- Category: Judge Karlin
- Published on 05 April 2012
- Written by Judge Karlin
In Re Westby, 11-40986 (Bankr. D. Kan. Apr. 4, 2012) Doc. # 45
SIGNED this 4th day of April, 2012.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
Dustin Jay Westby Case No. 11-40986
Brandi Michelle Westby, Chapter 7
Memorandum Opinion and Order
Overruling the Trustee’s Objection to Exemption
Under new legislation effective April 14, 2011, a Kansas debtor in bankruptcy
is entitled to exempt from the bankruptcy estate the right to receive the federal and
state earned income tax credit (“EIC”).1 A general debtor in Kansas not proceeding
under bankruptcy, however, is not entitled to this protection. The Trustee has objected
to the Debtors’ use of the exemption based on the Uniformity and Supremacy Clauses
of the United States Constitution, as well as the textual application of the statute.
Because the Kansas exemption statute is a state, rather than a federal
enactment on the subject of bankruptcy, this Court finds no Uniformity Clause
1 S. 12, 2011 Reg. Sess. (Kan. 2011), to be codified at K.S.A. § 60-2315.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 1 of 51
violation. In addition, because of the concurrent nature of state/federal authority in
bankruptcy, and because the Trustee has shown no express conflict between the
exemption statute and the Bankruptcy Code, nor an implied conflict between the given
exemption and the language and goals of the Bankruptcy Code, the Court finds no
Supremacy Clause violation. The Court also rejects the Trustee’s additional challenges
based on the reference within the exemption to “the federal bankruptcy reform act of
1978 (11 U.S.C. § 101 et seq.),” reprioritization of the payment of claims, unauthorized
transfer, conflict with portions of the Internal Revenue Code, and the application of the
“right to receive tax credits” language from the exemption. The Trustee’s objection to
the exemption2 is overruled.
Findings of Fact
I. Factual History3
On June 22, 2011, Debtors Dustin and Brandy Westby filed a voluntary Chapter
7 petition.4 The Westbys’ Schedule C claimed as exempt the “Earned Income Credit”
with a current value of “Unknown.”5 The Westbys received their federal and state tax
refunds on or about March 5, 2012.6 The Westbys’ total federal refund received was
2 Doc. 10 (objection).
3 The following facts are taken from the parties’ bankruptcy petition, supporting
schedules, and additional notices to the court.
4 Doc. 1.
5 Id. at 20.
6 Doc. 42.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 2 of 51
$6702, and their total federal EIC was $5751.7 The Westbys received a total state
refund of $1490; their total state EIC was $1035.8
II. Procedural History
The Trustee timely objected to the Westbys’ attempt to exempt the 2011 EIC
under Kansas Senate Bill No. 12 (“Senate Bill No. 12”),9 and the Westbys filed a
response.10 The Trustee’s objection to the EIC exemption contained a constitutionality
challenge to the Senate Bill No. 12 exemption.11 The Court certified that constitutional
objection to the Kansas Attorney General, who has intervened in this case. Although
the Westbys received their bankruptcy discharge on September 30, 2011, this case
remains pending as a Chapter 7 case.
9 Doc. 10.
10 Doc. 22.
11 See In re Gifford, Case No. 11-40589, Doc. 44 (Trustee’s memorandum in supportof amended objection to Debtors’ exemption of EIC). The Court originally used the Gifford
case as its lead case on the constitutional challenge to the EIC exemption, and most of thebriefs on the matter were filed in that case. The Kansas Attorney General, intervening inthis matter after the constitutional challenge to the statute, participated in the briefing ofthese issues. The Court has considered all briefs filed, including the amicus brief of TrusteeRobert L. Baer filed in support of the Trustee’s position, Doc. 59 in the Gifford case, and theamicus briefs of the National Association of Consumer Bankruptcy Attorneys (“NACBA”),
Doc. 63, and Debtor Carrie Lynn Rolin, Doc. 49, both filed in support of the Debtors’position in the Gifford case.
The Trustee objects to the amicus brief of the NACBA because it was filed in In re
Rolin, Case No. 11-40950, rather than in Gifford. The Court expressly granted amicus thepermission to file a brief in any case, however, and directed that it would be considered inthe resolution of the present objection. As of the date this opinion is issued, this Court hasdozens of pending EIC cases, and allowing briefing in this fashion was the most expeditiousway to be sure the Court considered all the arguments that might be raised in any of thosecases without requiring the redundancy of filing the briefs in each case. In addition,
because the Trustee was given, and took, the opportunity to respond to the amicus brief ofthe NACBA, the Trustee has not been prejudiced by the NACBA’s participation.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 3 of 51
III. The Earned Income Credit
The federal EIC, found in the Internal Revenue Code (“IRC”) at 26 U.S.C. § 32,
is characterized as a refundable tax credit.12 An individual’s tax credits are applied to
the tax otherwise owed for a given year, and are considered an overpayment of tax
under the IRC when they exceed the tax owed, thereby resulting in a tax refund.13 “An
individual who is entitled to an earned-income credit that exceeds the amount of tax
he owes thereby receives the difference as if he had overpaid his tax in that amount.”14
The Supreme Court has noted that the federal EIC “was enacted to reduce the
disincentive to work caused by the imposition of Social Security taxes on earned income
(welfare payments are not similarly taxed), to stimulate the economy by funneling
funds to persons likely to spend the money immediately, and to provide relief for
low-income families hurt by rising food and energy prices.”15 “Primarily, the EIC
benefits low-income married couples and heads of households with qualifying
dependent children.”16 Kansas’s EIC is computed as a percentage of the federal EIC.17
12 Sorenson v. Sec’y of Treasury, 475 U.S. 851, 854 (1986).
13 In re Montgomery, 224 F.3d 1193, 1194 (10th Cir. 2000). The Tenth Circuit noted
that “EICs are to be treated as tax refunds.” Id. at 1195.
14 Sorenson, 475 U.S. at 855.
15 Id. at 864.
16 Crowson v. Zubrod (In re Crowson), 431 B.R. 484, 492 (10th Cir. BAP 2010).
17 K.S.A. § 79-32,205. Currently, the Kansas tax credit is 18% of the federal EIC.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 4 of 51
Conclusions of Law
I. An Introduction to Senate Bill No. 12 and Exemptions
under the Bankruptcy Code
Under the Bankruptcy Code, when a debtor files a petition for bankruptcy relief,
an estate is created.18 That bankruptcy estate consists of “all legal or equitable
interests of the debtor in property as of the commencement of the case.”19 The
Bankruptcy Code does, however, permit the exemption of certain property from the
estate.20 The Bankruptcy Code includes a list of federal exemptions available to the
debtor,21 but permits a state to “opt-out” of the federal exemptions in favor of state-law
exemptions, when that state specifically excludes the use of the federal exemptions.22
Kansas has opted out of the federal exemption scheme.23 Because Kansas has opted out
of using the federal exemptions, the Kansas debtor may exempt from the estate those
“State or local law” exemptions that are “applicable as of the filing date.”24
The Trustee challenges the constitutionality of the newest exemption. Senate
Bill No. 12, titled “AN ACT concerning civil procedure; relating to bankruptcy; exempt
18 11 U.S.C. § 541(a) (“The commencement of a case under . . . this title creates anestate.”).
19 Id. § 541(a)(1).
20 See id. § 522(b)(1) (“Notwithstanding section 541 of this title, an individual debtormay exempt from property of the estate the property listed in either paragraph (2) or, in thealternative, paragraph (3) of this subsection.”).
21 Id. § 522(d).
22 Id. § 522(b)(2).
23 K.S.A. § 60-2312 (prohibiting, with exception, individual debtors from electing
24 11 U.S.C. § 522(b)(3)(A); K.S.A. §§ 60-2301 through 60-2315 (Kansas exemptions).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 5 of 51
property; earned income tax credit,” states as follows:
Section 1. An individual debtor under the federal
bankruptcy reform act of 1978 (11 U.S.C. §101 et seq.), mayexempt the debtor’s right to receive tax credits allowedpursuant to section 32 of the federal internal revenue codeof 1986, as amended, and K.S.A. 2010 Supp. 79-32,205, andamendments thereto. An exemption pursuant to this sectionshall not exceed the maximum credit allowed to the debtor
under section 32 of the federal internal revenue code of
1986, as amended, for one tax year. Nothing in this sectionshall be construed to limit the right of offset, attachment orother process with respect to the earned income tax creditfor the payment of child support or spousal maintenance.
Sec. 2. This act shall take effect and be in force from
and after its publication in the Kansas register.25
The statute was effective on April 14, 2011, with its publication in the Kansas
The legislative history of Senate Bill No. 12 shows that the exemption was
proposed and supported based on concerns regarding the ability of “low income
Kansans . . . to maintain and improve their lives.”27 The sponsor of the exemption
further stated: “Under current law, the debtor can be forced to forfeit the [refund of the
EIC]. Such forfeiture is counterproductive and further inhibits the debtor’s ability to
recover, making it more likely that the debtor will come to require state services.”28 The
Kansas Attorney General, therefore, argues that the exemption is based on a
25 S. 12, 2011 Reg. Sess. (Kan. 2011), to be codified at K.S.A. § 60-2315.
26 See Vol. 30, No. 15 Kan. Reg. page 437 (April 14, 2011) (publication).
27 Minutes of the House Judiciary Committee, 2011 Reg. Sess., Attach. No. 5 (Kan.
Mar. 3, 2011) (Testimony Presented to House Judiciary Committee by Sen. John Vratil),
attached as exhibit in In re Gifford, Case No. 11-40589, Doc. 53.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 6 of 51
“legitimate state interest—protecting the welfare of children in low income families
and promoting reliance on work instead of the public dole.”29 Notwithstanding those
laudable goals, there is no legislative history found by this Court (or cited by the
parties) that specifies why the exemption was given only to debtors in bankruptcy but
not to general debtors in Kansas outside of bankruptcy.
In a challenge to a claimed exemption, the objecting party—here the
Trustee—has the “burden of proving that the exemptions are not properly claimed.”30
Furthermore, in cases challenging the constitutionality of a state statute, a Court must
apply a presumption that the act of the state legislature is constitutional.31 In addition,
under Kansas law, exemption statutes are to be liberally construed for the benefit of
The Court has jurisdiction to decide contested matters such as the Trustee’s
objection to exemption.33 This matter constitutes a core proceeding.34
29 In re Gifford, Case No. 11-40589, Doc. 53 at p. 5.
30 Fed. R. Bankr. P. 4003(c).
31 Hopkins v. Okla. Pub. Employees Ret. Sys., 150 F.3d 1155, 1160 (10th Cir. 1998).
32 Hodes v. Jenkins (In re Hodes), 308 B.R. 61, 65 (10th Cir. BAP 2004) (“UnderKansas law, exemption statutes are to be liberally construed in favor of those intended bythe legislature to be benefitted.”); In re Hall, 395 B.R. 722, 730 (Bankr. D. Kan. 2008)
(stating that “the Kansas Supreme Court has directed that exemption claims are to beliberally construed in favor of debtors”).
