Opinion
BANKRUPTCY NO: 13-02903-MM7
11-22-2013
In re: SERGEY EGOROV, Debtor
WRITTEN DECISION - NOT FOR PUBLICATION
CHAPTER: 7
MEMORANDUM DECISION RE
TRUSTEE'S OBJECTION TO CLAIM OF
EXEMPTION FILED BY DEBTOR
JUDGE: Margaret M. Mann
I. INTRODUCTION
On March 25, 2013, debtor Sergey Egorov ("Debtor") voluntarily filed a Chapter 7 bankruptcy petition. As a California debtor, Egorov was required to select from the California exemption options instead of the federal exemption options because California opted out of the federal exemption regime through 11 U.S.C. § 522(b)(2). See Cal. Civ. Proc. Code § 703.130; Drummond v. Urban (In re Urban), 375 B.R. 882, 888 (B.A.P. 9th Cir. 2007).
Under California law, a debtor in bankruptcy may choose from two alternative sets of exemptions: the exemptions available under Cal. Civ. Proc. Code § 703.140(b) that mirror the federal exemptions, or the regular state law exemptions. Goswami v. MTC Distrib. (In re Goswami), 304 B.R. 386, 390 (B.A.P. 9th Cir. 2003). Debtor chose the regular state law exemptions, which provide a large homestead exemption, but do not include a wildcard exemption that could cover any property up to a specified amount. He initially scheduled exemptions for two cars, equity in his residence, furnishings and personal effects. He later amended his schedules and claimed several more exemptions, including an exemption for a federal tax refund worth $5,561.00, consisting exclusively of earned income tax credits ("EITC") and child tax credits (collectively "Tax Credits").
Debtor claimed the full amount of the Tax Credits exempt under Cal. Code Civ. Pro. § 704.210, which exempts all property not subject to a money judgment; in other words, property interests that are not assignable or transferable. See Cal. Civ. Proc. Code § 695.030(a) ("Except as otherwise provided by statute, property of the judgment debtor that is not assignable or transferable is not subject to enforcement of a money judgment."). Debtor argues that the Tax Credits are inalienable public assistance benefits, citing Cal. Welf. & Inst. Code § 11002, providing that aid given under any public assistance program is "absolutely inalienable" by sale, assignment or otherwise. Debtor did not schedule the exemption specifically available for public assistance benefits. Cal. Civ. Proc. Code § 704.080 exempts "public benefits" held in a deposit account, but only to the extent of $1,225.
Chapter 7 Trustee Leslie Gladstone timely filed an objection to Debtor's exemption for the Tax Credits, arguing that the Tax Credits are not exempt under any California exemption since they are not aid given under a public assistance program. The Trustee reasonably speculates Debtor relied on the potentially unlimited general exemption for inalienable property since the value of the Tax Credits is greater than the cap for the specific public benefits exemption.
Having analyzed the parties' contentions, the Court concludes: 1) the Tax Credits are subject to levy under federal law and cannot fit within the general exemption for inalienable property interests claimed by Debtor as provided by Cal. Code Civ. Pro. § 704.210; and 2) the Tax Credits are not a public assistance benefit as necessary to qualify for the $1,225 specific exemption provided under Cal. Civ. Proc. Code § 704.080. Since the Tax Credits are not exempt on any ground under California law, the Court sustains the Trustee's objection.
A. Jurisdiction
The Court has jurisdiction to resolve objections to exemption claims pursuant to 28 U.S.C. § 157(b)(2)(B). Urban, 375 B.R. at 887. This Court has authority to enter a final judgment on the Trustee's exemption objection as the objection resolves claims to property of the estate, and is therefore central to the public bankruptcy scheme. In re Carlew, 469 B.R. 666, 672-73 (Bankr. S.D. Tex. 2012), aff'd. West v. Carlew, 2012 U.S. Dist. LEXIS 101770 (S.D. Tex., July 23, 2012) (Stern v. Marshall, 131 S. Ct. 2594 (2011), did not limit bankruptcy court's authority to enter a final order in resolving an exemption objection).
B. Standard of Review
A claimed exemption is "presumptively valid." Tyner v. Nicholson (In re Nicholson), 435 B.R. 622, 630 (B.A.P. 9th Cir. 2010). "[I]f a party in interest timely objects, 'the objecting party has the burden of proving that the exemptions are not properly claimed.'" Id. (quoting Fed. R. Bank. Proc. 4003(c)). While the allocation of the burden of proof is not at issue in this case since no facts are in dispute and the issue is purely one of law, the Court recognizes that the availability of exemptions is to be liberally construed in favor of the debtor. Hitt v. Glass (In re Glass), 164 B.R. 759, 764 (B.A.P. 9th Cir. 1994); In re Gardiner, 332 B.R. 891, 894 (Bankr. S.D. Cal. 2005). Even liberally construing the presumption in favor of claimed exemptions, the Court cannot find the Tax Credits exempt under California law.
