Nationsbank v. Stine

• Decision Date: 30 December 2003
• Docket Number: No. 3,3
• Citation: 379 Md. 76,839 A.2d 727
• Parties: BANK OF AMERICA f/k/a/ Nationsbank v. Kenneth W. STINE.
• Court: Maryland Court of Appeals

839 A.2d 727

379 Md. 76

BANK OF AMERICA f/k/a/ Nationsbank v. Kenneth W. STINE.

No. 3, September Term, 2001.

Court of Appeals of Maryland.

December 30, 2003.

Ronald S. Canter (Harry K. Wolpoff, Wolpoff & Abramson, L.L.P., on brief), Rockville, for appellant.

Mark F. Scurti (Scurti and Gulling, P.A., Robert Neil Grossbart, David A. Rosenberg, Robert A. Grossbart, P.A., on brief), Baltimore, for appellee.

Argued before BELL, C.J., and ELDRIDGE,¹ RAKER, WILNER, CATHELL, HARRELL and BATTAGLIA, JJ.

BELL, C.J.

I.

The limited issue that has been certified to this court by the United States Circuit Court of Appeals for the Fourth Circuit, and which we must answer, is whether, when a garnishment is avoided as a preferential transfer, a debtor in bankruptcy, pursuant to Maryland Code (1973, 1998 Replacement Volume), § 11-504 of the Courts and Judicial Proceedings Article ("Courts"), may claim as exempt from the bankruptcy estate, wages previously garnished by a judgment creditor, pursuant to Maryland Code (1975, 2000 Replacement Volume), §§ 15-601-607 of the Commercial Law Article ("CL").

II. The facts are not in dispute.

In February, 1998, the appellant, NationsBank, obtained a judgment against the appellee, Kenneth Stine, in the District Court of Maryland. It thereafter filed a Writ of Garnishment to enforce its judgment and, pursuant that writ, attached 25% of the appellee's wages, the amount allowable by law. CL § 15-601.1(b) exempts from attachment 75% of the debtor's disposable wages.² On December 23, 1998, the appellee filed for relief under Chapter 7 of the United States Bankruptcy Code. Pursuant to 11 U.S.C. § 522(h), which empowers a debtor to avoid a transfer of property when the bankruptcy trustee could have, but chose not to avoid such a transfer, the appellee sought to recover the $1,064.05 of his wages that the appellant had garnished within the 90 days preceding the appellee's bankruptcy filing. The United States Bankruptcy Court entered judgment in favor of the appellee.

The appellant noted an appeal to the United States District Court for the District of Maryland, arguing that the appellee could not recover his wages under 11 U.S.C. § 522(h) because, although the trustee could have avoided the transfer, the appellee could not, because the wages were not exempt under the Maryland exemption scheme. More particularly, the appellant argued that the clear and unambiguous language of Maryland's exemption scheme, codified at Courts § 11-504, expressly prohibits a debtor from claiming an exemption in wage garnishments. Further, the appellant argued that the appellee had already availed himself of the only exemption to which he was entitled, when 75% of his net wages were exempted pursuant to CL § 15-601.1 in connection with the appellant's garnishment.

Conceding that, as written, the language of § 11-504(e) disallows the exemption of wage garnishments, the appellee argued, nevertheless, that the exception did not mean that wage garnishments could never be exempted. To the contrary, he submits, relying on the decision of the District Court in this case, see Bank of Am., N.A. v. Stine, 252 B.R. 902, 904 (D.Md.2000),

that the language of § 11-504(e) simply prevents a judgment creditor from claiming § 11-504 exemptions "at the time of the attachment". Id. at 904. The appellee also asserted that, once a debtor files for bankruptcy, that subsection does not protect a creditor's interest in a preferential transfer, to which the creditor is not entitled under federal bankruptcy law. To accept the appellant's interpretation, argued the appellee, would mean that the § 11-504 exemption scheme would protect the wage garnishment as a preferential transfer, "... to the detriment of the bankruptcy estate and the debtor's right to emerge from bankruptcy with adequate possessions to begin his fresh start, as was Congress' intent." [the appellee's brief at 7].

