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13.2.1 Statutory Amendments That Increase Exemptions Do Not Unconstitutionally Impair Contracts

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  3. Chapter 13 Enforcement of Judgments: General Principles, Constitutional Issues
  4. 13.2 Constitutionality and Validity of Exemption Laws
  5. 13.2.1 Statutory Amendments That Increase Exemptions Do Not Unconstitutionally Impair Contracts

13.2.1 Statutory Amendments That Increase Exemptions Do Not Unconstitutionally Impair Contracts

Whether an amendment to an exemption law applies to preexisting debts is first a question of statutory construction.11 Assuming that an amendment increasing an exemption applies to preexisting debts, the question may arise whether this application is constitutional.

Exemption laws do not unconstitutionally impair the obligation of contracts, even when an increase in the exemption amount applies to debts incurred before the change.12 The Contract Clause does not bar every state law that affects a contractual relationship. The reservation of certain essential attributes of sovereign power, such as the right to declare exemptions and to modify them in response to economic changes, must be read into every contract.13 As one court noted, “[i]nflation is an economic reality; as long as it continues, the legislature has a legitimate interest in making corresponding reforms to outdated and unrealistic state laws.”14

To balance the legitimate expectations of contracting parties with the reserved police power of the state, the U.S. Supreme Court has articulated a three-part test for impairment of contract claims. First, does the statute substantially impair the contract? If so, does it serve a “significant and legitimate” public purpose, such as “remedying a broad and general social or economic problem”? Finally, does it adjust “the rights and responsibilities of the contracting parties” based upon “reasonable conditions . . . appropriate to the public purpose”?15

On the first criterion—whether the statute substantially impairs the contract—severity of impact is a key question. “Minimal alteration” of contract rights will end the inquiry at step one, but “severe impairment” will require a “careful examination of the nature and purpose” of the legislation.16 Courts distinguish between statutes that affect the “core purpose” of a contract and those that merely modify the remedy, such as increased exemptions that place more of an asset off limits.17 The latter will not be a substantial impairment, unless a very large or unexpected change “destroy[s] the value of the contract by destroying any meaningful remedy.”18

The other two criteria closely resemble the familiar “rational relationship to a proper public purpose” balancing test applied in due process and equal protection cases. Courts have generally held that state legislatures may properly shield debtors from total destitution, respond to economic crises, or amend unrealistic statutes to allow for changed prices and that reasonable exemption statutes are a rational means to these ends.19

The reasonable expectations of the parties are highly significant.20 “State regulation that restricts a party to the gains that it reasonably expected from a contract does not necessarily constitute a substantial impairment.”21 If, for example, exemption amounts are updated to account for inflation, “the reasonable expectations of creditors are realized, not disturbed, by the increased statutory exemption.”22

One important factor in determining reasonableness is the extent of regulation of the subject matter at the time the contract is formed.23 Because exemption laws have been in existence for many decades and have changed periodically to accommodate increased prices, a creditor may not reasonably rely upon their remaining frozen.

Footnotes

  • 11 See § 15.2.8, infra.

  • 12 CFCU Cmty. Credit Union v. Hayward, 552 F.3d 253 (2d Cir. 2009) (retroactive application of New York’s increased homestead not impairment of contract); In re Selzer, 104 F.3d 234 (9th Cir. 1996) (retroactive application of statute exempting individual retirement accounts does not impair contracts); In re Evans, 362 B.R. 275 (Bankr. D.S.C. 2006); In re Betz, 273 B.R. 313 (Bankr. D. Mass. 2002); In re Larson, 260 B.R. 174 (Bankr. D. Colo. 2001) (impairment of contract not substantial when change affected only the remedy, and creditors could reasonably expect exemption amounts to change with time); In re Johnson, 69 B.R. 988 (Bankr. D. Minn. 1987) (application of increased homestead exemption to existing unsecured debt not impairment of contract; bank could not reasonably expect that exemption laws would remain unchanged); In re Punke, 68 B.R. 936 (Bankr. N.D. Iowa 1987) (application of new exemption amounts to preexisting debts is not impairment of contract); In re Hockinson, 60 B.R. 250 (Bankr. N.D. Ill. 1986) (increased exemption amount is “minimal alteration” of contractual relationship; no substantial impairment); In re Barnhart, 47 B.R. 277 (Bankr. N.D. Tex. 1985) (Texas’s increased homestead exemption applies to existing judgment liens; sovereign’s power to change laws is read into all contracts); Homeside Lending, Inc. v. Miller, 31 P.3d 607 (Utah Ct. App. 2001) (allowing application of increased exemption); Macumber v. Shafer, 637 P.2d 645 (Wash. 1981) (increasing exemption only modified remedy; reasonable exercise of police power in response to cost of living increases). See also In re Stewart, 246 B.R. 134 (Bankr. D.N.H. 2000) (application of federal bankruptcy law to exempt individual retirement account that was created before state exemption was adopted does not violate contract clause, which only limits states, not federal government); In re Bartlett, 168 B.R. 488 (Bankr. D.N.H. 1994) (New Hampshire’s constitutional prohibition against retroactive statutes applies only to substantive rights, not remedies; creditor has no “vested substantive right” in lower exemption amount). But see In re Fossum, 59 B.R. 820 (Bankr. D. Minn. 1986) (applying new amounts to preexisting debt would violate contract clause); Builders Supply Co. v. Pine Belt Sav. & Loan Ass’n, 369 So. 2d 743, 745 (Miss. 1979).

