- Category: Judge Somers
- Published on 22 July 2015
- Written by Judge Somers
- Hits: 316
In Re Reed, 14-12644 (Bankr. D. Kan. Jul. 21, 2015) Doc. # 31
SIGNED this 21st day of July, 2015.
Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
CHRISTOPHER SHAWN REED, CASE NO. 14-12644-7
JESSICA RAE REED, CHAPTER 7
OPINION AND JUDGMENT DENYING
TRUSTEE’S MOTION FOR TURNOVER
This matter is before the Court on the Chapter 7 Trustee’s motion for turnover of a
portion of the Debtors’ state income tax refund. Trustee J. Michael Morris appears as his
own attorney. The Debtors appear by counsel Doug Depew. The Court has reviewed the
relevant materials and is now ready to rule.
The Debtors’ 2014 Kansas K-40 income tax return showed they owed $653 before
the allowance of credits. The K-40 form then had them deduct an earned income credit of
Case 14-12644 Doc# 31 Filed 07/21/15 Page 1 of 8
$394, leaving a tax balance of $259. After this calculation was made, the form had a line
labeled “Refundable portion of earned income tax credit” where the Debtors entered $0 to
report the earned income credit amount that remained after applying the credit to their
income tax liability. Next, the Debtors’ income tax withholding of $1,181 was deducted,
which covered the $259 tax balance and left them with an overpayment of $922. They
therefore received a refund of $922.
The Court notes that, as a matter of mathematics, the Debtors’ refund would have
been the same if the $1,181 withheld from their wages had been applied first to the $653
they owed in taxes, leaving an overpayment of $528, and then their earned income credit
had been added to bring their total refund to $922. In other words, the fact the Debtors
qualified for the earned income credit increased the amount of the refund they were
entitled to receive by the amount of their earned income credit. The parties agree that the
bankruptcy estate is entitled to 330/365ths of whatever part of the Debtors’ refund is not
The question here is whether (1) the Debtors are entitled to keep their $394 earned
income credit as exempt under K.S.A. 60-2315, or (2) the fact they had to enter $0 on the
line on the K-40 labeled “Refundable portion of earned income tax credit” means their
otherwise exempt earned income credit was used up paying part of the tax they owed so
that their entire refund has to be attributed to money that was withheld from their wages
and not to the earned income credit.
Case 14-12644 Doc# 31 Filed 07/21/15 Page 2 of 8
The Trustee has crafted a plausible argument based on the K-40 tax return form the
Debtors filed for 2014. As indicated, the form directs the taxpayer to determine the
amount of tax owed and then deduct the earned income credit from that amount before
deducting the credit for taxes withheld from the taxpayer’s wages. The form refers to any
excess of the earned income credit over the taxes owed as the “[r]efundable portion of
earned income tax credit.” In addition, as the Trustee claims, K.S.A. 2014 Supp. 7932,205
(a) There shall be allowed as a credit against the tax liability of a
resident individual imposed under the Kansas income tax . . . an amount
equal to 17% for tax year 2013, and all tax years thereafter, of the amount
of the earned income credit allowed against such taxpayer’s federal income
tax liability pursuant to section 32 of the federal internal revenue code for
the taxable year in which such credit was claimed against the taxpayer’s
federal income tax liability.
(b) If the amount of the credit allowed by subsection (a) exceeds the
taxpayer’s income tax liability under the Kansas income tax act, such
excess amount shall be refunded to the taxpayer.
Subsection (b) can be read to suggest the earned income credit is the first credit item that
is to be deducted from the taxpayer’s tax liability. However, subsection (b) can also be
read simply to declare that the earned income credit is a refundable credit. The Trustee
has not offered any reason why the earned income credit should be applied before the
taxpayer’s credit for withholding taxes is applied, beyond the fact the K-40 form says to
make the calculation that way. As in this case, the refund due to the taxpayer would
ordinarily be the same no matter which credit is applied first. And since the earned
income credit exemption provided by K.S.A. 2014 Supp. 60-2315 applies only in cases
Case 14-12644 Doc# 31 Filed 07/21/15 Page 3 of 8
filed in federal bankruptcy courts, Kansas state regulators have no apparent reason to try
to control how the exemption is applied by those courts.
The Trustee has not cited any of the Kansas Administrative Regulations and the
Court could find nothing in them imposing a requirement that an earned income credit be
deducted from a taxpayer’s income tax liability before the withholding tax the taxpayer
had deducted from his or her wages.1 Without the earned income credit, the Debtors’
refund would have been $528; with it, their refund was $922. Thus, $394 of their refund
is clearly attributable to the earned income credit.
Similar to K.S.A. 2014 Supp. 79-32,205, the statutes governing income tax
withholding require applying the tax withheld from the taxpayer’s wages as a credit
against any income tax owed, and refunding any excess to the taxpayer. In relevant part,
K.S.A. 2014 Supp. 79-32,100 provides:
(c) The amount deducted and withheld under this act during any
calendar year from the wages or payments other than wages of an individual
taxpayer shall be allowed as a credit against the income tax otherwise
imposed on such taxpayer by the “Kansas income tax act,” whether or not
such amount was remitted to the division of taxation by the employer,
payer, person or organization deducting and withholding tax in accordance
with the terms of this act.
(d) If the amount withheld under this act during any calendar year
exceeds the individual income tax liability of the employee-payee-taxpayer
any excess shall be applied to any other income tax owed the state of
Kansas by such individual, including fines, penalties and interest, if any,
and the balance of such excess, if any, refunded to the taxpayer as provided
1See Kansas Administrative Regulations, Agency 92. Dep’t of Revenue, Article 12. Income Tax,
K.A.R. 92-12-1 through 92-12-149 (found in database “KS ADC” on Westlaw, current through Volume
34, No. 22, May 28, 2015).
Case 14-12644 Doc# 31 Filed 07/21/15 Page 4 of 8
in subsection (c) of K.S.A. 79-32,105, and amendments thereto.2
These provisions make clear that the credit for income tax withheld from the taxpayer’s
wages is a refundable credit. The provisions are more complicated than 79-32,205, but
any amount withheld is to be refunded to the taxpayer to the extent it exceeds the current
and past income taxes and related charges the taxpayer owes.
Comparing 79-32,205 to 79-32,100(d) suggests a reason why the drafters of the K40
form wanted to apply the earned income credit to the taxpayer’s tax liability before the
credit for taxes withheld from the taxpayer’s wages: the earned income credit statute (7932,205)
does not say the refundable part of the earned income credit can be applied to
other income taxes and related charges the taxpayer owes to the state, but the withholding
tax credit statute (79-32,100) does say any excess withholding credit can be applied to
such debts. So applying the earned income credit first to the taxes owed for that tax year
ensures that any refund can be attributed to taxes withheld to the greatest extent possible,
and that allows the state to rely on 79-32,100 and recover as much as possible from the
refund to pay any other income taxes the taxpayer owes. But nothing in the statutes leads
to the conclusion they should be construed to limit the exemption that is available to a
debtor in a bankruptcy case. The Court is not willing to read the K-40 form to mean the
form’s creators intended to reduce or eliminate the earned income credit exemption a
2K.S.A. 2014 Supp. 79-32,105(c) says when the director of the Department of Revenue discovers
that the amounts paid by or credited to a taxpayer exceed the amount legally due for the income tax or
any other tax owed to the state, the director is to certify that fact to the director of accounts and reports,
who is then to issue a warrant to the taxpayer for the excess.
Case 14-12644 Doc# 31 Filed 07/21/15 Page 5 of 8
taxpayer would otherwise be able to claim in a bankruptcy case.
K.S.A. 2014 Supp. 60-2315 provides, in relevant part,
An individual debtor under the federal bankruptcy reform act (11
U.S.C. § 101 et seq.), may exempt the debtor’s right to receive tax credits
allowed pursuant to section 32 of the federal internal revenue code of 1986,
as amended, and K.S.A. 2014 Supp. 79-32,205, and amendments thereto.
An exemption pursuant to this section shall 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.
