- Category: Judge Karlin
- Published: 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. 12-40906
Courtney Jane Beach Chapter 7
John Edward Beach,
Memorandum Opinion and Order Overruling the
Trustee’s Objection to Exemption
This matter is before the Court on Trustee Robert L. Baer’s objection to
exemption of the earned income tax credit (“EIC”), claimed by Debtors Courtney and
John Beach 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 his avoidance
powers under 11 U.S.C. § 544(a)(2) defeat the Debtors’ exemption. Because the
1 Doc. 9.
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exemption claimed does not conflict with the Trustee’s rights and powers as a
hypothetical executing creditor under § 544(a)(2), the Trustee’s objection is overruled.
I. Factual and Procedural History
The Debtors filed a Chapter 7 bankruptcy petition on June 13, 2013. The
Debtors’ Schedule C claimed as exempt their “Earned Income Credit,” pursuant to the
Kansas exemption statutes, and the Trustee objected to that exemption.2
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 Debtors have now received their
2012 tax refund, the matter is now ripe.4 Their federal EIC was $2078, and the Kansas
EIC was $375.5
2 Doc. 9.
3 See Doc. 10 (Order Placing the Trustee’s Objection to Exemption UnderAdvisement and Setting Case Management Deadlines) and Doc. 28 (General Order In re:
Objections to 2012 Exemption of the Earned Income Tax 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 asanticipated, 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. 38 (Stipulation By and Between Robert L. Baer and Debtors); Doc. 39 (Noticeof Receipt of Intercepted Federal Tax Refund). The issue before the Court has been fullybriefed, and the Court has considered all briefs. See In re Murray, Case No. 12-41579 (casedesignated as lead case for administrative simplicity; briefs filed in that case as follows:
Case 12-40906 Doc# 43 Filed 04/29/13 Page 2 of 10
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
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
Doc. 29 (Amicus Curiae Brief of Trustee Robert L. Baer in Support of Objection toExemption of Earned Income Credit); Doc. 30 (Trustee Williamson’s Memorandum inSupport of Objection to Debtor’s Exemptions); Doc. 32 (Debtor’s Memorandum inOpposition to Trustee’s Objection to Earned Income Credit Exemption); Doc. 36 (Brief ofAmicus Curiae National Association of Consumer Bankruptcy Attorneys in Support ofDebtor); Doc. 37 (Kansas Attorney General’s Memorandum in Opposition to the Trustee’sObjection 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 of Objection toExemption of Earned Income Credit Filed on Behalf of Debtors Edinger (12-40904) andBeach (12-40906)); Doc. 50 (Trustee Williamson’s Reply Brief to Responsive Briefs of theDebtor and the State of Kansas)).
6 11 U.S.C. § 541(a) (“the 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).
10 Id. § 522(b)(2).
Case 12-40906 Doc# 43 Filed 04/29/13 Page 3 of 10
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 Debtors’ 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
Court has jurisdiction to decide contested matters such as the Trustee’s objection to
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)
(stating that “the Kansas Supreme Court has directed that exemption claims are to beliberally construed in favor of debtors”).
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exemption.17 This matter constitutes a core proceeding.18
B. The Trustee’s Powers Under § 544 of the Bankruptcy Code
The Trustee bases his objection on 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
his 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
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
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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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 judgmentsagainst 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
19 457 B.R. 820 (10th Cir. BAP 2011).
20 Id. at 827–28.
21 Id. at 828.
22 Id. (quoting Zilkha Energy Co. v. Leighton, 920 F.2d 1520, 1523 (10th Cir. 1990)).
Case 12-40906 Doc# 43 Filed 04/29/13 Page 6 of 10
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 Therefore, the BAP concluded, “[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 non-exempt funds.25
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
of that case.27
This Court has had prior occasion to consider the Duffin BAP decision, albeit
23 Id. at 829.
26 Id. at 821–22.
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.
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only briefly. In In re Westby, 28 the 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
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
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). The Sixth Circuit recently affirmed the constitutionality of, and rejectedvarious challenges to, a Michigan bankruptcy specific exemption in In re Schafer, 689 F.3d
601 (6th Cir. 2012), cert denied, Richardson v. Schafer, 133 S. Ct. 1244 (2013).
29 Id. at 419 n.189 (internal citations omitted).
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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.
The Court concludes that the Trustee has not carried his burden to prove that
the exemption is not properly claimed.32
It is, therefore, by the Court Ordered that the Trustee’s objection to
exemption33 is overruled.
It is further Ordered that this Memorandum Opinion and Order shall be
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 See Fed. R. Bankr. P. 4003(c) (placing burden of proof regarding exemptions on“the objecting party”).
33 Doc. 9.
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placed on the Court’s website. Additional objections to exemption filed by Trustee Baer
asserting the same basis rejected herein are held under advisement, pending resolution
of any appeal the Trustee may elect to file.34 In the event no appeal is taken, the Court
will set for hearing Trustee Baer’s other objections to exemption and determine, after
input from the parties, how to proceed.
# # #
34 These additional cases are: In re Hill, Case No. 12-40587; In re Graham, Case No.
12-40610; In re Jackson, Case No. 12-40623; In re Griffith, Case No. 12-40643; In re Torres,
Case No. 12-40659; In re Maendele, Case No. 12-40673; In re Belk, Case No. 12-40697; In re
Edinger, Case No. 12-40904; In re Orlando, Case No. 12-40916; and In re Sandquist, Case
In the Hill and Graham cases, extended briefing deadlines were set due to the latefiling of the parties’ Joint Stipulation caused by late-filed tax returns. The Court finds thatadditional briefing on these matters is unnecessary, and cancels the previously set briefingschedules. In addition, in both the Hill and Graham cases, the Joint Stipulation required bythe General Order entered in those cases has never been filed. Both cases (Hill and
Graham) remain set for hearing on April 30, 2013 at 1:30 p.m. so the Court can monitor thefiling of the required Joint Stipulation.
In the following cases of Trustee Baer, a motion to compromise the Trustee’sobjection to exemption of the EIC has been filed, but the objection deadline has not yet run,
so no final order has been entered: In re Orlando, Case No. 12-40916 (objection deadlineMay 14, 2014); In re Cagle, Case No. 12-41075 (objection deadline May 8, 2013), and In re
Ramirez, Case No. 12-41955 (objection deadline May 7, 2013). The Court does not enter thisorder in these pending compromised cases, and leaves the parties to their bargain.
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