Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 95 C 6152 James B. Zagel, Judge.
Before COFFEY, MANION, and EVANS, Circuit Judges.
Cynthia Clark filed a Chapter 13 Bankruptcy petition. The Chicago Municipal Employees Credit Union ("Credit Union") filed proof of a fully secured claim for $15,465.06, which represented the entire balance due on a car loan, signature loan, and revolving line of credit (Visa credit card) that Clark had entered into with the Credit Union. Each of these agreements was secured by a grant of a security interest in any rebate or refund which Clark might receive from her retirement fund. The bankruptcy court denied Clark's objection to the Credit Union's proof and found that the entire balance on all three agreements was secured. On appeal, the district court affirmed in part and reversed in part, finding that advances on a revolving line of credit could not be deemed a loan under 40 ILCS 5/8-244(2), the Illinois statute permitting Credit Union members to pledge municipal pension refunds payable upon separation from service as security for a loan. The Credit Union appeals arguing that the district court incorrectly determined that a revolving line of credit could not be considered a secured loan under Illinois law. Clark cross-appeals asserting that a credit union cannot encumber a member's pension refund because of the Bankruptcy Code's clear directive that a debtor must be left with enough post-petition property to ensure a "fresh start." We affirm.
Cynthia Clark worked for the City of Chicago as a meter maid for 28 years. During this period of employment she became a member of the Chicago Municipal Employees Credit Union. Clark entered into three different loan agreements with the Credit Union. She received a cash advance on a signature loan, a financing agreement to buy a Buick LeSabre automobile, and a Visa credit card from the Credit Union. Each of these agreements were secured by a grant of a security interest in any rebate or refund which may become payable to Clark from her retirement fund. There were outstanding balances on all three agreements when Clark suffered a stroke that left her unable to continue her employment as a meter maid and resulted in a subsequent reduction of income. Following her stroke, she began to receive $920 per month from the city in the form of disability payments. On April 3, 1995, Clark filed for bankruptcy relief under Chapter 13 of the Bankruptcy Code. The plan she proposed would have repaid 100% of the fair market value of her car, which was evaluated to be $9,392, to the Credit Union. However, her plan would have treated the remaining balances on her personal loan and on her revolving line of credit as unsecured debts that would have only been repaid at 10% of their value. On May 30, 1995, the Credit Union filed a proof of claim listing Clark's outstanding balances in the amount of $15,465.06 as debts secured by any refund Clark might receive from her pension upon her termination of employment with the city. Clark subsequently filed an objection to the Credit Union's proof of claim asserting that Illinois law, which allows a municipal credit union to encumber a person's pension refund, contravenes the congressional intent of enacting the Bankruptcy Code, which clearly directs that debtors who go through bankruptcy must be left with enough post-petition property to ensure a "fresh start." In re Szekely, 936 F.2d 897, 901 (7th Cir. 1991); In re Smith, 848 F.2d 813, 817 (7th Cir. 1988). She additionally argued that credit card debts are not within the scope of the Illinois statute at issue and, therefore, may not be secured by a person's pension fund.
On September 20, 1995, the bankruptcy court overruled Clark's objections to the Credit Union's proof of claim, thereby allowing the entirety of her outstanding balances to the Union to stand as secured debts. Clark appealed to the district court arguing that the Illinois statute allowing credit unions the power to encumber pension refunds of their members as security for loans violated the purpose of the federal Bankruptcy Code to allow debtors a "fresh start." She additionally argues that if the Credit Union was allowed to receive a security interest in loans, the amount of her outstanding debt to the Credit Union with respect to the line of credit on her Visa card could not be considered a "loan" under the Illinois statute.
The district court affirmed in part and reversed in part the decision of the bankruptcy court. The district court rejected Clark's general challenge to the enforceability of such pension refund encumbrances, but agreed that the Illinois statute did not permit a municipal credit union to place a lien on a refund on the basis of credit card debt. Both the Credit Union and Clark appealed the district court's ruling and these appeals have been consolidated for decision.
The Credit Union argues that the entirety of Clark's outstanding balances be considered secured debt, and that the district court's distinction between a "loan" and a "line of credit" is a misinterpretation of the relevant Illinois statute. Clark contends that her entire outstanding balance is unsecured because the Illinois statute allowing municipal credit unions to encumber the pension refunds of their members violates the federal Bankruptcy Code's requirement that debtors be left enough post-petition property to ensure a "fresh start."
A. Municipal Credit Union's Security Interest in Member's Pension Refunds
Clark argues that a municipal credit union cannot encumber a member's pension refund due to the Bankruptcy Code's clear directive stating that a debtor must be left with enough post-petition property to ensure a "fresh start" after filing for bankruptcy. The district court determined that 40 ILCS 5/8-244 did not conflict with the Bankruptcy Code and that the Credit Union had enforceable liens on Clark's pension for the signature and car loans. Because the trial court's ruling was based solely on its interpretation of the law, we ...