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In re Lea

United States District Court, Tenth Circuit

August 16, 2013

In re: ANTHONY TAYLOR LEA, MEREDITH RENEE LEA, Chapter 7 Debtors.
v.
ANTHONY TAYLOR LEA, MEREDITH RENEE LEA, Appellees. EDWARD J. NAZAR, Trustee, Appellant and DEREK SCHMIDT, Kansas Attorney General, Intervenor-Appellee. In re: LAURA LOUISE HUDSON, Chapter 7 Debtor. LINDA S. PARKS, Trustee, Appellant
v.
LAURA LOUISE HUDSON, Appellee, and DEREK SCHMIDT, Kansas Attorney General, Intervenor-Appellee. Bankr. Case No. 11-11131 No. 12-1297-JTM. Bankr. Case No. 11-12855

MEMORANDUM AND ORDER

J. THOMAS MARTEN, District Judge.

In 2011, the Kansas legislature adopted a provision that exempts Earned Income Tax Credit (EITC) benefits from the estate of a bankruptcy debtor. The bankruptcy trustees in three separate cases ( In re Taylor, NO. 11-11131; In re Hudson, No 11-12855; In re Fogle, No. 11-13302) challenged the validity of the Kansas statute as unconstitutional. In a joint opinion, Bankruptcy Judge Robert Nugent upheld the constitutionality of the statute, [1] and two appeals from this decision are now before the court. The only issue on appeal is the constitutionality of the Kansas statute.[2]

For the reasons explained below, the court finds that the Kansas EITC exemption is a permissible exercise of state power, and the decision of the bankruptcy court is affirmed.[3]

The court initially notes that, in addition to Judge Nugent, Bankruptcy Judge Janice Miller Karlin found, in a separate decision, that the EITC exemption is constitutional. In re Westby, 473 B.R. 392 (Bankr. D. Kan. 2012), aff'd, 486 B.R. 509 (10th Cir. BAP 2013). The Bankruptcy Appellate Panel recognized Judge Karlin's opinion as both "extremely well-crafted" and "methodical and complete." 486 B.R. at 515. This is also true of Judge Nugent's considered analysis in the appeals now before this court, and the court accordingly adopts and incorporates the Bankruptcy Court's findings and conclusions in In re EITC Exemption. The Kansas EITC exemption is constitutional.

The EITC is a refundable tax credit designed to benefit low-income Americans with dependent children. See Crowson v. Zubrod, 431 B.R. 484, 492 (10th Cir. BAP 2010). If an individual's credit exceeds the amount of tax owed, it is considered an overpayment and refunded, even if the individual has not actually had such tax withheld. In re Montgomery, 224 F.3d 1193, 1194 (10th Cir. 2000). The Supreme Court has recognized that the purpose of the EITC is

to reduce the disincentive to work caused by the imposition of Social Security taxes on earned income (welfare payments are not similarly taxed), to stimulate the economy by funneling funds to persons likely to spend the money immediately, and to provide relief for low-income families hurt by rising food and energy prices.

Sorenson v. Sec'y of Treasury, 475 U.S. 851, 864 (1986).

K.S.A. 60-2315 authorizes debtors in Kansas to exempt EITC benefits for one year.[4] Here, the Trustees in the relevant cases argue that the Kansas exemption violates federal law because Kansas residents who are not filing a bankruptcy claim cannot claim such an exemption. Specifically, the Trustees allege that the Kansas law violates the Uniformity Clause (U.S. Const. art. I, § 8, cl. 4), and the Supremacy Clause, by conflicting with specific provisions of the Bankruptcy Code.

The Uniformity Clause provides generally that federal bankruptcy laws must "be uniform throughout the United States, but that uniformity is geographical and not personal." Hanover Nat'l Bank v. Moyses, 186 U.S. 181, 190 (1902). The Uniformity Clause does not preclude the flexible state laws based upon differing policies, even if this yields different results.

Notwithstanding this requirement as to uniformity the bankruptcy acts of Congress may recognize the laws of the State in certain particulars, although such recognition may lead to different results in different States. For example, the Bankruptcy Act recognizes and enforces the laws of the States affecting dower, exemptions, the validity of mortgages, priorities of payment and the like. Such recognition in the application of state laws does not affect the constitutionality of the Bankruptcy Act, although in these particulars the operation of the act is not alike in all the States.

Stellwagen v. Clum, 245 U.S. 605, 613 (1918). As Judge Nugent recognized, the Uniformity Clause does not support the Trustees' argument because it reflects a restriction on congressional power rather than the authority of the States. 477 B.R. at 800. The Tenth Circuit has specifically recognized that States can create their own bankruptcy-only exemption schemes. See In re Kulp, 949 F.2d 1106, 1109 n. 3 (10th Cir. 1991) (deeming "meritless" the argument that the Uniformity Clause is violated if a State "creates a bankruptcy exemption which is not available to other [State] debtors").

The key case relied on by the Trustees, In re Schafer, 455 B.R. 590 (6th Cir. BAP 2011), has subsequently been reversed by the Sixth Circuit, Richardson v. Schafer, 689 F.3d 601 (6th Cir. 2012). The Sixth Circuit explicitly agreed with the arguments of the debtor and the State of Michigan that the Uniformity Clause "permits states to act in the area of bankruptcy even if they do so by making certain exemptions available only to debtors in bankruptcy. " 689 F.3d at 603 (emphasis added).

Similarly, in Sticka v. Applebaum, 422 B.R. 684, 692 (9th Cir. BAP 2009), the court found that the "uniformity requirement... is an affirmative limitation or restriction upon Congress's power, not a limitation on the state." States are free to create bankruptcy-specific exemptions, so long as the exemptions apply "equally in form (but not necessarily in effect) to all creditors and debtors, or to defined classes' of debtors and creditors." Id. at 693; see also In re Cross, 255 B.R. 25, 31 (N.D. Ind. 2000) ("[o]nce we recognize that the Uniformity Clause does not apply to the states, that part of the trustee's objection is easily disposed of"). In light of Kulp and Schafer, the Trustees' Uniformity Clause arguments cannot be sustained. See also Sheehan v. Peveich, 574 F.3d 248, 252 (4th Cir. 2009) (upholding West Virginia bankruptcy-only exemption).

The Trustees also argue that § 60-2315 violates the Supremacy Clause, which provides: "This Constitution, and the Laws of the United States... and all Treaties... shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." U.S. Const. art. VI, cl. 2. The Supreme Court has recognized that States are authorized to enact bankruptcy legislation, and they run afoul of the Supremacy Clause only where they conflict with federal bankruptcy legislation adopted by Congress. Stellwagen v. Clum, 245 U.S. 605, 615 (1918). Under the Supremacy Clause, Congress may preempt States from enacting their own laws on a given subject by doing so expressly, or by implication. See English v. General Electric Co., 496 U.S. 72, 79 (1990). Implied preemption may arise when Congress occupies the field, creating so pervasive a regulatory scheme that there is simply no room for state action. See Rice v. Santa Fe Elevator, 331 U.S. ...


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