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Judge Nugent

11-12156 Hobson (Doc. # 77)

In Re Hobson, 11-12156 (Bankr. D. Kan. Feb. 14, 2014) Doc. # 77

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 DESIGNATED FOR ONLINE PUBLICATION BUT NOT PRINT PUBLICATION

 

 

IN THE UNITED STATES BANKRUPTCY COURT

 FOR THE DISTRICT OF KANSAS

IN RE: )

 )

ANGELA KAY MYERS, ) Case No. 11-12155

 ) Chapter 7

 Debtor. )

__________________________________________)

 )

IN RE: )

 )

MARK ANDREW HOBSON, ) Case No. 11-12156

ELAINE MICHELLE HOBSON, ) Chapter 7

 )

 Debtors. )

__________________________________________)

 )

IN RE: )

 )

KYLE LYNN ROBERTS, ) Case No. 12-10752

HEATHER MARIE ROBERTS, ) Chapter 7

 )

 Debtors. )

__________________________________________)

 


REPORT AND RECOMMENDATION

ON CHAPTER 7 TRUSTEE’S MOTION TO WITHDRAW REFERENCE

 

 In these three cases, the debtors claimed a portion of their earned income tax
credit for the tax year 2011 exempt under KAN. STAT. ANN. § 60-2315 (2012 Supp.).
This much-litigated provision exempts a debtor’s right to receive an earned income
credit (EIC), but only if the debtor is a debtor in a bankruptcy case. The federal
constitutionality of this provision has been upheld by me, by Judge Karlin, by District
Judge Marten, and by the Bankruptcy Appellate Panel for the Tenth Circuit.1 Those
cases resolved trustees’ constitutional challenges to the state exemption on a number
of grounds, including whether it ran afoul of the Supremacy Clause, the Uniformity
Clause, and other provisions of the U.S. Constitution. No bankruptcy trustee has yet
asserted that the provision offends the Equal Protection Clause of the federal
Constitution.2 The bankruptcy trustee in the current cases instead alleges that this
statute violates the Uniformity Clause found in Article 2, Section 17 of the Kansas
Constitution which provides that “All laws of a general nature shall have a uniform
operation throughout the state ….”

1 In re Westby, 473 B.R. 392 (Bankr. D. Kan. Apr. 4, 2012) (Karlin, J.), aff’d 486 B.R. 509 (10th Cir.
B.A.P. Feb. 4, 2013) (Michael, J.), appeal dismissed No. 13-3044 (10th Cir. Mar. 29, 2013); In re Earned
Income Tax Credit Exemption Constitutional Challenge Cases, 477 B.R. 791 (Bankr. D. Kan. Aug. 2,
2012) (Nugent, J.), aff’d 2013 WL 4431267 (D. Kan. Aug. 16, 2013) (Marten, J.).

2 In the In re Earned Income Tax Credit Exemption Constitutional Challenge Cases litigation before
this Court, a different trustee initially raised an equal protection challenge in her objection to the
exemption, but the trustees in those proceedings abandoned this ground when they failed to brief the
argument. 477 B.R. at 806-07.

 The parties here join in asking that the reference of this matter be withdrawn
by the District Court so that it may certify the question of the exemption statute’s


