In re Sanders, Bankruptcy No. 86-00498(N).

• Decision Date: 29 January 1987
• Docket Number: Bankruptcy No. 86-00498(N).
• Citation: 69 BR 569
• Parties: In re Stanford Floyd SANDERS and Julie Ann Sanders, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Missouri

69 B.R. 569 (1987)

In re Stanford Floyd SANDERS and Julie Ann Sanders, Debtors.

Bankruptcy No. 86-00498(N).

United States Bankruptcy Court, E.D. Missouri, N.D.

January 29, 1987.

James S. Cole, Kirksville, Mo., for debtors.

Fredrich J. Cruse, Hannibal, Mo., trustee.

MEMORANDUM OPINION

DAVID P. McDONALD, Bankruptcy Judge.

INTRODUCTION

This contested matter presents the question of whether either the federal or Missouri garnishment statute permits a bankrupt debtor to exempt pre-bankruptcy earnings from property of the estate. The Court holds that although the federal garnishment statute does not apply to Missouri debtors, the Missouri statute does permit a Missouri bankrupt debtor to exempt pre-bankruptcy earnings from property of the estate.

FACTS

The Debtors, husband and wife, filed their voluntary joint petition under Chapter 7 of the Bankruptcy Code on February 28, 1986. On the date their petition was filed, the husband had accrued but unpaid wages of $1,100. No creditor was then attempting to garnish his wages and on their Schedule B-4, Debtors claimed $990 of these pre-bankruptcy earnings as exempt under the Missouri garnishment statute, Mo.Rev.Stat. § 525.030.¹ In the event their exemption claim were disallowed under that statute, Debtors then claimed $825 of said pre-bankruptcy earnings as exempt under the federal garnishment statute, 15 U.S.C. § 1673. The trustee timely objected to their claim of exemption on April 15, 1986, and the matter has been submitted to the Court upon the Stipulation and Briefs of the parties.

JURISDICTION

This Court has jurisdiction over the parties and subject matter of this proceeding pursuant to 28 U.S.C. §§ 1334, 151, and 157 and Local Rule 29 of the United States District Court for the Eastern District of Missouri. This is a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(B), which the Court may hear and determine.

DISCUSSION

Section 522(b) of the Bankruptcy Code allows a state to "opt out" of the federal exemption scheme and to substitute its own scheme of exemptions. Missouri "opted out" on August 13, 1982, the effective date of Mo.Rev.Stat. § 513.427. That statute states:

"Bankruptcy, Exemptions Allowed — Every person by or against whom an order is sought for relief under Title 11, United States Code, shall be permitted to exempt from property of the estate any property that is exempt from attachment and execution under the law of the state of Missouri or under federal law, other than Title 11, United States Code, Section 522(d), and no such person is authorized to claim as exempt the property that is specified under Title 11, United States Code, Section 522(d)."

Given the statutory language, two questions arise. First, are a bankrupt debtor's pre-bankruptcy earnings "exempt from attachment and execution" under the federal garnishment statute, 15 U.S.C. § 1673? Second, are a bankrupt debtor's pre-bankruptcy earnings "exempt from attachment and execution" under the Missouri garnishment statute, Mo.Rev.Stat. § 525.030?

The Federal Garnishment Statute

In 1968, Congress enacted the Federal Consumer Credit Protection Act, also known as the Truth in Lending Act, 15 U.S.C. §§ 1601-1693r.

"Title III of the Act limits the amount which can be garnished. Under Title III a creditor may garnish the lesser of 1) 25 percent of a debtor\'s weekly disposable earnings or 2) the amount by which the debtor\'s disposable earnings exceeds thirty times the federal minimum hourly wage. `Disposable earnings\' means the debtor\'s salary less deductions required by law.

To illustrate, assume that D\'s weekly salary is $280 and that $80 is deducted for taxes and Social Security. D\'s weekly disposable earnings are $200. Under option one of Title III, a maximum of $50 (25 percent of $200) from D\'s weekly paycheck could be made subject to garnishment. To figure the amount garnishable under option two, the federal minimum wage, presently $3.35, is multiplied by thirty: $3.35 × 30 = $105. Under option two the excess over $105 ($200 — $105), or $95 of D\'s take-home pay could be made subject to garnishment. Because option one ($50) is less than option two ($95), $50 is the maximum amount which can be garnished. Under Title III, the lesser of the two amounts must be chosen....

Title III allows the states to enact garnishment laws which increase the exemptions accorded by the Act and which do not decrease any federal benefit. Where state exemptions are more liberal, the state garnishment exemptions apply. Missouri adopted Title III verbatim and added an additional exemption. A Missouri resident who is a head of household may have only 10 percent of his wages garnished. Thus, if D is the head of a household, in Missouri, only $20 of his $200 weekly take-home pay could be garnished. Because the head of a family Missouri exemption is more liberal than those granted in Title III, the state exemption supersedes federal exemptions."

