity provision of the revenue clause, 56 the court claimed that no support could be found for this distinction in the Moyses decision or in later Supreme Court cases.57 49 178 U.S. at 84. "Id. at 89. t8 Id. at 106. "Id. at 107-09. ""Id. at 89. 51 186 U.S. 181 (1902). &2 Id. at 188. 53680 F.2d at 1133-34. M Id. at 1133. 55 Id. at 1134. 56 /d. "Id. at 1134-35. 856 INDIANA LAW REVIEW [Vol. 15:849 The Sullivan court's analysis is subject to attack on two grounds. First, the term "uniform" need not be given the same meaning under both the revenue and bankruptcy clauses. As pointed out in Sullivan, the uniformity requirement under the naturalization clause has not been interpreted as demanding only geographical uni- formity. 58 Second, a strong argument can be made that Moyses developed a different test of geographical uniformity for the bank- ruptcy clause than the nondiscrimination test of the tax cases. A proper analysis of the Moyses decision and the cases on which it relied supports this argument. The bankruptcy laws of 180059 and 184160 did not allow debtors in bankruptcy proceedings to claim state exemptions.61 The first act allowing state exemptions was enacted in 1867. The 1867 Act allowed debtors to claim the state exemptions only as they existed in 1864, and permitted their application only if the state exemptions exceeded the $500 upper limit imposed by the act.62 The use of state exemption laws in the 1867 Act prompted arguments for the first time that the recognition of state exemp- tions by the federal bankruptcy law would violate the constitutional uniformity requirement. Although several lower court decisions up- held the constitutionality of the 1867 Act on this issue,63 the Supreme Court did not address the problem until it decided Moyses in 1902. 64 In Moyses, the Court construed the 1898 Act which allowed debtors to claim only the exemptions provided by their dom- iciliary states. 65 In Moyses, the creditor bank had brought suit on a judgment against Moyses for nonpayment of his promissory note. The bank, unable to collect on the judgment because of Moyses's discharge in M/d at 1135. See also Hertz, Limits to the Naturalization Power, 64 Geo. L.J. 1007, 1013-17 (1976) (arguing that the naturalization clause requires more than geographical uniformity). ^Bankruptcy Act of 1800, ch. 19, 2 Stat. 19 (repealed 1803). ""Bankruptcy Act of 1841, ch. 9, 5 Stat. 440 (repealed 1843). "Under the Bankruptcy Act of 1800, debtors in bankruptcy proceedings were not allowed exemptions under state exemption statutes. Rather, the act stipulated what exemptions the debtor was allowed, permitting the debtor to retain certain specified property, such as clothing and household necessities. Bankruptcy Act of 1800, ch. 19, § 5, 2 Stat. 19, 23 (repealed 1803). In addition, the debtor could retain a portion of his other assets, such portion determined as a percentage of the total assets available to creditors. Id. § 34. The Bankruptcy Act of 1841 provided a similar exemption subject, however, to a flat $300 maximum limit. Bankruptcy Act of 1841, ch. 9, § 3, 5 Stat. 440, 442 (repealed 1843). ^Bankruptcy Act of 1867, ch. 176, § 14, 14 Stat. 517, 522-23 (repealed 1879). 63 E.g., Darling v. Berry, 13 F. 659 (C.C.D. Iowa 1882); In re Beckerford, 3 F. Cas. 26 (C.C.D. Mo. 1870) (No. 1,209). 64186 U.S. 181 (1902). 65See note 23 supra. 1982] BANKRUPTCY CODE 857 bankruptcy, argued that the 1898 Act was unconstitutional. The bank alleged, inter alia, that because the 1898 Act gave debtors in bankruptcy proceedings the exemptions provided by the various laws of their domiciliary states, the 1898 Act did not establish a uniform bankruptcy law and therefore was void.66 The Supreme Court rejected the bank's arguments and held the 1898 Act to be constitutional. 67 Although the Court stated, in dicta, that the 1898 Act satisfied the geographical uniformity required by the Constitution,68 the Court specifically held that: [T]he system is, in the constitutional sense, uniform throughout the United States, when the trustee [in bank- ruptcy] takes in each State whatever would have been avail- able to the creditors if the bankrupt law had not been passed. The general operation of the law is uniform although it may result in certain particulars differently in different States. 