Daniel J. Gatti, Gatti & Gatti, Salem, Or., for defendant-appellant.

Frank Wilson, Portland, Or., argued, for plaintiffs-appellees; John H. Durkheimer, Sussman, Shank, Wapnick, Caplan & Stiles, Portland, Or., on brief.

Appeal from the United States Bankruptcy Court For the District of Oregon.

Before KILKENNY and SCHROEDER, Circuit Judges and JAMESON,* District Judge.

Credithrift of America, Inc. (Credithrift) perfected liens on personal property of the debtors between the enactment date (November 6, 1978) and the effective date (October 1, 1979) of the Bankruptcy Reform Act of 1978. Credithrift has appealed from two decisions of the Bankruptcy Court for the District of Oregon which applied 11 U.S.C. § 522(f) of the Reform Act to those liens, thereby allowing their avoidance by the debtors. The sole question on appeal is whether § 522(f) may constitutionally be applied to liens perfected after the enactment date but before the effective date of the Act.

The Reform Act was passed by Congress on October 6, 1978 and signed into law by the President on November 6, 1978. The effective date of the Act was October 1, 1979.

A primary goal of the Reform Act, the first major revision of the Bankruptcy Act since 1938, was to provide an effective modern bankruptcy mechanism for consumer debtors. Congress recognized that consumer credit had become a fundamental element of the post-war economy and that the laws needed reform to make "bankruptcy a more effective remedy for the unfortunate consumer debtor." H.R.Rep.No.95-595, 95th Cong., 2nd Sess. 4 (1978), reprinted in 5 U.S.Code Cong. & Ad.News 5787, 5966 (1978).

Congress found that most state bankruptcy laws were as outmoded as the federal laws and that there was a federal interest in seeing that a debtor survives bankruptcy with adequate possessions to avoid becoming a public charge and to make a fresh start. Id. at 126, reprinted in 5 U.S.Code Cong. & Ad.News 6087. Accordingly, Congress established a set of federal exemptions which serve as an alternative to state bankruptcy law exemptions. Section 522(d) of the Reform Act provides for the exemption of specified personal property from the portion of the debtor's estate subject to sale in bankruptcy for the satisfaction of debts, including

(3) The debtor's interest, not to exceed $200 in value in any particular item, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.

As the bankruptcy court noted, "Any excess value will usually be exempt through the use of subsection (d)(5) which gives the debtor another $400.00 general exemption and the right to apply the 'spill over' from the unused portion of the homestead exemption under subsection (d)(1)."

Congress recognized, however, that something more was needed, because the purpose of household property exemptions had often been frustrated by creditors who acquired dragnet security interests in otherwise exempt property when making consumer loans. Consequently, Congress included § 522(f)1 in the Reform Act to allow debtors to avoid certain security interests of creditors:

(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 impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is-

(1) a judicial lien; or

(2) A nonpossessory, nonpurchase-money security interest in any-

(A) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;

(B) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor; or

(C) professionally prescribed health aids for the debtor or a dependent of the debtor.

On July 2, 1979, defendant/appellant Credithrift made a loan to Everett and Elizabeth Yoder. The Yoders executed a note for $2,508.90, payable to Credithrift, and signed a form pledging their household furnishings, goods and appliances as security for the loan. On July 23, 1979, Credithrift made a loan to Harry G. and Susan Marie Webber, who executed a note for $3,224.96 and signed a similar security agreement. The parties stipulated that each lien is a "nonpossessory, nonpurchase-money security interest" that arose after November 6, 1978 and before October 1, 1979.

The Webbers and Yoders subsequently filed petitions in bankruptcy on May 5, 1980 and July 1, 1980 respectively. Each couple sought to avoid the Credithrift liens in their exempt household goods pursuant to § 522(f)(2)(A). Credithrift asserted that § 522(f)(2)(A) cannot be constitutionally applied in these cases because the security interests were perfected prior to the effective date of the Reform Act. The constitutional question was certified to the Attorney General of the United States, who, through the United States Attorney, intervened, pursuant to 28 U.S.C. § 2403, in support of the constitutionality of the challenged provision.