Even though the Kansas earned income credit clearly caused the Debtors’ state tax refund
to increase by the amount of the credit, the Trustee contends the K-40 method of
calculating their refund means they had no “right to receive” the Kansas earned income
credit because it was all applied to the amount of their tax liability, and their entire refund
was therefore attributable solely to the income tax withheld from their wages. The Court
cannot agree. The “right to receive” language does not have to be read to mean the
exemption is available only to a debtor who is entitled to get specific money that
constitutes the earned income credit. It can instead be read simply to mean the exemption
is available to any debtor who qualifies for the credit.3 In this sense, the Debtors
“received” the credit by having it applied to their income tax liability, which in turn
increased their tax refund by the amount of the credit. As indicated, the Court is
convinced the K-40 form was constructed the way it was to make sure the state could
collect as much as possible in other income taxes owed by a taxpayer who qualified for
3In re Westby, 473 B.R. 392, 421 (Bankr. D. Kan. 2012) (suggesting 60-2315 applies to part of
refund “caused or brought about by” earned income credit).
Case 14-12644 Doc# 31 Filed 07/21/15 Page 6 of 8
both an earned income credit and a withholding tax credit, not so a taxpayer who filed
bankruptcy would lose an otherwise exempt earned income credit to his or her creditors.
Despite the computation method employed on the K-40 form, the Court concludes
this case is properly decided by applying the general Kansas view that “exemption
statutes are to be liberally construed in favor of those intended by the legislature to be
benefitted.”4 Clearly the Kansas legislature intended for K.S.A. 2014 Supp. 60-2315 to
benefit people who file for bankruptcy by allowing them to protect one years’ worth of
their earned income tax credits from the claims of their creditors and bankruptcy estates.
The Court notes this result also agrees with decisions by two other bankruptcy judges in
this District who rejected different efforts to reduce or eliminate a debtor’s earned income
credit based on the “right to receive” language, or by apportioning some or all of the
earned income credit to the prepetition portion of the debtor’s tax liability for the year.5
For these reasons, the Court concludes the Trustee’s motion for turnover must be
and it is hereby denied. The foregoing constitutes Findings of Fact and Conclusions of
Law under Rules 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure, which
make Rule 52(a) of the Federal Rules of Civil Procedure apply to this matter. This
4Hodes v. Jenkins (In re Hodes), 308 B.R. 61, 65 (10th Cir. BAP 2004); Nohinek v. Logsdon, 6
Kan. App. 2d 342, 344 (1981).
5Westby, 473 B.R. at 421 (Karlin, J.), aff’d 486 B.R. 509 (10th Cir. BAP 2013); In re Roy, Case
No. 12-11246-7, Order on Trustee’s Motion for Turnover (Bankr. D. Kan. Sept. 24, 2013, unpub. op.)
Case 14-12644 Doc# 31 Filed 07/21/15 Page 7 of 8
judgment will become effective when it is entered on the docket for this case, as provided
by Federal Rule of Bankruptcy Procedure 9021.
# # #
Case 14-12644 Doc# 31 Filed 07/21/15 Page 8 of 8
- Category: Judge Somers
- Published on 25 June 2015
- Written by Judge Somers
- Hits: 431
Murray et al v. ECMC, 15-06016 (Bankr. D. Kan. Jun. 24, 2015) Doc. # 38
SIGNED this 24th day of June, 2015.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
ALAN J. MURRAY and
CATHERINE A. MURRAY,
ALAN J. MURRAY and
CATHERINE A. MURRAY,
CASE NO. 14-22253
ADV. NO. 15-6016
MEMORANDUM OPINION AND ORDER GRANTING
DEFENDANT'S MOTION TO DISMISS
Defendant Educational Credit Management Corporation (ECMC) moves under
Federal Rule of Bankruptcy Procedure 7012(b)(1) and (h) to dismiss Plaintiffs’
Case 15-06016 Doc# 38 Filed 06/24/15 Page 1 of 13
Complaint to Determine Dischargeability of Student Loan Debts (Complaint) on the
premise that the claim is not ripe for adjudication. Defendant appears by N. Larry Bork
of Goodell, Stratton, Edmonds & Palmer, L.L.P. Plaintiff-Debtors oppose the motion,
and they appear by George J. Thomas of Phillips & Thomas LLC.1
Alan and Catherine Murray (Plaintiffs) filed for relief under Chapter 13 on
September 23, 2014. Their unsecured debts as reported on Schedule F included
approximately $263,000 in student loan debts, the total of two loans, one for each Debtor.
Debtors filed a proposed plan with their petition. An amended plan was filed on October
29, 2014, and was confirmed by an order filed December 23, 2014. The plan provides for
payments of $500 per month for a period of 60 months.
On March 25, 2015, six months after filing their petition, Debtors filed their
Complaint requesting the Court to determine that because of undue hardship, their student
loan debts do not fall within the discharge exception of § 523(a)(8).2 ECMC moves to
dismiss under Federal Rule of Bankruptcy Procedure 7012(b)(1), providing that a party
1 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C.
§§ 157(a) and 1334(a) and (b), and the Amended Standing Order of Reference of the United States
District Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to the
District’s bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the
Code or arising in or related to a case under the Code, effective June 24, 2013. D. Kan. Standing Order
No. 13-1, printed in D. Kan. Rules of Practice and Procedure at 168 (March 2014). Furthermore, this
Court may hear and finally adjudicate this matter because it is a core proceeding pursuant to 28 U.S.C.
§ 157(b)(2)(I). There is no objection to venue or jurisdiction over the parties.
2 The original defendants were Navient Solutions Inc. and Sallie Mae. By an order filed on April
29, 2015, ECMC was added as a defendant. By a stipulation approved by the Court on May 22, 2015,
Navient Solutions Inc. and Sallie Mae were dismissed, leaving ECMC as the sole defendant.
Case 15-06016 Doc# 38 Filed 06/24/15 Page 2 of 13
may assert the defense of lack of subject matter jurisdiction by motion, and Federal Rule
of Bankruptcy Procedure 7012(h)(3), providing “[i]f the court determines at any time that
it lacks subject-matter jurisdiction, the court must dismiss the action.” ECMC predicates
lack of subject matter jurisdiction upon the doctrine of ripeness.
“The ripeness doctrine aims to prevent courts ‘from entangling themselves in
abstract disagreements’ by avoiding ‘premature adjudication.’”3 “Ripeness reflects
constitutional considerations that implicate ‘Article III limitations on judicial power,’ as
well as ‘prudential reasons for refusing to exercise jurisdiction.’”4 “In evaluating a claim
to determine whether it is ripe for judicial review, [the Supreme Court] consider[s] both
‘the fitness of the issues for judicial decision’ and ‘the hardship of withholding court
consideration.’”5 In the Tenth Circuit, “ripeness analysis focuses on ‘whether the harm
asserted has matured sufficiently to warrant judicial intervention.’”6 “Ripeness is
peculiarly a question of timing.”7 As for hardship from withholding judicial action, the
3 Awad v. Ziriax, 670 F.3d 1111, 1124 (10th Cir. 2012) (quoting Abbott Labs. v. Gardner, 387
U.S. 136, 148 (1967), overruled on other grounds by Califano v. Sanders, 430 U.S. 99, 105 (1977)).
4 Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 670, n. 2 (2010) (quoting Reno v.
Catholic Social Services, Inc., 509 U.S. 43, 57, n. 18 (1993)).
5 Id. (quoting Nat’l Park Hospitality Ass’n v. Department of Interior, 538 U.S. 803, 808 (2003)).
6 Awad, 670 F.3d at 1124 (quoting Kansas Judicial Review v. Stout, 519 F.3d 1107, 1116 (10th
7 Onyeabor v. Centennial Pointe Owners Ass’n (In re Onyeabor), 487 B.R. 599, 2013 WL
819726 at *4 (unpub. op., 10th Cir. BAP 2013) (citing Reg’l Rail Reorganization Act Cases, 419 U.S.
102, 140 (1974)).
