In re Lawrence

• Decision Date: 14 January 1997
• Docket Number: No. 96-11249.,96-11249.
• Parties: In re Michael Warren LAWRENCE, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

205 B.R. 115 (1997)

In re Michael Warren LAWRENCE, Debtor.

No. 96-11249.

United States Bankruptcy Court, E.D. Tennessee, Southern Division.

January 14, 1997.

Thomas E. Ray, Trustee, Ray & Bolen, Chattanooga, TN, for Debtor.

Richard P. Jahn Jr., Trustee, Chattanooga, TN.

William R. Sonnenburg, Assistant United States Trustee, Chattanooga, TN.

MEMORANDUM

JOHN C. COOK, Bankruptcy Judge.

Before the court is the trustee's objection to an exemption claimed by the debtor in the sum of $140,000. According to a stipulation of facts entered into by the parties, the debtor is engaged in business as a podiatrist and had accumulated $140,000 in accounts receivable from various patients at the time of his bankruptcy filing. In his schedule of exemptions he claimed 75% of these accounts receivable as exempt property under Tenn. Code Ann. § 26-2-106. The propriety of that claim is the issue in this case.

The parties disagree about the functioning of Tenn.Code Ann. § 26-2-106. Specifically, the trustee argues that § 26-2-106 merely limits the amount of earnings that may be garnished outside bankruptcy and does not purport to create an exemption within the purview of 11 U.S.C. § 522(b)(2)(A). He further argues that the accounts receivable of a professional podiatrist are not enough like wages or salary paid by an employer to an employee to qualify as "earnings" within the meaning of Tenn.Code Ann. § 26-2-105(1). The debtor, on the other hand, contends that the garnishment restriction effected by §§ 26-2-105, -106 constitutes a kind of state exemption recognizable by 11 U.S.C. § 522(b)(2)(A) and that the debtor's accounts receivable qualify for exemption under the state statute. For the reasons that follow, the court concludes that the Tennessee garnishment statute does not create an exemption cognizable in bankruptcy.

I.

In 1968 Congress passed the Consumer Credit Protection Act ("CCPA"), 15 U.S.C. §§ 1671-77, which imposed nationwide restrictions on garnishments in order to protect debtors from what Congress believed to be the predatory lending practices of some credit institutions. In so doing, Congress provided that the CCPA would preempt any less protective state statutes, 15 U.S.C. § 1673(c), and so Tennessee, like many other states whose garnishment laws had been rendered obsolete, eventually enacted its own version of the CCPA, adopting the operative provisions of the CCPA almost verbatim. Tenn.Code Ann. §§ 26-2-105, -106 ("garnishment statute"). Both statutes provide in their material parts that

the maximum part of the aggregate disposable earnings of an individual for any workweek which is subjected to garnishment may not exceed

(1) Twenty-five percent (25%) of his disposable earnings for that week. . . .

Tenn.Code Ann. § 26-2-106(a); see 15 U.S.C. § 1673(a). Both statutes define earnings as

compensation paid or payable for personal services, whether denominated as wages, salary, commission, bonus, or otherwise, and includes periodic payments pursuant to a pension or retirement program.

Tenn.Code Ann. § 26-2-105(1); 15 U.S.C. § 1672(a). They also define garnishment as

any legal or equitable procedure through which the earnings of an individual are required to be withheld for the payment of any debt.

Tenn.Code Ann. § 26-2-105(3); 15 U.S.C. § 1672(c).

The debtor argues that a bankruptcy case fits the foregoing definition of "garnishment" and that Tennessee, by the enactment of this garnishment statute, must have intended to allow a debtor to exempt 75% of his disposable earnings in bankruptcy.¹ The trustee insists that the garnishment statute does not create an exemption in bankruptcy because it does not use any form of the word "exempt" and in its own terms purports to do nothing more than limit the amount of earnings that may be garnished in the hands of a third party.

