In re King

• Decision Date: 28 March 2014
• Docket Number: No. 13–20884 JPK.,13–20884 JPK.
• Citation: 508 B.R. 71
• Parties: In re Margaret Naomi KING, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

508 B.R. 71

In re Margaret Naomi KING, Debtor.

No. 13–20884 JPK.

United States Bankruptcy Court,

N.D. Indiana,

Hammond Division.

Signed March 28, 2014.

Kenneth A. Manning, Kenneth A. Manning, Ch.7 Trustee, Dyer, IN, Kimberly A. Mouratides, Manning & Gonzalez, P.C., Dyer, IN, for Kenneth A. Manning, Trustee.

Christopher R. Schmidgall, Merrillville, IN, for Debtor.

MEMORANDUM OF DECISION DETERMINING TRUSTEE'S OBJECTION TO THE DEBTOR'S EXEMPTIONS

J. PHILIP KLINGEBERGER, Bankruptcy Judge.

This Chapter 7 case was initiated by a voluntary petition filed by the debtor Margaret Naomi King (“King”) on March 22, 2013. On June 3, 2013, Kenneth A. Manning, as Trustee of the Chapter 7 bankruptcy estate of Margaret Naomi King (“Trustee”) filed an objection to the debtor's exemptions [record # 20]. On June 21, 2013, King, by counsel, filed a response to the Trustee's objection [record # 23]. The Trustee objected to King exempting $5,891.00 as an earned income credit pursuant to I.C. § 34–55–10–2(c)(11), on the basis that King as of the petition date was no longer in possession of these funds. Also, there was a pre-petition garnishment on King's bank account at 1st Midwest Bank in the amount of $3,138.63. This garnishment was released post-petition by the judgement-creditor, Credit Acceptance Corporation. In the objection the Trustee took the position that the foregoing was not an exempt asset of the bankruptcy estate and could be fully administered. In her response, King asserted that this entire amount could be traced back as the earned income credit (“EIC”) portion of a tax refund that was previously deposited into her bank account.¹ It is these funds that are the source of the dispute between the parties and the issue is to what extent, if any, King can exempt the $3,138.63 as an earned income credit.

On August 9, 2014, a conference was held with the court and it was determined that this matter would be adjudicated on a stipulated record. Pursuant to an order of the court entered on August 23, 2013, the parties filed a stipulation of facts, contentions of law and exhibits on September 24, 2013 (the “Stipulation”). This issue was fully briefed as of November 1, 2013. The court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a) and (b)(1), and N.D.Ind.L.R. 200.1(a)(1) and (2). This contested matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).

The facts of this case are best summarized by the Stipulation filed by the parties:

FACTS

1. Margaret Naomi King filed a voluntary Chapter 7 petition March 22, 2013.

2. On or about January 29, 2013, Margaret Naomi King filed IRS form 1040A for the tax calendar year 2012.

3. The IRS tax return claimed and asserted a tax refund of $8,548, consisting of:

W–2 withholdings of $1,010

Earned Income Credit of $5,891

Additional Child Tax Credit of $1,647

4. The IRS return was filed by and through the H & R Block Tax Group.

5. Prior to receipt of any tax refund, Margaret Naomi King fully assigned all her right, title, and interest in the claimed $8,548 tax refund to H & R Block Tax Group, pursuant to the agreementwith H & R Block, for the specific purpose of the Refund Anticipation Check.

6. H & R Block filed Margaret Naomi King's taxes, and received her refund check by deposit into the Refund Anticipation Check account created specifically for Debtor.

7. The refund check was deposited into a bank account which was opened for Margaret Naomi King by H & R Block, with H & R holding exclusive control over the account, for the benefit of Debtor.

8. H & R Block withdrew the amount Margaret Naomi King owed them for preparing her taxes from this account plus other service charges, then direct deposited the remaining funds into Debtor's 1st Midwest account.

9. On February 8, 2013, the sum of $8,196.55 was deposited in Margaret Naomi King's personal checking account at 1st Midwest Bank by H & R Block.

10. On February 8, 2013, Margaret Naomi King withdrew the sum of $3,000 from her 1st Midwest Bank Account.

11. On February 13, 2013, the sum of $3,138.63 was debit memo (i.e. frozen) from the 1st Midwest Bank Account; this was the result of a garnishment by Margaret Naomi King's judgment creditor Credit Acceptance Corporation.

12. After the commencement of this case, Credit Acceptance Corporation filed a Motion to Release Hold on Bank Account on April 5, 2013 and notified 1st Midwest Bank, who released the frozen funds.

13. Debtor is currently in possession and control of the $3,138.63 released by 1st Midwest Bank.

[14.] At no time, prior to the commencement of this case, did Debtor claim or assert any exemptions pursuant to I.C. 34–55–10–6 and I.C. 34–55–10–12 in the State Court Case.

