- Category: Judge Karlin
- Published on 15 May 2013
- Written by Judge Karlin
SIGNED this 29th day of April, 2013.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 12-41579
Connie Rae Murray Chapter 7
Memorandum Opinion and Order Overruling the
Trustee’s Objection to Exemption
This matter is before the Court on Trustee Darcy Williamson’s objection to
exemption of the earned income tax credit (“EIC”), claimed by Debtor Connie Rae
Murray pursuant to K.S.A. § 60-2315.1 Under this exemption, a Kansas debtor in
bankruptcy is entitled to exempt from the bankruptcy estate the right to receive the
federal and state EIC. A general debtor in Kansas not proceeding in bankruptcy,
however, is not entitled to this protection. The Trustee argues that her avoidance
powers under 11 U.S.C. § 544(a)(2) defeat the Debtor’s exemption, that the exemption
1 Doc. 14.
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violates the Uniformity and Supremacy Clauses of the United States Constitution, and
that the exemption impermissibly reprioritizes the order in which bankruptcy claims
are to be paid under 11 U.S.C. § 507. Because the exemption claimed does not conflict
with the Trustee’s powers and rights as a hypothetical executing creditor under §
544(a)(2), and because the Trustee’s remaining arguments have previously been
invalidated, the Trustee’s objection to exemption of the EIC is overruled.
I. Factual and Procedural History
The Debtor filed a Chapter 7 bankruptcy petition on October 2, 2012. The
Debtor’s Schedule C claimed as exempt her “2012 Federal and State Refunds,”
pursuant to the Kansas exemption statutes. The Trustee objected to the exemption of
The Court originally placed the objection to exemption under advisement, based
on ripeness concerns stemming from the exemption of a tax refund that was neither
certain to occur nor certain in amount.3 Because the Debtor has now received at least
part of her anticipated 2012 tax refund, the matter is now ripe.4 She expects to receive
2 Doc. 14.
3 Doc. 18 (General Order In re: Objections to 2012 Exemption of the Earned IncomeTax Credit).
4 See Tarrant Reg’l Water Dist. v. Herrmann, 656 F.3d 1222, 1250 (10th Cir. 2011)
(“In evaluating ripeness the central focus is on whether the case involves uncertain orcontingent future events that may not occur as anticipated, or indeed may not occur atall.”); Salt Lake Tribune Publ’n Co. v. Mgmt. Planning, Inc., 454 F.3d 1128, 1140 (10th Cir.
2006) (“Determining whether the issues presented by this case are ripe for review requiresus to evaluate both the fitness of the issues for judicial decision and the hardship to theparties of withholding court consideration. We have described the fitness inquiry aswhether the case involves uncertain or contingent future events that may not occur as
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$2276 for her federal EIC, and has already received $410 for her Kansas EIC.5
A. Objections to Exemptions
Under the Bankruptcy Code, when a debtor files a petition for bankruptcy relief,
an estate is created.6 That bankruptcy estate consists of “all legal or equitable interests
of the debtor in property as of the commencement of the case.”7 The Bankruptcy Code
does, however, permit the exemption of certain property from the estate.8 The
Bankruptcy Code includes a list of federal exemptions available to the debtor,9 but
anticipated, or indeed may not occur at all. We have described the hardship inquiry aswhether the challenged action creates a direct and immediate dilemma for the parties.”
(internal quotations and citations omitted)).
5 Doc. 28 (Joint Stipulation Required by Court’s General Order on Objections to2012 EIC Exemption); Doc. 32 at p.1–2. The issues before the Court have been fully briefed,
and the Court has considered all briefs. See Doc. 29 (Amicus Curiae Brief of Trustee Robert
L. Baer in Support of Objection to Exemption of Earned Income Credit); Doc. 30 (Trustee’sMemorandum in Support of Objections to Debtor’s Exemptions); Doc. 32 (Debtor’sMemorandum in Opposition to Trustee’s Objection to Earned Income Credit Exemption);
Doc. 36 (Brief of Amicus Curiae National Association of Consumer Bankruptcy Attorneys inSupport of Debtor); Doc. 37 (Kansas Attorney General’s Memorandum in Opposition to theTrustee’s Objection to Debtor’s Exemption and in Defense of the Constitutionality of K.S.A.
60-2315); Doc. 41 (Response to Amicus Curiae Brief of Robert L. Baer in Support ofObjection to Exemption of Earned Income Credit Filed on Behalf of Debtors Edinger (1240904)
and Beach (12-40906)); Doc. 50 (Trustee Williamson’s Reply Brief to ResponsiveBriefs of the Debtor and the State of Kansas).