validity to the Kansas Supreme Court.3 In defense of the bankruptcy-only exemption
statute, the intervener State of Kansas argues that the statute is in fact
constitutional and that only the Kansas Supreme Court may interpret the Kansas
Constitution. But questions of law should only be certified to the Kansas Supreme
Court where there is no controlling authority from that Court that bears on the issue.
That is not the case here. As such, withdrawal of the reference would serve no
purpose. Accordingly, I recommend that the District Court deny the request and
permit this Court to determine whether the exemption is valid and applicable in these
cases.4
Withdrawal of Reference
The Trustee’s motion is brought as one for permissive withdrawal for cause
under 28 U.S.C. § 157(d) and for discretionary abstention under 28 U.S.C. §
1334(c)(1).5 He contends that cause exists under D. Kan. Rule 83.8.6(a)(1) [interest of
comity with state courts or respect for state law to exercise discretionary abstention]
and (a)(6) [other specified cause].6 Note, though that this matter bears directly on
the degree and extent of the property of the estate and is fundamentally a core
3 These cases are submitted on stipulated facts and the Trustee’s motion to withdraw the reference for
cause to enable the District Court to certify the state constitutional question to the Kansas Supreme
Court. See In re Myers, Case No. 11-12155, Dkt. 60. Neither debtors nor the intervener State of Kansas
object to withdrawal of the reference for the purpose of certifying a state constitutional challenge, but
the State of Kansas defends the constitutionality of the state bankruptcy-only exemption.
4 D. Kan. 83.8.6(f) provides that the bankruptcy court submit a written recommendation on the motion
to the district court.
5 See also Fed. R. Bankr. P. 5011 and D. Kan. Rule 83.8.6(a).
6 The Trustee does not specify a “cause” under (a)(6) that differs much in substance from permissive
abstention incorporated in (a)(1), other than the alleged inability of the bankruptcy court to certify the
constitutional question. That “cause” for withdrawal of the reference is addressed in the next section.
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proceeding, a fact which the Trustee concedes.7 Only in the most unusual event would
the District Court consider withdrawal of the reference to determine whether an
exemption applies in a particular case.8 The fact that the bankruptcy court is
determining application of a state law exemption statute is alone insufficient by itself
to warrant withdrawal of the reference, because allowing exemptions is intrinsically
connected to a debtor’s bankruptcy case.9 Indeed, KAN. STAT. ANN. § 60-2315, enacted
in 2011, has no application outside of a bankruptcy proceeding and would be unlikely
to ever arise in a state court proceeding.10 Judicial economy and uniform bankruptcy
administration is best served by having the bankruptcy court determine the validity
of the bankruptcy-only exemption at issue in this case. Numerous bankruptcy courts
have determined the constitutionality of state law bankruptcy specific exemptions
7 See Dkt. 60, p. 5, ¶ 15; 28 U.S.C. § 157(b)(2)(B). See also 11 U.S.C. § 522(l); Schwab v. Reilly, 560 U.S.
770, 130 S.Ct. 2652, 177 L.Ed. 2d 234 (2010) (All of a chapter 7 debtor’s assets become property of the
bankruptcy estate except that property which a debtor claims exempt).
8 Use of the “for cause shown” test in 28 U.S.C. § 157(d) indicates that Congress intended to have
bankruptcy proceedings adjudicated in the bankruptcy court unless a contravening interest requires
withdrawing the reference. See In re American Community Services, Inc., 86 B.R. 681, 686 (D. Utah
1988) citing In re DeLorean Motor Co., 49 B.R. 900, 912 (Bankr. E.D. Mich. 1985). See also Matter of
Edward Pirsig Farms, Inc., 47 B.R. 376 (D. Minn. 1984) (constitutional challenge to lien avoidance
statute § 544, did not require withdrawal of reference); In re Coe-Truman Technologies, Inc., 214 B.R.
183 (N.D. Ill. 1997) (Most important factor to consider is determining whether discretionary
withdrawal of the reference is appropriate is whether the proceeding sought to be withdrawn is core
or noncore).
9 Cf. Stern v. Marshall, 131 S. Ct. 2594, 2611-15 (2011) (state law tortious interference counterclaim
that existed independent of any bankruptcy proceeding required adjudication by an Article III court
that could enter a final judgment). See also In re Security Bank Corp., 2010 WL 2464966 (M.D. Ga.
2010) (refusing to withdraw the reference of a proceeding to determine whether a $17 million tax
refund was property of the estate; the proceeding was core and consideration of non-bankruptcy tax
law did not warrant withdrawal.).
10 See Container Recycling Alliance v. Lassman, 359 B.R. 358, 360 (D. Mass. 2007) (Withdrawal of