STATEMENTS OF LAW

1. Federal and State EIC funds are exempt under I.C. 34–55–10–2(c)(11).

2. Amounts from tax refunds other than EIC funds are not exempt under Indiana law.

3. Non-exempt funds in debtor's bank accounts over the exemption amount set by the state as of the date of filing must be turned over to the Trustee.

CONTENTIONS OF LAW

1. The Trustee contends that the $3,138.63 released by Credit Acceptance Corporation now in possession of Debtor is non-EIC funds, property of the Estate, and must be turned over to the Trustee.

2. Debtor contends the $3,138.63 released by Credit Acceptance Corporation is EIC credit proceeds, exempt property of the estate, and should not be turned over to the Trustee.

3. Trustee contends that the nature of the funds changed when they were deposited into a bank account opened and controlled exclusively by a third party (H & R Block), and then later transferred to the Debtor.

4. Debtor contends that funds were deposited into a bank account opened by a third party (H & R Block), for the specific purpose of depositing her tax refund in order to pay preparation and various other fees, thereby creating an account holding funds in trust for Debtor's benefit.

5. The Trustee contends that by assigning the entire amount of her tax refund to H & R Block and that third party receiving the Debtor's refund; the funds became a refund to Debtor by H & R Block of amounts overpaid and not due under the Refund Anticipation Check agreement between Debtor and H & R Block.

6. Debtor contends that after the H & R Block account was created for her benefit; she retained an interest in the account consistent with the documents creating the account; and said tax refunds were not commingled with other funds and therefore specifically traceable back to Debtor's tax refund.

7. The Trustee contends that under the Refund Anticipation Check contract, the funds Debtor received from H & R Block were characterized not as tax refund funds but rather “Refund Anticipation Check” funds, which changes the nature of the funds by agreement of the parties.

8. The Trustee contends that Debtor made no objection or claim of exemption of the funds in the state court proceeding, thereby waving her claim of exemption under I.C. 34–55–10–6 and I.C. 34–55–10–12.

9. Debtor contends that she did not waive her claim of exemption under I.C. 34–55–10–6 and I.C. 34–55–10–12.

EXHIBITS

Attached are complete copies of:

1. Margaret Naomi King's 2012 Federal and State tax returns. (redacted)

2. 1st Midwest Bank checking account of Margaret Naomi King, Acct 1816 for the months/period January 1, 2013 through April 15, 2013. (redacted)

3. Margaret Naomi King's RAC contract and disclosure with H & R Block.

The first place to start is with the exemption statute at issue. The earned income credit exemption is provided by I.C. § 34–55–10–2(c)(11) and states as follows: ²

(c) the following property of a debtor domiciled in Indiana is exempt:

(11) The debtor's interest in a refund or a credit received or to be received under the following:

(A) Section 32 of the Internal Revenue Code of 1986 (the federal earned income tax credit),

(B) IC 6–3.1–21–6 (the Indiana earned income tax credit)

The scope of a statutory exemption is to be interpreted liberally in favor of the debtor; Union Nat. Bank of Muncie v. Finley, 180 Ind. 470, 103 N.E. 110, 114 (1913); See, In the Matter of Zumbrun, Ind., 626 N.E.2d 452, 455 (1993). As stated by this court in the case of In re Kuhn, 322 B.R. 377, 385–386 (Bankr.N.D.Ind.2005):

The Seventh Circuit Court of Appeals, in addressing Illinois' ambiguous statutory exemptions of personal property in In re Barker, 768 F.2d 191, 196 (7th Cir.1985), stated that “this circuit and the courts of Illinois have consistently held that personal property exemption statutes should be liberally construed in order to carry out the legislature's purpose in enacting them—to protect debtors.” (emphasis supplied). In more pertinent part, the court wrote:

This clear legislative intent to grant protections to debtors and the court's liberal construction of exemption statutes convince us that a case such as this one, where an exemption statute might be interpreted either favorably or unfavorably vis-a-vis a debtor, we should interpret the statute in a manner that favors the debtor.Id. See also, In re Owen, 2002 WL 531570, at *5 (S.D.Ill.) [“Generally, ambiguous bankruptcy exemption provisions should be construed in favor of the debtor”]; In re De Vries Jr., 76 B.R. 917 (Bankr.N.D.N.Y.1987) [“Code § 522(b), and those state exemption statutes adopted pursuant thereto, are to be liberally construed in order to effectuate the debtor's ‘fresh start’ ”]; In re Vale, 110 B.R. 396, 400 (Bankr.N.D.Ind.1989) [“Indiana exemption laws are liberally construed to affect their intent and purpose”]; In the Matter of South Bend Community School Corp., 215 B.R. 1012, 1015 (N.D.Ind.1997) [“... if it is possible, to construe an exemption statute in ways that are both favorable and unfavorable to the debtor, then favorable method should be chosen”].

The plain language of I.C. § 34–55–10–2(c)(11) is extremely broad and exempts the “ debtor's interest in a refund or a credit received or to be received ”...