II. ANALYSIS
A. Nature of Tax Credits
Logically, the first step in considering the validity of an exemption claim is to determine the nature of the property interest at issue. See In re Rutter, 204 B.R. 57, 59 (Bankr. D. Or. 1997); In re Thompson, 336 B.R. 800, 801 (Bankr. D. Nev. 2005). Tax Credits are considered an overpayment of tax, or a tax refund, under the relevant provisions of the Social Security Act and the Internal Revenue Code. Sorenson v. Secretary ofTreas. of U.S., 475 U.S. 851, 859 (1986) (EITC are an overpayment of tax that can be intercepted by state authorities and used to pay child support obligations).
B. Tax Credits are Not Inalienable
As properly characterized, Tax Credits are therefore generally subject to levy. Sorenson, 475 U.S. at 864 n.7 (noting that "once an individual has actually received his tax-refund payment, the proceeds of that refund, even if they reflect an earned-income credit component, are subject to levy"); 26 U.S.C. § 6331 (authorizing the Secretary of the Treasury to levy upon all property and rights to property when there is a lien for the payment of a tax); 31 U.S.C. § 3720A (authorizing levy of tax refunds for the payment of past-due child support obligations, as well as any legally enforceable debt against a federal agency); Brandt v. Fleet Capital Corp. (In re TMCI Elecs.), 279 B.R. 552, 555 (Bankr. N.D. Cal. 1999 (stating the right to receive a tax refund is a general intangible, to which a security interest may attach once the debtor acquires rights in it); see also Official Comm. of Unsecured Creditors of Tousa, Inc. v. Citigroup N. Am., Inc. (In re Tousa, Inc.), 406 B.R. 421, 429 (Bankr. S.D. Fla. 2009) (describing "a blanket lien on intangibles that attaches to a federal tax refund"). Since Debtor's Tax Credits are generally subject to levy, they are not inalienable and cannot be exempt under Cal. Code Civ. Pro. § 704.210.
Debtor nevertheless contends that California law carves out a specific exemption for the Tax Credits because they are public assistance benefits as defined in Cal. Welf. & Inst. Code § 10061, which are categorically inalienable under Cal.Welf. & Inst. Code § 11002. To analyze this contention, the Court must first consider whether this specific California exemption overrides federal law deeming the Tax Credits subject to levy. Sorenson, 475 U.S. at 864 n.7.
State exemptions do not overcome the operation of federal law; rather, state exemptions apply subject to federal law. United States v. Bess, 357 U.S. 51, 57 (1958). Because the state exemptions do not apply to the federal government, the tax refund payment is subject to levy by the federal government regardless of whether it is determined to be a public assistance benefit under California law. Little v. United States, 704 F.2d 1100, 1105 (9th Cir. 1983) ("Of course, once it is determined that the taxpayer possesses property or rights to property recognizable under state law the federal tax consequences pertaining to such rights are solely a matter of federal law and, consequently, liens provided by federal statute may not be defeated by state exemption statutes.").
Because the Tax Credits are subject to levy under federal law regardless of whether they are public assistance benefits exempt under state law, the Court concludes they cannot fit within the general unlimited exemption provided by Cal. Code Civ. Pro. § 704.210.
C. The Tax Credits are not Public Assistance Benefits under California Law
Even though the Tax Credits are generally subject to levy and Cal. Code Civ. Pro. § 704.210 does not apply, the limited $1,225 exemption under Cal. Civ. Proc. Code § 704.080 could be available if the Tax Credits can be considered public assistance benefits as defined in Cal. Welf. & Inst. Code § 10061. Section 10061 provides a comprehensive list of over 30 different "public assistance programs" defined as those included in Part 3 of Cal. Welf. & Inst. Code § 11000, et. seq., which lists aid for needy families, supportive services, and general aid, among other items. See, e.g., Cal. Welf. & Inst. Code § 11450 (aid for needy families); Cal. Welf. & Inst. Code §11323.2 (payments for supportive services); Cal. Welf. & Inst. Code §11006.4 (AFDC payments); Cal. Welf. & Inst. Code §11006.5 (aid to the aged, blind and disabled); Cal. Welf. & Inst. Code §11008.4 (property tax assistance); Cal. Welf. & Inst. Code §11008.10 (student loans). No type of tax credits are on the list provided in Part 3 of Cal. Welf. & Inst. Code § 11000, et. seq. and the Court is bound to interpret the statute according to its plain language. See Orange County Dep't of Educ. v. Cal. Dep't of Educ., 668 F.3d 1052, 1055 (9th Cir. 2011) ("Under California law, a question of statutory interpretation begins with the statute's plain language, as the words the Legislature chose to enact are the most reliable indicator of its intent.").
Even though the list is statutorily required to be construed in a fair and equitable manner, see Cal. Welf. & Inst. Code § 11000, it is beyond this Court's authority to add an excluded item such as the Tax Credits to this well-defined list. See Sanders v. Lawson, 164 Cal. App. 4th 434, 440 (Cal. App. 2d Dist. 2008) ("Where the words of a statute are clear, we may not add to or alter the statute to accomplish a purpose which does not appear on its face."); see also Silvers v. Sony Pictures Entm't, Inc., 402 F.3d 881, 885 (9th Cir. 2005) (en banc) ("The doctrine of expressio unius est exclusio alterius as applied to statutory interpretation creates a presumption that when a statute designates certain persons, things, or manners of operation, all omissions should be understood as exclusions."). As a federal court interpreting California law, this Court must follow these interpretive guidelines set by the California courts. Lewis v. Tel. Employees Credit Union, 87 F.3d 1537, 1545 (9th Cir. 1996).