reference is an exception to the general rule that bankruptcy proceedings should be adjudicated in the
bankruptcy court and power to withdraw should be used only when it is essential to preserve a higher
interest.)
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under their applicable state constitution.11 Given the discretionary nature of
withdrawal and abstention in these cases, I submit that the District Court should
allow this Court to retain and decide this matter, giving due respect for controlling
Kansas law regarding Art. 2, § 17 of the Kansas Constitution to guide its
determination.12
Certification of Questions of Law, KAN. STAT. ANN. § 60-3201, et seq.
Kansas has adopted that Uniform Certification of Questions of Law Act.13 The
statutes provide that the Kansas Supreme Court may answer legal questions certified
to it by the Supreme Court of the United States, a federal court of appeal, a United
States district court, or an appellate court from a sister state.14 It does not specifically
authorize bankruptcy courts to certify questions to the Kansas Supreme Court.
Indeed, one bankruptcy court concluded that without express authority to certify, it
11 See In re Joyner, 489 B.R. 292 (Bankr. S. D. Ga. 2012) (Georgia’s bankruptcy specific exemption in
the cash value of life insurance policies did not violate the equal protection clause of the Georgia
Constitution.); In re McFarland, 481 B.R. 242 (Bankr. S.D. Ga. 2012) (accord); In re Holt, 894 F.2d
1005 (8th Cir. 1990) (Arkansas exemption statute for proceeds of life, health, accident and disability
insurance was unconstitutional where it was in direct conflict with $500 limitation imposed by
Arkansas Constitution); In re Foster, 168 B.R. 183 (Bankr. S. D. Ind. 1994) (Indiana exemption statute
regarding IRAs, as amended, did not violate Indiana Constitution, Art. 1, § 22 regarding debtor’s right
to exempt a reasonable amount of property.); In re Butcher, 189 B.R. 357 (Bankr. D. Md. 1995)
(Maryland statute exempting monies payable to debtors due to personal injury claims did not violate
reasonableness requirement of Maryland Constitution protecting debtor’s property from execution).
12 The intervener cites Michigan v. Long, 463 U.S. 1032, 1041, 103 S. Ct. 3469, 77 L.Ed. 2d 1201 (1983)
for the proposition that only state courts may interpret their state constitutions. The facts of Michigan
v. Long, a criminal case, have no bearing on the issue before this Court and in any event, this Court
has available to it Kansas Supreme Court precedent as to the meaning and application of the
uniformity clause of the Kansas Constitution. The bankruptcy court is not seeking to interpret the
Kansas Constitution but instead, to apply the legal principles set forth in the Kansas uniformity cases
to the Kansas bankruptcy exemption statute.
13 KAN. STAT. ANN § 60-3201-3212 (2005).
14 § 60-3201.
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would retain and decide the constitutionality of a state law exemption for itself.15 It
is not clear that if a legal question is to be certified, the reference must be withdrawn.
In 28 U.S.C. § 151 Congress declared that bankruptcy courts shall constitute
“a unit” of the district court and that bankruptcy judges are deemed to be a “judicial
officer of the district court.”16 Citing § 151, at least one bankruptcy court has
concluded that it has the power to certify a question of law to its state supreme
court.17 Thus, there is arguably authority for this Court to certify a question of law to
the Kansas Supreme Court, mooting the Trustee’s motion to withdraw the reference.
Even if the District Court withdraws the reference, it must conclude that
“there is no controlling precedent in the decisions of the supreme court and the court
of appeals of this state” to certify the question.18 Here, while there is no case that
specifically addresses the Kansas constitutionality of § 60-2315, there are many
Kansas cases that interpret and apply the Uniformity Clause of the Kansas
Constitution and state the controlling legal principles to which this Court is bound.
In addition, having heard and decided the federal constitutional challenges to the
Kansas earned income tax credit exemption, this Court is already intimately familiar
with both the exemption statute and the constitutional arguments, including the
15 In re Butcher, 189 B.R. 357, 364 (Bankr. D. Md. 1995).
16See Badami v. Sears (In re AFY, Inc.), 461 B.R. 541, 546-47 (8th Cir. BAP 2012) (“While the
bankruptcy court typically functions as a separate court, for jurisdictional purposes, it is not a court
apart from the district court. . . . whatever jurisdiction Congress vested in the district court, has now
been referred to the bankruptcy court.”)
17 See In re Sterling Mining Company, 415 B.R. 762, 768 (Bankr. D. Idaho 2009) citing JP Morgan
