IN RE DUCOTE (Bankr.W.D.La 2004)

IN RE: DONALD J. DUCOTE MARY J. DUCOTE.

Case No: 04-80293.United States Bankruptcy Court, W.D. Louisiana, Alexandria Division.
August 25, 2004

REASONS FOR DECISION
HENLEY HUNTER, Bankruptcy Judge

This matter come before the Court on the Objection by the Trustee to the debtors’ claim of exemption on cash held in a checking account as earnings. This is a Core Proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (B). This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and by virtue of the reference by the District Court pursuant to Local District Court Rule 83.4.1 incorporated into Local Bankruptcy Rule 9029.3. This Court makes the following Findings of Fact and Conclusions of Law in accordance with F.R.B.P. 7052. Pursuant to these reasons, the Trustee’s Objection is SUSTAINED.

FINDINGS OF FACT AND CONCLUSIONS OF LAW
These debtors filed a voluntary petition under Chapter 7 on February 20, 2004. The Trustee timely objected to the “earnings” exemption claimed by the debtors on the funds contained in their bank accounts as set forth on the schedules.[1] The debtors have claim an exemption as to a total of $1,750.00, $500 of which was in a checking account, and the remainder split between two savings accounts. The parties have stipulated that the debtors have no source of income other than their employments and tax refunds. After the parties filed a Joint Stipulation, this matter was taken under advisement.

Page 2

Applicable Law
Property of the estate under 11 U.S.C. § 541 encompasses a broad and inclusive range of estate property. It includes exempt property that is ultimately “exempted out” of the estate. A debtor is required to file a schedule or listing of exempt property. If no objection is filed, the listed property is exempt. 11 U.S.C. § 522, F.R.B.P. 4003, Taylor v. Freeland Kronz, 503 U.S. 638 (1992). If an objection to the exemption is filed, then the objecting party has the burden of establishing that the exemption was not properly claimed. Louisiana is an “opt-out” state, meaning that its residents may exempt only that property that is exempt under its laws or federal laws other than those set forth in 11 U.S.C. § 522(d).

La.R.S. 13:3881 provides, in pertinent part, as follows:

A. The following income or property of a debtor is exempt from seizure under any writ, mandate or process whatsoever:
(1)(a) Seventy-five percent of his disposable earnings for any week, but in no case shall this exemption be less than an amount in disposable earnings which is equal to thirty times the federal minimum hourly wage in effect at he time the earnings are payable or a multiple or fraction thereof, according to whether the employee’s pay period is greater or less than one week.

The debtors argue that the earnings do not cease to be earnings when they are deposited into a bank account, because the amount of the earnings can be traced to their employment source. The debtors cite the Judgment in a case within this district, however in a different division, to support this proposition, and that case is currently on appeal to the United States District Court In re: Toby Sinclair, 03-11003, Judgment dated August 11, 2003 (Shreveport Division).[2] [3] Nevertheless, this

Page 3

Court respectfully declines to adopt the same reasoning, finding that the case law instructs otherwise, that the exemption does not extend to wages already given to the employee (also known as “passive earnings”), but rather, only extends to wages earned but still held by the employer (also known as “active earnings”) See Kokoszka v. Belford, 417 U.S. 642, 648, 94 S.Ct. 2431
(1974) (interpretation of the same language in the Consumer Protection Act and equivalent to the Louisiana earnings exemption); See also In re: Ballard, 238 B.R. 610 (Bankr. M.D.La. 1999) (an extensive exposition of the law concerning the earnings exemption, particularly footnote 135, explaining that proceeds of the earnings lose their status as “earnings” once they become cash in the hands of the debtor). The fact that the funds claimed exempt in this case are spread between two savings accounts and a checking account further proves the point that the funds are not traceable to the original earnings source, namely, a single pay check.

Page 4

Debtors’ counsel in this case cited no authority other than the holding in Sinclair, supra. Counsel for the Sinclair debtor cited a number of cases, including the Tenth Circuit holding i Guidry v. Sheet Metal Workers National Pension Fund, 39 F.3d 1078 (10th Cir. 1994), interpreting a Colorado statute similar to Louisiana’s. There, the Tenth Circuit, in a non-bankruptcy context, allowed a convicted embezzler to shield his pension fund against a garnishment under Colorado law. Counsel for Sinclair noted that the Tenth Circuit did cite a Colorado Supreme Court case, Rutter v. Shumway, 16 Colo. 95, 26 P. 321 (1891) allowing a debtor to keep his wages once they were received and deposited into his bank account, but the Tenth Circuit expressly limited its holding to the situation where the funds had not been commingled. Thus, this Court suggests that the Tenth Circuit non-bankruptcy holding in Guidry is inapposite here.