6 11 U.S.C. § 541(a) (“[T]he commencement of a case under . . . this title creates anestate.”).
7 Id. § 541(a)(1).
8 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.”).
9 Id. § 522(d).
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permits a state to “opt-out” of the federal exemptions in favor of state-law exemptions,
when that state specifically prohibits the use of the federal exemptions.10
Kansas is an “opt-out” state, meaning that it has opted out of using the federal
Bankruptcy Code exemptions in favor of its state-created exemptions.11 The exemptions
in Kansas, specifically K.S.A. § 60-2315, permit a debtor to “exempt the debtor’s right
to receive tax credits allowed pursuant to” the federal and state EIC for “one tax
year.”12 The exemption also 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.”13
The Trustee objected to the Debtor’s exemption under K.S.A. § 60-2315.14 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.”15 Under Kansas law,
exemption statutes are to be liberally construed for the benefit of the debtor.16 The
10 Id. § 522(b)(2).
11 11 U.S. C. § 522(b)(2); K.S.A. § 60-2312 (prohibiting, with exception, individualdebtors from electing federal exemptions).
12 K.S.A. § 60-2315.
14 There is no dispute that the Trustee’s objection was timely filed. See Fed. R.
Bankr. P. 4003(b)(1) (requiring objections to claims of exemptions be filed “within 30 daysafter the meeting of creditors held under § 341(a) is concluded”).
15 Fed. R. Bankr. P. 4003(c).
16 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)
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Court has jurisdiction to decide contested matters such as the Trustee’s objection to
exemption.17 This matter constitutes a core proceeding.18
B. The Trustee’s Powers Under § 544 of the Bankruptcy Code
The Trustee’s primary objection to Debtor’s exemption arises from 11 U.S.C. §
544(a)(2). That section, titled “Trustee as lien creditor and as successor to certain
creditors and purchasers,” states:
(a) The trustee shall have, as of the commencement of the case, andwithout regard to any knowledge of the trustee or of any creditor, therights and powers of, or may avoid any transfer of property of the debtoror any obligation incurred by the debtor that is voidable by– –
. . .
(2) a creditor that extends credit to the debtor at the time of thecommencement of the case, and obtains, at such time and with
respect to such credit, an execution against the debtor that isreturned unsatisfied at such time, whether or not such a creditor
Generally stated, this section of the “strong-arm statute” permits a trustee to exercise
her strong-arm powers to gain remedies under state law that would be available to
creditors holding executions remaining unsatisfied as of the commencement of the
The Trustee argues that because an individual outside of bankruptcy is not
(stating that “the Kansas Supreme Court has directed that exemption claims are to beliberally construed in favor of debtors”).
17 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 United States District Court for the District of Kansas of all cases and proceedings in,
under, or related to Title 11 to the District’s bankruptcy judges).
18 28 U.S.C. § 157(b)(2)(B).
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given the exemption of the EIC from creditors as is the debtor in bankruptcy, a
judgment creditor outside of bankruptcy could gain access to an EIC in the individual’s
hands, limiting the powers of a hypothetical Kansas execution creditor. The Trustee’s
reliance on this section of the Bankruptcy Code stems from selectively quoted language
from a Tenth Circuit BAP case, Rupp v. Duffin (In re Duffin). 19 In Duffin, the BAP
considered whether a trustee could object to an exemption under 11 U.S.C. § 544(a),
utilizing his “rights and powers” under that statute as a hypothetical creditor. The
BAP analyzed a Utah exemption that excluded from its reach prepetition payments
debtor made on life insurance policies within one year of filing bankruptcy.
Regarding § 544(a)(2), the Duffin Court discussed a split in authority over the
breadth of a trustee’s hypothetical powers under § 544(a)(2).20 The Court ultimately
concluded that “the powers given to a trustee under § 544(a)(2) are not limited to
avoidance of transfers but specifically include broader ‘rights and powers.’”21 The Court
quoted with approval a Tenth Circuit case stating that:
Simply stated, from the reservoir of equitable powers granted to thetrustee to maximize the bankruptcy estate, Congress has fashioned alegal fiction. Not only is a trustee empowered to stand in the shoes of adebtor to set aside transfers to third parties, but the fiction permits thetrustee also to assume the guise of a creditor with a judgment against thedebtor. Under that guise, the trustee may invoke whatever remediesprovided by state law to judgment lien creditors to satisfy judgments
19 457 B.R. 820 (10th Cir. BAP 2011).