69 The Moyses test states, in effect, that the uniformity requirement is satisfied if creditors, through the bankruptcy trustee, take pro rata in bankruptcy the same amount of property that they could have taken to satisfy their claims in state court proceedings by means of judicial process. In other words, to be uniform the bankruptcy act must grant the same exemptions to debtors in bankruptcy that are available to debtors outside of bankruptcy. As noted by the Sullivan court, the Supreme Court based its holding in Moyses on two earlier federal circuit court decisions, In re Beckerford70 and In re Deckert.11 In Beckerford, the court found support for the uniformity of the 1867 Act on two grounds. First, the law was uniform with respect to the distribution of the debtor's assets because the law distributed equally among creditors that property which was not exempt.72 Second, the amount of assets available to creditors in and out of bankruptcy was uniform because the existing state exemptions also were the exemptions in bank- ruptcy.73 In Deckert, Chief Justice Waite, sitting as Circuit Justice, reiterated the position taken in Beckerford to justify the 1867 Act's uniformity. He stated that because "every debt is contracted with 66186 U.S. at 183. 67ta at 190. "Id. at 188. "Id. at 190 (emphasis added). 70 3 F. Cas. 26 (C.C.D. Mo. 1870) (No. 1,209). 71 7 F. Cas. 334 (C.C.E.D. Va. 1874) (No. 3,728). 72 3 F. Cas. at 27. 13 Id. 858 INDIANA LAWREVIEW [Vol. 15:849 reference to the rights of the parties thereto under existing exemp- tion laws, ... no [bankruptcy] creditor can reasonably complain if he gets his full share of all that the law, for the time being, places at the disposal of [judgment] creditors."74 Therefore, the courts in both Beckerford and Deckert upheld the uniformity of the 1867 Act because creditors were able to obtain the same amount of property in bankruptcy that they could obtain outside of bankruptcy under state law. In other words, they upheld the uniformity of the 1867 Act because the exemptions were the same both in and out of bank- ruptcy. This is precisely the rationale which was followed by the Supreme Court in Moyses. It could be argued that the Court in Moyses did not intend equality of exemptions in and out of bankruptcy to be an exclusive test of uniformity, but merely one example of uniform operation. However, the Court's reliance on Deckert and Beckerford disputes this argument. In Deckert, the court noted that the uniformity of the 1867 Act was sustained because it "subjected] to the payment of debts under its operation only such property as could [be reached] by judicial process . . . ," 75 The court in Deckert also stated that it was proper to confine the 1867 Act's operation to such property.76 Therefore, these earlier cases, which the Court in Moyses solely relied upon, determined that the uniformity requirement under the bankruptcy clause was one of equality and fairness in its "opera- tions" 77 upon debtors and creditors.78 As the Sullivan court noted,79 the Court in Moyses relied exclusively on Beckerford and Deckert. Although it had decided Knowlton just two years earlier, the Supreme Court did not cite Knowlton for the geographical uniformi- ty established in Moyses.80 This implies that the Court in Moyses in- tended to adopt the uniformity interpretation set out in Beckerford and Deckert, rather than follow the nondiscrimination test of unifor- mity enunciated by the Supreme Court in Knowlton. 74 7 F. Cas. at 336. Deckert involved the 1873 amendment to the 1867 act, 17 Statutes at Large 577, which set bankruptcy exemptions equal to state exemptions as they existed in 1871. Because bankruptcy exemptions did not, as a result, follow ex- isting state laws, the court found the amendment unconstitutional. 7 F. Cas. at 336. But see In re Smith, 22 F. Cas. 413, 414 (C.C.N.D. Ga. 1876) (No. 12,996). That the original act of 1867 set exemptions as they existed in 1864, 14 Statutes at Large 523, .seems to have been overlooked in both Beckerford and Deckert. 75 7 F. Cas. at 336 (emphasis added). 76/d 77"A bankrupt law, therefore, to be constitutional . . . must be uniform in its operations, not only within a state, but within and among all the states." Deckert, 7 F. Cas. at 335 (emphasis added). nSee Countryman, supra note 28, at 681. 79680 F.2d at 1134. 80186 U.S. at 188. 1982] BANKRUPTCY CODE 859 Prior to Knowlton, a lower court applied a nondiscrimination test to determine the uniformity of bankruptcy exemptions in Darling v. Berry. 