The United States District Court agreed with the appellee and affirmed the Bankruptcy Court decision. See Stine, supra.,

252 B.R. 902. In so doing, the court explained that § 11-504(e) was intended to prevent a non-bankruptcy judgment debtor from claiming exemption from wage attachment, 75% of his wages as allowed under CL § 15-601.1 and then also claiming an exemption from attachment under § 11-504(e) so as to prevent the creditor from attaching the 25% of the wages CL § 15-601.1 makes available to a judgment creditor. Id. at 904. Further, the court stated that Courts § 11-504(e) did not prevent a bankruptcy debtor from claiming an exemption in attached wages which, in bankruptcy, amounted to a preferential transfer. Id. at 904-05. The court opined:

"Section 11-504 (e) ... provides a shield for a creditor who has properly garnished wages under section 15-601.1 against a debtor's misuse of section 11-504 exemptions. The shield is a critical part of the statutory scheme and must be honored. NationsBank, however, is seeking to use the shield as a sword to frustrate the policy of federal bankruptcy law of avoiding preferential transfers. This is not a case in which Stine asserted section 11-504(e) exemptions to defeat a lawful garnishment at the time his wages were attached. Rather, his aim is to undo preferential transfers to which NationsBank is not entitled under federal law."

Id., 252 B.R. at 904. The court further elucidated that "when enacting sections 11-504 and 15-601.1 the Maryland General Assembly did not intend unnecessarily to undermine a fundamental policy of federal bankruptcy law. Therefore, if section 11-504 can be read in a manner that reconciles both federal and state interests, it is that reading that must govern." Id.

The appellant timely noted an appeal to the United States Court of Appeals for the Fourth Circuit. In turn, pursuant to Maryland Code, (1973, 1998 Replacement Volume) §§ 12-603, 12-605 and 12-606 of the Courts and Judicial Proceedings Article, that court certified the following question of law for our determination:

"Whether a debtor in bankruptcy may claim as exempt from the bankruptcy estate, pursuant to Maryland Code Annotated, Courts and Judicial Proceedings § 11-504 (1998) wages previously garnished by a judgment creditor pursuant to Maryland Code Annotated, Commercial Law II §§ 15-601-607 (2000), when the garnishment is avoided as a preferential transfer."

We agree with the appellee, the Bankruptcy Court, and the District Court and hold that Maryland's exemption scheme disallows the exemption of wage attachments only to the extent that it applies to a non-bankruptcy judgment debtor under § 15-601.1, but that when a debtor files for bankruptcy, any wage attachment, as a pre-petition judgment, becomes a preferential transfer in the form of earned wages, which is avoidable by the trustee and derivatively avoidable by the debtor within the contemplation of the Federal Bankruptcy Code and thus, is exempt.

II.

The field of bankruptcy is generally governed by Title 11 of the United States Code, the Federal Bankruptcy Code. Under that code, when a debtor files for bankruptcy under Chapter 7, 11 U.S.C. § 701 et seq., all of that debtor's assets are liquidated and transferred to the bankruptcy estate. A trustee is assigned to oversee the administration of the bankruptcy estate and to ensure that the bankrupt individual's debts are satisfied to the extent possible from the assets of the bankruptcy estate. The trustee is empowered to avoid preferential transfers that occurred within the 90 days preceding the bankruptcy filing under 11 U.S.C. § 547.³ Further, pursuant to 11 U.S.C. § 522(h), the code empowers the bankruptcy debtor to avoid certain preferential transfers when the trustee has chosen not to do so. That section provides:

"(h) The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if—

"(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and

"(2) the trustee does not attempt to avoid such transfer."

This case had its genesis when, after he filed for bankruptcy, the appellee sought to avoid, under 11 U.S.C. § 522(h), the amount of his wages the appellant had garnished within the 90 days prior to his filing bankruptcy.

To avoid a transfer pursuant to § 522(h), a bankruptcy debtor must meet five requirements. Stine, 252 B.R. at 903, citing Humphrey v. Herridge (In re Humphrey), 165 B.R. 578, 580 (Bankr.D.Md. 1993). Those requirements are: the debtor must show that "(1) the debtor could have exempted the property at issue; (2) the transfer would have been avoidable by the trustee; (3) the trustee has not attempted to avoid the transfer; (4) the transfer was not voluntary; and (5) the debtor did not conceal the property." Both parties agree that prongs 2 through 5 have been satisfied. The only question that remains, therefore, and the one that has been certified to this Court for resolution, is whether the appellant could have exempted the property at issue.

The exemptions available to a debtor in bankruptcy under the federal bankruptcy exemption scheme are enumerated at 11 U.S.C. § 522(d). In the Bankruptcy Reform Act of 1978, however, Congress permitted states to "opt out" of the Federal exemption scheme and enact their own exemption provisions.⁴ Maryland is one of the states that has chosen to opt out of the Federal scheme,⁵ and thus, the exemptions a bankruptcy debtor may take are limited to those enumerated in Md.Code (1973, 1998 Repl.Vol.) § 11-504 of the Courts and Judicial Proceedings Article. Whether, therefore, the appellee may exempt the appellant's wage attachments under the current Maryland scheme will turn on the interpretation given the Maryland exemption statute, in particular, subsection 11-504(e) addressing...