33 28 U.S.C. § 157(a) and 11 U.S.C. § 1334(a)–(b); see also Standing Order datedAugust 1, 1984, effective July 10, 1984, referenced in D. Kan. Rule 83.8.5 (reference fromthe District Court for the District of Kansas of all cases and proceedings in, under, orrelated to Title 11 to the District’s bankruptcy judges).
34 28 U.S.C. § 157(b)(2)(B).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 7 of 51
The Trustee Has Standing to Raise an Objection to
Exemption and the Matter is Ripe for Consideration
The Court must assure itself of the Trustee’s standing to object to a debtor’s
claimed exemption.35 Standing jurisprudence encompasses both constitutional standing
and prudential standing.36 Constitutional standing requires the presence of a “case or
controversy,” and requires that the individual has suffered “an ‘injury in fact’ that a
favorable judgment will address.”37 Prudential standing requires that the litigant
assert its own particular rights, and forbids a litigant from “‘rest[ing] his claim for
relief on the legal rights or interest of third parties.’”38
In its analysis, the Court first notes that Bankruptcy Rule 4003(b)(1) provides
that “a party in interest may file an objection to the list of property claimed as exempt.”
Although the phrase “party in interest” is not a defined term in the Bankruptcy Code
or Rules, it is generally accepted that a Trustee is a party in interest.39
35 See Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 102 (1998) (noting thelimit of courts’ jurisdiction to actual cases and controversies and the requirement ofstanding to sue).
36 The Wilderness Soc’y v. Kane County, Utah, 632 F.3d 1162, 1168 (10th Cir. 2011).
37 Id. (quoting Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 12 (2004)).
38 Id. (quoting Warth v. Seldin, 422 U.S. 490, 499 (1975)).
39 See, e.g., Schwab v. Reilly, __ U.S. __, 130 S. Ct. 2652 (2010) (referring throughoutthe Court’s discussion of the case to the trustee as an “interested party”); Taylor v. Freeland& Kronz, 503 U.S. 638, 643–44 (1992) (concluding that a trustee who does not timely file anobjection to a debtor’s exemption is barred from later asserting that the exemption isimproperly claimed); Russell v. Kuhnel (In re Kuhnel), 495 F.3d 1177, 1180 (10th Cir. 2007)
(addressing the trustee’s objection to exemption under Rule 4003); Rupp v. Duffin (In reDuffin), 457 B.R. 820 (10th Cir. BAP 2011) (referring throughout to the trustee’s objectionto the debtor’s claimed exemption); see also Edmonston v. Murphy (In re Edmonston), 107F.3d 74, 76–77 (1st Cir. 1997) (concluding that a trustee is a “party in interest” based on
Case 11-40986 Doc# 45 Filed 04/04/12 Page 8 of 51
The Attorney General argues that the Trustee lacks standing because a trustee’s
role is to stand in the shoes of a debtor in bankruptcy, and the Trustee cannot assert
the rights of a general debtor in Kansas, not a party to the bankruptcy, who may be
injured by the unavailable exemption of EIC.40 To the contrary, the Trustee is not
limited to considerations only affecting the debtor in bankruptcy. As “the
representative of the estate,”41 the Trustee is under a duty to “collect and reduce to
money the property of the estate.”42 Despite this statutory mandate, the Attorney
General argues that an injury to a creditor is “incidental” to the bankruptcy. Again,
however, the Trustee’s duty to collect and account for the property of the estate, so that
estate property can be distributed to creditors,43 is not an incidental feature of the
Bankruptcy serves two purposes. While its primary purpose is to give the debtor
in bankruptcy a fresh start, it is also designed to ensure the fair and equitable
40 In re Gifford, Case No. 11-40589, Doc. 53 at 10–13.
41 11 U.S.C. § 323(a).
42 Id. § 704(a)(1) (duties of chapter 7 Trustee).
43 See C.W. Mining Co. v. Aquila, Inc. (In re C.W. Mining Co.), 636 F.3d 1257, 1261(10th Cir. 2011) (“Chapter 7 trustees have extensive powers and responsibilities relating tothe liquidation of the bankruptcy estate. Trustees must: collect and liquidate all of theestate’s property; close the estate as efficiently as possible; account for all property received;
investigate the debtor’s financial affairs; examine claims against the estate and reject thosethat are not meritorious; and may (and sometimes must) bring legal action on behalf of theestate.”); see also Young v. Higbee Co., 324 U.S. 204, 210 (1945) (“[H]istorically, one of theprime purposes of the bankruptcy law has been to bring about a ratable distribution amongcreditors of a bankrupt’s assets; to protect the creditors from one another.”).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 9 of 51
treatment of the creditors of a debtor in bankruptcy.44 Whether an exemption is
constitutional or properly claimed most certainly affects the property available to the
estate that is available for creditors. The Trustee is a party in interest with standing
to object to the exemption claimed herein.
The Court must also determine whether there exists a justiciable dispute.
Ripeness “may be examined . . . sua sponte.”45 The doctrine of ripeness “aims ‘to
prevent the courts, through avoidance of premature adjudication, from entangling
themselves in abstract disagreements.’”46 “Like standing, the ripeness inquiry asks
whether the challenged harm has been sufficiently realized . . . [t]he ripeness issue,
however, focuses not on whether the plaintiff was in fact harmed, but rather whether
the harm asserted has matured sufficiently to warrant judicial intervention.”47 The
“[r]ipeness doctrine addresses a timing question: when in time is it appropriate for a
court to take up the asserted claim.”48
“In evaluating ripeness the central focus is on whether the case involves
uncertain or contingent future events that may not occur as anticipated, or indeed may
44 See Schwab v. Reilly, ___ U.S. ___, 130 S. Ct. 2652, 2667 (2010) (acknowledgingthat exemptions in bankruptcy aid the primary purpose of bankruptcy of providing a “freshstart” post-bankruptcy, but noting that this policy must be balanced with “the economicharm that exemptions visit on creditors”).
45 Keyes v. Sch. Dist. No. 1, 119 F.3d 1437, 1444 (10th Cir. 1997) (emphasis omitted).
46 Tarrant Reg’l Water Dist. v. Herrmann, 656 F.3d 1222, 1249 (10th Cir. 2011)
(quoting Abbott Labs. v. Gardner, 387 U.S. 136, 148 (1967)).
47 Id. (internal quotations omitted).
48 Kan. Judicial Review v. Stout, 519 F.3d 1107, 1116 (10th Cir. 2008).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 10 of 51
not occur at all.”49 To determine “whether a claim is ripe, a court must look at (1) the
fitness of the issue for judicial resolution and (2) the hardship to the parties of
withholding judicial consideration.”50 The first inquiry asks “whether the case involves
uncertain or contingent future events that may not occur as anticipated, or indeed may
not occur at all.”51 This first prong is met when the matter “does not involve uncertain
or contingent events that may not occur at all (or may not occur as anticipated).”52 The
second inquiry asks “whether the challenged action creates a direct and immediate
dilemma for the parties.”53
Here, the Westbys filed their 2011 tax returns and received federal and state tax
refunds on or about March 5, 2012.54 The Westbys received a federal EIC of $5751, and
a federal refund of $6702. The Westbys received a state EIC of $1035, and a state
refund of $1490. As a result, the amount of the claimed exemption is now a fixed,
certain figure. The claimed exemption now also directly reduces the value of the estate.
Both prongs of the ripeness inquiry are, therefore, satisfied.
49 Tarrant Reg’l Water Dist., 656 F.3d at 1250 (quoting Initiative & Referendum Inst.
v. Walker, 450 F.3d 1082, 1097 (10th Cir. 2006)).
50 Skull Valley Band of Goshute Indians v. Nielson, 376 F.3d 1223, 1237 (10th Cir.
2004) (internal quotation omitted).
51 Salt Lake Tribune Publ’n Co. v. Mgmt. Planning, Inc., 454 F.3d 1128, 1140 (10th
52 Chavez v. N.M. Pub. Educ. Dep’t, 621 F.3d 1275, 1281 (10th Cir. 2010).
53 Salt Lake Tribune Publ’n Co., 454 F.3d at 1140.
54 Doc. 42.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 11 of 51
III. Senate Bill No. 12 Does Not Violate the Uniformity Clause
A. The Uniformity Clause Generally
The Uniformity Clause of the United States Constitution grants Congress the
power “[t]o establish . . . uniform Laws on the subject of Bankruptcies throughout the
United States.”55 Because Senate Bill No. 12 treats Kansas debtors in bankruptcy
differently than Kansas debtors outside of bankruptcy, thereby impacting creditors
differently depending on whether the debtor has filed a bankruptcy petition, the
Trustee claims that Senate Bill No. 12 violates the Uniformity Clause.56
A review of Supreme Court jurisprudence considering the Uniformity Clause is
helpful to the Court’s consideration of the Trustee’s challenge, because the cases
interpreting the Uniformity Clause use varying terms to extrapolate its meaning. For
example, in a very early Supreme Court case considering the Uniformity Clause,
Sturges v. Crowninshield,57 the Court appeared to use a preemption analysis to
determine whether a New York statute on the subject of bankruptcies was valid. In
that case, the Court recognized Congress’s power to establish a bankruptcy system
under the Uniformity Clause, but noted that Congress had not done so.58 Because of
this, the Supreme Court noted: “It is not the mere existence of the power, but its
exercise, which is incompatible with the exercise of the same power by the states. It is
55 U.S. Const. art. I, § 8, cl. 4. The Uniformity Clause is alternately referred to asthe Bankruptcy Clause.
56 In re Gifford, Case No. 11-40589, Doc. 44 at 9–24.
57 17 U.S. 122 (1819).
58 Id. at 195–96.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 12 of 51
not the right to establish these uniform laws, but their actual establishment, which is
inconsistent with the partial acts of the states.”59 The Court concluded that, “until the
power to pass uniform laws on the subject of bankruptcies be exercised by congress, the
states are not forbidden to pass a bankrupt law.”60 Because there was no act of
Congress with which the New York statute could have conflicted, the Supreme Court
found no Uniformity Clause problem.
The facts of Sturges are unique—there was no federal bankruptcy system in
place when it was decided. In one of the earliest cases interpreting a modern
bankruptcy statute under the Uniformity Clause, Hanover National Bank v. Moyses,61
the Supreme Court more squarely addressed the concept of uniformity. The Court
concluded that the exemption provisions of the Bankruptcy Act of 1898, which did not
contain uniform federal exemptions but recognized general state exemption statutes,
satisfied the uniformity requirement. The Court stated: “The laws passed on the
subject must, however, be uniform throughout the United States, but that uniformity
is geographical, and not personal, and we do not think that the provision of the act of
1898 as to exemptions is incompatible with the rule.”62 The Court found that
geographic uniformity was present when “the trustee takes in each State whatever
would have been available to the creditors if the bankrupt law had not been passed.
The general operation of the law is uniform although it may result in certain
59 Id. at 196.
61 186 U.S. 181 (1902).