81 In addition, the Darling court pointed out that the test of uniformity developed in Beckerford and Deckert was a different test than the nondiscrimination test, which was later adopted in Knowl- ton. 82 In Darling, the court severely criticized Justice Waite's view of the bankruptcy uniformity requirement as expressed in Deckert and later adopted in Moyses. The Darling court stated that courts which had "treat[ed] the question as depending rather upon the operation or working of the law, than upon its application according to its own terms to the various states of the Union" had "applied to it an erroneous test of uniformity."83 The court then refined its reference to the law's application to the various states. "[Wjhen a bankrupt, revenue, or naturalization law is made by its terms ap- plicable alike to all the states of the Union, without distinction or discrimination, it cannot be successfully questioned on the ground that it is not uniform, in the sense of the [C]onstitution . . . ." 84 Although the Darling court conceded that the use of existing state exemptions in bankruptcy was fair and just, it admonished that justice and the constitutional requirement of uniformity should not be confused.85 In criticizing the Deckert court's uniformity test of fairness of operation, the Darling court stated that, "All that the [C]onstitution intends is that [CJongress shall not pass partial revenue and bankruptcy laws. It shall not prescribe one law for this state or section, and a different law for that state or section." 8* Although Darling was effectively overruled by Moyses, Darling clearly shows that the interpretation of the bankruptcy uniformity requirement in Beckerford, Deckert, and Moyses differs from the interpretation of the revenue uniformity requirement in the tax cases. The Court in Moyses must have been aware of its decision in Knowlton just two years earlier, yet the Court relied on the older Beckerford and Deckert circuit court decisions. Therefore, even though the Court in Moyses stated in dicta that the uniformity re- quired by the bankruptcy clause was geographical, the test the Court adopted in Moyses is not the same geographical uniformity test enunciated in the tax cases. Rather, the Moyses test is one of 81 13 F. 659 (C.C.D. Iowa 1882). B2See text accompanying notes 43-50 supra. 83 13 F. at 667 (emphasis added). M Id. (emphasis added). For a comment on the court's inclusion of naturalization law in this statement see Hertz, supra note 58, at 1014. The court later left out any reference to naturalization law in a similar statement. See text accompanying note 86 infra. 85 13 F. at 668. m Id. at 667 (emphasis added). 860 INDIANA LAWREVIEW [Vol. 15:849 fairness of operation of the bankruptcy act on the creditors and deb- tors of each state. The test requires that creditors be able to obtain the same amount of assets in bankruptcy as they can out of bankruptcy. Although this Note has shown that the Moyses test of bankruptcy uniformity differs from the nondiscrimination test enunciated in Knowlton, this distinction is insignificant if the opt-out provision is constitutional under either test. It is apparent that the opt-out pro- vision satisfies the nondiscrimination test of uniformity. The Code initially provides specific federal exemptions to the debtors of each state. In addition, the Code permits any state to opt out of the federal exemptions. The Code, by its terms, is applicable alike to all the states without discrimination and therefore is uniform under the nondiscrimination test of geographical uniformity. The opt-out provision, however, is not constitutional under the Moyses test. The Moyses test of uniformity requires that creditors, through the bankruptcy trustee, take pro rata in bankruptcy the same amount of property that they could have taken to satisfy their claims in state court by means of judicial process. Stated another way, under the Moyses test a bankruptcy law is uniform with regard to exemptions only if debtors obtain the same exemptions in and out of bankruptcy.87 The problems with a general uniformity test based on equality of exemptions in and out of bankruptcy are readily apparent. If Con- gress had followed the Commission's recommendation and had en- acted a bankruptcy law which provided only an exclusive federal list of exemptions, the Moyses test would not be satisfied. Even though bankruptcy