Bankruptcy-Only Exemptions Constitutional

Posted by NCBRC - April 5, 2012

In a lengthy and comprehensive opinion, Judge Karlin of the Bankruptcy Court of Kansas, overruled the trustee’s objection to debtor’s claimed exemption for earned income tax credits under a state bankruptcy-only exemption scheme. In re Westby, No. 11-40986, 2012 Bankr. LEXIS 1428, (Bankr. Kan. April 4, 2012).The trustee had challenged the exemption in Westby and several other cases based on the contention that the state exemption violated the Uniformity and Supremacy Clauses of the U.S. Constitution.

Discussing a long line of Supreme Court cases, Judge Karlin concluded that the Uniformity Clause is a constraint on congressional power and does not impose any requirement of uniformity with respect to state laws. As applied to the federal bankruptcy laws, the Uniformity requirement only mandates that the federal law apply uniformly across the country even though application within individual states may have different results due to differing state commercial laws. Moreover, the court found that the uniformity requirement is met when a law applies equally to defined classes of debtors such as bankruptcy debtors.

The court then turned to the issue of whether the exemption was preempted under the Supremacy Clause due either to  Congress’ complete occupation of the area of bankruptcy (“field” preemption), or upon a specific conflict between the state exemption and the federal bankruptcy laws (“conflict” preemption). The court found that, where Congress had explicitly given states the power to apply their own exemptions in bankruptcy, there could be no field preemption. Turning to whether there existed a conflict between the state exemption and federal law, the court found that the exemption at issue did not conflict with either of the primary bankruptcy goals: providing debtor a fresh start, and optimizing return to creditors, and that its effect on creditors was true of all exemptions. It further noted that where Congress allowed states to choose between federal and state exemptions, the fact that a creditor may receive a different return from a debtor outside bankruptcy than from a debtor in bankruptcy, was irrelevant.

NACBA’s amicus brief filed in the companion case of In re Rolin, No. 11-40950 (objection to exemption withdrawn) was considered by the court.

Westby opinion

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