20 Id. at 827–28.
21 Id. at 828.
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against the debtor.22
Under this rubric, the Duffin panel applied § 544(a)(2). The Court stated that the
statute granted the Trustee “the guise of a creditor with an execution returned
unsatisfied against the Debtors.”23 Therefore, the BAP held, the Trustee could invoke
the remedies provided by state law to creditors holding executions returned
unsatisfied.24 The BAP concluded that, “[t]hrough the use of a trustee’s hypothetical
powers” under § 544, the trustee could stand as a creditor would, and gain access to the
The important point in the Duffin BAP Court’s analysis is that the property at
issue was non-exempt. There was no bankruptcy specific exemption at issue in Duffin.
A trustee exercising § 544(a)(2) rights stands in the shoes of a hypothetical executing
creditor only to the extent the creditor could attach the property outside of bankruptcy.
Based on the applicable state law, the creditor in that case would have had access to
payments made by the debtors on life insurance policies in the year prior to the
bankruptcy petition date, because such payments were excluded from the applicable
exemption.26 The Duffin analysis is simply inapplicable because it is limited to the facts
22 Id. (quoting Zilkha Energy Co. v. Leighton, 920 F.2d 1520, 1523 (10th Cir. 1990)).
23 Id. at 829.
26 Id. at 821–22.
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of that case.27
This Court has had prior occasion to consider the Duffin decision, although only
briefly. In In re Westby, 28 this Trustee challenged the same exemption addressed herein
on myriad grounds. One of those challenges was based on 11 U.S.C. § 549, based on an
alleged unauthorized transfer. In a footnote to the analysis of § 549, the Court
addressed the Duffin case. The Court stated:
[T]he Tenth Circuit BAP opinion in Rupp v. Duffin (In re Duffin), . . .
upon which the Trustee relies, is inapplicable. In Duffin, the BAP
considered whether a trustee could object to an exemption under 11
U.S.C. § 544(a), utilizing his “rights and powers” under that statute as ahypothetical creditor. The BAP analyzed a Utah exemption that excludedfrom its reach prepetition payments on life insurance policies. The BAPconcluded that, “[t]hrough the use of a trustee’s hypothetical powers”
under § 544, the trustee could stand as a creditor would, and gain accessto the non-exempt funds. As should be abundantly clear from thediscussion herein, Senate Bill No. 12 makes a debtor’s EIC exempt, andno creditor of a debtor in bankruptcy could reach that exempt asset, justas the Trustee may not.29
Section 544(a)(2) grants its hypothetical powers to a trustee “as of the commencement
of the case.” Therefore, § 544(a)(2) permits a trustee to stand in the shoes of a creditor
to claim that creditor’s hypothetical priority only as to property of the estate. As
27 By analogy to Duffin, if the Debtor in this case had failed to file two years of taxreturns before the date of her petition, and was entitled to EIC refunds for each year, theTrustee may well be entitled to the EIC refunds for one of those years since the statutelimits the exemption to one year. In that instance, the Trustee would be pursuingstatutorily non-exempt property, as was the case in Duffin.
28 473 B.R. 392 (Bankr. D. Kan. 2012), aff’d, In re Westby, 486 B.R. 509 (10th Cir.
BAP 2013), appeal dismissed, Williamson v. Westby (In re Westby), Case No. 13-3044 (10thCir. Mar. 29, 2013).
29 Id. at 419 n.189 (internal citations omitted).
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discussed above, the commencement of a case creates the bankruptcy estate—the
exercise of an exemption removes property from the bankruptcy estate.
The Trustee’s argument was more extensively addressed in a decision from
Judge Nugent, In re Earned Income Tax Credit Exemption Constitutional Challenge
Cases30—the opinion in the jointly administered, similar EIC cases in the Wichita
division of the District of Kansas Bankruptcy Court. Judge Nugent rejected the
Trustee’s § 544 argument as follows:
The Trustees suggest that because a debtor outside of bankruptcy cannottake this exemption, a judgment creditor outside bankruptcy could attachthe EIC in the debtor’s hands, limiting the powers of a hypotheticalKansas execution creditor. But § 544 grants these hypothetical powers toa trustee “as of the commencement of the case,” meaning that the trusteemay stand in the shoes of a creditor to claim that creditor’s hypotheticalpriority in property of the estate. The exercise of the exemption removesthat property from the estate, depriving the trustee of the right toadminister it. The same is true for all property claimed as exempt inbankruptcy.31
Judge Nugent’s reasoning applies equally well to the Trustee’s argument in this case.