On November 17, 1980 the bankruptcy court concluded in the Webber case that " § 522(f)(2) is constitutional in so far as it applies to liens arising between November 6, 1978 and October 1, 1979, and the plaintiffs are entitled to the voiding of the defendant's lien on their household furnishings, household goods and appliances." In re Webber, 7 B.R. 580, 586 (Bkrtcy.D.Or.1980). A stipulated judgment was subsequently entered in the Yoder case allowing similar relief based upon the Webber decision. Both cases have come to this court on direct appeal pursuant to 28 U.S.C. § 1293(b). In this court, the United States, in effect, represents the debtors/appellees.

Appellant contends that (1) § 522(f)(2)(A) cannot be given retroactive effect because to do so would be manifestly unreasonable; (2) a creditor whose rights in specific property have attached prior to the effective date of the law may not be deprived of those rights by legislative enactment, and giving retroactive effect to § 522(f)(2) amounts to an unconstitutional taking of property under the holding in Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S. Ct. 854, 79 L. Ed. 1593 (1935); (3) the public cannot be considered to be "on notice" of a statute until it is made effective and both parties were on notice of the effective date; and (4) the Fifth Amendment protects all property interests, whether real or personal, regardless of monetary value.

Appellee contends that (1) the bankruptcy law comports with due process because it is not so grossly unreasonable or arbitrary as to be incompatible with fundamental law; (2) because appellant was on notice of the contents of § 522(f)(2)(A) when the liens were perfected, there is no retroactive effect of constitutional dimension; (3) even if considered to be retroactive, application of § 522(f)(2)(A) is constitutional because it effectuates sound Congressional policy; (4) Radford has been severely limited by subsequent case law and is inapplicable to this case; and (5) the Fifth Amendment does not protect ownership of these liens because they are not property interests of "substantial value."

At the outset it may be noted that both the bankruptcy courts and the courts of appeal are divided with respect to the retroactive applicability of § 522(f) (2)(A). Bankruptcy courts in Oklahoma, Colorado, Oregon, Michigan, Washington, Kansas, and New Mexico have held that it cannot be applied to liens perfected before the Reform Act's enactment date.2 This holding was followed by the Court of Appeals for the Tenth Circuit in Rodrock v. Security Industrial Bank, 642 F.2d 1193 (10 Cir. 1981), prob. jur. noted, --- U.S. ----, 102 S. Ct. 969, 71 L. Ed. 2d 108 (U.S.1981) and by the Court of Appeals for the Seventh Circuit in In the Matter of: Willis R. Gifford and Jacqueline M. Gifford, 669 F.2d 468, 474, (7 Cir. 1982) ("Gifford").3 Bankruptcy courts in Ohio, Utah and Wisconsin have held that § 522(f)(2)(A) may be applied to pre-enactment liens.4 This holding was followed by the Court of Appeals for the Third Circuit in In re: Charles E. Ashe and Susan J. Ashe, t/a C & S Fuel Service, Debtors, et al., 669 F.2d 105 (3 Cir. 1982) ("Ashe").

Bankruptcy courts in Tennessee, Illinois, Wisconsin, Nevada (dealing with § 522(f)(1)-judicial liens), Texas, Oregon, Colorado, Louisiana, Missouri, Kansas, Georgia and Ohio have held that § 522(f)(2)(A) may be applied to liens created after the Reform Act's enactment date but before its effective date, i.e., in the so called "gap" period.5 Both Ashe and Gifford6 impliedly support this holding, while Rodrock is equivocal.7 Courts in Michigan, Washington, Oklahoma, Colorado (dealing with § 522(f)(1)-judicial liens) Kansas and Florida have held that the effective date is controlling and that § 522(f)(2)(A) cannot be applied to liens vested before that date.8 It will be noted that the bankruptcy courts in Colorado and Kansas are themselves divided. In In Re Henderson, 10 B.R. 19 (Bkrtcy.N.D. Indiana 1980), the court ruled against giving retroactive effect to § 522 but left open the question of whether the controlling date was the enactment date or the effective date. Aside from what is implied in Ashe and Gifford, no appellate court has directly ruled on the applicability of § 522(f) to liens vested during the "gap" period.