Before resolving this question, it must be observed that the answer does not turn entirely upon state law. The exemption provision of the Bankruptcy Code allows a debtor to "exempt from property of the estate" such property as is "exempt under . . . State . . . law," 11 U.S.C. § 522(b)(2)(A). While it is certainly fitting for a state to declare a list of assets that it considers to be exempt from the reach of creditors and therefore exempt in bankruptcy, the question of whether an asset is exempt in bankruptcy is ultimately a question of federal, not state, law. This is so because the word "exempt" as used in § 522(b)(2)(A) must be given the meaning intended by Congress. In bankruptcy, property of the debtor that is "exempt from property of the estate" is property that the debtor may sequester to himself forever beyond the reach of his creditors in bankruptcy. Exempt property is subtracted from the estate, and no creditor will benefit from it in distribution. Furthermore, no creditor may attempt to execute on it thereafter because the debtor's obligation to the creditor will have been discharged and the debt itself wiped out. The discharge injunction will also be in full force and effect. 11 U.S.C. § 524(a). Thus, the effect of exempting property in bankruptcy is to sequester the property from creditors in the most complete and permanent way by removing it from the estate while destroying the very debtor-creditor relationship that would otherwise permit creditors to threaten property with execution, seizure, or attachment.

Of course, state exemption laws cannot destroy the debtor-creditor relationship by discharge, but they do sequester certain assets of the debtor from his creditors, at least while those assets are maintained in their exempt forms. These are the kinds of exemptions Congress must have had in mind when it permitted debtors in bankruptcy to exercise state exemptions as alternatives to those in the federal list. See 11 U.S.C. 522(d). The question in this case is whether Congress also intended to allow statutes, such as Tennessee's garnishment statute, which operate in some other manner and do not sequester property to the debtor in the usual way, to exempt property from property of the estate in bankruptcy.

II.

The Bankruptcy Code provision for recognizing state exemptions is evidently designed to secure the same treatment to a debtor who is forced to the point of claiming exemptions, whether he is in or out of bankruptcy. If a state permits a debtor to sequester certain assets from his creditors, then the Bankruptcy Code does likewise. But what if the Tennessee garnishment statute does not permit full sequestration from creditors and instead merely limits the amount a creditor can obtain from a third-party garnishee? Does the Bankruptcy Code recognize that mechanism as an "exemption" to be applied in bankruptcy proceedings?

The mechanism is decidedly different from other Tennessee statutes creating exemptions. Wherever else Tennessee has sought to create an exemption, it has provided that the property in question shall be "exempt from execution, seizure or attachment," Tenn.Code Ann. §§ 26-2-102, -111, or, if the property may be in the hands of a third person, "exempt from execution, attachment or garnishment." Tenn.Code Ann. §§ 26-2-104, -110. This kind of language directly prohibits the creditor from subjecting the exempt property to his debt, and the prohibition is permanent: the debtor may keep his exempt property from creditors forever. The garnishment statute, which is found among those just mentioned, does not prohibit execution, seizure, or attachment of property (wages) in the hands of the debtor. It merely limits to 25% the amount of disposable earnings that may be "subjected to garnishment." Tenn.Code Ann. § 26-2-106(a). As for the creditor's access to the remaining 75% of the debtor's wages once they are paid over to the debtor, the statute says nothing.

In the absence of a statute exempting wages from execution, seizure, or attachment, there seems to be no prohibition against a creditor seizing cash in the debtor's hands or in his bank account, even where the cash is directly traceable to wages. Tennessee does have a general personal property exemption worth $4000 that could be used by any debtor to exempt his unpaid wages, Tenn.Code Ann. § 26-2-102, but Tennessee does not specifically exempt wages or earnings² as some states do, although it certainly knows how to. In the statute next preceding the garnishment statute, Tennessee provided that

all moneys received by a resident of the state, as a pension from the state of Tennessee, or any subdivision or municipality thereof, before receipt, or while in his hands or upon deposit in the bank, shall be exempt from execution, attachment or garnishment whether such pensioner is the head of a family or not.

Tenn.Code Ann. § 26-2-104 (emphasis added). This statute, covering a situation almost identical to that in which a debtor is about to receive unpaid earnings, directly provides for a total exemption, not just a limitation on garnishment, by making the pension moneys exempt from execution and attachment as well as garnishment. Furthermore, it specifically covers the periods of time both before and after receipt of pension moneys by the debtor. The existence of this statute is proof that Tennessee is capable of drafting the kind of statute the debtor wishes were available to him in bankruptcy. Its immediate proximity to the garnishment statute also makes it a possibility that the Tennessee General Assembly considered its language for the strikingly similar situation of unpaid wages, then rejected it as overbroad, preferring a mere limitation on garnishments instead.

If there is no general exemption for wages in Tennessee, then a creditor can pursue wages once they have been paid over to the debtor, and, if the debtor cannot protect the wages in his own hands, then it is questionable whether the wages are "exempt." There are no Tennessee cases construing the garnishment statute as either permitting or prohibiting a creditor's execution on a debtor's...