Case 15-06016 Doc# 38 Filed 06/24/15 Page 3 of 13
court asks “whether the challenged action creates a direct and immediate dilemma for the
Determination of whether Debtors’ claim is ripe requires consideration of the law
concerning the discharge of student loan debts. In a Chapter 13 case, upon the
completion of all payments under the plan, debtors are generally granted a discharge of
all debts provided for by the plan, except certain debts provided for under § 1322(b)(5) or
covered by some subsections of § 523(a). Those debts excepted from discharge include
student loans, unless, as provided in § 523(a)(8), “excepting such debt from discharge . . .
would impose an undue hardship on the debtor and the debtor’s dependents.”9 A debtor
wishing to discharge a student loan debt must file an adversary proceeding seeking a
determination of dischargeability upon proof of undue hardship. The Tenth Circuit has
adopted the three-part Brunner test for undue hardship, which requires the debtor to
(1) that the debtor cannot maintain, based on current income
and expenses, a “minimal” standard of living for herself and
her dependents if forced to repay the loans; (2) that additional
circumstances exist indicating that this state of affairs is likely
to persist for a significant portion of the repayment period of
the student loans; and (3) that the debtor has made good faith
efforts to repay the loans.10
8 Awad, 670 F.3d at 1125 (quoting New Mexicans for Bill Richardson v. Gonzales, 64 F.3d 1495,
1499 (10th Cir. 1995)).
9 11 U.S.C. § 523(a)(8).
10 Educational Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1307 (10th Cir 2004) (quoting
Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2nd Cir. 1987)).
Case 15-06016 Doc# 38 Filed 06/24/15 Page 4 of 13
Bankruptcy Rule 4007 addresses the determination of the dischargeability of a debt.
Subsection (a) provides that a debtor may file a complaint to obtain a determination of the
dischargeability of any debt. As to the timing of such a complaint, subsection (b)
provides that a complaint other than under § 523(c) “may be filed at any time.”
Neither the Tenth Circuit Court of Appeals nor the lower courts in the district have
ruled on a ripeness challenge to the filing of a complaint seeking a determination of the
dischargeability of a student loan debt in a Chapter 13 case substantially before the
completion of plan payments. In Swanson,11 this Court did reject a ripeness challenge to a
Chapter 12 debtor’s adversary proceeding, filed before a Chapter 12 plan was proposed,
that sought a determination of the dischargeability of his federal income tax debt. When
seeking dismissal on ripeness grounds, the IRS relied on Chapter 13 student loan
dischargeability cases.12 The Court distinguished those cases, where “[d]etermining the
dischargeability of such [student loan] debts long before a debtor will qualify for a
discharge simply adds to the speculative nature of the required soothsaying,” from the
situation presented where “the facts that control whether the Debtor’s obligations to the
IRS are dischargeable have already occurred.”13 The Court concluded that the
dischargeability of the debts was ripe for determination because the controlling facts
“ha[d] already occurred and the dischargeability of the debts will probably affect how the
11 Swanson v. Internal Revenue Service (In re Swanson), 343 B.R. 678 (Bankr. D. Kan. 2006).
12 Id. at 681.
13 Id. at 681.
Case 15-06016 Doc# 38 Filed 06/24/15 Page 5 of 13
Debtor chooses to structure his Chapter 12 plan.”14 Although Debtors rely on Swanson as
supporting their position, it is sufficiently different to be of little help. Here, not all of the
facts relevant to the determination of undue hardship at the time of discharge have
occurred, and a finding of dischargeability at this stage of the Chapter 13 case will not
determine the future course of the bankruptcy proceeding. The harm Debtors allege is the
loss of the protection of the automatic stay and the continued accrual of interest on their
student loan debts if they are required to wait to file such a proceeding until after plan
The circuit courts and bankruptcy courts are divided on the issue presented. Some
courts have held that because the discharge of debts in a Chapter 13 case occurs, if at all,
after completion of plan payments, a claim of undue hardship is not ripe until sometime
close to the date that a discharge is anticipated. ECMC urges the Court to follows these
cases. For example, in Bender,16 a Chapter 13 debtor filed a proceeding to determine the
dischargeability of a student loan debt four months after filing the case and three-and-ahalf
years before she would be entitled to a discharge. The bankruptcy court ruled in the
debtor’s favor. On appeal, the district court reversed, finding the adversary petition was
not ripe for adjudication. The Eight Circuit Court of Appeals affirmed. The court
reasoned that the factual question to be determined in the adversary proceeding was
14 Id. at 683.
15 Doc. 17 at 3-5.
16 Bender v. Educational Credit Mgmt. Corp. (In re Bender), 368 F.3d 846 (8th Cir. 2004).
Case 15-06016 Doc# 38 Filed 06/24/15 Page 6 of 13
“whether there is undue hardship at the time of discharge, not whether there is undue
hardship at the time that a § 523(a)(8) proceeding is commenced.”17 Although as a matter
of administrative convenience, it makes sense to file the adversary proceeding some time
before the actual date of the anticipated discharge, the proceedings should take place
close to that date “so the court can make its determination in light of the debtor’s actual
circumstances at the relevant time.”18 The consequences to the debtor were rejected as a
basis to find ripeness, since during the period between the date of the filing of the petition
and the date of plan completion, the debtor was protected by the automatic stay from any
attempts to collect the debt.
Bankruptcy courts have reached the same conclusion. Raisor19 is an example. In
that case, the court dismissed as premature a proceeding to determine the partial
dischargeability of a student loan when the proceeding was filed approximately seven
months after the filing of a Chapter 13 petition and approximately three years before the
debtors’ plan was scheduled for completion. The ruling rested upon the court’s
conclusion that all of the factors relevant to a hardship discharge could not be addressed
fully until later in the case, and that the congressional intent of preserving student loans
from discharge could best be followed by accurately analyzing the debtors’ financial
17 Id. at 848.
19 Raisor v. Educational Loan Serv. Ctr., Inc. (In re Raisor), 180 B.R. 163 (Bankr. E.D. Tex.
Case 15-06016 Doc# 38 Filed 06/24/15 Page 7 of 13
condition at the time a discharge is granted. The provision of Rule 4007(b) that a
complaint to determine dischargeability could be filed at any time was held not to be
controlling. “The lack of a time limitation should not be interpreted as meaning that any
proceeding filed pursuant to Rule 4007(b) is ripe for adjudication. Bankruptcy Rule 4007
does not determine whether a proceeding is ripe for adjudication but merely permits the
filing of certain types of proceedings when the matter is ripe.”20 Raisor was followed by
Pair,21 where the debtor filed a dischargeability complaint three months after the Chapter
13 petition. The complaint was dismissed without prejudice to refiling no earlier than six
months before the debtor’s discharge was due to be entered. ECMC also cites additional
bankruptcy court decisions holding that complaints seeking determinations of the
dischargeability of student loan debts because of undue hardship soon after the filing of a
Chapter 13 petition are premature.22
A number of courts have held that the ripeness doctrine does not preclude an
undue hardship determination shortly after the filing of a Chapter 13 petition. Debtors
urge the Court to follow these cases. In Ekenasi,23 the debtor filed a petition under
Chapter 13 in August 1997, his five-year plan was confirmed in February 1998, and in
20 Id. at 167.
21 Pair v. United States - U.S. Dep’t of Educ. (In re Pair), 269 B.R. 719, 720-21 (Bankr. N.D.
22 Walton v. Sallie Mae Educ. Credit Fin. Corp. (In re Walton), 340 B.R. 892, 893-95 (Bankr.
S.D. Ind. 2006); Soler v. United States (In re Soler), 250 B.R. 694, 695-97 (Bankr. D. Minn. 2000).