Chase Bank, N.A. v. Cougar Crest Lodge, LLC (In re Weddle), 2006 WL 3692425 at *2 and n. 8 (Bankr.
D. Idaho. Dec. 12, 2006).
18 § 60-3201.
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Uniformity Clause of the U.S. Constitution and concepts such as geographic
uniformity.19 Those concepts are not unsettled under Kansas law nor novel to the
Kansas Constitution. As noted by the federal district court in Marzolf v. Gilgore:
“The decision to certify rests in the sound discretion of the federal
district court.” Allstate Ins. Co. v. Brown, 920 F.2d 664, 667 (10th Cir.
1990) (quoting Lehman Bros. v. Schein, 416 U.S. 386, 391, 94 S. Ct.
1741, 1744, 40 L.Ed. 2d 215 (1974)). Furthermore, “certification is
not to be routinely invoked whenever a federal court is presented with
an unsettled question of state law.” Armijo v. Ex. Cam., Inc., 843 F.2d
406 (10th Cir. 1998).
“If a district court or court of appeals believes that it can resolve
an issue of state law with available research materials already at
hand, and makes the effort to do so, its determination should not be
disturbed simply because the certification procedure existed but was
not used.” Lehman Bros. v. Schein, 416 U.S. 386, 395 . . .20
These certification principles were applied in In re Medill, a case where the chapter
7 trustee objected to debtors’ claim of exemption of a personal injury action and
asserted that the exemption violated the Minnesota Constitution.21 The debtors
19 The Supreme Court has spoken on geographic uniformity under the federal Constitution and the
Kansas Supreme Court has addressed it under the Kansas Constitution. See In re Agriprocessors, Inc.,
479 B.R. 835, 848 (Bankr. N.D. Iowa 2012) (No basis existed for bankruptcy court to order parties to
file request for withdrawal of reference of fraudulent and preferential transfer claims; bankruptcy
court’s familiarity with case, related adversary proceedings, and preference and fraudulent transfer
actions strongly weighed against any need for withdrawal of reference.).
20 924 F. Supp. 127, 129 (D. Kan. 1996). See also In re Sterling Min. Co., 415 B.R. 762, 767-68 (Even
where state law is unsettled or has not directly addressed an issue of law, certification is not
mandatory; bankruptcy court could apply the “holdings and principles articulated in the Idaho cases
and the state’s statutes and rules” to the facts); In re Touch America Holdings, Inc., 401 B.R. 107, 119-
20 (Bankr. D. Del. 2009) (federal court, in deciding whether to certify issues to state court, may
consider existence of sufficient sources of state law, such as statutes and judicial decisions to allow a
principled, rather than a conjectural, conclusion; declining to certify issues to Montana Supreme
Court).
21 119 B.R. 685 (Bankr. D. Minn. 1990).
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sought to have the bankruptcy court certify the constitutional issue to the Minnesota
Supreme Court.22 In declining to certify, the bankruptcy court reasoned:
. . . its use should be confined largely to instances where the state
supreme court has never addressed the dispositive issue . . .
The constitutional issues at bar are certainly determinative of the
Trustee’s objection to Debtors’ claim of exemption. To be sure, the
Minnesota Supreme Court has never ruled on the constitutionality of
subd. 22. However, in a long line of cases applying art. 1, § 12 to
various exemption statutes enacted by the Minnesota state
legislature, that line commencing almost with the advent of statehood
and extending through . . . (1989), the Minnesota Supreme Court has
announced and refined an analysis which provides ample guidance to
this Court. The published history of the framing of the Minnesota
state constitution also sheds light on the questions posed. The lines
of authority for the present inquiry are settled, and certification is not
warranted.23
So too, here, there exists a body of Kansas Supreme Court case law interpreting
Art. 2, § 17 of the Kansas Constitution from which this Court may decide the validity
of the Kansas bankruptcy-only exemption. For all of these reasons, it is my
recommendation that the request for certification to the Kansas Supreme Court be
denied.
Uniformity under the Kansas Constitution, Art. 2, §17.
Article 2, section 17 of the Kansas Constitution provides—
All laws of a general nature shall have a uniform operation throughout
the state: Provided, The legislature may designate areas in counties that
have become urban in character as “urban areas” and enact special laws
giving to any one or more of such counties or urban areas such powers
22 The Minnesota version of the Uniform Certification of Questions of Law Act expressly authorized a
bankruptcy court to certify questions of law to the Minnesota Supreme Court. 119 B.R. at 688.