exemptions would be the same throughout the United States, those exemptions would necessarily differ from the exemp- tions under the various states' laws. Similarly, the Moyses test is not met when debtors in states which have not opted out of the federal exemptions choose the exemptions in subsection 522(d) in- stead of state and nonbankruptcy federal exemptions. This failure to conform to Moyses results even though the exemptions claimed by the debtors in those different states are more uniform, in terms of being identical, than the supposedly uniform exemptions the debtors would have claimed under the 1898 Act. One possible answer to this dilemma is that the Moyses test is not a general test of uniformity, but is to be applied only in the specific instance when state exemp- tion laws are given effect in bankruptcy. The 1898 Act clearly satisfied this limited interpretation of the Moyses test. Because the 1898 Act adopted the existing state exemp- tions as those which would be recognized in bankruptcy, exemptions "See text accompanying note 69 supra. 1982] BANKRUPTCY CODE 861 were the same both in and out of bankruptcy. However, exemption legislation enacted in several states under the opt-out provision of the Code raises the question of whether the Code satisfies even this narrow interpretation of Moyses. Ohio's exemption law is repre- sentative of such legislation. Ohio, exercising its power under subsection 522(b)(1), opted out of the federal exemption plan and denied the list of exemptions in subsection 522(d) to its domiciliaries. 88 Ohio also revised its list of ex- emptions, generally increasing the amount of property debtors can exempt and updating its law as to the types of property exempted.89 In this respect, Ohio has done basically what other opt-out states have done.90 However, Ohio's exemption legislation was unpre- cedented in declaring that two particular exemptions are available to debtors only in bankruptcy proceedings.91 As a result, in Ohio a bankruptcy trustee will get less property for distribution to cred- itors than creditors will obtain by judicial process in state courts. Moyses expressly prohibits this result when state exemption laws are used in bankruptcy proceedings. An Ohio bankruptcy trustee raised precisely this point in In re 88 Ohio Rev. Code Ann. § 2329.662 (Page 1981). The Ohio statute provides: "Pur- suant to the 'Bankruptcy Reform Act of 1978,' 92 Stat. 2549, 11 U.S.C. 522(b)(1), this state specifically does not authorize debtors who are domiciled in this state to exempt the property specified in . . . [Code section] 522(d)." Ohio Rev. Code Ann. § 2329.662 (Page 1981) (repealed effective Sept. 28, 1983, unless reenacted by subsequent legisla- tion). 89 Ohio Rev. Code Ann. § 2329.66 (Page 1981). For a thorough examination and analysis of the Ohio exemption statute see Fisher, The Federal Exemption Scheme: Delayed Until 1983 For Ohio Bankrupts, 49 U. Cin. L. Rev. 791 (1980). See also Note, Ohio Opts Out of the Federal Bankruptcy Exemptions and Revises Its Exemption Laws, 5 U. Dayton L. Rev. 461 (1980). 90See generally Ariz. Rev. Stat. Ann. § 33-1133 (Supp. 1981); Ind. Code § 34-2-28-1 (Supp. 1981); Neb. Rev. Stat. § 25-15, 105 (Supp. 1981). 91Ohio Rev. Code Ann. § 2329.66(A)(4)(a), .66(A)(17) (Page 1981). The statute pro- vides, in pertinent part, as follows: 2329.66 Exempted interests and rights. (A) Every person who is domiciled in this state may hold property ex- empt from execution, garnishment, attachment, or sale to satisfy a judgment or order, as follows: (4)(a) The person's interest, not to exceed four hundred dollars, in cash on hand, money due and payable, money to become due within ninety days, tax refunds, and money on deposit with a bank, building and loan association, savings and loan association, credit union, public utility, landlord, or other person. This division applies only in bankruptcy proceedings. (17) The person's interest, not to exceed four hundred dollars, in any property, except that this division applies only in bankruptcy proceedings. Id. (emphasis added). 862 INDIANA LA W REVIEW [Vol. 15:849 Vasko. 