62 Id. at 188.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 13 of 51
particulars differently in different states.”63
In other words, in this very early bankruptcy case, the Court found “uniformity”
in the fact that Congress, through the Bankruptcy Act of 1898, had uniformly granted
states the power to determine a debtor’s exemptions, and thus the size of the
bankruptcy estate. The Court focused on federal procedural uniformity, rather than
uniformity from state to state or person to person.
Therefore, Sturges and Moyses indicate the following views of the Supreme
Court: the states and federal government have concurrent jurisdiction in bankruptcy,
although only Congress has the power to establish a uniform system of bankruptcy.
And once Congress passes one uniform act, if that system has differing effects on
citizens of different states based on a particular state’s laws, that result is acceptable.
That position was reaffirmed in Stellwagen v. Clum,64 when the Supreme Court stated:
Notwithstanding this requirement as to uniformity thebankruptcy acts of Congress may recognize the laws of theState in certain particulars, although such recognition maylead to different results in different States. For example, theBankruptcy Act recognizes and enforces the laws of theStates affecting dower, exemptions, the validity of
mortgages, priorities of payment and the like. Suchrecognition in the application of state laws does not affectthe constitutionality of the Bankruptcy Act, although inthese particulars the operation of the act is not alike in allthe States.65
The Stellwagen Court emphasized the flexibility of the Uniformity Clause, noting again
63 Id. at190.
64 245 U.S. 605 (1918).
65 Id. at 613.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 14 of 51
that the substantive effect or operation of bankruptcy legislation need not be uniform
across state lines.
Ten years later, in 1929, the Supreme Court again looked to the Uniformity
Clause in a challenge to a state enactment on bankruptcies. In International Shoe Co.
v. Pinkus,66 the Supreme Court considered whether the Arkansas “insolvency
law”—providing for the surrender of nonexempt property, liquidation by a trustee,
payment of debts under court direction, classification of creditors, order of payments,
preferences, and discharge—was valid against the existing federal Bankruptcy Act.
Like it did in Sturges, the Supreme Court relied on a preemption analysis.67
First, the Court noted Congress’s “unrestricted” and “paramount” power “to
establish uniform laws on the subject of bankruptcies.”68 The Supreme Court then
In respect of bankruptcies the intention of Congress is plain.
The national purpose to establish uniformity necessarilyexcludes state regulation. It is apparent, without
comparison in detail of the provisions of the Bankruptcy Actwith those of the Arkansas statute, that intolerable
inconsistencies and confusion would result if that insolvencylaw be given effect while the national act is in force.
Congress did not intend to give insolvent debtors seekingdischarge, or their creditors seeking to collect claims, choicebetween the relief provided by the Bankruptcy Act and thatspecified in state insolvency laws. States may not pass orenforce laws to interfere with or complement the
Bankruptcy Act or to provide additional or auxiliaryregulations.
66 278 U.S. 261 (1929).
67 Id. at 264–65.
68 Id. at 265.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 15 of 51
The Court concluded that it was “clear” the Arkansas insolvency statute was “within
the field entered by Congress when it passed the Bankruptcy Act,” and, therefore,
invalidated the Arkansas statue.69 Ultimately, it was preemption, rather than the
Uniformity Clause, that provided the basis for the Supreme Court’s conclusion, and the
Court did not expound on the pronouncements of Moyses or Stellwagen concerning the
The concurrence in Vanston Bondholders Protective Committee v. Green,70 a
Supreme Court case decided about twenty years later, addressed a Uniformity Clause
complaint in more detail. In Green, New York contract law provided that a claim for
interest on interest was void, and, therefore, the claim could not be presented in
bankruptcy for payment under the 1898 Bankruptcy Act’s recognition of state contract
law.71 The claimant argued that state law should not be the determining force on
whether a claim is enforceable in bankruptcy.72 Citing Moyses, Justice Frankfurter
rejected this argument under the Uniformity Clause, stating:
But this misconceives the purpose and settled
understanding of the bankruptcy clause of the Constitution.
The Constitutional requirement of uniformity is a
requirement of geographic uniformity. It is wholly satisfiedwhen existing obligations of a debtor are treated alike bythe bankruptcy administration throughout the countryregardless of the State in which the bankruptcy court sits.
To establish uniform laws of bankruptcy does not mean
69 Id. at 265–66.
70 329 U.S. 156 (1946) (Frankfurter, J, concurrence).
71 Id. at 171–72.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 16 of 51
wiping out the differences among the forty-eight States intheir laws governing commercial transactions. The
Constitution did not intend that transactions that have
different legal consequences because they took place indifferent States shall come out with the same result because
they passed through a bankruptcy court. In the absence ofbankruptcy such differences are the familiar results of afederal system having forty-eight diverse codes of local law.
These differences inherent in our federal scheme the daybefore a bankruptcy are not wiped out or transmuted theday after.73
According to Justice Frankfurter, the settled law under the Uniformity Clause required
only that the federal system of bankruptcy be uniform in its particulars, not that the
individual states be required to give up their differences in state law.
In 1974, the Supreme Court again addressed the Uniformity Clause in the
regional rail reorganization cases in Blanchette v. Connecticut General Ins. Corps.74 At
the time, the United States was experiencing a potential transportation crisis when
eight major railroads filed reorganization proceedings under the Bankruptcy Act.75
Congress responded by passing the Rail Act, which reorganized each railroad and
restructured the railroads into a new, single system for continued operation.76
In response to a Uniformity Clause challenge to the Rail Act—brought because
“the Rail Act’s provisions apply only to railroads in reorganization in the ‘region,’” and
73 Id. at 172–73.
74 419 U.S. 102 (1974).
75 Id. at 108.
76 Id. at 108–17.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 17 of 51
therefore lacked geographic uniformity77—the Supreme Court reiterated its relaxed
view of the uniformity requirement. Rejecting the geographic uniformity notion, the
Supreme Court relied on “the flexibility inherent in the constitutional provision.”78 The
Court also noted that the Uniformity Clause permitted Congress “to take into account
differences that exist between different parts of the country, and to fashion legislation
to resolve geographically isolated problems.”79 The Supreme Court concluded: “The
uniformity clause requires that the Rail Act apply equally to all creditors and all
debtors, and plainly this Act fulfills those requirements. No provision of the Act
restricts the right of any creditor wheresoever located to obtain relief because of
regionalism.”80 The Court seemed to indicate that the Rail Act was uniform merely
because it uniformly applied to all debtors and creditors falling within its purview.
A few years later, the Supreme Court decided Butner v. United States,81 a case
that affirms these principles regarding the Uniformity Clause. In Butner, the Court
was asked to determine whether the right to rents collected after a bankruptcy but
before a foreclosure should be governed by the federal rule of equity or State law.82 The
Court first noted that Congress had not chosen, in that instance, “to exercise its power
to fashion” a rule on the subject, although the constitutional authority of Congress to
77 Id. at 156–57.
78 Id. at 158.
79 Id. at 159.
80 Id. at 160 (internal citations and quotations omitted).
81 440 U.S. 48 (1979).
82 Id. at 50.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 18 of 51
do so was “clear” under the Uniformity Clause.83 The Court noted, with approval, that
“Congress has generally left the determination of property rights in the assets of a
bankrupt’s estate to state law.”84 The Court also noted that, because of the grant of
authority to Congress to pass uniform laws, state laws are suspended only “to the
extent of actual conflict” with the bankruptcy system.85 Again, the Supreme Court
announced that a state statute touching on the subject of bankruptcy was
impermissible only if it conflicted with the federal system Congress had chosen under
its power to do so given by the Uniformity Clause.
In another railroad case, Railway Labor Executives’ Assoc. v. Gibbons,86 the
Supreme Court—for the first, and only, time—struck down a statute based on
Uniformity Clause grounds. Therein, the Supreme Court considered a federal statute,
the Rock Island Railroad Transition and Employee Assistance Act (“RITA”), which was
hurriedly passed by Congress to prevent the bankruptcy liquidation of the Chicago,
Rock Island and Pacific Railroad Co.87 In a challenge to RITA’s constitutionality under
the Uniformity Clause, the Supreme Court first concluded that Congress’s passage of
RITA was an exercise of its powers under the Uniformity Clause, rather than the
Commerce Clause.88 The Court reiterated that, under the Uniformity Clause,
83 Id. at 54.
85 Id. at 54 n.9.
86 455 U.S. 457 (1982).
87 Id. at 459–60.
88 Id. at 465–66.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 19 of 51
“uniformity does not require the elimination of any differences among the States in
their laws governing commercial transactions.”89 Although the Court referenced its’
previous Rail Act cases, it noted the significant difference that RITA was enacted in
“response to the problems caused by the bankruptcy of one railroad.”90 As such, the
Court found that RITA was “a private bill,” and “not within the power of Congress”
under the Uniformity Clause.91 The Supreme Court noted: “A law can hardly be said
to be uniform throughout the country if it applies only to one debtor and can be
enforced only by the one bankruptcy court having jurisdiction over that debtor.”92
Importantly, the Supreme Court stated: “Our holding today does not impair
Congress’ ability under the Bankruptcy Clause to define classes of debtors and to
structure relief accordingly. We have upheld bankruptcy laws that apply to a particular
industry in a particular region. The uniformity requirement, however, prohibits
Congress from enacting a bankruptcy law that, by definition, applies only to one
regional debtor.”93 Although this case strikes down a statute as invalid under the
Uniformity Clause, it is important to this discussion not for what the Court found to
be invalid, but for its continued recognition of the flexibility of the Uniformity Clause
despite this narrow finding of invalidity.
89 Id. at 169.
90 Id. at 470.
91 Id. at 471.
93 Id. at 473.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 20 of 51
In 1978, Congress passed the Bankruptcy Reform Act,94 and the modern view
of bankruptcy has evolved with a comprehensive federal structure and an opt-out
provision allowing for state-law exemptions. The opt-out provision has not been before
the Supreme Court on a Uniformity Clause challenge,95 and this Court has not been
asked to consider the constitutionality of the opt-out provision.96 The Supreme Court
has, however, recently recognized the concurrent actions of Congress and states in the
bankruptcy arena without bothering to reference the Uniformity Clause.
For example, in Owen v. Owen,97 the Court was asked to consider the effect of
lien-avoidance provisions of the Bankruptcy Code on state-exemptions in opt-out
states.98 The Court, without reference to the Uniformity Clause or any considerations
of preemption, noted: “If a State opts out, then its debtors are limited to the exemptions
provided by state law. Nothing in [§ 522(b)] (or elsewhere in the Code) limits a State’s
94 Pub. L. No. 95-598, 92 Stat. 2549.
95 The Circuit Courts that have considered the issue have concluded that the opt-outprovision of the Bankruptcy Code passes Constitutional muster. See Storer v. French (In re
Storer), 58 F.3d 1125 (6th Cir. 1995) (due process and equal protection challenges); Rhodes
v. Stewart, 705 F.2d 159 (6th Cir. 1983) (Uniformity Clause challenge); In re Sullivan, 680F.2d 1131 (7th Cir. 1982) (Uniformity Clause challenge); In re Stinson, 36 B.R. 946 (9th Cir.
