In re Johnson

• Citation: 593 B.R. 331
• Decision Date: 17 October 2018
• Docket Number: No. 17-13247-j7,17-13247-j7
• Parties: IN RE: Don Edward JOHNSON and Keiko Johnson, Debtors.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of New Mexico

593 B.R. 331

IN RE: Don Edward JOHNSON and Keiko Johnson, Debtors.

No. 17-13247-j7

United States Bankruptcy Court, D. New Mexico.

Signed October 17, 2018

Arun A. Melwani, Melwani Law P.C., Albuquerque, NM, for Debtors.

Philip J. Montoya, Albuquerque, NM, for Trustee

MEMORANDUM OPINION

ROBERT H. JACOBVITZ, United States Bankruptcy Judge

Debtors claimed an exemption under New Mexico's wage garnishment statute, N.M.S.A. 1978 § 35-12-7, in certain funds deposited pre-petition into their checking account at Wells Fargo Bank. The Chapter 7 Trustee and Xerox Corporation objected, asserting that the New Mexico garnishment statute is inapplicable for use by a debtor in bankruptcy to claim an exemption in otherwise non-exempt assets.¹ After considering the New Mexico statutes, the related New Mexico rules, and relevant case law, the Court concludes that the Debtors cannot rely on the New Mexico wage garnishment statute to claim an exemption in the funds deposited pre-petition into their checking account. The Court will, therefore, sustain the objections, and disallow Debtors' claimed exemption.

PROCEDURAL HISTORY

Debtors filed a voluntary petition under Chapter 7 of the Bankruptcy Code on December 29, 2017. See Docket No. 1. Debtors elected to claim exemptions under New Mexico law.² See Schedule C – Docket No. 1. Debtors initially claimed an exemption under N.M.S.A. 1978 § 35-12-7 in $3,000 on deposit in a Wells Fargo Bank checking account, $2.00 on deposit in a Wells Fargo Bank savings account, and $5.00 in a savings account at US Eagle Federal Credit Union. Id. Debtors claimed all other exemptions under N.M.S.A. 1978 §§ 42-10-1 through 42-10-13. The claim of exemptions under N.M.S.A. 1978 § 35-12-7 is predicated on the exempted funds being proceeds of the Debtors' wages. The Chapter 7 Trustee and Xerox Corporation objected to the Debtors' claim of exemptions. See Docket Nos. 19 and 20. The Court held a preliminary hearing on the objections to Debtors' claim of exemptions on May 1, 2018. At the hearing the Court directed the Debtors to amend their claim of exemptions based on counsel's representation that the schedules required an amendment to correct the amount of funds in the Wells Fargo Bank checking account as of the petition date. The Court took under advisement the issue of whether, as a matter of law, the Debtors can claim an exemption under the New Mexico garnishment statute, N.M.S.A. 1978 § 35-12-7.

Debtors amended their claim of exemption under N.M.S.A. 1978 § 35-12-7 to reduce the amount of the claimed exemption in the funds on deposit in their checking account at Wells Fargo Bank to $1,893.00. See Docket No. 35.³ The Chapter 7 Trustee objected to the Debtors' amended claim of exemptions on the same grounds previously raised. See Docket No. 39. Debtors' amended claim of exemption also reflects a claimed exemption in $78.00 of the funds on deposit in their Wells Fargo Bank checking account under N.M.S.A. 1978 §§ 42-10-1, -2. See Docket No. 35.

The Court held a status conference on August 16, 2018 because there was no evidence before the Court that the source of the funds in the Wells Fargo Bank checking account in which the Debtors claim an exemption under N.M.S.A. 1978 § 35-12-7 are the proceeds of the Debtors' wages. Following the status conference, the parties filed Stipulated Facts Regarding Objection to Debtors['] Claim of Exemption ("Stipulation"). See Docket No. 44. The Stipulation establishes that the total amount of the funds on deposit in the Wells Fargo Bank checking account on the petition date was $2,601.98. Id. Of that amount, $1,819.02 was attributable to wages, and $782.96 was attributable to non-wages. Id.

DISCUSSION

The objections raise the issue of whether the New Mexico garnishment statute⁴ affords debtors in bankruptcy an exemption in wages already paid to the Debtors, in addition to the exemptions provided under New Mexico's general exemption statutes. The party objecting to a debtor's claim of exemption has the burden to establish that the exemption is not properly claimed. Fed. R. Bankr. P. 4003(c). Because the Court finds that the exemption in wages under the New Mexico garnishment statute only applies to disposable earnings a debtor's employer still owes to a judgment debtor, the Court concludes that the New Mexico garnishment exemption is inapplicable to the funds in the Debtors' bank account in which the Debtors claimed an exemption under N.M.S.A. 1978 § 35-12-7. The claimed exemption will, therefore, be disallowed.