The Trustee’s § 544 rights do not extend to property that is not property of the estate.
C. The Trustee’s Additional Arguments Against K.S.A. § 60-2315
The Trustee also contends that the Kansas EIC exemption statute violates the
Uniformity and Supremacy Clauses of the United States Constitution.32 The Trustee’s
30 477 B.R. 791 (Bankr. D. Kan. 2012). The trustee appealed Judge Nugent’sdecision to the United States District Court for the District of Kansas, but no decision has
yet been rendered.
31 Id. at 804.
32 The Uniformity Clause reserves to Congress the duty to make “uniform Laws onthe subject of Bankruptcies.” U.S. Const. art. I, § 8, cl. 4. The Supremacy Clause provides
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constitutional arguments were thoroughly addressed and rejected by this Court’s prior
opinion in In re Westby, 33 by the Tenth Circuit Bankruptcy Appellate Panel on appeal
of that decision,34 and by Chief Judge Nugent of this district in In re Earned Income
Tax Credit Exemption Constitutional Challenge Cases. 35 The Trustee appealed the
BAP’s Westby decision to the Tenth Circuit Court of Appeals, then dismissed her
appeal, abandoning these issues.36 The BAP’s Westby decision is now final and
controlling. Accordingly, these arguments will not be revisited here and are overruled
for the same reasons stated in those opinions.
Finally, the Trustee argues that the Kansas EIC exemption statute unlawfully
reprioritizes the order in which bankruptcy claims are to be paid under 11 U.S.C. §
507. The Kansas EIC exemption provides that “[n]othing 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.”
that the “Laws of the United States . . . shall be the supreme Law of the Land,”
notwithstanding any law enacted by a state. U.S. Const. art. VI, cl. 2. The Sixth Circuitrecently affirmed the constitutionality of, and rejected various challenges to, a Michiganbankruptcy specific exemption in In re Schafer, 689 F.3d 601 (6th Cir. 2012), cert denied,
Richardson v. Schafer, 133 S. Ct. 1244 (2013).
33 473 B.R. 392 (Bankr. D. Kan. 2012).
34 In re Westby, 486 B.R. 509, 515–16 (10th Cir. BAP 2013).
35 477 B.R. at 798–803.
36 Trustee Williamson filed her brief in this case, reasserting constitutionalarguments, on March 28, and the very next day dismissed her appeal of the BAP’s Westbydecision (upholding the constitutionality of the Kansas EIC exemption statute) to the TenthCircuit Court of Appeals. She has persisted in her constitutional arguments even in herreply brief filed a month after she dismissed her Tenth Circuit appeal.
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Section 507 provides the priority in which a bankruptcy trustee is to pay claims, and
§ 507(a)(1)(C) provides for payment of a trustee’s administrative expenses before
domestic support obligations “to the extent that the trustee administers assets that are
otherwise available for the payment of such claims.” The Trustee contends that the
Kansas exemption conflicts with § 507 because it eliminates the EIC as a source of
payment for administrative claims. The Trustee argues that it is impossible for her to
comply with both the Kansas exemption and § 507.
In Westby, this Court overruled the Trustee’s argument regarding the interplay
of the Kansas EIC exemption and § 507. The Court found no conflict between the state
and federal statute, because the Kansas EIC exemption statute worked to remove
property from the estate, and it was only estate property that the Trustee was charged
with distributing.37 Despite this holding, the Trustee once again argues that she is “in
the untenable position of choosing whether to comply with K.S.A. 60-2315 and pay the
child support or spousal maintenance claims, or comply with Section 507 and pay the
claims in the priority set forth by Congress.”
To the contrary, the Court finds no conflict between the state exemption statute
and § 507 priorities. As Chief Judge Nugent aptly noted, the language quoted above
from the Kansas EIC exemption “merely subjects the debtor’s right to receive the EIC
to setoff or attachment by governmental entities collecting and enforcing domestic
37 In re Westby, 473 B.R. at 418.
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support obligations under existing federal and state law.”38 But even if it did require
the Trustee to collect the EIC and distribute it “for the payment of child support or
spousal maintenance,” which this Court doubts, the Trustee again refuses to
acknowledge the nature of the exemption statute: it is only the non-exempt property
the Trustee is charged with distributing under § 507, not exempt property.39 Even if
the Trustee intercepted a debtor’s refund, and even if that debtor’s refund consisted
wholly of exemptible EIC, and then the Trustee paid part or all of that EIC “for the
payment of child support or spousal maintenance,” there would be no conflict with
§ 507 because she would have distributed no non-exempt property, which is all
§ 507 concerns.40
The Trustee’s original objection to exemption raised many additional arguments,
38 In re Earned Income Tax Credit Exemption Constitutional Challenge, 477 B.R. at
39 In fact, courts have routinely disallowed attempts by trustees to execute againstexempt property on behalf of DSO creditors. See In re Vandeventer, 368 B.R. 50, 54 (Bankr.