BAP 1984) (Uniformity Clause challenge).
96 See In re Gifford, Case No. 11-40589, Doc. 61 at 8 (“The Trustee understands thatCongress has authorized each state to enact its own exemption schemes that may apply inbankruptcies. The Trustee does not challenge this delegation of power to the states.”).
Amicus Trustee Baer obliquely argues that § 522 must be read narrowly to prevent it frombeing unconstitutional, but does not expand and argue that Congress’s authorization ofstate-created exemptions under § 522 is unconstitutional under the Uniformity Clause. See
id. Doc. 59 at 12 (“Only by narrowly reading § 522 as authorizing States to restrict debtorsto use non-federal exemptions that States allow residents to use both inside and outside ofbankruptcy saves 11 U.S.C. § 522 from being unconstitutional.”).
97 500 U.S. 305 (1991).
98 Id. at 309–12.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 21 of 51
power to restrict the scope of its exemptions; indeed, it could theoretically accord no
exemptions at all.”99 The Supreme Court has recently stated, therefore, that once a
state opts-out of the federal exemption scheme under the Bankruptcy Code, that state
has incredibly broad leeway to fashion exemptions in the manner it chooses.
The long line of cases discussed herein provide the following general rules. First,
the Uniformity Clause has never been the basis for striking down a state enactment.
Second, the Uniformity Clause has rarely been the basis for invalidating a federal
enactment, and then only when Congress has passed a bankruptcy law that singles out
an individual debtor and its creditors. The Supreme Court has indicated that as long
as state statutes are not in conflict with whatever federal bankruptcy law is in place,
there is no Uniformity Clause violation.
B. Bankruptcy Only Exemption Statutes Under the Uniformity Clause
Since the implementation of the 1978 Bankruptcy Reform Act’s opt-out
provision, a handful of states have adopted bankruptcy specific
exemptions—exemptions available to a debtor in bankruptcy but not available to a
debtor in that state outside of bankruptcy. As a result, courts have been asked to
consider the scope of the Uniformity Clause in the face of challenges to state exemption
laws treating debtors in bankruptcy differently than general debtors outside of the
bankruptcy system, as is the case herein.
The results of those challenges have been mixed. In a case from the Bankruptcy
99 Id. at 308.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 22 of 51
Appellate Panel for the Sixth Circuit, In re Schafer,100 the Court struck down a
Michigan bankruptcy only exemption statute as an unconstitutional violation of the
Uniformity Clause. In Schafer, the BAP first determined that the Uniformity Clause
applies to state statutes, relying on the desire of the framers of the Constitution to
deliver a national system of bankruptcy.101 The BAP then concluded that uniformity
was not present, because the state bankruptcy only exemption statute differentiated
between the protections available to a debtor outside of bankruptcy and inside
bankruptcy, relying on the language from the Supreme Court’s 1902 Moyses decision
that “a statute is uniform ‘when the trustee takes in each state whatever would have
been available to the creditor if the bankrupt[cy] law had not been passed.’”102 A few
additional bankruptcy courts have also found bankruptcy specific exemption statutes
to be a violation of the Uniformity Clause.103
100 455 B.R. 590 (6th Cir. BAP 2011). The Schafer decision analyzes the samebankruptcy specific Michigan statute about which four published bankruptcy courtdecisions from Michigan came to varying conclusions: In re Reinhart, 460 B.R. 466, 466(Bankr. E.D. Mich. 2011) (addressing Uniformity Clause challenge to bankruptcy specificexemption and concluding, on alternate grounds, that the opt-out clause “permit[s] a debtorto exempt in bankruptcy only the property that the debtor can exempt from collection on ajudgment under state law” and, therefore, finding the bankruptcy specific exemption to beineffective); In re Jones, 428 B.R. 720, 727 (Bankr. W.D. Mich. 2010) (concluding that thebankruptcy specific exemption does not conflict with the requirements granted to Congressthrough the Uniformity Clause); In re Pontius, 421 B.R. 814, 819–21 (Bankr. W.D. Mich.
2009) (finding the bankruptcy specific exemption unconstitutional under the UniformityClause); and In re Wallace, 347 B.R. 626, 632–34 (Bankr. W.D. Mich. 2006) (finding thebankruptcy specific exemption unconstitutional under the Uniformity Clause).
101 In re Schafer, 455 B.R. at 601.
102 Id. at 606 (quoting Hanover National Bank v. Moyses, 186 U.S. 181, 190 (1902)).
103 See, e.g., In re Mata, 115 B.R. 288, 291 (Bankr. D. Colo. 1990); In re Lennen, 71
B.R. 80, 83 (Bankr. N.D. Cal. 1987); In re Reynolds, 24 B.R. 344, 347 (Bankr. S.D. Ohio1982).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 23 of 51
In other cases, the courts have rejected Uniformity Clause challenges to state
bankruptcy specific exemption statutes. The Ninth Circuit BAP concluded, in Sticka
v. Applebaum (In re Applebaum),104 that a California bankruptcy only exemption did
not violate the Uniformity Clause. The Applebaum Court began by noting: “The
uniformity requirement pertains only to Congress; it is an affirmative limitation or
restriction upon Congress’s power, not a limitation on the states.”105 Citing the railroad
cases, the BAP then concluded that the Uniformity Clause required only “that federal
bankruptcy laws apply equally in form (but not necessarily in effect) to all creditors
and debtors, or to “defined classes” of debtors and creditors.”106 Because the California
bankruptcy only exemption applied equally to all debtors and creditors in bankruptcy,
the BAP found that there could be no violation of the Uniformity Clause.107
The BAP rejected the Trustee’s Moyses-based argument that, because of the
bankruptcy only exemption, creditors in California bankruptcies may not receive the
same assets as creditors of debtors outside of bankruptcy. As the BAP correctly noted,
“that is exactly the result in a non-opt-out state when a debtor chooses the federal
exemption scheme,”108 a scheme that Congress has expressly authorized. Numerous
104 422 B.R. 684 (9th Cir. BAP 2009).
105 Id. at 692.
106 Id. See also Drummond v. Urban (In re Urban), 375 B.R. 882, 891 (9th Cir. BAP2007) (concluding that § 522’s domicile requirements do not violate the Uniformity Clausebecause “the classification scheme applies in the same manner to all similarly situatedparties”).
107 Id. at 692–93.
108 Id. at 693.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 24 of 51
other bankruptcy court cases have found no Uniformity Clause violation from
bankruptcy specific exemption statutes.109
Although the Tenth Circuit has not squarely addressed the matter, it has gotten
close, and has found the argument advanced by the Trustee to be meritless. In Kulp
v. Zeman (In re Kulp),110 the Tenth Circuit interpreted a Colorado exemption of
seventy-five percent of “earnings.”111 The definition of earnings included the “avails”
of an individual retirement account (“IRA”).112 However, the statute then added a
section only applicable in bankruptcy that the “avails” of an IRA included “profits or
proceeds.”113 The Tenth Circuit parsed the language of this exemption and ultimately
concluded that the debtor was permitted by the statute “to exempt seventy-five percent
109 See In re Brown, Nos. 06-30199, 06-30872, 2007 WL 2120380, at *6–7 (Bankr.
N.D.N.Y. July 23, 2007) (stating that the Uniformity Clause “contains no restriction on thestates” and that the Court would, therefore, focus its analysis on the Supremacy Clause andwhether conflict existed between the bankruptcy only exemption and the Bankruptcy Code);
In re Chandler, 362 B.R. 723, 728 (Bankr. N.D.W. Va. 2007) (concluding that “theUniformity Clause forbids only arbitrary regional differences in the provisions of theBankruptcy Code, and private bankruptcy bills that are limited to a single debtor”); In re
Cross, 255 B.R. 25, 31 (Bankr. N.D. Ind. 2000) (concluding that the Uniformity Clause “isnot a restriction upon the states”); In re Shumaker, 124 B.R. 820, 826 (Bankr. D. Mont.
1991) (rejecting Uniformity Clause challenge based on the “constitutional power of a stateto enact bankruptcy laws where Congress has not sought to act”); In re Holt, 84 B.R. 991,1001–02 (Bankr. W.D. Ark. 1988) (“[A]ll bankruptcy debtors in Arkansas have theopportunity to elect the exemptions provided under the Arkansas opt-out statute and,
therefore, the test for geographic uniformity is satisfied”); In re Vasko, 6 B.R. 317, 320(Bankr. N.D. Ohio 1980) (stating that the Uniformity Clause is “only controlling as to thecongressional exercise of power” and that “state laws are thus suspended only to the extentof actual conflict with the system provided by Congress”).
110 949 F.2d 1106 (10th Cir. 1991).
111 Id. at 1107.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 25 of 51
of the entire balance of their IRAs from the bankruptcy estate.”114 Giving it only the
import of a footnote, the Tenth Circuit then addressed an alternative argument by the
trustee that the Colorado statute violated “the constitution’s uniformity requirement
for bankruptcy laws because it creates a bankruptcy exemption which is not available
to other Colorado debtors.”115 The Circuit easily dismissed the Trustee’s argument,
This argument is meritless. The [bankruptcy court casescited] confuse the geographical uniformity doctrine with thewell-established principle that states may pass laws whichdo not conflict with the federal scheme. In this case, we have
no conflict because 11 U.S.C. § 522 expressly delegates tostates the power to create bankruptcy exemptions.116
The Tenth Circuit has thus summarily dismissed, as an issue worthy of substantive
consideration, the constitutionality of a Colorado bankruptcy specific exemption.
Soon after the Kulp decision however, the Tenth Circuit did address more
substantively, but still rejected, a trustee’s argument that an Oklahoma exemption
statute for IRAs “exceeded the scope of authority delegated to the States pursuant to
§ 522 of the Bankruptcy Code to establish bankruptcy exemptions.”117 In Walker v.
Mather (In re Walker), the Tenth Circuit dispatched a Uniformity Clause argument by
noting that Congress was aware of the “wide disparity” in exemptions allowed by the
114 Id. at 1109.
115 Id. at 1109 n.3.
116 Id. (internal citations omitted).
117 Walker v. Mather (In re Walker), 959 F.2d 894, 896 (10th Cir. 1992).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 26 of 51
states when the opt out provision of the Bankruptcy Code was enacted.118 The Circuit
concluded that delegation to states to enact exemptions is therefore an implicit
acknowledgment and approval of this disparity in exemptions, so long as an exemption
is not “inconsistent with” the federal bankruptcy statute.119
Admittedly, neither Kulp nor Walker directly resolve the issue herein. Neither
case squarely addresses a bankruptcy specific exemption statute under the Uniformity
Clause. Both cases do lend credence, however, to the above-stated extrapolations from
the Supreme Court case law on the Uniformity Clause—that the Uniformity Clause
has never been the basis for invalidating a state bankruptcy statute, and that the
Uniformity Clause has only caused invalidation of a federal bankruptcy statute when
the enactment singled out an individual debtor. Both Kulp and Walker suggest that the
Tenth Circuit will view the Uniformity Clause as a control on the actions of Congress,
not on the states, and that a state exemption statute is constitutionally permissible as
long as it does not conflict with the federal bankruptcy statute enacted pursuant to the
Relying on this interpretation of the case law, this Court finds no Uniformity
Clause violation through Senate Bill No. 12. Simply put, the exemption is a state, not
a Congressional, enactment. Even if it were not a state statute outside of the
Uniformity Clause’s reach, the exemption applies equally to all Kansas debtors in
bankruptcy. The Court will therefore turn to the Trustee’s contention that Senate Bill
118 Id. at 900 (finding the trustee’s argument “meritless.”) The Oklahoma exemption
in Walker, however, was not a bankruptcy only exemption as it was in Kulp.
