Gladwell v. Reinhart (In re Reinhart)

• Decision Date: 04 December 2012
• Docket Number: No. 20110257.,20110257.
• Citation: 723 Utah Adv. Rep. 66,291 P.3d 228
• Parties: In re Douglas James REINHART, Debtor. David L. Gladwell, Trustee, Appellant, v. Douglas James Reinhart, Appellee.
• Court: Utah Supreme Court

291 P.3d 228

723 Utah Adv. Rep. 66

In re Douglas James REINHART, Debtor.

David L. Gladwell, Trustee, Appellant,

v.Douglas James Reinhart, Appellee.

No. 20110257.

Supreme Court of Utah.

Dec. 4, 2012.

Adam S. Affleck, Charles L. Perschon, Salt Lake City, for appellant.

Duane H. Gillman, Michael F. Thomson, Jessica G. Peterson, Salt Lake City, Stephen R. Bailey, Ogden, for appellee.

Justice PARRISH, opinion of the Court:

INTRODUCTION

¶ 1 This case presents a certified question of law from the Tenth Circuit Court of Appeals. Dr. Douglas Reinhart claimed an exemption in bankruptcy for 75 percent of wages that he earned prior to filing his bankruptcy petition but that were either paid to or still owing to Dr. Reinhart after the date of the petition. Dr. Reinhart based his claim on section 1673 of the federal Consumer Credit Protection Act (Section 1673), 15 U.S.C. § 1673, and, alternatively, on section 103 of the Utah Consumer Credit Code (Section 103), Utah Code § 70C–7–103. The trustee of Dr. Reinhart's bankruptcy estate, David Gladwell (Trustee), opposed the claimed exemption. The bankruptcy court permitted the exemption, the district court summarily affirmed, and the Trustee appealed to the Tenth Circuit Court of Appeals. The Tenth Circuit held that Section 1673 did not permit Dr. Reinhart's claimed exemption. To resolve the state law question presented under Section 103, the appeals court certified the following question to us: “Does [Section 103] create an exemption in bankruptcy, or does it only limit a judgment creditor's garnishment remedy outside bankruptcy?”

¶ 2 We conclude that Section 103 does not create an exemption in bankruptcy. Instead, Section 103 limits garnishment of a debtor's disposable earnings under the narrow circumstance when a creditor seeks to enforce payment of a judgment based on a consumer credit agreement. Accordingly, Dr. Reinhart may not rely on Section 103 to assert an exemption in bankruptcy.

BACKGROUND

¶ 3 We recite the facts as stated in the certification order filed by the Tenth Circuit Court of Appeals. On December 30, 2004, the Trustee commenced an adversary proceeding against Dr. Reinhart and his professional corporation, Douglas J. Reinhart, M.D., P.C. The Trustee sought to recover at least $49,000 in salary, bonuses, and interest that Dr. Reinhart earned prior to filing his bankruptcy petition, but which the corporation either paid to or still owed to Dr. Reinhart after the petition date (collectively, Pre–Petition Wages). The parties resolved the adversary proceeding in arbitration, with the arbitrator awarding $10,315 for Dr. Reinhart's 1999 unpaid wages. Gladwell v. Reinhart, No. 00–20995, slip op. at 2 (Bankr.D.Utah July 8, 2008).¹

¶ 4 During the adversary proceeding, Dr. Reinhart amended Schedules B and C of his petition to claim an exemption for 75 percent of the Pre–Petition Wages. He based his claim on Section 1673 of the federal Consumer Credit Protection Act (Consumer Protection Act), 15 U.S.C. § 1673; Section 103 of the Utah Consumer Credit Code (Utah Credit Code); Utah Code section 70C–7–103; and In re Stewart, 32 B.R. 132, 139 (Bankr.D.Utah 1983), which interpreted a predecessor to Section 103.

¶ 5 The Trustee opposed the claimed exemption. He argued that Kokoszka v. Belford, 417 U.S. 642, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974), precluded Dr. Reinhart's claim for an exemption under Section 1673 of the Consumer Protection Act. The Trustee also argued that Section 103 does not create an exemption in bankruptcy for the following reasons: (1) Section 103 is similar to the Consumer Protection Act and Kokoszka resolved the issue; (2) Section 103, by its terms, does not apply in bankruptcy; (3) Section 103's garnishment limitation serves a different purpose than a bankruptcy exemption; and (4) In re Stewart was wrongly decided and, in any event, was later abrogated by subsequent amendments to the Utah Credit Code.

¶ 6 The bankruptcy court overruled the Trustee's objection. It did not, however, articulate its reason for doing so. Instead, it merely stated that Dr. Reinhart could exempt 75 percent of the Pre–Petition Wages under either Section 1673 or Section 103, as interpreted by In re Stewart. The district court summarily affirmed the bankruptcy court and the Trustee appealed to the Tenth Circuit Court of Appeals.

