In re Marve

• Decision Date: 04 January 2013
• Docket Number: CASE NO. 12-20611 JPK
• Parties: In re: TAMECA D MARVE, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

IN RE: TAMECA D MARVE, Debtor.

CASE NO. 12-20611 JPK

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF INDIANA HAMMOND DIVISION

Dated: January 4, 2013

Chapter 7

MEMORANDUM OF DECISION PARTIALLY DETERMINING

TRUSTEE'S MOTION FOR TURNOVER

This Chapter 7 case was initiated by voluntary petition filed by the debtor Temeca D. Marve ("Marve") on March 1, 2012. On June 26, 2012, Stacia L. Yoon, as Trustee of the Chapter 7 bankruptcy estate of Temeca D. Marve ("Trustee") filed a motion for turnover [record #17]. On July 12, 2012, as record #25, Marve, by counsel, filed an objection to the motion for turnover. On July 13, 2012, as record #26, Marve filed an amended Schedule C. The motion for turnover filed by the Trustee requested turnover of $3,819.44 of funds in the debtor's two bank accounts. Marve's objection to the motion for turnover in part asserted that a portion of the funds in her joint checking account at Chase Bank ending with the numbers 985 was derived from a federal income tax refund of $8,236.46, $5,291.00 of which constituted an earned income credit. The amended Schedule C claimed an exemption of $5,291.00 in the earned income credit¹ .

The matter before the court primarily relates to the Trustee's motion for turnover with respect to funds in the Chase Bank account ending with the number 985. The matter before the court is a contested matter pursuant to Fed.R.Bankr.P. 9014. The court determines that it has full jurisdiction and authority to render a final decision with respect to this contested matter.

At conferences held with the court, the court and the parties discussed that the primary issue was determining whether an earned income credit retained its exempt nature provided by Indiana law after its receipt by the taxpayer/debtor and deposit into a bank account. The court entered an order (record #32) reflecting this approach to the case. The parties did not timely file the stipulation of facts required by that order, and as a result, on November 9, 2012, a hearing was held to determine the course of further proceedings in the case, attended both by Trustee Yoon and by attorney Rosalind Parr, as counsel for Marve. The parties had filed a stipulation of facts on November 9, 2012, which the court addressed at that hearing. As a result of that hearing, the court entered an order which determined that there were now two issues necessary for decision: First, whether the Indiana exemption statute concerning the earned income credit continues to protect the amount of the credit after it is received by the debtor/taxpayer; second, if the foregoing issue were determined in the affirmative, the principles to be employed to determine the amount actually subject to exemption when the earned income credit amount is co-mingled in a bank account with non-exempt funds.

The first issue - whether an earned income credit retains its exempt character after it is received by a debtor/taxpayer/recipient of the earned income credit - is very easily resolved. The earned income credit exemption is provided by I.C. 34-55-10-2(c)(11) as follows:

(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 federalearned income tax credit),

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

This court has issued a number of decisions, some of which have been published by bankruptcy decision publication services, and some of which have not been so published. It is difficult sometimes to keep track of the issues which the court has previously determined. This is one of them. As record #30 in the case of Shashunte Jameca Norwood, Case No. 08-20259, the court determined that the exemption provided by the foregoing statute extends to the earned income credit after it is received by the debtor/recipient, and after it is deposited into a bank account. A copy of that memorandum of decision is attached to this document and is incorporated herein as the court's determination concerning the foregoing issue. Due to the manner in which the record was made in Norwood, the court did not determine the second issue, i.e., the manner in which the exempt amount would be determined with respect to earned income credit funds deposited in a bank account which were co-mingled with non-exempt funds. It is the second issue which will be determined by this Memorandum of Decision.

The court's research has disclosed three mechanisms for determining the amount of exempt funds existing on the date of the filing of a bankruptcy petition when prior to that date exempt funds have been co-mingled with non-exempt funds.