119 Id. at 900–01.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 27 of 51
No. 12 conflicts with the federal bankruptcy scheme.
IV. Senate Bill No. 12 Does Not Violate the Supremacy Clause
The Supremacy Clause of the United States Constitution states: “This
Constitution, and the Laws of the United States . . . and all Treaties . . . shall be the
supreme Law of the Land; and the Judges in every State shall be bound thereby, any
Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”120
The Trustee argues that Senate Bill No. 12 is both expressly and impliedly preempted
by the Bankruptcy Code.121
As early as 1819, the Supreme Court recognized the concurrent jurisdiction
present in bankruptcy, and the considerations applicable to the preemption analysis
in bankruptcy. The Supreme Court stated in Sturges v. Crowninshield that “until the
power to pass uniform laws on the subject of bankruptcies be exercised by Congress,
the States are not forbidden to pass a bankrupt law.”122 Only when Congress passes a
bankruptcy law are state laws on the same subject “suspended.”123 When a state
statute contains “intolerable inconsistencies” with the federal bankruptcy law, the
Supreme Court has concluded that the state enactment was preempted by the federal
bankruptcy system then in place.124 However, only those state statutes “which conflict
with the bankruptcy laws of Congress . . . are suspended; those which are in aid of the
120 U.S. Const. art. VI, cl. 2.
121 In re Gifford, Case No. 11-40589, Doc. 44 at p. 25–33.
122 17 U.S. (4 Wheat) 122, 196 (1819).
124 Int’l Shoe Co. v. Pinkus, 278 U.S. 261, 265 (1929).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 28 of 51
Bankruptcy Act can stand.”125
To determine whether a state statute is preempted by federal law, “[t]he purpose
of Congress is the ultimate touchstone.”126 Federal statutes can preempt state statutes
either by an express statement of preemption or by implication.127 Express preemption
arises “from explicit preemption language in the statute.”128 Here, rather than
expressly forbidding state action, Congress has invited it by deferring to state
exemption schemes. Section 522 of the Bankruptcy Code expressly permits a state to
“opt-out” of the federal exemptions in favor of state-law exemptions.129 Kansas has
opted out of the federal exemption scheme,130 and Kansas debtors are, therefore,
expressly required to utilize “State or local law” exemptions.131
Implied preemption includes field preemption or conflict preemption.132 Field
preemption occurs when Congress “take[s] unto itself all regulatory authority” by
125 Stellwagen v. Clum, 245 U.S. 605, 615 (1918); see also In re Morrell, 394 B.R. 405,408 (Bankr. N.D.W. Va. 2008) (concluding that the federal and state governments haveconcurrent jurisdiction in bankruptcy, citing Stellwagen v. Clum), aff’d sub nom, Sheehan v.
Peveich, 574 F.3d 248 (4th Cir. 2009).
126 Retail Clerks Int’l Ass’n v. Schermerhorn, 375 U.S. 96, 103 (1963).
127 Altria Group, Inc. v. Good, 555 U.S. 70, 76 (2008) (“Congress may indicatepre-emptive intent through a statute’s express language or through its structure andpurpose.”).
128 Tarrant Reg’l Water Dist. v. Herrmann, 656 F.3d 1222, 1241 (10th Cir. 2011).
129 11 U.S.C. § 522(b)(2).
130 K.S.A. § 60-2312 (prohibiting, with exception, individual debtors from electingfederal exemptions).
131 11 U.S.C. § 522(b)(3)(A); K.S.A. §§ 60-2301 through 60-2315 (Kansasexemptions).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 29 of 51
legislating in a “field which the States have traditionally occupied.”133 Implied field
preemption has been found when (1) the federal regulatory scheme is so pervasive that
the reasonable inference is that Congress left no room for state supplementation, or (2)
the federal statute is in a field with a dominant federal interest and is “assumed to
preclude enforcement of state laws on the same subject.”134
The Trustee argues that implied field preemption is present here because
“Congress has left no room” for state exemptions applicable only in bankruptcy.135 To
the contrary, Congress has placed no limit on states’ ability to pass exemption schemes.
As the Supreme Court has noted, “nothing in subsection (b) [of § 522] (or elsewhere in
the Code) limits a State’s power to restrict the scope of its exemptions; indeed, it could
theoretically accord no exemptions at all.”136 Surely this broad ability to opt-out of the
federal exemption scheme in favor of state-enacted exemptions cannot also import a
limit on the express grant of the exemption power to the states by Congress through
the Bankruptcy Code. Again, where Congress has expressly granted to the states the
power to enact state-specific exemptions, without limitation, there is no implied
preemption of a state’s ability to do so. Indeed, several appellate courts have concluded
that “Congress has not occupied the field of bankruptcy regulation to the point of
133 Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947).
134 English v. Gen. Elec. Co., 496 U.S. 72, 79 (1990).
135 In re Gifford, Case No. 11-40589, Doc. 44 at 28.
136 Owen v. Owen, 500 U.S. 305, 308 (1991).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 30 of 51
preempting state exemption statutes.”137
Conflict preemption occurs “where Congress has not completely displaced state
regulation in a specific area” and where “state law is nullified to the extent that it
actually conflicts with federal law.”138 Implied conflict preemption has been found
“when it is impossible . . . to comply with both state and federal requirements.”139 This
can be a physical impossibility: “A holding of federal exclusion of state law is
inescapable and requires no inquiry into congressional design where compliance with
both federal and state regulations is a physical impossibility for one engaged in
interstate commerce.”140 Short of physical impossibility, state law may still stand “as
an obstacle to the accomplishment and execution of the full purposes and objectives of
Congress.”141 “What is a sufficient obstacle is a matter of judgment, to be informed by
examining the federal statute as a whole and identifying its purpose and intended
effects.”142 The Trustee argues implied conflict preemption by alleging that Senate Bill
137 Sticka v. Applebaum (In re Applebaum), 422 B.R. 684, 689 (9th Cir. BAP 2009);
see also Rhodes v. Stewart, 705 F.2d 159, 163 (6th Cir. 1983) (“Congress did not intend topreempt bankruptcy exemptions through promulgation of 11 U.S.C. § 522(d) since it vestedin the states the ultimate authority to determine their own bankruptcy exemptions.”);
Matter of Sullivan, 680 F.2d 1131, 1137 (7th Cir. 1982) (finding no implied conflictpreemption based on the grant by Congress to states to set their own exemptions).
138 Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 153 (1982).
139 PLIVA, Inc. v. Mensing, 564 U.S. __, 131 S. Ct. 2567, 2577 (2011).
140 Fla. Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142–43 (1963).
141 Hines v. Davidowitz, 312 U.S. 52, 67 (1941); see also Pharm. Research & Mfrs. of
Am. v. Walsh, 538 U.S. 644, 679 (2003) (Thomas, J., concurring) (“Obstacle pre-emptionturns on whether the goals of the federal statute are frustrated by the effect of the statelaw.”).
142 Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363, 373 (2000); see also
Ingersoll–Rand Co. v. McClendon, 498 U.S. 133, 138 (1990) (stating that a court reviewing
Case 11-40986 Doc# 45 Filed 04/04/12 Page 31 of 51
No. 12’s bankruptcy only exemption is a sufficient obstacle to the full purposes and
effect of Congress through the Bankruptcy Code in two ways.
First, the Trustee argues that Congress intended, through the Bankruptcy Code,
that exemptions be uniform within a state, applicable to all citizens within a state. The
Trustee argues that Congress entered the field of bankruptcy to further bankruptcy
consistency, and prevent the result of different citizens within a state having different
exemptions.143 The Court, however, believes that the statutory language points to the
opposite conclusion. Section 522(b) refers to “state or local law” exemptions. Surely this
means Congress is aware that citizens could be treated differently, based on the
particular enactments of a state legislature. In fact, the Supreme Court has recently
stated that “[t]he case for federal pre-emption is particularly weak where Congress has
indicated its awareness of the operation of state law in a field of federal interest, and
has nonetheless decided to stand by both concepts and to tolerate whatever tension
there is between them.”144 This rule of thumb seems especially apt advice when, as
here, Congress has expressly prescribed the federal/state concurrent scheme through
the opt-out provision.145
an implied conflict preemption claim must “examine the explicit statutory language and thestructure and purpose of the statute”).
143 In re Gifford, Case No. 11-40589, Doc. 44 at 31.
144 Wyeth v. Levine, 555 U.S. 555, 575 (2009) (quoting Bonito Boats, Inc. v. Thunder
Craft Boats, Inc., 489 U.S. at 166–67).
145 In this manner, the present matter is also different from Perez v. Campbell, a1971 Supreme Court opinion addressing a Supremacy Clause challenge to an Arizonastatute in conflict with federal bankruptcy legislation. 402 U.S. 637 (1971). In an oft-quotedconclusion from Perez, the Supreme Court stated that “any state legislation whichfrustrates the full effectiveness of federal law is rendered invalid by the SupremacyClause.” Id. at 652. In that case, however, the Court found an actual conflict between an
Case 11-40986 Doc# 45 Filed 04/04/12 Page 32 of 51
In addition, the Trustee does not answer how either of the purposes of the
Bankruptcy Code are adversely affected by a state-provided, bankruptcy only
exemption.146 As discussed above, the Bankruptcy Code serves two purposes: to give
the debtor in bankruptcy a fresh start and to ensure the fair and equitable treatment
of the creditors of a debtor in bankruptcy. Senate Bill No. 12 presents no obstacle to
either of these purposes.147 The exemption was designed to protect the most low-income
debtors in bankruptcy, which enables those debtors to have a fresh start, thus fulfilling
the first goal of the Bankruptcy Code. In addition, the exemption does not effect how
a creditor of a debtor in bankruptcy is treated any more than any exemption reduces
the distribution to that creditor. The Bankruptcy Code seeks to ensure the ratable
distribution of estate property to creditors: the allowance of state-law created
exemptions enables each state to determine how much of a debtor’s property is
included in that distribution and Senate Bill No. 12 does not interfere with this goal.
The Court finds nothing in the exemption that would serve as an obstacle to “the full
purposes and objectives of Congress.”148
Arizona statute governing the discharge of judgments resulting from an automobileaccident lawsuit and the specific provision of the federal bankruptcy legislation on the sametopic. Id. at 651–52. There is no actual conflict between the state law and the federal law in
this case, and the federal/state scheme is expressly intended.
146 Crosby, 530 U.S. at 373 (noting that a finding of implied conflict preemptionrequires a showing that the state law is “an obstacle to the accomplishment of Congress’sfull objectives under the federal” statute).
