Bankruptcy Specific Exemption Triumphs Again

Posted by NCBRC - March 7, 2014

For the seventh time Kansas’s bankruptcy-specific exemption for earned income tax credit (EITC) has emerged unscathed from constitutional challenge. Williamson v. Murray (In re Murray), No. 13-34 and Williamson v. Beach (In re Beach) No. 13-37 (B.A.P. 10th Cir. March 4, 2014) (cases administratively merged). In this attack the trustees advanced three arguments only one of which was new to the Tenth Circuit Bankruptcy Appellate Panel. The two rehashed arguments – that the exemption violated the Uniformity Clause because it applied only to bankruptcy debtors rather than all state debtors, and the Supremacy Clause because it altered the way payments were made under section 507 – were disposed of as having been decided in In re Westby, 486 B.R. 509, 515 (B.A.P. 10th Cir. 2013) in favor of constitutionality.

The remaining claim advanced by the trustees was that the exemption violates the Supremacy Clause because it conflicts with the trustee’s strong arm powers under 544(a)(2). In so arguing, the trustees relied on In re Duffin, 457 B.R. 820 (B.A.P. 10th Cir. 2011), which involved a Utah exemption for life insurance policies that excluded premium payments made within the year preceding the creditor’s levy. The BAP found the trustees’ reliance on Duffin not only “misplaced” but “way off the mark.” In Duffin, the trustee was permitted to stand in the shoes of a creditor to reach the debtor’s life insurance premiums that the Utah legislature had expressly excepted from the state exemption. Therefore, the issue was not whether the trustee could reach exempt assets, but whether the assets the debtor claimed as exempt were, in fact, exempt under state law. (When this argument was made before Judge Karlin in the bankruptcy court, she rejected it, distinguishing Duffin as not involving exempt property. Notably, Judge Karlin was on the panel that decided Duffin).

The BAP next found that the trustees’ argument that they could capture the EITC refund in the window of time between the creation of the estate, when the trustee’s strong arm power takes effect, and the allowance of the exemption, put “form over substance.” If trustees could take advantage of the time discrepancy in this case, they could defeat any exemption under the same reasoning.

Finally, the court rejected as resting on a faulty premise the trustees’ argument that the exemption alters a creditor’s right to obtain outside of bankruptcy the same recovery he could obtain in bankruptcy. It found that, in fact, creditors outside bankruptcy had other obstacles in place that would prevent them from recovering a debtor’s EITC refund and that the bankruptcy specific exemption merely ensures that they cannot recover more in bankruptcy.

The BAP made specific reference to NACBA’s involvement as amicus in this case.

Murray Beach opinion


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