¶ 7 The Tenth Circuit held that Kokoszka governed Dr. Reinhart's claimed exemption under Section 1673 and that “the Supreme Court has instructed that [Section 1673] does not provide for an exemption in bankruptcy....” Gladwell v. Reinhart, 416 Fed.Appx. 761, 763 (10th Cir.2011). The Tenth Circuit noted that Utah courts have yet to address whether Section 103 provides an alternative basis for an exemption in bankruptcy. Id. Accordingly, the Tenth Circuit certified to us three questions of state law. Id. We have jurisdiction pursuant to section 78A–3–102(1) of the Utah Code.

STANDARD OF REVIEW

¶ 8 “On a certified question, we are not presented with a decision to affirm or reverse, and traditional standards of review do not apply.” Whitney v. Div. of Juvenile Justice Servs., 2012 UT 12, ¶ 7, 274 P.3d 906 (internal quotation marks omitted).

ANALYSIS

¶ 9 The United States Court of Appeals for the Tenth Circuit has certified to us three questions of state law. First, “Does Utah Code Ann. § 70C–7–103 create an exemption in bankruptcy, or does it only limit a judgment creditor's garnishment remedy outside bankruptcy?” Second, “If § 70C–7–103 does create an exemption in bankruptcy, do pre-petition wages such as those claimed by the debtor in this case qualify as ‘disposable earnings' under the statute?” Third, “If § 70C–7–103 does create an exemption in bankruptcy, and the debtor's pre-petition wages qualify as ‘disposable earnings' under the statute, do the debts in this case ‘aris[e] from a consumer credit agreement’?”

¶ 10 With respect to the first question, we hold that Section 103 does not provide an exemption in bankruptcy. Rather, it limits only a creditor's ability to garnish a debtor's disposable earnings in cases involving an individual judgment based on a consumer credit agreement. Because we conclude that Section 103 does not create an exemption in bankruptcy, we do not address the second and third certified questions.

I. SECTION 103 DOES NOT CREATE AN EXEMPTION IN BANKRUPTCY

¶ 11 The Tenth Circuit's first certified question asks us to determine whether Section 103 of the Utah Credit Code provides an exemption in bankruptcy. The federal bankruptcy code provides a process for debtors to discharge debts and obtain a “fresh start.” Gladwell v. Reinhart ( Reinhart I ), 2011 UT 77, ¶ 14, 267 P.3d 895 (internal quotation marks omitted). To initiate Chapter 7 bankruptcy, the type of bankruptcy at issue here, a debtor files a petition. 11 U.S.C. § 101(42). Doing so creates an estate, which is comprised of “all legal or equitable interests of the debtor in property” at the time of filing. 11 U.S.C. § 541(a)(1). A trustee is appointed to manage the bankruptcy estate. 11 U.S.C. § 1104(a). The debtor must deliver all property of the bankruptcy estate to the trustee. 11 U.S.C. §§ 542(a), 704(a)(1). After assembling the property of the estate, the trustee liquidates the property. 11 U.S.C. § 704(a)(1). The proceeds are then distributed to the bankruptcy estate's creditors based on a statutorily prescribed priority schedule. 11 U.S.C. § 726; see also11 U.S.C. § 507.

¶ 12 Pursuant to statute, a debtor may exempt property from the bankruptcy estate. Upon claiming a valid exemption, the exempt property passes out of the bankruptcy estate and returns to the debtor. 11 U.S.C. § 522(c) (“[P]roperty exempted under this section is not liable during or after the case for any debt of the debtor that arose ... before the commencement of the case....”).

¶ 13 Each state has the opportunity to accept federally enumerated bankruptcy exemptions, 11 U.S.C. § 522(d), or to opt-out and provide its own bankruptcy exemptions, see11 U.S.C. § 522(b)(2). Utah has elected to opt-out. Utah Code § 78–23–15 (2004) (“No individual may exempt from the property of the estate in any bankruptcy proceeding the property specified in [s]ubsection (d) of Section 522 of the Bankruptcy Reform Act (Public Law 95–598), except as may otherwise be expressly permitted under this chapter.” (footnote omitted)). As a result, the bankruptcy exemptions available to a debtor in Utah are those “under Federal law, other than [Section 522(d) ], or State or local law that is applicable on the date of the filing of the [bankruptcy] petition....” 11 U.S.C. § 522(b)(3)(A). Utah's exemptions are generally located in the Exemptions Act. SeeUtah Code §§ 78B–5–501 to –513. But additional exemptions may be found outside the Exemptions Act. See, e.g.,Utah Code § 35A–3–112 (“Public assistance provided under this chapter is not assignable, at law or in equity, and none of the money paid or payable under this chapter is subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”).

¶ 14 The first of the certified questions asks us to determine whether one such section, located outside of the Exemptions Act, creates an exemption in bankruptcy. The section at issue is Section 103. Section 103 states:

(2) The maximum part of the aggregate disposable earnings of an individual for any pay period which is subjected to garnishment to enforce payment of a judgment arising from a consumer credit agreement may not exceed the lesser of:

(a) 25% of his disposable earnings for that pay period; or

(b) the amount by which his disposable earnings for that pay period exceed 30 hours per week multiplied by the federal minimum hourly wage prescribed by Section 6(a)(1) of the Fair Labor Standards Act of 1938, 29 U.S.C., Section 206(a)(1), in effect at the time the earnings are payable.

Section 103 defines “disposable earnings” as “that part of the earnings of an...