23 119 B.R. at 688.
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of local government and consolidation of local government as the
legislature may deem proper.24
This provision has been amended several times since the Constitution was first
adopted in 1861. It initially contained two provisions, the first relating to “laws
of a general nature” and the second prohibiting the Legislature from enacting
a “special “law” where a general law can be made applicable. The Kansas
Supreme Court distinguished between laws of a general nature and general
laws defining the former as a law “whose subject is common to all of the people
of the state” and the latter as “which apply to and operate uniformly upon all
members of any class of persons, places, or things, by requiring legislation
peculiar to themselves in the matters covered by the laws.”25
The second clause was repealed, leaving only the “laws of a general
nature” reference. As the Kansas court has said in Stephens v. Snyder Clinic
Ass’n, “[t]he effect of this change is that the only prohibition contained in
Article 2, Section 17, relates to laws of a general nature which affect the people
of the state generally. Such laws must apply uniformly throughout the state
and thus be geographically uniform.”26 The court held in that case, and has
thereafter reaffirmed, that this provision of the Kansas constitution does not
24 KAN. CONST. Art. 2, § 17.
25 Stephens v. Snyder Clinic Ass'n, 230 Kan. 115, 124, 631 P.2d 222 (1981) (quoting from Richardson
v. Board of Education, 72 Kan. 629 (1906)).
26 Stephens, 230 Kan. 115, 127.
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apply to challenges based on denial of equal protection that do not involve a
claim of geographical uniformity.27
The Trustee’s Uniformity Challenge is Not Based on Geography
The Trustee does not allege that Kan. Stat. Ann. § 60-2315 applies
differently in different parts of Kansas. Instead, he asserts that its operation
unfairly burdens the creditors of bankrupt debtors who avail themselves of this
exemption while allowing the creditors of non-bankrupt debtors access to those
debtors’ EIC. But, as the Stephens case shows, Art. 2, §17 doesn’t apply to this
alleged lack of uniformity.
There is already controlling Kansas Supreme Court case law on how to
apply Art. 2, §17 and that case law is easily applied to this situation. As the
“wrong” of which the Trustee complains is not “geographical,” this
constitutional provision does not apply. Accordingly, there is no basis for
certifying this already-answered question to the Kansas Supreme Court and,
therefore, no reason to withdraw the reference from this Court.
The Trustee cannot likely demonstrate that this “law of a general
nature” operates in a non-uniform fashion. As I stated in In re Lea, it is
anything but clear that a Kansas creditor of a non-bankrupt debtor would
receive any more of the EIC benefit than would a trustee constrained by this
statute.28 All that KAN. STAT. ANN. § 60-2315 exempts is the “right to receive
27 Id. See also Board of County Com’rs of Riley County v. City of Junction City, 233 Kan. 947, 958, 667
P.2d 868 (1983); State ex rel. Stephan v. Smith, 242 Kan. 336, 381-83, 747 P.2d 816 (1987).
28 In re Earned Income Tax Credit Exemption Constitutional Challenge Cases (In re Lea), 477 B.R.
791, 800 (Bankr. D. Kan. 2012), aff’d 2013 WL 4431267 (D. Kan. Aug. 16, 2013).
10
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tax credits.” A creditor of a non-bankrupt Kansas debtor could only attach the
proceeds of the EIC in the hands of the debtor once she had received them.
That creditor could not, for instance, garnish the funds in the hands of the
Internal Revenue Service or the Kansas Department of Revenue because those
entities are authorized by statute to only pay refunds to the taxpayer, not to
creditors.29 The Trustee will receive exactly what a creditor outside bankruptcy
in Kansas would receive from the debtor’s “right to receive” the EIC: nothing.
I therefore recommend that the Trustee’s motions to withdraw the
reference in these three cases be denied and that the District Court order the
Bankruptcy Court to retain the reference of these matters for further decision.
For the District Court’s convenience, a copy of the Trustee’s Motion to
Withdraw the Reference, as well as his objection to debtors’ exemption, are
attached to this Report and Recommendation.30
# # #
29 See Brockelman v. Brockelman, 478 F. Supp. 141 (D. Kan. 1979) (creditor’s garnishment of tax refund
in hands of IRS was barred by sovereign immunity, citing Buchanan v. Alexander, 45 U.S. 20, 11 L.
Ed 857 (1846)); 26 U.S.C. § 6402; KAN. STAT. ANN. §§ 75-6204, -6203, -6216 and 79-3233j (2011 Supp.).
30 No. 11-12155, Dkt. 44, 60.
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