147 Of course, the Court can imagine scenarios where a state enacts an exemptionscheme so contrary to the bankruptcy fresh start or the ratable distribution of assets thatthe exemptions conflict with the purpose and objectives of the Bankruptcy Code. Thatscenario is simply not present here.
148 Hines, 312 U.S. at 67; see also Pharm. Research & Mfrs. of Am. v. Walsh, 538
U.S. 644, 679 (2003) (Thomas, J., concurring) (“Obstacle pre-emption turns on whether the
Case 11-40986 Doc# 45 Filed 04/04/12 Page 33 of 51
Second, the Trustee alleges that Senate Bill No. 12 interferes with the
distribution of estate property to creditors. The Trustee cites Kanter v. Moneymaker
(In re Kanter), a case from the Ninth Circuit finding a California statute—not an
exemption statute, but one prohibiting trustees from acquiring an interest in money
recovered for general damages by parties to personal injury actions—invalid under the
Supremacy Clause.149 The Ninth Circuit concluded that the California statute
conflicted with the provision of the federal bankruptcy law in force in 1974 that vested
in the trustee the title to “property, including rights of action.”150 The Circuit found
that the California statute limited the trustee’s powers under the federal bankruptcy
law, which granted the trustee “the rights and powers of . . . a creditor who obtained
a judgment against the bankrupt upon the upon the date of bankruptcy.”151
The Trustee focuses on the following language from Kanter to support her
Supremacy Clause argument:
[The California statute] thus stands as an obstacle to theaccomplishment and execution of the full purposes andobjectives of Congress, since it would operate to deny to thetrustee assets which could ordinarily be reached insatisfying the claims of general creditors. [The statute]
revives the race to the courthouse by creditors seeking toavoid the threat of having both their claims discharged andthe assets necessary to satisfy them denied to the trustee.
As the Court noted . . ., any state legislation whichfrustrates the full effectiveness of federal law is rendered
goals of the federal statute are frustrated by the effect of the state law.”).
149 505 F.2d 228 (9th Cir. 1974).
150 Id. at 229–30.
151 Id. at 231.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 34 of 51
invalid by the Supremacy Clause.152
The Trustee alleges that Senate Bill No. 12 “shields assets, specifically the EICs, that
otherwise would be available to the trustee for distribution.”153
But an exemption statute by definition shields assets from a trustee. That is the
purpose of an exemption, and Congress expressly provided for exemptions in § 522. The
differences from the facts of this case and those present in Kanter abound. Foremost,
Kanter was decided prior to the Bankruptcy Reform Act of 1978, and prior to the reworked
definitions of property in the Bankruptcy Code. In addition, the state statute
was found not to be an exemption provision, and therefore Kanter found the state
statute to be in conflict with an entirely separate provision of the prior bankruptcy law.
Here, there is no language of the current Bankruptcy Code with which Senate Bill No.
As the Ninth Circuit BAP stated in Applebaum,154 Congress has specifically
sanctioned a difference in the distribution to creditors between a debtor in bankruptcy
and a general debtor outside of bankruptcy. The Applebaum court stated:
The Trustee argues that under California’s bankruptcy-onlyexemption scheme, creditors might not receive the sameassets that otherwise might be available to them underCalifornia’s generally applicable exemption statute, or, thanthose allowed by federal law. However, that is exactly theresult in a non-opt-out state when a debtor chooses thefederal exemption scheme. In such instances, it may be that
152 Id. (internal citations, footnote, and quotations omitted).
153 In re Gifford, Case No. 11-40589, Doc. 44 at 33.
154 Sticka v. Applebaum (In re Applebaum), 422 B.R. 684, 689–91 (9th Cir. BAP
Case 11-40986 Doc# 45 Filed 04/04/12 Page 35 of 51
the bankruptcy trustee will not recover the same assets ofa debtor for distribution that he or she would under state
When a state has not opted out of the federal exemption scheme, the debtor in that
state chooses between the use of the federal exemptions or the applicable non-
bankruptcy exemptions.156 A minority of states have chosen not to opt out of the federal
exemptions.157 In those states, there could certainly be a difference between the
property available to creditors under the state’s laws and the distribution to creditors
in bankruptcy of property available after the federal exemptions are applied.
For example, in Kansas, a general debtor can protect a portion of their wages
from garnishment.158 Under the federal exemptions, there is no exemption for the
debtor’s wages.159 If Kansas had not opted out of the federal exemptions, then the
Kansas debtor in bankruptcy choosing the federal exemptions would not be able to
exempt their wages and, therefore, there would be more estate property available for
distribution to creditors in bankruptcy than if the debtor was outside of bankruptcy.160
155 Id. at 693.
156 11 U.S.C. § 522(b)(1).
157 4 Collier on Bankruptcy ¶ 522.02 (Alan N. Resnick & Henry J. Sommer eds.,
158 K.S.A. § 60-2310.
159 11 U.S.C. § 522(d).
160 A similar example could be given where the federal exemptions are more
generous than the protections afforded a debtor not in bankruptcy in Kansas if Kansaswere to no longer opt-out of the federal exemptions, resulting in the creditors in bankruptcyreceiving less than the creditors of a debtor outside of bankruptcy. See, e.g., 11 U.S.C. §
522(d)(11)(D)(exempting the “debtor’s right to receive, or property that is traceable to– apayment, not to exceed $21,625, on account of personal bodily injury, not including pain andsuffering or compensation for actual pecuniary loss, of the debtor or an individual of whom
Case 11-40986 Doc# 45 Filed 04/04/12 Page 36 of 51
Disparity in exemption schemes, whether bankruptcy-only or otherwise, may affect an
individual’s incentive to file bankruptcy—but this is not, standing alone, a sufficient
basis for finding interference with the Bankruptcy Code, especially in an area of the
Code where differences are contemplated.161 The Trustee’s general reference to
interference “with the federal bankruptcy distribution scheme,”162 without more, is
This Court acknowledges a split of authority with respect to the validity of
bankruptcy only exemptions in the face of Supremacy Clause challenges.163 Due to
the debtor is a dependent”).
161 The amicus brief of Debtor Rolin argues that unsecured creditors in Kansas haveno right to claim an individual’s EIC outside of bankruptcy. In re Gifford, Case No. 1140589,
Doc. 49 at p. 8 (“However, Trustee cites no statute or case law that permitsunsecured creditors to lay claim to EICs outside bankruptcy and this lawyer knows ofnone.”). The Court presumes that if a Kansas general debtor outside of bankruptcy receivesa tax refund and deposits it in a bank account, that account may be subject to garnishment,
but that a tax refund of a general debtor in Kansas is difficult for a creditor to capture whilestill in the hands of the taxing authority.
As the testimony in support of Kansas Senate Bill No. 12 stated, a low-incomedebtor entitled to an EIC is generally a single parent, using the tax refund for necessities.
Minutes of the House Judiciary Committee, 2011 Reg. Sess., Attach. No. 4 (Kan. Mar. 3,2011) (Testimony Presented to House Judiciary Committee by John R. Hooge), attached asexhibit to In re Gifford, Case No. 11-40589, Doc. 53. Such an individual may not have abank account, or may not deposit the money, but, rather, use the tax refund immediately topay bills. It certainly seems likely, therefore, that Kansas Senate Bill No. 12 simply levelsthe playing field, and allows a debtor inside of bankruptcy to keep their EIC the same waygeneral debtors, and those debtors who can wait to file bankruptcy until after their EIC isspent, likely retain and spend their EIC outside of bankruptcy.
While the record before this Court does not concretely support such a supposition,
there is ample other support for the Court’s determination that Kansas Senate Bill No. 12does not, in practice, conflict with the Bankruptcy Code’s treatment of creditors.
162 In re Gifford, Case No. 11-40589, Doc. 44 at 33.
163 The following cases have upheld Supremacy Clause challenges of bankruptcyonly exemption statutes: In re Regevig, 389 B.R. 736, 740 (Bankr. N.D. Ariz. 2008) (findingSupremacy Clause violation based on controlling 9th Circuit precedent, Kanter); In re
Cross, 255 B.R. 25, 34 (Bankr. N.D. Ind. 2000) (concluding bankruptcy only exemption ispreempted because it “changes the distribution of assets between debtors and creditors and,
thus, frustrates the full effectiveness of federal law by changing the balance between
Case 11-40986 Doc# 45 Filed 04/04/12 Page 37 of 51
Congress’s express delegation in the Bankruptcy Code to states to create their own
exemptions, however, without any limiting language to that delegation, the Court finds
Kansas shares concurrent jurisdiction with the federal government in this discrete
area. Because of the concurrent nature of state/federal authority in bankruptcy, and
because the Trustee has shown no conflict from Senate Bill No. 12 with the language
or goals of the Bankruptcy Code, the Court finds no Supremacy Clause violation here.
As the Fourth Circuit stated when it considered a preemption challenge to a
bankruptcy only exemption statute:
Section 522(b)(1) affords the states the authority to restricttheir respective residents to exemptions promulgated by thestate legislatures, if they so choose. This statutory provisionis an express delegation to the states of the power to createstate exemptions in lieu of the federal bankruptcyexemption scheme. Congress has not seen fit to restrict theauthority delegated to the states by requiring that stateexemptions apply equally to bankruptcy and
non-bankruptcy cases, and we are without authority toimpose such a requirement.164
debtors and creditors that Congress created in the Bankruptcy Code”); In re Reynolds, 24
B.R. 344, 347 (Bankr. S.D. Ohio 1982) (holding that § 522 permits states only to adoptuniform exemptions).
The following cases have rejected Supremacy Clause challenges to bankruptcy onlyexemption statutes: Sheehan v. Peveich, 574 F.3d 248, 252 (4th Cir. 2009) (concluding that §
522 is an express delegation to create state exemptions and that Congress did not “restrictthe authority delegated to the states by requiring that state exemptions apply equally tobankruptcy and non-bankruptcy cases”); Sticka v. Applebaum (In re Applebaum), 422 B.R.
684, 689–91 (9th Cir. BAP 2009) (finding “no conflict between the purpose and goals of theBankruptcy Code and the California bankruptcy-only exemption statute” and stating that“[s]imply because the exemptions differ from the federal exemptions (or from itsnon-bankruptcy counterpart), does not mean that such differences create a conflict thatimpedes the accomplishment and execution of the Bankruptcy Code”); In re Brown, No. 0630199,
2007 WL 2120380, at *15 (Bankr. N.D.N.Y. July 23, 2007) (concluding that NewYork’s bankruptcy only exemption “was commensurate with § 522(b)’s goals of balancingthe state’s interests in defining exemptions according to the needs and conditions of thelocality, and the Code’s fresh-start policy and uniformity” (internal quotations omitted)).
164 Sheehan v. Peveich, 574 F.3d 248, 252 (4th Cir. 2009).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 38 of 51
The Court agrees with this analysis. There is simply no conflict, express or implied,
between Senate Bill No. 12 and the Bankruptcy Code.