92 Although the Vasko court cited an earlier Ohio case which had addressed the uniformity requirement,93 the court refused to ad- dress the issue raised by the trustee. Because the trustee attacked the validity of the state's exemption law, rather than challenging the constitutionality of the Code itself, the Vasko court was spared the difficult task of resolving this obvious conflict.94 The court recognized that the uniformity requirement is "only controlling as to the congressional exercise of power."95 Eventually the Code will be challenged as violating the Moyses test because the opt-out provision allows state exemption statutes like the one in Ohio. Posited in this context, the uniformity issue would be properly raised. When this challenge arises, a proper appli- cation of Moyses demands that the opt-out provision be found un- constitutional. Notwithstanding the arguments raised in Darling against the test of uniformity later adopted in Moyses, a lower court "obviously lacks the authority to overrule a Supreme Court case."96 If the opt-out provision is to be found constitutional, the Supreme Court must resolve the uniformity issue by reassessing its decision in Moyses. IV. The Unlawful Delegation Issue A. The Sullivan Court's Resolution of the Unlawful Delegation Issue In addition to arguing that the opt-out provision violates the bankruptcy uniformity requirement, the debtors in Sullivan argued that the opt-out provision constitutes an unlawful delegation by Con- gress of its power to enact bankruptcy laws.97 The court in Sullivan rejected this argument on three grounds. First, the court found that the exemptions in section 522 of the Code have not preempted state exemptions.98 Second, the court determined that the opt-out provi- sion is not a delegation of congressional authority because the states have concurrent power to enact bankruptcy laws.99 Third, the court relied on Moyses to support its finding that no unlawful delegation exists under the Code.100 92 6 Bankr. 317 (Bankr. N.D. Ohio 1980). 93 Id. at 319 (citing In re Hill, 4 Bankr. 310 (Bankr. N.D. Ohio 1980)). 9iSee 6 Bankr. at 318. 95 Id. at 320. 96 In re Sullivan, 680 F.2d 1131, 1134 (7th Cir. 1982). 91 Id. at 1132. 9 *Id. at 1136-37. "Id. at 1137. 100ta 1982] BANKRUPTCY CODE 863 In rejecting the reasoning of two cases on which the debtors relied, In re Rhodes 101 and Cheeseman v. Nachman,102 the Sullivan court addressed only the preemption analysis raised in these cases. In both Rhodes and Cheeseman, the courts had found that by enact- ing the specific federal bankruptcy exemptions in the Code, Con- gress had preempted state law on the subject of exemptions. 103 Both courts had found a fresh start policy in the section 522 exemption scheme; therefore, if state law exemptions conflicted with this fresh start policy, the state exemption scheme was void.104 The Sullivan court refused to apply this preemption analysis to the opt-out provision. Because of the compromise between the House and Senate which resulted in the opt-out provision of the Code, the Sullivan court found that the fresh start policy of the ex- emption provision could be attributed only to the House version, and not to the final enacted version of the Code.105 The court in Sullivan also stated that a preemption analysis is not applicable where the states are specifically permitted by Con- gress to opt out of the federal exemptions. 106 The Rhodes court determined that because the exemptions in the Code had preempted the state exemptions, the opt-out provision was a delegation by Con- gress of its bankruptcy power to the states.107 That delegation was lawful, however, because the federal exemption scheme in section 522 set limits on the states' bankruptcy power.108 "[T]he delegation of authority to the states to 'opt-out' has been carefully circum- scribed and the states may exercise that authority only if they pro- vide their citizens with a scheme of bankruptcy exemptions that is not inconsistent with the provisions of § 522." 109 However, the Sullivan court failed to address the delegation finding in Rhodes. In- stead, the Sullivan court determined that there was no delegation because the states have concurrent bankruptcy power. The court in Sullivan stated that the debtors had "overlooked] the long-established principle that the states retain the power to enact bankruptcy laws so long as they do not conflict with federal bankruptcy legislation." 110 To support this statement, the Sullivan 101Rhodes v. Stewart (In re Rhodes), 14 Bankr. 629 (Bankr. M.D. Tenn. 1981). 102 656 F.2d 60 (4th Cir. 1981). 103 14 Bankr. at 631; 656 F.2d at 63. 104 14 Bankr. at 631-33; 656 F.2d at 64. 105680 F.2d at 1135-36. m I