C.D. Ill. 2007) (holding trustee would not be allowed to sell exempt homestead in order topay DSO creditor); In re Quezada, 368 B.R. 44, 49 (Bankr. S.D. Fla. 2007) (same); In re
Ruppel, 368 B.R. 42 (Bankr. D. Or. 2007 ); In re Covington, 368 B.R. 38, 40–41 (Bankr. E.D.
40 See also In re Earned Income Tax Credit Exemption Constitutional Challenge, 477
B.R. at 805 (“The Trustees apparently contend that the EIC exemption effectively elevatespriority of domestic support obligations over the trustee’s administrative expenses incontravention of § 507(a)(1)(C). However, this argument fails to recognize and differentiatebetween estate property and exempt property. Exempt property is never distributed under
§ 507—because it is no longer available for administration by the trustee. Once anexemption of property is allowed, it is no longer property of the estate nor subject to thetrustee’s administration. Thus, if a debtor’s exemption of the right to receive the EIC isallowed, this property would be unavailable in any event to the trustee for payment ofclaims, including the trustee’s administrative expenses.” (internal footnotes omitted)).
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but she elected not to brief them.41 The Court treats these arguments as abandoned,
and declines to consider them.42
The Court concludes that the Trustee has not carried her burden to prove that
the exemption is not properly claimed.43
It is, therefore, by the Court Ordered that the Trustee’s objection to
exemption44 is overruled.
It is further Ordered that this Memorandum Opinion and Order shall be
placed on the Court’s website.
Additional cases with similar objections to exemption filed by Trustee
Williamson are held under advisement, pending resolution of any appeal the Trustee
41 See Doc. 14 (arguing: (1) that the Kansas EIC exemption is an unauthorizedtransfer under 11 U.S.C. § 549; (2) the Kansas EIC exemption does not apply to bankruptcycases filed under the current Bankruptcy Code; (3) a violation of the Due Process and EqualProtection Clauses of the Fourteenth Amendment of the United States Constitution; (4)
that the Kansas EIC exemption is subject to the pro rata distribution rules of In re
Barowsky, 946 F.2d 1516 (10th Cir. 1991); (5) that the EIC is payable only as a tax refundand is therefore not exempt under In re Montgomery, 224 F.3d 1193 (10th Cir. 2000); and
(6) the Kansas EIC exemption conflicts with portions of the Internal Revenue Code). Thesearguments are presumably waived, and rightly so, because this Court has alreadyaddressed and overruled them in Westby.
42 See Kannady v. City of Kiowa, 590 F.3d 1161, 1174–75 (10th Cir. 2010) (decliningto consider arguments on appeal that were not briefed).
43 See Fed. R. Bankr. P. 4003(c) (placing burden of proof regarding exemptions on“the objecting party”).
44 Doc. 14.
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elects to file.45 In the event no appeal is taken, the Court will set for hearing Trustee
Williamson’s remaining objections to exemption, and determine, after input from the
parties, how to proceed.
# # #
45 These additional cases are: In re Bond, Case No. 12-40869 and In re Gabrick,
Case No. 12-41875.
In the Bond case, extended briefing deadlines were set due to the late filing of theparties’ Joint Stipulation caused by late-filed tax returns. The Court finds that additionalbriefing on these matters is unnecessary, and cancels the previously set briefing schedule.
In the Gabrick case, although an amended Schedule C has been filed implyingDebtor Shaw will receive the EIC, no Joint Stipulation has been filed as required by theCourt’s General Order (Docket No. 20 in Gabrick). The Court sets the Gabrick case for
hearing on May 8, 2013 at 1:30 p.m. so that it may determine the best course of action.
In the following cases of Trustee Williamson, a motion to compromise the Trustee’sobjection to exemption of the EIC has been filed, but the objection deadline has not yet runor the order has not been submitted, so no final order has been entered: In re Mitchell, Case
No. 11-40608 (objections due May 6, 2013); and In re Harris, Case No. 12-40873 (objectionsdue April 25, 2013). The Court does not enter this order in these compromised cases, andleaves the parties to their bargain.
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