V. Additional Arguments Raised by the Trustee’s Objection165
A. Reference to the Federal Bankruptcy Reform Act of 1978
Senate Bill No. 12 begins as follows: “[a]n individual debtor under the federal
bankruptcy reform act of 1978 (11 U.S.C. § 101 et seq.), may exempt. . . .”166 The
Trustee argues that because Senate Bill No. 12 refers to debtors under the “federal
bankruptcy reform act of 1978,” it necessarily does not apply to debtors filing a petition
under the Bankruptcy Code as amended in 2005 by the Bankruptcy Abuse Prevention
and Consumer Protection Act (“BAPCPA”).167 A similar argument has previously been
rejected within this District, and this Court is, likewise, not persuaded.
As Judge Nugent noted in In re Foth,168 when the Bankruptcy Reform Act of
1978 became effective on October 1, 1979, Congress expressly repealed the prior
bankruptcy statute.169 To the contrary, “[w]hile BAPCPA significantly modified the
provisions of the ‘federal bankruptcy reform act of 1978,’ Congress did not repeal the
165 In the initial objection to the claimed exemption, the Trustee additionallyclaimed that Senate Bill No. 12 violated the “Due Process and Equal Protection Clause ofthe 14th Amendment to the United States Constitution.” In re Gifford, Case No. 11-40589,
Doc. 12 ¶ 3; see also id. Doc. 34 ¶ 15. The Trustee has expressly abandoned this argumentin her final brief, id. Doc. 61 p. 14–15, and for that reason, the Court need not address theissue.
166 S. 12, 2011 Reg. Sess. (Kan. 2011), to be codified at K.S.A. § 60-2515.
167 Pub. L. 109-8, 119 Stat. 23, § 106 (Apr. 20, 2005).
168 No. 06-10696, 2007 WL 4563434, at *4 (Bankr. D. Kan. Dec. 21, 2007) (citingPub. L. 95-598, 92 Stat. 2549, title IV, § 401(a) (Nov. 6, 1978)).
169 In re Foth, No. 06-10696, 2007 WL 4563434, at *4 (Bankr. D. Kan. Dec. 21, 2007)
(citing Pub. L. 95-598, 92 Stat. 2549, title IV, § 401(a) (Nov. 6, 1978)).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 39 of 51
Federal Bankruptcy Reform Act of 1978 as it did the 1898 Act in 1978.”170 In addition,
as in Foth, Senate Bill No. 12 expressly refers to “11 U.S.C. § 101, et seq.” Those
provisions of Title 11 “now embod[y] BAPCPA. Much of the substance of title 11 as
enacted in the 1978 Code remains intact . . . [and] [n]early all of the Code’s structure
remains in place.”171 Judge Nugent also noted in Foth that “BAPCPA’s amendments
were not the first to the 1978 Code; indeed the Code was amended a number of times
between 1978 and 2005, and notably so in 1984 and 1994.”172
Finally, Senate Bill No. 12 refers to an “individual debtor” under the federal
bankruptcy reform act. The definition of the term “debtor” under the 1978 Act is the
same as the term is defined after the BAPCPA amendments. Under the 1978 Act, a
“debtor” was defined as a “person or municipality concerning which a case under this
title has been commenced.”173 Under the current version of the Bankruptcy Code, the
definition of “debtor” remains the same.174 The individual referred to as a “debtor” in
bankruptcy has not changed—BAPCPA did not change that portion of the code
expressly referenced in Senate Bill No. 12.175 The Trustee’s argument is without merit
173 Pub. L. 95-598, 92 Stat. 2549, § 101 (Nov. 6, 1978).
174 11 U.S.C. § 101(13).
175 In addition, the Court will not read the exemption in a way that would producean absurd result. See In re Western Pacific Airlines, Inc., 273 F.3d 1288, 1292 (10th Cir.
2001) (“The goal in statutory interpretation is to determine and give effect to the intent ofthe legislature. To ascertain that intent, it is presumed that a just and reasonable result isintended.”). The Trustee’s interpretation of the exemption would mean that the Kansaslegislature created a new exemption that would be applicable to no debtors, which is simply
Case 11-40986 Doc# 45 Filed 04/04/12 Page 40 of 51
and is rejected.
B. Reprioritization of Payment of Claims
The Trustee next argues that Senate Bill No. 12 impermissibly reprioritizes the
payment of claims in bankruptcy cases. Under Senate Bill No. 12, there is a
qualification to the exemption, which states: “Nothing in this section shall be construed
to limit the right of offset, attachment or other process with respect to the earned
income tax credit for the payment of child support or spousal maintenance.” Protecting
her own turf, the Trustee points to § 507(a) of the Bankruptcy Code, which specifies the
order in which expenses and claims are to be paid.176 Pertinent here, under § 507 the
Trustee’s administrative expenses can be paid before the payment of domestic support
obligations.177 Because of this, the Trustee argues that the exemption conflicts with
federal law,178 and states that “it is impossible to comply with both Section 507(a) and
Senate Bill 12.”179
This Court finds no conflict, however. Under the Bankruptcy Code, when a
176 11 U.S.C. § 507(a) (providing the order in which priority claims are to be paid).
177 Id. § 507(a)(1)(C) (“If a trustee is appointed . . ., the administrative expenses ofthe trustee allowed under paragraphs (1)(A), (2), and (6) of section 503(b) shall be paidbefore payment of claims under subparagraphs (A) and (B) [relating to domestic supportobligations], to the extent that the trustee administers assets that are otherwise availablefor the payment of such claims.”).
178 The Trustee cites as an example the Supreme Court case of Barker v. Kansas,
503 U.S. 594 (1992). The case deals with the constitutional doctrine of intergovernmentaltax immunity as applied to state taxation of military retirement pay, a subject which doesnot appear applicable to the present facts.
179 In re Gifford, Case No. 11-40589, Doc. 44 at 35.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 41 of 51
debtor files a petition for bankruptcy relief, an estate is created.180 That bankruptcy
estate consists of “all legal or equitable interests of the debtor in property as of the
commencement of the case.”181 However, once an exemption of property is claimed, and
then allowed by the bankruptcy court, that property is removed from the estate.182
Once property is removed from the estate, it is not available for distribution to
creditors.183 Therefore, while the Bankruptcy Code directs the Trustee to “collect and
reduce to money the property of the estate,”184 once an exemption applies, that property
is not available for distribution by the Trustee.185 There is no conflict with § 507,
because that section only applies to the distribution of estate property, not exempted
C. Unauthorized Transfer Under 11 U.S.C. § 549
Under the Bankruptcy Code, the Trustee can avoid a transfer of property of the
estate if that transfer occurs after the bankruptcy case is commenced and the transfer
is not authorized by the Code or the Court.186 The Trustee argues that a postpetition
180 11 U.S.C. § 541(a) (“The commencement of a case under . . . this title creates anestate.”).
181 Id. § 541(a)(1).
182 See id. § 522(b)(1) (“Notwithstanding section 541 of this title, an individualdebtor may exempt from property of the estate the property listed in either paragraph (2)
or, in the alternative, paragraph (3) of this subsection.”).
183 Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992) (“The Code . . . allows thedebtor to prevent the distribution of certain property by claiming it as exempt.”).
184 11 U.S.C. § 704(a)(1).
185 Owen v. Owen, 500 U.S. 305, 308 (1991) (“An exemption is an interest withdrawnfrom the estate (and hence from the creditors) for the benefit of the debtor.”).
186 11 U.S.C. § 549(a).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 42 of 51
transfer occurs through the application of the EIC exemption, essentially arguing that
the EIC became part of the Westbys’ bankruptcy estate upon the filing of the
bankruptcy petition and was then transferred from the estate to the Westbys with
Senate Bill No. 12.187
Again, however, the Trustee does not give due credit to exemptions under the
Bankruptcy Code. When a debtor is entitled to claim an exemption, that property is
withdrawn from the estate,188 and there is no postpetition transfer of the property by
virtue of claiming an exemption. Under the Trustee’s theory, all exemption statutes
would create a postpetition transfer of property, which flies in the face of the
exemption provisions in § 522.189
D. Conflict with Portions of the Internal Revenue Code
Finally, the Trustee argues that Senate Bill No. 12 conflicts with provisions of
the IRC. Specifically, the Trustee argues that Senate Bill No. 12 conflicts with § 6402
of title 26.190 That section states that a federal tax refund may be offset to pay past-due
187 In re Gifford, Case No. 11-40589, Doc. 44 at 37–38.
188 Owen, 500 U.S. at 308.
189 For this reason, among many others, the Tenth Circuit BAP opinion in Rupp v.
Duffin (In re Duffin), 457 B.R. 820 (10th Cir. BAP 2011), upon which the Trustee relies, isinapplicable. In Duffin, the BAP considered whether a trustee could object to an exemptionunder 11 U.S.C. § 544(a), utilizing his “rights and powers” under that statute as ahypothetical creditor. Id. at 827–29. The BAP analyzed a Utah exemption that excludedfrom its reach prepetition payments on life insurance policies. Id. at 829. The BAP
concluded that, “[t]hrough the use of a trustee’s hypothetical powers” under § 544, thetrustee could stand as a creditor would, and gain access to the non-exempt funds. As should
be abundantly clear from the discussion herein, Senate Bill No. 12 makes a debtor’s EICexempt, and no creditor of a debtor in bankruptcy could reach that exempt asset, just as theTrustee may not.
190 In re Gifford, Case No. 11-40589, Doc. 44 at 36–37.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 43 of 51
state income tax obligations and other federal debt obligations.191 The Trustee argues
that Senate Bill No. 12 “overrides” § 6402 because it causes a refund of the EIC to
debtors with an exception for the payment of domestic support obligations.
Under Senate Bill No. 12, a debtor can exempt “the debtor’s right to receive tax
credits allowed pursuant to” the EIC.192 The statute further states that the exemption
“shall not exceed the maximum credit allowed to the debtor under” the EIC, “for one
tax year.”193 This language creates no conflict with § 6402. Under the IRC, if an
individual’s federal tax withholding exceeds that individual’s federal tax liability, then
the individual is entitled to a refund of the overpayment.194 The IRC, however,
authorizes offsets for payment of certain items delineated in § 6402.195 The result of an
offset under § 6402 is that the individual has no right to receive the amount that has
been offset.196 Senate Bill No 12 in no way conflicts with this scheme: the statute
provides an exemption only if the individual has a “right to receive” a refund based on
the EIC. If the debtor has no right to receive the EIC as a refund, based on § 6402
offsets or for whatever reason, then there is no refund available to which the exemption
could apply. Senate Bill No. 12 merely provides that if the Debtor receives a refund
attributable to the EIC, then the exemption will apply to the refund up to the
191 26 U.S.C. § 6402.
192 S. 12, 2011 Reg. Sess. (Kan. 2011), to be codified at K.S.A. § 60-2315.
194 Sorenson v. Sec’y of Treasury, 475 U.S. at 859.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 44 of 51
maximum EIC amount, except for the payment of domestic support obligations.