  • 13 El Paso v. Simmons, 379 U.S. 497, 85 S. Ct. 577, 13 L. Ed. 2d 496 (1965); Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 54 S. Ct. 231, 78 L. Ed. 413 (1934) (upholding Depression-era statute that extended period for redemption from foreclosure); In re Barnhart, 47 B.R. 277 (Bankr. N.D. Tex. 1985); Macumber v. Shafer, 637 P.2d 645 (Wash. 1981) (“it is presumed that parties contract with knowledge that reservation of essential attributes of sovereign power is written into all contracts”).

  • 14 In re Punke, 68 B.R. 936, 941 (Bankr. N.D. Iowa 1987). See also CFCU Cmty. Credit Union v. Hayward, 552 F.3d 253 (2d Cir. 2009) (adjustment of homestead amount because inflation had made old amount “tantamount to no exemption at all”); In re Little, 2007 WL 2791122 (N.D.N.Y. Sept. 24, 2007) (when homestead exemption so unreasonably low as to be “tantamount to no exemption,” legislature recognized need to “review and update”; application of new amount to preexisting debt not unconstitutional); In re Brown, 2007 WL 2120380 (Bankr. N.D.N.Y. July 23, 2007) (amendment to take account of “economic reality”), aff’d, 2007 WL 4560671 (N.D.N.Y. Dec. 18, 2007).

  • 15 Energy Reserves Grp., Inc. v. Kan. Light & Power Co., 459 U.S. 400, 103 S. Ct. 697, 74 L. Ed. 2d 569 (1983). See also Allied Structural Steel Co. v. Spanaus, 438 U.S. 234, 98 S. Ct. 2716, 57 L. Ed. 2d 727 (1979); Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 54 S. Ct. 231, 78 L. Ed. 413 (1934).

  • 16 Allied Structural Steel Co. v. Spanaus, 438 U.S. 234, 98 S. Ct. 2716, 2723, 57 L. Ed. 2d 727 (1979) (severity of impact on contract rights defines “height of the hurdle” that state legislation must clear; when law regarding employee pension rights had severe impact on employer’s rights, public purpose was insufficient to save it); Eagle SPV NV I, Inc. v. Kiley Ranch Cmtys., 5 F. Supp. 3d 1238 (D. Nev. 2014) (statute sharply restricting mortgage assignees’ recovery of deficiencies must be given prospective-only application; effect on existing assignees would be severe). See also Sveen v. Melin, ___ U.S. ___, 138 S. Ct. 1815, 201 L. Ed. 2d 180 (2018) (substantial impairment of contract not shown by retroactive application of statute providing that life insurance beneficiary designations of a spouse are revoked upon divorce; beneficiaries know that designations can be changed, and an insured who wishes to keep ex-spouse as beneficiary can easily make a new designation).

  • 17 CFCU Cmty. Credit Union v. Hayward, 552 F.3d 253 (2d Cir. 2009) (impairment not substantial when homestead exemption adjusted for inflation); In re Larson, 260 B.R. 174 (Bankr. D. Colo. 2001) (impairment of contract not substantial when change in exemption amount affected only the remedy); In re Bartlett, 168 B.R. 488 (Bankr. D.N.H. 1994) (state constitutional prohibition against retroactive statutes does not apply to remedies such as exemption amount); In re Hockinson, 60 B.R. 250 (Bankr. N.D. Ill. 1986) (increased exemption amount is “minimal alteration” of contractual relationship; no substantial impairment); Macumber v. Shafer, 637 P.2d 645 (Wash. 1981) (increased exemption amounts merely modified remedy). See also In re Bartlett, 168 B.R. 488 (Bankr. D.N.H. 1994) (New Hampshire’s constitutional prohibition against retroactive statutes applies only to substantive rights, not remedies; creditor has no “vested substantive right” in lower exemption amount). Cf. W. Des Moines State Bank v. Mills, 482 N.W.2d 432 (Iowa 1992) (rejecting homeowners’ claim that retroactive application of statute eliminating special notice requirement for homestead waivers was an unconstitutional impairment of contract; they had raised failure to include this notice in their mortgage documents as a defense to foreclosure).

