No. 10 April Term, 1977, Appeal from an Order dated July 16, 1976, of the Court of Common Pleas of Allegheny County, Pennsylvania, Civil Division, No. GD 76-7233.
Joseph F. McDonough, Pittsburgh, for appellant.
Carol L. K. Knutson, Pittsburgh, for appellees.
Watkins, President Judge, and Jacobs, Hoffman, Cercone, Price, Van der Voort and Spaeth, JJ. Jacobs and Watkins, former President Judges, and Hoffman and Van der Voort, JJ., did not participate in the consideration or decision of this case.
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This matter came before the court below on appellees' preliminary objection to appellant's complaint in replevin. From an order sustaining appellees' objection alleging lack of subject matter jurisdiction, appellant brings this appeal. For the reasons detailed below, we reverse and remand to the lower court.
The facts giving rise to this appeal are as follows. On March 27, 1975, appellant, Beneficial Consumer Discount Company, extended a loan to appellees. In return for the loan, appellees executed a personal note payable to appellant in the amount of $912.00 and a security agreement granting appellant a security interest in their household furnishings. The loan to appellees was not a purchase-money transaction, and the money was not used by them to purchase the household furnishings. The security agreement provided that appellees were to retain possession of the furnishings unless and until they defaulted in repaying the loan. At some unspecified time, conceded by all to be within the time
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requirement for such transactions, appellant filed a financing statement in the Prothonotary's Office of Allegheny County recording its security interest in the furnishings.*fn1 Again at some unspecified time, appellees became delinquent in the repayment of the loan.
On January 23, 1976, appellees filed voluntary petitions in bankruptcy in the United States District Court for the Western District of Pennsylvania (BK 76-73, BK 76-74). In schedule A-2 of their petitions, they listed appellant as one of their creditors and noted their indebtedness to appellant in the amount of $760.87. In additional schedules, appellees listed their assets as consisting entirely of their household furnishings, valued at $380.00, which had been pledged to appellant as security for the loan. In accordance with section 6 of the Bankruptcy Act (11 U.S.C. § 24), which permits bankrupts to claim property exempt from bankruptcy proceedings as prescribed by the law of their domicile, see Act of April 9, 1849, P.L. 533, § 1, 12 P.S. § 2161 (1967), appellees each claimed exemptions of $190.00 for a total of $380.00, thus claiming their household furnishings as exempt from the bankruptcy proceedings.
Pursuant to section 58 of the Bankruptcy Act (11 U.S.C. § 94), a notice of the first meeting of creditors was mailed to appellant on January 30, 1976. Appellant, however, failed to enter an appearance to present its claim. On April 19, 1976, the bankruptcy judge entered an order discharging appellees' debt to appellant and awarding their household furnishings as their exemption. Appellant did not file objections to the discharge, nor to the grant of exemptions. See Bankruptcy Act, section 14b (11 U.S.C. § 32(b)).
Prior to the discharge, appellant made demand upon appellees to relinquish their household furnishings in accordance with the security agreement. Upon appellees' refusal, appellant commenced an action in replevin on April 2, 1976,
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in the Court of Common Pleas of Allegheny County to enforce its security interest. Appellees filed preliminary objections alleging that exclusive jurisdiction reposed with the federal bankruptcy court and that the courts of this Commonwealth were without jurisdiction to entertain the suit in replevin.
On July 11, 1976, the court below entered an order sustaining appellees' preliminary objections. The court held that the bankruptcy court had exclusive jurisdiction to pass upon the discharge of appellees' debts in bankruptcy, and that appellant's failure to file objections to the discharge of its claim precluded it from proceeding in the state forum. By way of dictum, the court held that even if the action could be brought in the courts of this Commonwealth, a recent decision by the Supreme Court of Pennsylvania, Mayhugh v. Coon, 460 Pa. 128, 331 A.2d 452 (1975), prevented appellant from enforcing its security interest in property held to be exempt under the Pennsylvania exemption provision. See Act of April 9, 1849, supra. In Mayhugh, the supreme court held that a debtor may not waive the benefits of the property exemption statute. From the grant of appellees' preliminary objections, appellant brings this appeal.
In resolving this appeal, numerous issues are raised. Of primary importance is the question whether the courts of this Commonwealth are invested with jurisdiction to determine the enforceability of appellant's claim, discharged in bankruptcy, in property awarded by a bankruptcy court as appellees' exemption under Pennsylvania law. If answered in the affirmative, we must then determine whether appellant's security interest survives the discharge in bankruptcy, and, if it does, whether its enforcement against property declared as appellees' exemption is contrary to the supreme court pronouncement in Mayhugh v. Coon, supra. These issues will be resolved in order.
I. Subject Matter Jurisdiction
It is a basic tenet of bankruptcy law that the United States district courts are "courts of bankruptcy and are
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hereby invested . . . with such jurisdiction . . . to (1) Adjudge persons bankrupt . . . ." Bankruptcy Act, section 2a(1) (11 U.S.C. § 11(a)(1)). In addition to administering bankruptcy proceedings, such courts are empowered to hear all claims against the bankrupt and to "[d]etermine all claims of bankrupts to their exemptions." Bankruptcy Act, section 2a(11) (11 U.S.C. § 11(a)(11)). Therefore, on initial inquiry, it would appear that exclusive jurisdiction to determine all claims and exemptions lies with the bankruptcy courts.
In Lockwood v. Exchange Bank, 190 U.S. 294, 23 S.Ct. 751, 47 L.Ed. 1061 (1903), however, the Supreme Court ruled that title to property held to be exempt under the law of the bankrupt's state of domicile remains in the bankrupt and never passes to the jurisdiction of the bankruptcy court. Cf. Bankruptcy Act, section 70a (11 U.S.C. § 110(a)). Consequently,
"[i]f creditors claim that the property, while exempt generally, is not exempt from process to enforce their particular debts, they must resort to a state court of competent jurisdiction to enforce payment of their debts out of such property." 1A Collier on Bankruptcy, para. 6.05 at 813 (Moore, ed. 1978), quoting Duffy v. Tegeler, 19 F.2d 305, 308 (8th Cir. 1927) [hereinafter cited as Collier ].
Thus, while section 2a(11) gives bankruptcy courts jurisdiction to determine a bankrupt's claim to his exempt property, once that determination is made, jurisdiction over the exempt property ceases. While generally criticized by commentators as inconsistent with the purposes of the Bankruptcy Act, see 1A Collier, para. 6.05 at 816-17 and sources cited ...