The significance of "legislative intent" in determining whether a statute may be applied retroactively was well stated in Matter of Ward, 14 B.R. at 557-58:

A retroactive statute is one "which takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty or attaches a new disability, in respect to transactions or considerations already past." 16A Am.Jur.2d Constitutional Law § 661, at 641 (1979). As a general rule of construction, " 'legislation must be considered as addressed to the future, not to the past ... (and) a retrospective operation will not be given to a statute which interferes with antecedent rights ... unless such be the unequivocal and inflexible import of the terms, and the manifest intention of the legislature'." Greene v. United States, 376 U.S. 149, 160, 84 S. Ct. 615, 621, 11 L. Ed. 2d 576 (1964) (quoting Union Pac. R. Co. v. Laramie Stock Yards Co., 231 U.S. 190, 199, 34 S. Ct. 101, 102, 58 L. Ed. 179 (1913)). Thus, the issue whether section 522(f) has retroactive application turns on a determination of legislative intent. See Hassett v. Welch, 303 U.S. 303, 58 S. Ct. 559, 82 L. Ed. 858 (1938). (footnote omitted).9

Each of the appellate courts which has considered § 522(f) has either expressly or implicitly ruled that Congress intended § 522(f) to apply to post enactment security interests. Rodrock, 642 F.2d at 1196-97; Ashe, supra; Gifford, 669 F.2d at 474 n.3. The bankruptcy courts are in general accord. As is exhaustively discussed in those cases, both the transition sections prescribed in Title IV of the Reform Act10 and the "fresh start" concept inherent in § 52211 provide forceful argument favoring retroactivity. We agree that Congress intended § 522(f) to apply retroactively to security interests created before October 1, 1979. There remains for consideration, however, the crucial question of whether the provisions of § 522(f) could constitutionally be applied to a security interest which vested prior to the effective date of the Act.

(a) Power of Congress

The Constitution expressly confers on the Congress the power to establish uniform laws on bankruptcy throughout the nation.12 Generally, this authority "includes the power to discharge the debtor from his contracts and legal liabilities as well as to distribute his property." Hanover National Bank v. Moyses, 186 U.S. 181, 188, 22 S. Ct. 857, 860, 46 L. Ed. 1113 (1902). Thus, bankruptcy legislation has traditionally operated to affect creditors' interests which vested prior to the effective date of the legislation. See Wright v. Union Central Life Ins. Co., 304 U.S. 502, 516, 58 S. Ct. 1025, 1033, 82 L. Ed. 1490 (1938).13 Unlike the states, Congress is not prohibited from passing laws that impair contractual obligations.14 Continental Bank v. Rock Island Ry., 294 U.S. 648, 680, 55 S. Ct. 595, 608, 79 L. Ed. 1110 (1935). See also Kuehner v. Irving Trust Co., 299 U.S. 445, 452, 57 S. Ct. 298, 301, 81 L. Ed. 340 (1937). In fact, the very essence of bankruptcy laws is the modification or impairment of contractual obligations.

There is, however, "as respects the exertion of the bankruptcy power, a significant difference between a property interest and a contract, since the Constitution does not forbid impairment of the obligation of the latter." Kuehner, 299 U.S. at 451-52, 57 S.Ct. at 301. But the "bankruptcy power, like the other great substantive powers of Congress, is subject to the Fifth Amendment." Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 589, 55 S. Ct. 854, 863, 79 L. Ed. 1593 (1935).

(b) Radford

The split in the case law with respect to the constitutional issue presented is due in large part to divergent interpretations of Radford. In Radford the Court held that the Frazier-Lemke Act was unconstitutional under the Fifth Amendment. The Act, an amendment to the Bankruptcy Code, was emergency legislation designed to provide relief for insolvent farmers by permitting them to obtain from the bankruptcy court a five-year stay of state foreclosure proceedings while paying a fair annual rental which would be divided among secured and unsecured creditors. At the end of the five year period the mortgage could be extinguished by the payment of the appraised price at the beginning or end of the period at the option of the mortgagee. The Act specifically provided that it was to have retroactive effect. In concluding that the Frazier-Lemke Act was unconstitutional under the Fifth Amendment, the Court recognized that under the bankruptcy power the court may discharge a debtor's personal obligations, but held that it could not take for the benefit of the debtor substantive rights in specific property acquired by the creditor prior to the Act.15

In Ashe, supra, the court concludes that Radford was effectively limited, if not tacitly overruled by Wright v. Vinton Branch of the Mountain Bank of Roanoke, 300 U.S. 440, 57 S. Ct. 556, 81 L. Ed. 736 (1937), and Helvering v. Griffiths, 318 U.S. 371, 400-401 & n. 52, 63 S. Ct. 636, 651-652 n. 52, 87 L. Ed. 843 (1943). 669 F.2d at 474. On the other hand, the court in Rodrock held that while Wright and other cases may well refine the rule of Radford, "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." 642 F.2d at 119816 The court in Gifford agreed with the holding in Rodrock. 669 F.2d at 472.