  • 18 In re Echevarren, 2 B.R. 215 (Bankr. D. Idaho 1980) (increased exemption amount may be used if “reasonable” and “does not destroy the value of the contract by destroying any meaningful remedy,” but retroactive application of increase in homestead from $10,000 to $25,000 would unconstitutionally impair contract).

  • 19 Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 54 S. Ct. 231, 78 L. Ed. 413 (1934) (upholding Depression-era statute that extended period for redemption from foreclosure); CFCU Cmty. Credit Union, 552 F.3d 253 (2d Cir. 2009) (even if increased homestead substantially impaired contracts, adjustment for inflation served “significant and legitimate public purpose”); In re Johnson, 69 B.R. 988 (Bankr. D. Minn. 1987) (changes in homestead exemption were reasonable response to “catastrophic” situation in agriculture); In re Barnhart, 47 B.R. 277 (Bankr. N.D. Tex. 1985); Macumber v. Shafer, 637 P.2d 645 (Wash. 1981) (reasonable response to increased cost of living).

  • 20 CFCU Cmty. Credit Union v. Hayward, 552 F.3d 253 (2d Cir. 2009) (creditors could reasonably expect homestead to be adjusted for inflation); In re Little, 2007 WL 2791122 (N.D.N.Y. Sept. 24, 2007) (no substantial impairment; amendment of unreasonably low homestead exemption to account for inflation was foreseeable when creditor made loan); In re Brown, 2007 WL 2120380 (Bankr. N.D.N.Y. July 23, 2007) (change in unreasonably low homestead exemption foreseeable), aff’d, 2007 WL 4560671 (N.D.N.Y. Dec. 18, 2007); In re Evans, 362 B.R. 275 (Bankr. D.S.C. 2006) (considering the choice-of-law provisions of the bankruptcy law and the mobility of the population, no reasonable creditor could assume that a certain set of exemptions would apply); In re Larson, 260 B.R. 174 (Bankr. D. Colo. 2001) (creditors could reasonably expect exemption amounts to change with time); In re Johnson, 69 B.R. 988 (Bankr. D. Minn. 1987) (bank could not reasonably expect exemption statutes to remain unchanged and did not rely on this assumption when, at time of loan, it appeared to be fully secured); In re Punke, 68 B.R. 936 (Bankr. N.D. Iowa 1987) (when inflation is an economic reality, legislation that adjusts for it will realize, rather than disturb, creditors’ expectations). See also In re Varanasi, 394 B.R. 430 (Bankr. S.D. Ohio 2008) (in today’s mobile society, creditor cannot reasonably rely on debtor’s being entitled to a specific state’s exemptions; here, Bankruptcy Code required application of New Hampshire’s homestead exemption, which is ten times Ohio’s exemption, to Ohio property).

  • 21 Energy Reserves Grp., Inc. v. Kan. Light & Power Co., 459 U.S. 400, 103 S. Ct. 697, 74 L. Ed. 2d 569 (1983) (quoting El Paso v. Simmons, 379 U.S. 497, 85 S. Ct. 577, 13 L. Ed. 2d 496 (1965)).

  • 22 In re Punke, 68 B.R. 936, 941 (Bankr. N.D. Iowa 1987). See also In re Little, 2006 WL 1524594 (Bankr. N.D.N.Y. Apr. 24, 2006) (application of new amount to preexisting debt not impairment of contract); Macumber v. Shafer, 637 P.2d 645 (Wash. 1981).

  • 23 Energy Reserves Grp., Inc. v. Kan. Light & Power Co., 459 U.S. 400, 103 S. Ct. 697, 74 L. Ed. 2d 569 (1983) (natural gas highly regulated); In re Evans, 362 B.R. 275 (Bankr. D.S.C. 2006) (noting heavily regulated nature of debt collection and bankruptcy; not unconstitutional impairment of contract to apply increased homestead exemption that was in effect on petition date to preexisting debt); In re Johnson, 69 B.R. 988 (Bankr. D. Minn. 1987) (exemption laws had long history); In re Punke, 68 B.R. 936 (Bankr. N.D. Iowa 1987); In re Barnhart, 47 B.R. 277 (Bankr. N.D. Tex. 1985). See also Allstate Ins. Co. v. Kim, 829 A.2d 611 (Md. 2003) (heavy regulation of insurance industry).