Speca, A Survey of Missouri Debtor-Creditor Law, 54 Univ. of Missouri at Kansas City L.Rev. 19, 34-35 (1985) (footnotes omitted); see also, 15 U.S.C. § 1677 (state garnishment law rather than the federal garnishment statute applies if state garnishment law provides for more limited garnishments than the federal statute).

It is interesting to note that if the federal garnishment statute had not been superseded by the Missouri garnishment statute, it would have created an exemption for Missouri debtors by reason of Missouri's "opt out" statute which allows Missouri debtors federal exemptions other than those listed in Section 522(d) of the Bankruptcy Code. Although the Supreme Court decision of Kokoszka v. Bedford, 417 U.S. 642, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974), has been construed by some courts to mean that the restriction on garnishment in Title III of the Federal Consumer Protection Act is not such a federal exemption, see, e.g., Usery v. First Nat'l. Bank, 586 F.2d 107 (9th Cir.1978); Dunlop v. First Nat'l. Bank, 399 F.Supp. 855 (D.Ariz.1975), the Court does not believe that Kokoszka warrants that construction.

"Kokoszka involved the narrow issues of whether an income tax refund is property of a debtor\'s estate and, if so, whether it was exempt under Title III of the Consumer Credit Protection Act. The Court correctly concluded that the refund was property of the estate since it was not necessary for a fresh start. The Court next correctly decided that the tax refund was not exempt. Although some language of the opinion intimates that Title III was not designed to apply in bankruptcy, but was only designed to prevent bankruptcy, see 417 U.S. at 650-51 94 S.Ct. at 2436, the Court concluded that `if, despite its protection, bankruptcy did occur, the debtor\'s protection and remedy remained under the Bankruptcy Act.\' Id. at 651 94 S.Ct. at 2436. The Court noted that the Bankruptcy Act, `provides that the Bankruptcy Act shall not affect the allowance to bankrupts of the exemptions which are prescribed by the laws of the United States,\' id. at 649 94 S.Ct. at 2435 (quoting Bankruptcy Act § 6, 11 U.S.C. § 24 (1976) (repealed 1978)). The Court then went on to agree with the court of appeals that a tax refund did not come under title III\'s protection of `earnings\' or `disposable earnings.\' 417 U.S. at 651-52 94 S.Ct. at 2436-37. That result is justified since the debtor will have current earnings to protect with the exemption; tax refunds seem unrelated to what Congress was striving to protect.

To interpret Kokoszka as holding that title III is not an exemption under federal law at all, as courts recently have been doing, ... is unwarranted. In the first place, if it is not an exemption law, it is difficult to say what is. Indeed, it appears to be a paradigm of an exemption law, given the traditional goals of exemption laws. Second, Kokoszka must be interpreted in light of its facts; so interpreted it merely means that income tax refunds are not `earnings\' within title III. Third, because Congress made title III preemptive of all state laws that were less protective of debtors, see 15 U.S.C. §§ 1673(c), 1675, 1677 (1976), many states amended their laws to conform to title III. If these state laws — which supplanted wage exemptions—are now held to be something less than exemptions, in line with recent court interpretations of Kokoszka, protection of debtors\' wages will be lost in bankruptcy although state legislatures clearly had no such intent."

Vukowich, Debtors' Exemption Rights Under The Bankruptcy Reform Act, 58 N.C. L.Rev. 769, 791 n. 192 (1980).

Because, however, the federal garnishment statute does not apply in Missouri, Debtors' alternative claim to exempt the husband's pre-bankruptcy earnings of $825 is without basis in law. The Trustee's objection, therefore, is to that extent meritorious.

The Missouri Garnishment Statute

Given the inapplicability of the federal garnishment statute, Debtors' exemption claim turns on the answer to the second question posed above, namely, whether a bankrupt debtor's pre-bankruptcy earnings are "exempt from attachment and execution" under the Missouri garnishment statute, Mo.Rev.Stat. § 525.030. The Trustee has four arguments that the Missouri garnishment statute is not available to a bankrupt debtor. The Court, however, finds none of these arguments meritorious.

First, the Trustee argues that "property exempt from attachment and execution" is completely enumerated in Chapter 513, Mo. Rev.Stat. Specifically, Section 513.430 of that Chapter contains an extensive list of exemptions and no reference is made to the state's garnishment statute.² The implication, the Trustee argues, is that Missouri did not intend its garnishment statute to provide an additional exemption for bankrupt debtors; for if it had so intended, at the very least the garnishment statute would have been referenced in Section 513.430.

The Trustee's argument is not sound. The fact that a garnishment exemption is not included in ...