23 Ekenasi v. Educ. Res. Inst. (In re Ekenasi), 325 F.3d 541 (4th Cir. 2003).
Case 15-06016 Doc# 38 Filed 06/24/15 Page 8 of 13
May 1998, he filed a proceeding seeking discharge of his student loan debts. In January
2001, the bankruptcy court entered an order granting Ekenasi a complete discharge of his
student loan debts for undue hardship. The creditors appealed, and the district court
affirmed. On appeal to the Fourth Circuit Court of Appeals, that court recognized that an
undue hardship discharge in a Chapter 13 case is premised upon a prediction of what the
debtor’s situation will be at the conclusion of the chapter 13 plan, but declined “to adopt a
hard and fast rule which would preclude bankruptcy courts from ever entertaining a
proceeding to discharge student loan obligations until at or near the time the debtor has
completed payments under a confirmed Chapter 13 plan.”24 The court stated, “The text of
the pertinent statues does not prohibit such an advance determination and, although
cognizant of the policy concerns expressed by Congress in its refusal to discharge such
loans, we can envision exceptional circumstances where the Brunner factors could be
predicted with sufficient certainty in advance of the conclusion of a Chapter 13
In Coleman,26 the Ninth Circuit thoroughly considered the two components of
24 Id. at 547.
25 Id. The Court went on to observe: “Nevertheless, while we do not preclude debtors from
seeking a discharge determination of student loan debts prior to the completion of payments under a
confirmed Chapter 13 plan, our cognizance of those policy concerns also counsels us to emphasize that it
will be most difficult for a debtor, who has advanced his education at the expense of the government-
guaranteed loans, to prove with the requisite certainty that the repayment of his student loan obligations
will be an ‘undue burden’ on him during a significant portion of the repayment period of the student loans
when the debtor chooses to make that claim far in advance of the expected completion date of his plan.”
26 Educational Credit Mgmt. Corp. v. Coleman (In re Coleman), 560 F.3d 1000 (9th Cir. 2009).
Case 15-06016 Doc# 38 Filed 06/24/15 Page 9 of 13
ripeness under Abbott,27 “‘the fitness of the issues for judicial decision’ and ‘the hardship
to the parties of withholding court consideration,’”28 and then agreed with the Fourth
Circuit that an undue hardship determination can be ripe substantially in advance of plan
completion. The fitness test operates to delay consideration of the issue until the facts
have been well-developed, but does not preclude court decision where “delay is unlikely
to provide much, if any, additional benefit to the bankruptcy court’s resolution of the
issue.” 29 As to the determination of undue hardship sufficient to support discharge, the
court found that a finding of lack of ripeness “due to the factual contingency of the
debtor’s financial situation makes little sense since the court must always speculate on the
debtor’s financial situation years into the future.”30 The finding of fitness for decision
was found to be consistent with the Code as “there is no clause in § 523(a)(8) specifying
that undue hardship must exist exactly at the time of discharge.”31 Hardship to the debtor
from postponing a decision was also found to support a finding of ripeness. “Here, the
hardship to Coleman is committing to a Chapter 13 plan for three to five years without
any guarantee that her student loans will be discharged at the end of this time period,”32
27 Abbott Labs. v. Gardner, 387 U.S. 136 (1967).
28 Coleman, 560 F.3d at 1006 (quoting Abbott, 387 U.S. at 149).
29 Id. at 1009.
31 Id. at 1010.
Case 15-06016 Doc# 38 Filed 06/24/15 Page 10 of 13
instead of proceeding under Chapter 7 where undue hardship could be litigated
immediately after filing for bankruptcy relief. Debtors also cite two bankruptcy court
decisions rejecting ripeness as a basis to dismiss a dischargeability complaint filed early
in a Chapter 13 case.33
The Court finds that the cases cited by ECMC are better reasoned and concludes
that the present case is not ripe for decision. As to the fitness element of ripeness, the
discharge exception of § 523(a)(8) requires the Court to project the hardship to the debtor
if the student loan is not discharged. In a Chapter 13 case, § 1328(a) provides that a
discharge does not occur until the completion of plan payments. The Code thereby
contemplates that the undue hardship finding will be based upon a projection of the
debtor’s anticipated post-bankruptcy financial circumstances. Generally, this projection
is best made when all of the debtor’s pre-discharge financial circumstances are known
and the post-bankruptcy period is imminent.34 Projecting whether the payment of student
loans after discharge would cause an undue hardship is at best a difficult process; hearing
the matter years before the beginning of the projection period would only compound the
difficulty. In addition, an early ruling could result in procedural issues which can be
avoided if the hearing is delayed. For example, if the Court were to find the absence of
33 Strahm v. Great Lakes Higher Educ. Corp. (In re Strahm), 327 B.R. 319 (Bankr. S.D. Ohio
2005); Hoffer v. American Educ. Servs. (In re Hoffer), 383 B.R. 78 (Bankr. S.D. Ohio 2008); Coleman v.
Educational Credit Mgmt. Corp. (In re Coleman), 333 B.R. 841 (Bankr. N.D. Cal. 2005).
34 The Court declines to adopt a hard and fast rule that would preclude in all cases the
consideration of an undue hardship discharge of a student loan in a Chapter 13 case until near the time of
discharge. It is possible that in rare circumstances, the issue could be ripe.
Case 15-06016 Doc# 38 Filed 06/24/15 Page 11 of 13
an undue hardship at a hearing held three to four years before discharge, would the
debtor, if his or her circumstances changed, be entitled to another hearing on the same
issue after completing all plan payments? On the other hand, if undue hardship were
found but the debtor’s circumstances changed before discharge, would the creditor be
entitled to challenge the prior ruling? Further, there is no guarantee early in a Chapter 13
case that a debtor will make all plan payments or otherwise be entitled to a discharge.
Trial on the issues early in the bankruptcy case could prove to be a waste of the parties’
and the Court’s resources.
Debtors’ plan provides for payment over 60 months. This case was filed on
September 13, 2014, and the adversary proceeding seeking discharge of the student loan
debts was filed on March 23, 2015. In the ordinary course of proceedings in this Court,
the matter would come to trial in late 2015 or early 2016, requiring the Court to predict
Debtors’ financial circumstances in the year 2019 and thereafter, without the benefit of
evidence regarding their finances during the pendency of their bankruptcy case. Debtors
have provided no suggestion of unusual facts indicating that their financial circumstances
In addition, the Court rejects Debtors’ argument that they will suffer harm if the
ruling is delayed. In their brief opposing ECMC’s motion to dismiss, Debtors assert:
The student loans in question are currently about $265,000.
Interest and penalties continue to accrue on this huge amount.
To permit this matter to sit unresolved for several years would
simply add to this amount, and be of no good for either party.
To require the Debtors to pursue this adversary after their
Case 15-06016 Doc# 38 Filed 06/24/15 Page 12 of 13
receiving a discharge would . . . definitely harm them.
Adversaries of this type can take a long time to resolve. They
would lose the automatic stay protections against the creditor,
and the closing of the case would be delayed.35
This argument is predicated upon two misconceptions. First, if the hardship trial were to
be held several years before completion of Debtors’ plan and the Court found undue
hardship, the discharge could not be entered immediately. The discharge of the student
loan debts, like the discharge of other debts, would have to await entitlement to a
discharge under § 1328. Second, a finding that the Complaint is not presently ripe does
not mean that the matter cannot be heard until after a discharge is entered. Rather, a
proceeding to include student loans in a Chapter 13 discharge would be ripe if filed not
more than approximately twelve months before the completion of plan payments, while
the automatic stay remains in place. The Court finds Debtors have not identified any
harm they will suffer if the trial on the discharge of their student loans is delayed.
For the foregoing reasons, the Court grants ECMC’s motion to dismiss this
proceeding for lack of ripeness. This dismissal shall be without prejudice, so Debtors
may refile a similar proceeding not more than twelve months before plan completion is
IT IS SO ORDERED.
# # #
35 Doc. 17 at 7.
Case 15-06016 Doc# 38 Filed 06/24/15 Page 13 of 13
- Category: Judge Somers
- Published on 16 June 2015
- Written by Judge Somers
- Hits: 292
In Re Swenson, 14-40173 (Bankr. D. Kan. Jun. 12, 2015) Doc. # 104
SIGNED this 12th day of June, 2015.
Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
KEITH ALLEN SWENSON, CASE NO. 14-40173-12
VICTORIA ANNE SWENSON CHAPTER 12
OPINION DISALLOWING CLAIM FILED BY SUNFLOWER BANK, N.A.
This matter is before the Court on the Debtors’ objection1 to Proof of Claim No.
14, filed by Sunflower Bank, N.A. A hearing on the matter was held on April 27, 2015.
The Debtors appeared by counsel David R. Klaassen. Sunflower Bank appeared by
counsel Michael R. Munson of Gay, Riordan, Fincher, Munson & Sinclair. Chapter 12
Trustee Eric C. Rajala appeared by phone, and the United States appeared by Assistant
Case 14-40173 Doc# 104 Filed 06/12/15 Page 1 of 8
U.S. Attorney Tanya Wilson. The Court has considered the matter and is now ready to
The Debtors commenced this case by filing a petition for Chapter 12 relief on
March 7, 2014. That same day, they filed a creditor matrix which included Sunflower
Bank as one of their creditors. They did not file their schedules until April 4, 2014, and
on Schedule D, they listed Sunflower Bank as a creditor holding two secured claims
against them. The real property that secures Sunflower’s claims includes the Debtors’
principal residence. A meeting of their creditors pursuant to § 341 of the Bankruptcy
Code was scheduled for April 8, 2014. Notice of the meeting was sent to their creditors,
and the notice also advised that the deadline for non-governmental creditors like
Sunflower to file a proof of claim was July 7, 2014. Sunflower has not suggested it was
not adequately informed of this claims bar date.
On May 9, 2014, an attorney filed a notice of appearance and request for notice,
saying he was appearing for Sunflower Bank and asking for notices to be served on him
via CM-ECF or at his street address. His notice also said, “Sunflower is a creditor and
party in interest in the above-captioned case and, therefore, is entitled to notice and the
right to be heard as to all matters that may affect Sunflower, the Debtors, property of the
Debtors, or property in which Sunflower may claim an interest.”
Sunflower did not file a proof of claim by July 7, 2014, and the Debtors did not
file one on the bank’s behalf at any time. Instead, the bank’s attorney filed a proof of
Case 14-40173 Doc# 104 Filed 06/12/15 Page 2 of 8
claim for the bank on August 11, 2014. That proof of claim said the Debtors owed
Sunflower $44,976.44, and the bank’s claim was secured by property worth $90,000.
On September 22, 2014, the Debtors filed an objection to Sunflower’s proof of
claim, arguing it should be disallowed under § 502(b)(9) because it was not timely filed.
Sunflower responded, largely arguing the Debtors’ objection was contrary to their own
best interests. On January 26, 2015, at a hearing on the claim objection, a briefing
schedule was set, and oral argument was scheduled for April 27, 2015.
In the meantime, the Debtors had obtained several extensions of the time for them
to file a plan, and they ultimately filed one on September 19, 2014.2 In the plan, they
propose to treat Sunflower’s two claims as disallowed claims, and make no payments to
the bank during the plan’s five-year term. Citing In re Boucek, 280 B.R. 533 (Bankr. D.
Kan. 2002), they say the bank’s failure to file a timely proof of claim means its claim will
be disallowed, and it is deprived of the right to participate in plan distributions during the
plan period, although it will retain its lien on its collateral. Consequently, they propose to
make no payments on the bank’s claims and for no interest to accrue during their plan.
They propose, however, to provide adequate protection for the bank by paying all real
estate taxes and assessments on the real property that secures the bank’s claims, and
paying for insurance on the property. After they complete their plan, the Debtors propose
to pay the bank’s claims, plus interest, by making 180 monthly payments. Sunflower has
Case 14-40173 Doc# 104 Filed 06/12/15 Page 3 of 8
objected to the plan. The United States, on behalf of the IRS, has also objected to the
On January 2, 2015, still before the hearing on the Debtors’ objection to its claim,
Sunflower filed a motion for stay relief. It alleged the Debtors had not made the monthly
payments that were due on March 1, 2014, when they filed their bankruptcy petition, but
on March 20, 2014, made a payment on one of the loans of somewhat more than the
amount that was due on March 1. The bank further alleged the Debtors were in arrears
for nine monthly payments that had come due on each loan after the Debtors filed
bankruptcy. Sunflower described the proposed treatment of its claims under the Debtors’
plan, and alleged the Debtors did not have sufficient equity in its collateral to justify what
the bank called “the payment vacation” proposed by the plan, which therefore did not
adequately protect the bank’s interest in its collateral. The Debtors opposed the motion.
Both the motion and the Debtors’ plan are set for an evidentiary hearing on June 10,
On March 3, 2015, Sunflower filed a brief in support of its response to the
Debtors’ objection to its proof of claim. In it, the bank argues the notice and entry of
appearance its attorney filed in May 2014 constituted an informal proof of claim that was
filed before the claims bar date, and therefore the Court should allow its claims as filed
after the bar date. The Debtors filed their opposing brief on April 7, 2015.
Section 502(b)(9) of the Bankruptcy Code provides that, with certain exceptions, if
Case 14-40173 Doc# 104 Filed 06/12/15 Page 4 of 8
an objection to a claim is made, the claim is to be disallowed if “proof of such claim is
not timely filed.” Sunflower concedes the proof of claim it filed in August 2014 was not
timely under Federal Rule of Bankruptcy Procedure 3002(c), and none of the exceptions
in the rule applied to give it more time to file a proof of claim. The Seventh Circuit has
ruled in a Chapter 12 case that a bankruptcy court has no power in that circumstance to
allow a late-filed proof of claim on equitable grounds.3 Furthermore, the Circuit ruled the
fact the debtor’s plan provided for the creditor’s claim to be allowed and paid was not
sufficient to excuse the late filing of the creditor’s proof of claim.4 Unless Sunflower did
something before the claims bar date that can be treated as the equivalent of filing a proof
of claim, its untimely proof of claim must be disallowed.
Sunflower argues that it did file something before the claims bar date that was as
good as a formally-filed proof of claim, namely the notice of appearance and request for
notice that the attorney filed on the Bank’s behalf in May 2014. The bank contends this
constituted an informal claim that its later proof of claim permissibly amended. In In re
Reliance Equities,5 the Tenth Circuit recognized a five-part test for determining whether a
document filed before the claims bar date qualifies as an informal proof of claim that the
creditor who filed the document can later amend by filing a formal proof of claim. The
3In re Greenig, 152 F.3d 631, 633-36 (7th Cir. 1998).
5966 F.2d 1338 (10th Cir. 1992) (quoting In re Bowers, 104 B.R. 362, 364 (Bankr. D. Colo.
Case 14-40173 Doc# 104 Filed 06/12/15 Page 5 of 8
1. the proof of claim must be in writing;
2. the writing must contain a demand by the creditor on the debtor’s estate;
3. the writing must express an intent to hold the debtor liable for the debt;
4. the proof of claim must be filed with the Bankruptcy Court; and
5. based on the facts of the case, it would be equitable to allow the
The parties cited the part of Chief Judge Nugent’s opinion in In re Boucek6 that
considered the informal proof of claim doctrine in a Chapter 12 case. There, the creditor
had filed a notice of appearance and request for service, and had approved an agreed
order about the debtors’ request for postpetition financing. After quoting the test set out
in Reliance Equities, Judge Nugent said, “Neither document contains a demand by the
[creditor] on the debtors’ estate or expresses an intent to hold the debtors liable for the
debt,” and ruled no informal proof of claim had been filed.7 The opinion did not quote
the notice of appearance and request for service, and Sunflower tries to distinguish its
document from the one filed in Boucek by pointing out that after the attorney stated he
was entering his appearance on behalf of the bank and asked for all notices and pleadings
in the case to be served on him, he added, “Sunflower is a creditor and party in interest in
the above-captioned case and, therefore, is entitled to notice and the right to be heard as to
all matters that may affect Sunflower, the Debtors, property of the Debtors, or property in
which Sunflower may claim an interest.” The Court is not convinced by this attempted
6280 B.R. 533, 535-36 (Bankr. D. Kan. 2002).
7Id. at 536.
