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In re Ondras

decided: May 9, 1988.

IN RE JAMES GEORGE ONDRAS, DEBTOR-APPELLANT


Appeal from the United States District Court for the Northern District of Indiana, Hammond Division, No. H 86-379, Michael S. Kanne, Judge.

Wood, Jr., Coffey and Ripple, Circuit Judges.

Author: Ripple

RIPPLE, Circuit Judge.

In this case, we must decide whether a now-superseded section of the Indiana Code*fn1 was an effective exemption alternative to the federal exemptions contained in section 522 of the Bankruptcy Code (the Code). The Indiana Code section in question exempted certain property from "levy or sale on execution or any other final process" based on "any debt growing out of or founded upon a contract express or implied." Ind. Code § 34-2-28-1 (1982). The bankruptcy court held that the Indiana statutory scheme was not an effective exemption alternative to the federal scheme. The district court reversed. We now affirm the judgment of the district court.

I

Background

A. The Applicable Statutory Scheme

Section 522 of the Code lists property that a debtor may exempt from the property of the estate. 11 U.S.C. § 522(d). However, the same section permits a state to enact its own exemption scheme to be used in place of the one contained in section 522. 11 U.S.C. § 522(b)(1). At least thirty-six states, including Indiana, have elected to opt-out of the federal exemption scheme. 3 Collier on Bankruptcy para. 522.02 (L. King 15th ed. 1987). The Indiana provision, Ind. Code § 34-2-28-0.5 (1982),*fn2 permits debtors domiciled in Indiana to exempt only property specified by Indiana law. Under Indiana law, as it existed when the petition was filed in this case, the state's list of exempt property was available only for "any debt growing out of or founded upon a contract express or implied." Ind. Code § 34-2-28-1 (1982).*fn3

B. Facts

On November 1, 1983, Ernst and Solie Paul, the appellees, obtained a jury verdict in the amount of $25,000 against the debtor-appellant, James G. Ondras, for personal injuries caused by Mr. Ondras' negligent use of a handgun. Subsequently, on March 12, 1984, Mr. Ondras filed a petition for personal bankruptcy. In re Ondras, No. H 86-379, order at 1 (N.B. Ind. Apr. 15, 1987) [hereinafter Order]; R.4 at 1. In his bankruptcy petition, Mr. Ondras claimed various exemptions under Indiana Code section 34-2-28-1. These exemptions, totaling $11,950, were both real and personal property that Mr. Ondras owned at the time he filed the petition. The Pauls objected to Mr. Ondras' claimed exemptions on the ground that Indiana's exemption statute does not apply to tort claims.

C. Bankruptcy Court Opinion

The bankruptcy court overruled the Pauls' objection and allowed the exemption. It held that the Indiana attempt to opt-out of the federal exemption scheme was inadequate and, therefore, Mr. Ondras was entitled to the federal exemptions listed in section 522 of the Code. In the bankruptcy court's view, the Indiana exemption attempt failed because it purported to divide the estate into two categories, claims based on tort and claims based on contract. In order to give effect to such an exemption scheme, concluded the bankruptcy court, the trustee would be forced to classify claims as either tort or contract. It would "then be necessary for the T rustee to liquidate the property claimed by the Debtor as exempt to create a fund out of which only the tort claims would be paid. There is no authority in the Bankruptcy Code permitting such discriminatory treatment of claims." In re Ondras, No. 84-60293, memorandum decision at 2 (Bankr. N.D. Ind. Dec. 30, 1985); R.5 at 2.

D. District Court Opinion

The district court reversed the judgment of the bankruptcy court. In the view of the district court, the issue before it was controlled by this court's holding in In re Sullivan, 680 F.2d 1131 (7th Cir.), cert. denied, 459 U.S. 992, 74 L. Ed. 2d 388, 103 S. Ct. 349 (1982). The district court noted that, while the legislative history evidenced substantial initial disagreement between the Senate and the House of Representatives, the plain wording of the statute evidenced that the disagreement was resolved in favor of "the Senate's intention to allow the states to determine whatever exemptions would be appropriate." Order at 3. The district court ...


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