Eighth Circuit Rejects State Common-Law Exemptions

Posted by NCBRC - July 22, 2013

The Eighth Circuit found that the Missouri opt-out statute does not permit exemptions that are based upon state common law. In re Abdul-Rahim, 12-3448 (8th Cir. July 12, 2013). In that case, the debtors sought to exempt their unliquidated personal injury claim from their bankruptcy estate. The bankruptcy court rejected the exemption because it originated under state common law rather than by statutory enactment. Missouri’s opt-out statute, section 513.427, provides that Missouri debtors “shall be permitted to exempt from property of the [bankruptcy] estate any property that is exempt from attachment and execution under the law of the state of Missouri.” In finding that the state exemptions referred to in that section did not include common law exemptions, the court relied on, and in fact felt compelled to follow, In re Benn, 491 F.3d 811 (8th Cir. 2007), which held that, under Missouri law, the tax refunds that the debtor sought to exempt were property of the bankruptcy estate and were not exemptible.

NACBA filed an amicus brief in this case arguing that the Benn decision merely determined that anticipated tax refunds were property of the bankruptcy estate and that Missouri’s opt-out statute did not create exemptions that did not otherwise exist under other state law. In finding that the opt-out statute did not create exemptions, the court in Benn stated: “The statute simply provides that where another Missouri statute specifies that certain property is exempt from attachment and execution, then a debtor may exempt that property from the bankruptcy estate.” 491 F.3d at 814. Despite the fact that Benn did not deal with a common law exemption, the court in Abdul-Rahim found that Benn’s reference to a Missouri statute, defined a rule that exemptions under Missouri common law could not be used in bankruptcy.

This decision flies in the face of well-established precedent that state law as determined by state legislature and courts, defines property rights in bankruptcy. As pointed out by NACBA in this case, Missouri courts have consistently held that unliquidated  personal injury claims are exempt property for purposes of bankruptcy. “Allowing debtors to exempt personal injury claims is consistent with policies underlying both bankruptcy and tort law and the fact that the exemption at issue was based in common law is irrelevant. Nothing in section 522(b)(3) or the history of the 1978 Bankruptcy Code suggests that only “statutory” exemption are permitted in states that have opted-out of the federal exemption scheme. The Eighth Circuit’s dictum in which suggests all state exemptions must be statutory, is not consistent with the law of Missouri or the plain language of section 522(b)(3).”

Nonetheless, the Abdul-Rahim court felt that the language of Benn was controlling and that “unless In re Benn is overruled en banc or by the Supreme Court, it remains binding precedent, and is directly applicable to the issues in this case.”

Abdul-Rahim opinion


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