Case 14-40173 Doc# 104 Filed 06/12/15 Page 6 of 8
distinction. The quoted language still does not state any amount for Sunflower’s claim
against the Debtors, assert any demand on the Debtors’ bankruptcy estate, or express any
intent to hold the Debtors liable for the debt that made the bank one of their creditors.
Sunflower also cited a more recent Chapter 12 case, In re Spresser,8 in which
Judge Karlin considered the informal proof of claim doctrine. In that case, Judge Karlin
concluded the creditor had not filed any document that qualified as a timely informal
proof of claim even though before the bar date, the creditor had filed (1) an objection to
the debtors’ claimed exemptions, (2) a motion for relief from the automatic stay, and
(3) an adversary complaint objecting to the discharge of a debt owed by one of the joint
debtors. She reviewed the objection to exemptions, and found it was in writing and was
filed before the bar date, but did not indicate the creditor had a claim against the debtors,
did not state the amount of any such claim, did not make a demand against the estate, and
did not indicate an intent to hold the debtors liable for any debt. She reviewed the stay
relief motion, and found it was in writing, filed before the bar date, indicated the debtors
owed the creditor a debt, and stated the amount of the debt as of the filing date. However,
Judge Karlin carefully reviewed the eight paragraphs of the stay relief motion and could
find no demand for payment from the estate or any assertion of an intent to hold the
debtors liable. Finally, she reviewed the adversary complaint, and similarly concluded it
contained no request for a distribution from the estate and made no demand on the estate.
82011 WL 2083964 (Bankr. D. Kan. May 19, 2011).
Case 14-40173 Doc# 104 Filed 06/12/15 Page 7 of 8
If these extensive documents are inadequate, the minimal assertions Sunflower made in
its entry of appearance and request for notice are certainly insufficient to qualify as an
informal proof of claim.
Sunflower questions the Debtors’ motives in objecting to its late-filed claim, and
questions their ability to get a plan confirmed if the claim is disallowed. But Sunflower
has cited no authority suggesting such considerations can have any impact on the Court’s
decision whether to allow the bank’s late-filed claim. Under the circumstances, the Court
concludes § 502(b)(9) requires it to disallow the claim.
For these reasons, the Debtors’ objection the Sunflower Bank’s proof of claim is
sustained. Proof of Claim No. 14 is hereby disallowed.
# # #
Case 14-40173 Doc# 104 Filed 06/12/15 Page 8 of 8
- Category: Judge Somers
- Published on 18 June 2015
- Written by Judge Somers
- Hits: 419
In Re Mosby, 14-22981 (Bankr. D. Kan. Jun. 17, 2015) Doc. # 40
SIGNED this 17th day of June, 2015.
Opinion designated for publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
REBECCA JOANNE MOSBY, CASE NO. 14-22981
MEMORANDUM OPINION AND JUDGMENT
SUSTAINING THE CHAPTER 7 TRUSTEE’S OBJECTION TO
DEBTOR’S CLAIMED EXEMPTION OF HER INHERITED IRA
The matter before the Court is the Chapter 7 Trustee’s objection to Debtor’s claim
of exemption of her Jackson Life IRA under K.S.A. 60-2308(b). The Chapter 7 Trustee,
Carl R. Clark, appears by Shane J. McCall of Lentz Clark Deines PA. Debtor Rebecca
Joanne Mosby appears by Ryan L. White of Evans & Mullinix, P.A. The Court has
1 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and § 1334(a) and (b) and the
Amended Standing Order of Reference of the United States District Court for the District of Kansas that
Case 14-22981 Doc# 40 Filed 06/17/15 Page 1 of 8
The facts are not in dispute. Debtor, a Kansas resident, filed a voluntary petition
under Chapter 7 on December 29, 2014. Carl R. Clark was appointed Trustee. In
Debtor’s Schedule C filed on December 29, 2014, she claims a Jackson Life IRA valued
at $15,015.50 as exempt under various Kansas statutes. Debtor inherited the Jackson Life
IRA from her mother, and it is an inherited IRA, as defined by 26 U.S.C.
POSITIONS OF THE PARTIES.
The Trustee objected to the exemption,2 arguing that none of the statutes listed on
Debtor’s Schedule C applied to exempt the Jackson Life IRA, and if the exemption were
claimed under K.S.A. 60-2308, the Kansas statute exempting pension and retirement
money, it should nevertheless be denied. Debtor responded, arguing that the Jackson Life
IRA is exempt under K.S.A. 60-2308.3 Argument was heard, and post-argument briefs
exercised authority conferred by § 157(a) to refer to the District’s bankruptcy judges all matters under the
Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the
Code, effective June 24, 2013. D. Kan. Standing Order No. 13-1, printed in D. Kan. Rules of Practice
and Procedure at 168 (March 2014). An objection to exemptions is a core proceeding which ths Court
may hear and determine as provided in 28 U.S.C. § 157(b)(2)(B). There is no objection to venue or
jurisdiction over the parties.
2 Doc. 15.
3 Debtor has filed an Amended Schedule C, which added K.S.A. 60-2308, -2308(b), and
-2313(a)(1) as the basis for the exemption of the IRA. Doc. 31.
Case 14-22981 Doc# 40 Filed 06/17/15 Page 2 of 8
When arguing the Jackson Life IRA is not exempt under the Kansas statute, the
Trustee relies upon the reasoning of Clark v. Rameker,4 where the United States Supreme
Court held that funds in an IRA which a Chapter 7 debtor inherited from her late mother
were not “retirement funds,” as that phrase is used in the federal bankruptcy exemption,
11 U.S.C. § 522(b)(3)(C).5 Debtor responds that the Kansas exemption statute is broader
than the corresponding federal statute, and the Trustee’s objection should be denied.
An individual retirement account, commonly called an IRA, is defined by 26
U.S.C. § 408(a) to be a trust created or organized in the United States for the benefit of an
individual or his beneficiaries that satisfies a number of conditions, such as containing
only contributions made in cash in amounts not exceeding a taxable-year maximum.
IRAs offer a number of tax advantages to encourage individuals to save for retirement.
To ensure that the accounts “are used for retirement purposes and not as general tax-
advantaged savings vehicles, Congress made certain withdrawals . . . subject to a 10
percent penalty if taken before an account holder reaches the age of 59½.”6 An inherited
IRA, defined by 26 U.S.C. § 408(d)(3)(C)(ii), is an IRA that has been inherited after the
owner’s death by an individual who is not the account owner’s surviving spouse. In
4 ___ U.S. ___, 134 S.Ct. 2242, 189 L.Ed.2d 157 (2014).
5 Future references in the text to Tittle 11 shall be to the section number only.
6 Clark, 134 S.Ct. at 2245.
Case 14-22981 Doc# 40 Filed 06/17/15 Page 3 of 8
Clark, the Supreme Court described the differences between a regular IRA and an
inherited IRA as follows:
Inherited IRAs do not operate like ordinary IRAs.
Unlike with a traditional . . . IRA, an individual may
withdraw funds from an inherited IRA at any time, without
paying a tax penalty. Indeed, the owner of an inherited IRA
not only may but must withdraw its funds: The owner must
either withdraw the entire balance in the account within five
years of the original owner’s death or take minimum
distributions on an annual basis. And unlike with a traditional
. . . IRA, the owner of an inherited IRA may never make
contributions to the account.7
In this case, Debtor seeks to exempt an inherited IRA. Kansas has exercised the
option under § 522(b) to opt out of the federal exemptions.8 Therefore, Debtor’s right to
exempt an IRA account is governed by K.S.A. 2014 Supp. 60-2308(b), which provides
that pension and retirement money is exempt. The statute states:
(b) Except as provided in subsection (c), any money or other
assets payable to a participant or beneficiary from, or any
interest of any participant or beneficiary in, a retirement plan
which is qualified under Sections 401(a), 403(a), 403(b), 408,
408A or 409 of the federal internal revenue code of 1986, and
amendments thereto, shall be exempt from any and all claims
of creditors of the beneficiary or participant. Any such plan
shall be conclusively presumed to be a spendthrift trust under
these statutes and the common law of the state.
