United States v. Security Industrial Bank

1982-11-30

Headline: Bankruptcy exemption provision is not applied retroactively to wipe out pre-1978 nonpossessory liens, so existing lenders keep their security interests and courts avoid resolving a constitutional takings claim.

Holding: The Court affirmed the Court of Appeals and held that §522(f)(2) should not be applied to void nonpossessory, nonpurchase-money liens created before the 1978 Act, avoiding the constitutional takings question.

Real World Impact:

Protects lenders’ pre-1978 nonpossessory liens from being voided by the new bankruptcy exemption.
Debtors cannot use the new exemption to cancel liens made before November 6, 1978 in these appeals.
Leaves open application to liens created after enactment but before the law became effective.

Topics: bankruptcy rules, creditor rights, property takings, lien protection

Summary

Background

A group of individual debtors who filed bankruptcy after the 1978 Bankruptcy Reform Act tried to use a new federal exemption rule to cancel certain loan liens. Small loan companies and other secured creditors had obtained and perfected nonpossessory, nonpurchase-money liens on household furnishings and similar items before the Act was enacted on November 6, 1978. The debtors sought to avoid those liens under the new exemption, and the United States intervened to defend the statute.

Reasoning

The central question was whether the new exemption provision (§522(f)(2)) applied to liens that were created before the 1978 Act. The Court found substantial doubt that making the provision retroactive would be constitutional because it could completely destroy previously vested property interests and raise a Fifth Amendment takings issue. To avoid deciding that sensitive constitutional question, the Court applied the long-standing rule that statutes are generally not read to affect antecedent property rights unless Congress clearly says so. Relying on earlier decisions and the statutory history, the Court concluded Congress had not plainly required retroactive destruction of pre-enactment liens and therefore limited the statute’s application.

Real world impact

The ruling means lenders who obtained these kinds of liens before November 6, 1978 keep those security interests in the cases before the Court, and debtors in these appeals cannot cancel those liens under §522(f)(2). The Court did not decide whether the statute might apply to liens created after the enactment date but before the law took effect, and it explicitly avoided resolving the broader constitutional takings question.

Dissents or concurrances

Justice Blackmun, joined by Justices Brennan and Marshall, concurred in the judgment but said he would have reached the constitutional question and would have resolved it in favor of the debtors, citing the limited value of these liens, creditor abuse concerns, and precedent such as Holt v. Henley.