(c) Notice of Enactment

While Radford may still be controlling as to property rights which vested prior to the enactment of new bankruptcy legislation, we conclude that it is inapplicable to the issue considered here. Justice Brandeis carefully noted that while the bankruptcy legislation considered in Radford was unconstitutional, "(t)he power over property pledged as security after the date of the Act may be greater than over property pledged before." Radford, 295 U.S. at 589, 55 S.Ct. at 863 (emphasis added).

Here the liens were acquired approximately eight months after the passage of the Reform Act and approximately four months before its effective date. Obviously both parties had notice of the enactment and the provisions of the Act with respect to when its various sections and subsections would take effect. Whether the enactment date or effective date is controlling under the circumstances of these cases presents a close question. It is not surprising that the bankruptcy courts have reached different conclusions.

The bankruptcy court in these cases held that the retroactive effects of § 522(f)(2) are not so unreasonable or arbitrary as to deny due process; and that "It is not unreasonable to impute to credit companies and their attorneys the knowledge and understanding of a new law after that law has been enacted." 7 B.R. at 584. The court concluded accordingly that there should be a distinction between cases where the lien arose before November 6, 1978, and those where it arose "between the enactment and effective dates of the Bankruptcy Code."

Typical of the cases holding that debtors are not entitled to avoid liens acquired before the effective date of October 1, 1979, is Schulte v. Beneficial Finance of Kansas, 8 B.R. 12 (Bkrtcy.D.Kan.1980). The decision in that case contains an analysis of prior cases involving the effect of notice of the passage of legislation with a postponed effective date.17 The court concluded that where a statute itself "schedules a specific effective date, it is that postponed date and not the earlier date of enactment which controls." Id. at 16.

Although a close question is presented, we agree with the bankruptcy court in the instant cases that it is "not unreasonable to impute to credit companies and their attorneys the knowledge and understanding of a new law after that law has been enacted." When Credithrift made the loans in July, 1979, it should have been fully aware that the exemption provisions of § 522 would become effective on October 1, 1979, and that any bankruptcy filed subsequent to that date could result in an avoidance of their liens on the exempt property. The bankruptcy court properly distinguished between cases where the liens arose before the enactment date and those arising after the enactment date where the creditor had knowledge of the prospective exemption provisions.

AFFIRMED.

SCHROEDER, Circuit Judge, concurring separately:

I agree with the result reached by the majority. The 1978 Bankruptcy Reform Act exemption, which makes certain liens unenforceable after the effective date of the Act, constitutionally can be applied to a lien created after the statute was enacted but before it became effective. I write separately only because I think the majority makes the problem harder than it is.

Congress clearly intended this result. The statute unambiguously provides for it. At the time this lien was created, the creditor had full notice that under the new law the lien would be unenforceable in the event the debtor filed for bankruptcy after the new Act became effective. In my view, application of the statute to liens created after the statute was passed simply does not present a substantial question, much less a close one. See, e.g., Note, Bankruptcy- Section 522(f) of the 1978 Code-Constitutionality of its Application to Security Interests Pre-Dating Enactment of the Code, 27 Wayne L.Rev. 1281, 1288-90, 1293, 1299, 1302 n.143 (1981); Note, Constitutionality of Retroactive Lien Avoidance Under Bankruptcy Code Section 522(f), 94 Harv.L.Rev. 1616, 1617 n.10 (1981).

Congress could have made the Act effective from the date of its passage. Had it done so, application of the exemption provisions to this post-enactment lien would raise no possible question of retroactive interference with property rights. Instead, Congress gave some lead time for the public to gain familiarity with the new Act and to adjust debtor/creditor practice accordingly. The creditor can hardly claim to have been prejudiced by Congressional leniency in deferring the effective date.