The first of these is the "Lowest Intermediate Balance Test", explained as follows in In re Ross, 2012 WL 3817792 (Bankr. S.D.Ind. 2012):

The Debtors next urge the Court to trace the Disputed Funds by using the "Lowest Intermediate Balance Test" ("LIBT") which they assert will result in all of the Disputed Funds being traced to the EIC Funds, and thus, exempt. The LIBT has been applied most frequently where a debtor commingles his own funds with funds he is holding in trust for another. For example, if the account balance is equal to or exceeds the amount of funds held in trust, then the full amount of the trust funds remain intact. If the account balance drops to zero, the trust funds are lost and subsequent deposits into the account are considered non-trust funds and do not replenish the trust fund portion. If the account drops to abalance less than the amount of trust funds, but not to zero, the trust funds are limited to the lowest intermediate balance in the account. Thus, the LIBT is based on the fiction that the debtor would withdraw the non-trust funds first, retaining as much as possible of the trust funds in the account. See, Connecticut Genera Life Ins. Co. v. Universal Ins. Co., 838 F.2d 612, 619 (1st Cir.1988); In re MJK Clearing, Inc., 371 F.3d 397, 401-402 (8th Cir.2004); In re Appalachian Oil Co., Inc., 471 B.R. 199 (Bankr.E.D.Tenn.2012). Courts use the LIBT to separate out funds held in trust for another from the debtor's funds which are property of the debtor's bankruptcy estate or where a creditor attempts to impress a constructive trust upon proceeds in the account. See, U.S. v. McConnell, 258 B.R. 869 (N. D.Tex.2001) (chapter 7 debtor had commingled immigration inspection fees which it held in trust for the Immigration and Naturalization Service); In re Stoler & Co., 144 B.R. 385 (N. D.Ill.1992) (broker sought constructive trust over funds held by bankruptcy trustee for unpaid commissions); In re LGI Energy Solutions, Inc., 460 B.R. 720 (8th Cir.B.A.P.2011) and In re Appalachian Oil Co., Inc., 471 B.R. 199 (Bankr.E.D.Tenn.2012) (in both cases, defendant in preference action asserted constructive trust as defense and argued that transfer was of property held in trust and not of property of the estate).

The second approach is that actually adopted in In re Ross, stated as follows in that decision:

This Court is of the opinion that the LIBT appropriately may be applied to determine what is property of the bankruptcy estate in two circumstances: (1) where the debtor has commingled his own funds with funds he holds for another in trust, or (2) where, in a case that converts from a chapter 13 to a chapter 7, the debtor has commingled funds acquired pre petition with funds acquired post petition but pre conversion. Neither of those circumstances is present here. Furthermore, the funds in the PNC Account were fungible ... certainly the EIC Funds within that account were not specially "marked" to physically distinguish them from the non exempt funds. Thus, this Court sees no logic in assuming that the Debtors first spent the non exempt funds in the PNC Account such that only the EIC Funds were deposited into the Huntington Account, or vice versa. Furthermore, unlike Maine, there is not one, but two bank accounts involved here and the balances in both dropped below the amount of the EIC Funds. Rather than using the LIBT, the fairer way to determine the exempt portion of the Disputed Funds is determine the percentage of the EIC Funds to the PNC Account total and to apply that percentage to the Disputed Funds. The parties stipulated that, as of March 16, 2012 and prior to the withdrawal of $9,300, the PNC Account balancewas $10,575.88, of which $6104, or 57.72%, was made up of the EIC Funds. Applying this percentage to the Disputed Funds results in $1,296.68 (57.72% of $2,246.50) in exempt EIC Funds and $949.82 in non-exempt funds.

Ross, supra.²

The third approach is the "first-in, first-out method", explained in In re Patterson, 2010 WL 3606893 (Bankr. N.D. Ohio 2010) as follows:

In determining the nature of the funds on deposit in Debtors' checking account at the time their bankruptcy petition was filed, the court finds use of the first-in, first out method of accounting appropriate to trace the source of the funds in the account. See In re Lichtenberger, 337 B.R. 322, 326 (Bankr.C.D.Ill.2006) ("[g]uided by the principle that exemptions are to be construed liberally in favor of debtors," the court applied the first-in, first-out method to determine the source of funds in the debtor's bank account); Shumate, 829 F.Supp. at 181 (using the first-in, first-out method in determining whether funds could be traced to social security benefits); United States v. Griffith, 584 F.3d 1004, 1021 (10th Cir.2009) (finding VA funds commingled in account with other funds will retain their VA character as long as they are readily traceable and may be accounted for with a standard accounting method, such as first-in, first-out tracing). Immediately before the deposit, the balance in Debtors' checking account was $362.23. After the income tax refund was deposited the balance was $5,267.23. However, before the date of filing, withdrawals were made from the account in the total amount of

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