Amicus Trustee Robert Baer argues an additional conflict with the IRC, citing
a conflict with § 1398(g)(4) of title 26.197 Section 1398(g)(4) specifies that the
bankruptcy estate is entitled to certain tax features and attributes of the debtor.
Because of this, Amicus Baer argues that Congress has determined that tax refunds
should be property of the bankruptcy estate for distribution to creditors. There is no
dispute that the Westbys’ 2011 tax refund becomes part of the bankruptcy estate upon
their filing of their bankruptcy petition. Section 522 of the Bankruptcy Code, however,
permits a debtor to apply exemptions to that bankruptcy estate. Section 522(b) permits
Kansas to opt-out of the federal exemption scheme in favor of state or local exemptions,
of which, Senate Bill No. 12 is one. There is simply no conflict between Senate Bill No.
12 and the general recognition of § 1398(g)(4) that a tax refund is generally part of the
property of the bankruptcy estate.
VI. Application to the Westbys
The Westbys filed their 2011 federal and Kansas tax returns and received their
tax refunds on March 5, 2012. On their tax return, the Westbys claim a $5751 federal
EIC and a $1035 state EIC. The Westbys’ federal return shows a refund of $6702, and
their maximum EIC is within this amount. The Westbys are therefore entitled to
exempt the $5751 of this federal refund pursuant to Senate Bill No. 12. The Westbys’
Kansas tax return shows a refund of $1490 and an EIC of $1035. Likewise, the
Westbys may exempt the entirety of this Kansas EIC pursuant to Senate Bill No. 12.
197 In re Gifford, Case No. 11-40589, Doc. 59 at 7–8.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 45 of 51
The Trustee makes one alternative argument within her objection to exemption,
citing Barowsky v. Serelson (In re Barowsky).198 In Barowsky, the Tenth Circuit held
that the prepetition portion of a debtor’s tax refund is property of the bankruptcy
estate when the relevant tax year did not end until after the petition in bankruptcy
was filed.199 The Trustee argues that if the Court finds Senate Bill No. 12 survives her
objection, the Trustee is still entitled to the pro rata portion of the EIC measured from
the Westbys’ petition date.
The Tenth Circuit’s holding in Barowsky is not applicable here. In that case, the
Court was dealing with a non-exempt asset, the Chapter 7 debtor’s federal income tax
refund. The Court cited the Supreme Court case, Kokoszka v. Belford,200 which held
that a tax refund—attributable to the entire tax year that had been completed before
the bankruptcy petition was filed—was “property,” and therefore part of the
bankruptcy estate. Relying on this holding, the Barowsky court concluded that the
portion of the tax refund that was attributable to that portion of the tax year that had
expired prior to the filing of a bankruptcy petition was property of the bankruptcy
Again, the Trustee fails to acknowledge the difference between estate property
and exempt property. Because of the exemption provided by Senate Bill No. 12, the
$5751 federal EIC and the $1035 Kansas EIC received by the Westbys are not estate
198 946 F.2d 1516 (10th Cir. 1991).
199 Id. at 1517–18.
200 417 U.S. 642 (1974).
201 946 F.2d at 1517–18.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 46 of 51
property. Senate Bill No. 12 explicitly exempts the “maximum credit” for “one tax
year.” Therefore, a pro rata division would not be appropriate, because Senate Bill No.
12 exempts the property from the estate entirely.
Finally, the Trustee argues that Senate Bill No. 12 is ineffectual, because it used
the wrong words to describe the purported exemption.202 The statute exempts “the
debtor’s right to receive tax credits,” rather than specifying an exemption for the tax
refund in an amount not to exceed the maximum amount attributable to the EIC. The
Trustee argues that because an individual has no right to receive an EIC as cash, the
exemption has no force.
The Tenth Circuit has noted, however, that “EICs are to be treated as tax
refunds.”203 The Circuit in In re Montgomery held that an individual’s tax credits, after
application to the tax otherwise owed, are considered an overpayment of tax under the
IRC when they exceed the tax owed, and result in a tax refund.204 Therefore, the
exemption provided by Senate Bill No. 12 is reflected in the individual’s tax refund.
Under Kansas law, exemption statutes are to be liberally construed for the benefit of
the debtor.205 Here, the exemption is of the “right to receive tax credits allowed
pursuant to” the EIC. The EIC is transferred to the debtor through the tax refund, and
202 In re Gifford, Case No. 11-40589, Doc. 44 at 5–9.
203 In re Montgomery, 224 F.3d 1193, 1195 (10th Cir. 2000).
204 Id. at 1194.
205 Hodes v. Jenkins (In re Hodes), 308 B.R. 61, 65 (10th Cir. BAP 2004) (“UnderKansas law, exemption statutes are to be liberally construed in favor of those intended bythe legislature to be benefitted.”); In re Hall, 395 B.R. 722, 730 (Bankr. D. Kan. 2008)
(stating that “the Kansas Supreme Court has directed that exemption claims are to beliberally construed in favor of debtors”).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 47 of 51
therefore applies to the cash refund. This interpretation of the Kansas statute complies
with the liberal interpretation owed.
Amicus Trustee Baer also argues that the exemption is ineffectual because there
is no way to determine what portion of the total tax refund is attributable to the EIC
and not to some other tax credit. The Tenth Circuit BAP was recently asked to
similarly interpret the Colorado exemption of the “full amount of any federal or state
income tax refund attributed to an earned income tax credit or a child tax credit.”206
Acknowledging Colorado’s liberal interpretation of exemption laws for the benefit of
debtors, the BAP defined the word “attribute” to exempt “that part of the refund that
is caused or brought about by the child tax credit.”207
Senate Bill No. 12 provides that the amount to be exempted is the “maximum
credit allowed” for “one tax year.” Regarding federal returns, the maximum credit
allowed is the amount of the EIC permitted by the IRC under 26 U.S.C. § 32.
Regarding state returns, that amount is the percentage of the federal EIC designated
by the Kansas statutes under K.S.A. § 79-32,205. As a result, the amount provided for
by the exemption is the amount of the tax refund the debtor had the right to receive,
up to the maximum amount of the EIC. For the Westbys, the federal EIC was $5751
and the total federal tax refund was $6702. The Kansas EIC was $1035 and the total
Kansas tax refund was $1490. Therefore, the amount of the exemption provided for by
Senate Bill No. 12 is $5751 plus $1035, or $6786.
206 Dunckley v. Cohen (In re Dunckley), 452 B.R. 241, 243 (10th Cir. BAP 2011).
207 Id. at 243–44 (internal quotations omitted).
Case 11-40986 Doc# 45 Filed 04/04/12 Page 48 of 51
Conclusion of the Court
The Court concludes that the Trustee has not carried her “burden of proving that
the exemptions are not properly claimed.”208 The Court overrules the Trustee’s
objection to the Westbys’ exemption.
It is, therefore, by the Court Ordered that the Trustee’s Objection to
Debtors’ Claim of Exemptions209 is overruled.
It is further Ordered that the hearing previously scheduled in this case for
April 11, 2012, at 9:00 a.m. to consider the Trustee’s Objection is cancelled.
This Order shall be placed on the Court’s website. Additional objections to
exemption challenging the constitutionality of the EIC exemption are held under
advisement, pending resolution of any appeal in this case.210 In the event no appeal is
taken, the Court will re-set the objections to exemption for hearing, and determine at
that point, after input from the parties, how it will proceed.
The Court previously ordered that the tax refunds in these cases be held in
trust, pending the Court’s decision on the constitutionality of the EIC exemption. The
funds previously held in trust pursuant to the Court’s prior orders shall now be
208 Fed. R. Bankr. P. 4003(c).
209 Doc. 10.
210 These additional cases are: In re Bonnette, Case No. 11-40985; In re Jones, CaseNo. 11-40996; In re Cook, Case No. 11-41054; In re Soza, Case No. 11-41012; In re Sequeira,
Case No. 11-41140; In re Schumock, Case No. 11-41142; In re Baker, Case No. 11-41394; In
re Freel, Case No. 11-41446; In re Railsback, Case No. 11-41546; In re Swagerty, Case No.
11-41562; In re Moore, Case No. 11-41606; In re Hilderbrand, Case No. 11-41670; In re
Diehl, Case No. 11-41705; In re Johnson, Case No. 11-41749; In re Rodriguez, Case No. 1141862;
In re Roberts, Case No. 11-41943; In re Wolford, Case No. 11-42000; In re Wilson,
Case No. 11-42031; In re Wright, Case No. 11-42052; In re Downs, Case No. 11-42086; In re
Nichols, Case No. 12-40004.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 49 of 51
released to the Debtors, both in this case and in all cases in which a Trustee has filed
an objection to the exemption based on the constitutionality of the EIC.
The Court’s previous Case Management Order and First Supplement to that
Order, both available on the Court’s website, required the Debtors to either: (1) file a
Notice with the Court informing it that the Debtor is entitled to a refund stemming
from the EIC, along with additional details; or (2) amend Schedule C to remove the
claimed EIC exemption. In cases where an amended Schedule C is filed removing the
claimed exemption, the Trustee is required to withdraw the objection to exemption as
moot. In the following cases, these procedures have been complied with, or a motion for
compromise has been filed, and the hearing set in the case for April 11, 2012, at 9:00
a.m. is cancelled:
In re Sequeira, Case No. 11-41140;
In re Schumock, Case No. 11-41142;
In re Baker, Case No. 11-41394;
In re Railsback, Case No. 11-41546;
In re Moore, Case No. 11-41606;
In re Hilderbrand, Case No. 11-41670;
In re Diehl, Case No. 11-41705;
In re Johnson, Case No. 11-41749; and
In re Wolford, Case No. 11-42000.
In the following cases, the required procedures have not been complied with, and the
cases remain set for hearing on April 11, 2012, at 9:00 a.m.:
In re Bonnette, Case No. 11-40985;
In re Jones, Case No. 11-40996;
In re Cook, Case No. 11-41012;
In re Soza, Case No. 11-41054;
In re Freel, Case No. 11-41446;
In re Swagerty, Case No. 11-41562;
In re Rodriguez, Case No. 11-41862;
In re Roberts, Case No. 11-41943;
Case 11-40986 Doc# 45 Filed 04/04/12 Page 50 of 51
In re Wright, Case No. 11-42052;
In re Downs, Case No. 11-42086;
In re Nichols, Case No. 12-40004.
The Trustee’s motion to file a supplemental brief, filed as Doc. 77 in In re
Gifford, Case No. 11-40589, is denied. Debtors’ motions to file a supplemental brief,
filed as Doc. 43 in In re Westby, Case No. 11-40986, Doc. 37 in In re Schumock, Case
No. 11-41142, and Doc. 68 in In re Moore, Case No. 11-41606, are also denied. Pursuant
to the Court’s prior orders, supplemental briefs were to be limited to situations where
“the facts have changed sufficiently to cause a different legal conclusion . . . after any
return is filed or refund issued.”211 The Court has considered the proposed briefs and
they do not comply with this directive.
# # #
211 See, e.g., Doc. 35 at 9.
Case 11-40986 Doc# 45 Filed 04/04/12 Page 51 of 51