The Split in the Case Law Regarding Whether a Debtor in Bankruptcy May Claim an Exemption under Applicable Garnishment Statutes

Courts examining the question of whether a state law garnishment statute affords debtors in bankruptcy an exemption in wages have come to opposite conclusions. Compare, e.g. , In re Urban, 262 B.R. 865 (Bankr. D. Kan. 2001) (debtors could claim an exemption in bankruptcy under Kansas's wage garnishment statute), In re Robinson, 241 B.R. 447 (9th Cir. BAP 1999) (Oregon garnishment statute provides debtors in bankruptcy with an exemption in wages), and In re Haraughty, 403 B.R. 607 (Bankr. S.D. Ind. 2009) (Indiana wage garnishment statute afforded debtors a bankruptcy exemption in a portion of wages), with, e.g. , In re Doughman , 263 B.R. 905 (Bankr. D. Kan. 1999)(Kansas wage garnishment statute does not confer an exemption in bankruptcy), In re Lawrence, 219 B.R. 786 (E.D. Tenn. 1998) (Tennessee garnishment statute does not provide debtors with a general exemption for non-garnishable disposable earnings in bankruptcy), and In re Thum , 329 B.R. 848, 856 (Bankr. C.D. Ill. 2005) (Illinois statutes governing wage garnishment and wage assignments "do not give rise to a general exemption for wages earned but not yet paid to an employee and have no relevance to the exemptions that a debtor may claim in a bankruptcy case.").⁵ To determine whether the New Mexico garnishment statute applies to the Debtors' claimed exemption, the Court will examine the intent of the statute embodied in its plain language.

The Garnishment Process in New Mexico

To determine whether the wage garnishment exemption contained in the New Mexico garnishment statute applies to proceeds of wages on deposit in a bank account, the Court will first examine the garnishment process in New Mexico. A creditor may garnish the following: 1) a debt owed to a defendant that is not exempt from garnishment; or 2) personal property belonging to the defendant. N.M.S.A. 1978 § 35-12-1. Wages are a form of debt owed to a defendant.

To initiate a garnishment, a creditor serves a writ of garnishment on a third-party garnishee whom the creditor believes either 1) is indebted to the defendant; or 2) is in possession of property that belongs to the defendant. See N.M.S.A. 1978 § 35-12-2 (service on garnishee); NMRA, Rule 1-065.2(B) (service of writ of garnishment). Service of the writ of garnishment after entry of a judgment "has the effect of attaching all personal property, money, wages or salary in excess of the amount exempt under Section 35-12-7 1978... in the garnishee's possession ..."

N.M.S.A. 1978 § 35-12-3(A).⁶ Thus, with the sole exception of wages and salary exempt from garnishment, the writ attaches to all indebtedness of the garnishee to the defendant and to all property in the garnishee's possession or under its control. Id. The writ does not attach to wages and salary exempt from garnishment.

To garnish wages, a judgment creditor serves a writ of garnishment on the judgment debtor's employer, who becomes the garnishee. The garnishment exemption statute caps the amount of disposable earnings for any pay period that can be garnished. N.M.S.A. 1978 § 35-7-12.⁷

Because a writ of garnishment never attaches to wages and salary exempt from garnishment, a judgment debtor is not required to do anything to claim an exemption in wages under New Mexico's wage garnishment statute.⁸ Instead, the "employer as a garnishee" is required to "pay to the defendant, when due, the amount of his wages or salary exempt from garnishment under Section 35-12-8 NMSA 1978." N.M.S.A. 1978 § 35-12-8. Thus, the exemption in wages provided in the New Mexico wage garnishment statute is applied automatically when the garnishee/employer determines, based on the maximum garnishable amount set forth in N.M.S.A. 1978 § 35-12-7, the exempt portion of wages to be paid to the judgment debtor after garnishment.

A garnishee who employs the judgment debtor continues to pay the judgment creditor the non-exempt portion of the debtor's wages until 1) the judgment is paid in full, or 2) the garnishee no longer employs the judgment debtor. See N.M.S.A. 1978 § 35-12-4(D) (if the garnishee employs the debtor, the judgment orders the garnishee to pay the creditor the non-exempt portion of the judgment debtor's wages until the judgment is satisfied, or the employment relationship is terminated, and the garnishee notifies the judgment creditor in writing that it no longer employs the judgment debtor). If the judgment debtor files a voluntary petition under the Bankruptcy Code, the automatic stay imposed by 11 U.S.C. § 362 stops the garnishment. See 11 U.S.C. § 362 (with exceptions, the automatic stay imposed upon the filing of a bankruptcy petition stays enforcement of a pre-petition judgment against the debtor and stays any act to collect a pre-petition claim against the debtor).

General Exemptions under New Mexico Law

The New Mexico general exemption statute is set forth in N.M.S.A. 1978 §§ 42-10-1 to 42-10-13. That statute grants exemptions against certain real and personal property. Unlike the wage garnishment exemption, which is self-executing, any person desiring to claim an exemption under the general exemption statute must file a claim of exemption in the appropriate court. See N.M.S.A. 1978 § 42-10-13 ("Any person desiring to claim that property is exempt ... shall file his claim of exemption ... in the appropriate court ..."). For writs of...