For debtors residing in states which have not opted out of the federal exemptions, the
Bankruptcy Code provides an exemption similar to the Kansas exemption for money in a
7 Id. (citations omitted).
8 K.S.A 60-2312.
Case 14-22981 Doc# 40 Filed 06/17/15 Page 4 of 8
retirement plan. The federal exemption provides that the following property is exempt:
“retirement funds to the extent that those funds are in a fund or account that is exempt
from taxation under section 401, 402, 408, 408A, 414, 457, or 501(a) of the Internal
Revenue Code of 1986.”9
In Clark, the United States Supreme Court held that funds contained in an
“inherited IRA,” as defined by 26 U.S.C. § 408(d)(3)(C)(ii), are not “retirement funds”
within the meaning of the federal exemption. Since the phrase “retirement funds” is not
defined by the Code, the Court adopted its ordinary meaning of “sums of money set aside
for the day an individual stops working.”10 Three legal characteristics of an inherited IRA
led the Court “to conclude that funds held in such accounts are not objectively set aside
for the purpose of retirement.”11 First, contributions to inherited IRAs are forbidden.
Second, “holders of inherited IRAs are required to withdraw money from such accounts,
no matter how many years they may be from retirement.”12 Third, the holder of an
inherited IRA may withdraw the entire balance, without penalty at any time and for any
purpose.13 The Court also found including inherited IRAs within the retirement funds
exemption would not be consistent with the exemption’s purpose of “helping to ensure
9 11 U.S.C. § 522(b)(3)(C).
10 Clark, 134 S.Ct. at 2246.
11 Id. at 2247.
Case 14-22981 Doc# 40 Filed 06/17/15 Page 5 of 8
that debtors will be able to meet their basic needs during their retirement years.”14
Because of the legal characteristics of an inherited IRA, the Court found that allowing the
exemption would convert the “fresh start” promoted by the Code into a “free pass,”
allowing the debtor to use the account balance for a vacation home or a sports car
immediately after completion of the bankruptcy process.15
The Court finds the reasoning of the unanimous Clark decision to be compelling,
and finds no material difference between the federal and Kansas exemptions. Whereas
the federal exemption applies to “retirement funds” that are exempted from taxation by
specified provisions of the Tax Code, the Kansas exemption applies to payments from
and interests in a “retirement plan” that is qualified under many of the same Tax Code
sections. Because of the differences between IRAs and inherited IRAs, it cannot be said
that an inherited IRA is a retirement plan. The individual holding an inherited IRA
cannot make contributions to the account for retirement (or any other purpose); must
withdraw the balance within five years or take annual minimum withdrawals, all without
regard to retirement; and may withdraw the entire balance without penalty for any
purpose. In so holding, this Court is in harmony with numerous decisions reached before
15 Id. at 2248.
Case 14-22981 Doc# 40 Filed 06/17/15 Page 6 of 8
the Supreme Court’s 2014 decision in Clark that likewise held inherited IRAs were not
exempt under a variety of state exemption statutes.16
As argued by the Debtor, her inherited Jackson Life IRA is defined by 26 U.S.C.
§ 408, one of the federal statutes enumerated in the Kansas retirement funds exemption
statute. But the Kansas statute uses that section of the Tax Code, together with other
sections, to define qualified retirement plans for purposes of the exemption. In addition
to inherited IRAs, § 408 defines IRAs and individual retirement annuities. The Kansas
statute does not say that all accounts defined by § 408 constitute retirement plans.
Examination of the legal characteristics of IRAs leads to the conclusion that IRAs
constitute retirement plans but inherited IRAs do not.
The Court is cognizant that, generally, exemption statutes are liberally construed to
give effect to their beneficent purpose. But this does not mean the Court should ignore
the limitations imposed by the legislature’s choice of language. In Moore, 17 a debtor
sought under a prior version of K.S.A. 2014 Supp. 60-2308(b),18 to exempt money paid to
her by her retirement plan and deposited into her bank account. Based upon the statutory
language that the exemption applies to funds “payable” from retirement plans, then
Bankruptcy Judge Robinson held funds already paid were not exempt. The Tenth Circuit
16 See James L. Boring, et al., Protection of Inherited IRAs, 36 ACTEC L. J. 577, 621, Exhibit C
(American College of Trust and Estate Counsel, Winter 2010).
17 In re Moore, 214 B.R. 628, 631 (Bankr. D. Kan. 1997).
18 The version of K.S.A. 60-2308(b) that Judge Robinson was construing did not differ from the
current version in any way that is relevant to this decision.
Case 14-22981 Doc# 40 Filed 06/17/15 Page 7 of 8
BAP cited Moore with approval in Carbaugh, and likewise held the 60-2308(b)
exemption was not available for funds paid from a pension plan and deposited into an
account of the debtor.19 The Kansas legislature stated that only assets and interests in “a
retirement plan” qualified under 26 U.S.C. § 408 are exempt; it did not state that all assets
and interests in an account recognized by 26 U.S.C. § 408 are exempt.
For the foregoing reasons, the Court sustains the Trustee’s objection to Debtor’s
claim of exemption of her Jackson Life IRA under K.S.A. 2014 Supp. 60-2308(b).
The foregoing constitute Findings of Fact and Conclusions of Law under Rules
7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure, which make Rule 52(a)
of the Federal Rules of Civil Procedure applicable to this matter.
Judgment is hereby entered sustaining the Trustee’s objection to Debtor’s claimed
exemption of her Jackson Life IRA, which constitutes an inherited IRA under 26 U.S.C.
§ 408(d)(3)(C)(ii). The judgment based on this ruling will become effective when it is
entered on the docket for this case, as provided by Federal Rule of Bankruptcy Procedure
IT IS SO ORDERED.
# # #
19 Carbaugh v. Carbaugh (In re Carbaugh), 278 B.R. 512, 523 (10th Cir. BAP 2002).
Case 14-22981 Doc# 40 Filed 06/17/15 Page 8 of 8
- Category: Judge Somers
- Published on 10 June 2015
- Written by Judge Somers
- Hits: 357
Flex Financial Holding Company v. One Beacon Insurance Company et al, 14-06070 (Bankr. D. Kan. Jun. 10, 2015) Doc. # 53
SIGNED this 9th day of June, 2015.
For online use but not print publication.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
FLEX FINANCIAL HOLDING
FLEX FINANCIAL HOLDING
ONEBEACON INSURANCE GROUP
ATLANTIC SPECIALTY INSURANCE
CASE NO. 13-21483
ADV. NO. 14-06070
MEMORANDUM OPINION AND ORDER DENYING
PLAINTIFF'S MOTION TO RECONSIDER
MEMORANDUM OPINION AND ORDER REJECTING PLAINTIFF’S
MOTION TO STRIKE DEFENDANT’S DEMAND FOR JURY TRIAL
Case 14-06070 Doc# 53 Filed 06/09/15 Page 1 of 8
Plaintiff Flex Financial Holding Company (Flex) moved to strike the demand of
Defendants OneBeacon Insurance Company and Atlantic Specialty Insurance Company
for trial by jury.1 Defendants opposed the motion. By Memorandum Opinion and Order
Rejecting Plaintiff’s Motion to Strike Defendants’ Demand for Jury Trial (Opinion)2 filed
on April 13, 2015, the Court found that Defendants have a constitutional right to trial by
jury in this action. Plaintiff filed a motion to reconsider on April 27, 2015. Finding no
error in the Opinion, the Court denies the motion to reconsider.