Counsel for Sinclair also cited the Louisiana Supreme Court holding in Succession of Erwin, 169 La. 877 (S.Ct. La. 1930), holding that the creditors of the decedent could not claim life insurance proceeds payable to the executors, administrators or assigns, even though the proceeds had been deposited with other estate funds. The statute at issue in that case was La.R.S. 22:646. There, the Court observed that the statute only protected the funds as against the creditors of the decedent. Thus, a different result might obtain as against the bank or other depositors.[4]

CONCLUSION
Pursuant to these reasons, the Objection by the Trustee to the Debtor’s Claims of Exemptions is SUSTAINED. A separate and conforming order will enter this date.

THUS DONE AND SIGNED.

[1] The Trustee also objected to debtors’ exemption claims as to multiple tracts of real estate and improvements. According to debtors’ counsel’s memorandum, that portion of the objection has been withdrawn, although the record does not reflect such disposition. Nevertheless, these reasons do not address that issue.
[2] This Court has reviewed the trial briefs in the Sinclair case.
[3] As noted by Counsel to the Trustee in the Sinclair case, the Louisiana Statute mirrors the protection afforded consumers under the Consumer Credit Protection Act, 15 U.S.C. §§ 1601 et seq., in that it restricts garnishments to protect consumer debtors. (See Transcript of Hearing to Consider Trustee’s Objection to Debtor’s Claimed Exemptions and the Trustee’s Motion to Compel Debtor to Turnover Property of the Estate, In re: Toby James Sinclair, 03-11003, August 4, 2003, (Bankr. W.D.La.) Judge Stephen V. Callaway, however, noted that the Louisiana exemption statute refers to “any writ, mandate, or process whatsoever.” (Transcript, p. 13, line 20 — p. 14, line 3.) The restrictions on garnishments in 15 U.S.C. § 1572(c) refer to “any legal or equitable procedure through which the earnings of any individual are required to be withheld for payment of any debt.” To the extent that Judge Callaway’s remarks suggests that the Louisiana statute had a different purpose than the Consumer Credit Protection Act, this Court disagrees. The trustee has, inter alia, the powers of a creditor holding a writ of execution that has been returned unsatisfied. 11 U.S.C. § 544. In this Court’s view, the wording in the Louisiana Statute and the Consumer Credit Protection Act is a difference without a distinction. Judge Callaway then decided that the Sinclair debtor (who filed for relief on March 28, 2003) was entitled to exempt 75% of the amount he was paid on March 20th (the date his employer, a school board, paid him) and the funds were deposited into the checking account, which also contained $202 from other sources and was deemed “non-exempt.” He then deducted the amounts of checks written on the account by pro-rating them against the exempt and non-exempt amounts on deposit 8 days before the filing date, using the 25/75 formula. This approach, while giving credence to the maxim that exemption statutes should be interpreted liberally in favor of the debtor, seemingly ignores a basic tenet in determining what constitutes property of the estate, i.e. looking at the snapshot of the assets on the date of filing. This formulaic result places the bankruptcy judge in the untenable position of restructuring the cash flow in the debtor’s account(s) using a formula that, in many cases, will be difficult, if not impossible, to apply. The colloquy between Judge Callaway, counsel to the debtor, and counsel to the trustee, following the ruling, (Transcript, p. 50, line 12 -p. 52, line 15) demonstrates the uncertainty and unwieldiness of the formula. The result distills to judicially micro-managing and reallocating the cash in a debtors account on an ad hoc basis, as opposed to simply recognizing that the Louisiana legislature simply did not intend to protect wages once they were paid to the employee.
[4] Counsel for the Trustee in the Sinclair case, where the Trustee had not only objected to the exemption, but also requested a turnover order, argued in his memorandum that the bank, not the debtor, controlled the funds on deposit. (Sinclair, 03-11003, Doc. 24.)

Page 1