The background facts, as previously found in the Opinion3, are as follows:
Debtor/Plaintiff Flex filed this adversary proceedings
on September 3, 2014. The Complaint is titled Complaint for
Declaratory Judgment. It states it was filed "to determine and
resolve the rights and obligations of the parties under the
contract of insurance issued by Defendant One Beacon
Insurance Group LLC and its member company Atlantic
Specialty Insurance Company to Debtor/Plaintiff related to
damage to property owned by Debtor/Plaintiff."4 The
Complaint alleges as follows. Defendants issued a policy of
insurance to Flex for two properties, one located in Merriam,
Kansas and the other in Gladstone, Missouri, for the period
December 15, 2012 to December 15, 2013. On or about April
11, 2013, Flex reported claims for damage to two insured
buildings located on the Merriam, Kansas property from a
wind and hail storm on or about April 7, 2013.
Flex filed for relief under Chapter 11 on June 10, 2013.
By letter date July 24, 2013, Defendants advised Flex that the
1 Doc. 15. A related matter, Defendants' motion to withdraw reference was also filed. Doc. 13. A
report and recommendation was filed. Doc. 39.
2 Doc. 37.
3 Doc. 37 at 2-5.
4 Doc. 1, 1.
Case 14-06070 Doc# 53 Filed 06/09/15 Page 2 of 8
policy provided coverage for the claim and sent a check to
Flex in the amount determined to be the net claim. Flex
advised Defendants that it believed the policy required
additional compensation. The adversary proceeding was filed
on September 3, 2014. The only count is for declaratory
relief. It alleges that “[a]n actual controversy exists between
Debtor/Plaintiff and Defendants concerning the appropriate
coverage, appropriate loss payments and any applicable
deductible for the claims .....”5 The prayer requests the an
entry of judgment declaring that Defendants have a duty
under the insurance policy to provide coverage for the claims
(a) Provide full replacement of the sloped and the flat
modified bitumen roof coverings, air conditioning (HVAC)
units atop the roof, metal copings and flashings, ventilation
covers, window frames and canopy covers at the estimated
expense of . . . $1,011,711.10;
(b) Provide coverage for the resulting Business Income Loss
and Extra Expense;
(c) Apply no depreciation deduction to the Replacement Cost;
(d) Apply a $25,000 deductible to each building; and
(e) For such other relief as the Court deems just and proper
under the circumstances.6
After being granted an extension of time to answer or
otherwise respond to the Compliant, Defendants filed their
answer on December 1, 2014.7 The answer prays that the
Court find that Defendants have already paid the full amount
owed for the loss of April 7, 2013, and have otherwise
fulfilled all their other obligations under the insurance policy.
The affirmative defenses include the allegation that Flex’s
“claims are barred by failure to comply with all policy
conditions concerning timely notice of losses claimed under
the policy, cooperation with the insurance company, or
5 Id. at 11.
7 Doc. 8.
Case 14-06070 Doc# 53 Filed 06/09/15 Page 3 of 8
making repairs or resuming operations as quickly as
possible.”8 Pursuant to Rules 38 and 39 of the Federal Rules
of Civil Procedure, the answer included a demand for jury
Flex moved to strike the jury trial demand on
December 24, 2014.10 It argues that there is no right to jury
trial “because this action solely seeks relief in the form of
construction of the language of a written contract of insurance
and determination of the meaning of the written contract
provisions, matters long held to be within the province of
determination by a judge rather than a jury."11 Defendants
respond that there is a right to jury trial because this action is
essentially a breach of contract action. They argue that the
Complaint not only seeks an interpretation of the insurance
contract but also clearly seeks monetary damages beyond the
repair costs that Defendants have already paid.12
As stated in the Opinion, the Seventh Amendment right to jury trial is “applied
using a two part historical test which asks (1) whether the court is dealing with a cause of
action that was either tried at law at the time of the founding or is at least analogous to
one that was and (2) if the action “belongs in the law category, . . . whether the particular
trial decision must fall to the jury in order to preserve the substance of the common-law
8 Id. at 7.
9 Id. at 8.
10 Doc. 15.
11 Id. at 2.
12 Doc. 20 at 5.
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right as it existed in 1791.”13 When seeking reconsideration, Plaintiff contends the Court
erred because it did not “apply the second part of the historical test, consideration of
whether under the common law in 1791 judges or juries construed written contracts.”14
This is not correct.
The Opinion recognized that in the 18th century construction of written documents
was kept out of the jury’s hands, but breach of contract actions for damages were tried to
a jury.15 The Court then applied a two part test to determine whether there is a jury trial
right in this declaratory judgment case. First, the Court applied the rule “to resolve
whether there is a right to a jury trial in a declaratory judgment action, it is necessary to
determine in what kind of action the issue would have come to the court if there were no
declaratory judgment procedure."16 This lead to the conclusion that the action would have
been one for damages for breach of contract, an action which was tried at law in the 18th
century. Second, the Court reasoned that because in the 18th century there was a right to
jury trial in a suit for contract damages, in order to preserve the common-law right, the
motion to strike should be denied. Although to resolve the insurance coverage dispute,
the Court will have the duty to construe the insurance contract, there is a constitutional
right to trial by jury on the factual issues relating to the proper amount of the claim.
13 Doc. 37 at 5, quoting Markman v. Westview Instruments, Inc., 517 U.S. 370, 376 (1996).
14 Doc. 46, 3.
15 Doc. 37, 6.
16 Id., 6-7, quoting 9 Wright & Miller, Federal Practice and Procedure, § 2313 at 170 (3rd ed.
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When seeking reconsideration, Plaintiff steadfastly adheres to its position that
because its Complaint frames the relief sought in terms of construction of the contract of
insurance, that there is no right to jury trial. Plaintiff’s position is contrary to the
statement of the Supreme Court that “the constitutional right to trial by jury cannot be
made to depend upon the choice of words used in the pleadings.”17 Plaintiff’s position
does not recognize that more than contract construction is sought. The Complaint alleges
that an actual controversy exists concerning coverage, loss payments, and deductibles for
the claim; these are not solely issues of contract construction. Further, the prayer requests
a determination that the policy requires replacement of roof coverings, HVAC units,
metal copings and flashings, ventilation covers, window frames and canopy covers at the
estimated expense of over $1 million. The Court could not make such a determination
based upon construction of the insurance contract alone; extrinsic evidence concerning
the loss, such as whether the claimed loss was caused by hail, would be required.
Likewise determination of coverage for business income loss and extra expenses would
require determination of the amount of the loss based upon extrinsic evidence. Plaintiff’s
claims involve contract construction and breach of contract.
Plaintiff takes issue with the Court’s analysis that, without a declaratory judgment
action, the issues presented would have been determined in an action for breach of
contract. Plaintiff suggests that the action could have been brought as an action for
17 Dairy Queen, Inc. v. Wood, 369 U.S. 469, 477-478 (1962).
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specific performance or for injunctive relief, which are equitable remedies. But these
alternatives would not preclude a jury trial if plaintiff continued to request a ruling that
defendants are liable under the insurance contracts for specific losses as alleged in the
Complaint. As to the right to jury trial in a specific performance action, respected
In view of a number of Supreme Court decisions, it now
seems clear that the right of the parties to have a jury trial
upon demand cannot be defeated by the fact that the claim for
specific performance is joined with the claim for damages. If
a jury is requested it must be allowed to pass on the issues of
fact that relate to the breach claim, and those common to both
remedies, and the court must decide whether to give specific
performance in light of the facts as found by the jury.18
Likewise, framing the case as one for injunctive relief could not defeat the right to a jury
trial if damages were incidentally sought.
The Supreme Court now has made it wholly clear that a claim
that otherwise would be triable to a jury must be so tried even
though it may be thought “incidental” to a claim for an
injunction. The order of trial must be arranged so that any
issues common to the legal claim and the claim for an
injunction are tried to a jury at the outset, with the court
thereafter resolving any purely equitable issues in the case.19
For the foregoing reasons, the Plaintiff’s motion to reconsider the Opinion denying
Plaintiff’s motion to strike Defendants’ demand for jury trial is denied. The allegations of
18 9 Wright & Miller, Federal Practice and Procedure, ¶ 2309 at 143-44 (3rd ed. 2008).
19 Id. at ¶ 2308 at 138.
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the Complaint include contract construction issues triable to a court and factual issues
concerning the cause and amount of loss triable to a jury.
IT IS SO ORDERED.
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