Particularly because the California Legislature was aware of the relationship between tax refunds and public assistance benefits, the Court is convinced that the exclusion was intentional and deserving of respect. For tax year 1974 only, the California Legislature clarified that federal tax refunds were not to be considered for either public assistance eligibility or calculation of benefits. Cal. Welf. & Inst. Code § 11008.3. Tax refunds from other years are otherwise not mentioned in Part 3 of Cal. Welf. & Inst. Code § 11000, et. seq. Debtor's Tax Credits derive from tax year 2012, nearly 40 years later than the specific 1974 tax refund that was referenced in Part 3 of Cal. Welf. & Inst. Code § 11000, et. seq. Even for the 1974 tax refund, the California Legislature did not consider it to be aid under a public assistance program. Instead, it was referenced to emphasis that the tax refund was not to affect the aid otherwise provided.
Debtor relies upon the decisions of other bankruptcy courts around the country that have found Tax Credits exempt, but his reliance is misplaced. All of these decisions can be reconciled based upon whether the specific state exemption statutes considered Tax Credits an exempt public assistance benefit. Where the state statute does not include Tax Credits within the definition of public assistance benefits, the Tax Credits are not found exempt. See Thompson, 336 B.R. at 803 (no state or federal exemptions apply to the EITC); Rutter, 204 B.R. at 61 (no exemption for EITC exists under Oregon law). Where the state statue is general or specifically includes Tax Credits, they are found exempt. See In re Longstreet, 246 B.R.611, 617 (Bankr. S.D. Iowa 2000) (holding EITC are equivalent to government grants and public assistance under Iowa law and are exempt from execution); In re Brown, 186 B.R. 224, 229 (Bankr. W.D. Ky. 1995) (EITC explicitly exempt by Kentucky law); Colo. Rev. Stat. §13-54-102(l)(o) (explicitly exempting full amount of any federal or state income tax refund attributed to an EITC or a child tax credit). The California statutes governing the exemption of public assistance benefit are simply more similar to the Oregon and Nevada exemption statutes than the states that have statutes deeming the Tax Credits exempt.
Debtor does not address whether the Tax Credits fit within the California statutory definition of public assistance under Cal. Welf. & Inst. Code § 10061. He instead stresses the policy reasons why he should be able to retain the Tax Credits as exempt property, citing Sorenson, 475 U.S. at 864 and Vaessen v. Woods, 35 Cal.3d 749 (1984). Relying upon the policy of protecting the indigent, Vaessen held that Tax Credits are excluded from the calculation of AFDC eligibility under California law as "resources" rather than as an income stream. Id. at 756. Vaessen, however, does not hold that Tax Credits are public assistance benefits, and in effect suggests the opposite. If Tax Credits were public assistance benefits, the Supreme Court in Vaessen would not have reversed the injunction issued by the lower court that reduced the AFDC aid to the indigent by the Tax Credits they received. Id. at 764. Sorenson, 475 U.S. at 864-65, similarly did not hold or even imply that EITC constitutes public assistance benefits; it merely acknowledged one of the goals of EITC was to provide relief for low-income families.
This Court wholeheartedly supports the public policy goals behind the Tax Credits, but this support does not permit it to override the clear statutory definition provided by California law.
III. CONCLUSION
The Tax Credits cannot be exempted under Debtor's stated exemption or under any alternative available to him given his choice to exempt the equity in his house. The Trustee's objection is sustained and she may upload an order disapproving the exemption.
_________________
MARGARET M. MANN, JUDGE
United States Bankruptcy Court
In re Sergey Egorov
Bankruptcy Case No. 13-02903-MM7
CERTIFICATE OF MAILING
The undersigned, a regularly appointed and qualified clerk in the office of the United States Bankruptcy Court for the Southern District of California, at San Diego, hereby certifies that a true copy of the attached document, to wit:
MEMORANDUM DECISION RE TRUSTEE'S OBJECTION TO CLAIM OF EXEMPTION FILED
BY DEBTOR - NOT FOR PUBLICATION
was enclosed in a sealed envelope bearing the lawful frank of the Bankruptcy Judges and mailed to each of the parties at their respective address listed below: Sergey Egorov
4119 Twilight Ridge
San Diego, CA 9213 0-8690
Leslie T. Gladstone
401 Via Del Norte
La Jolla, CA 9203 7
Daniel J. Winfree
1010 Second Avenue, Suite 1015
San Diego, CA 92101
Said envelope(s) containing such document were deposited by me in a regular United States mail box in the City of San Diego, in said district on November 22, 2013.
_________________
Michele McConnell, Judicial Assistant
Notice Recipients
| District/Off: 0974-3 | User: ddebose | Date Created: 11/22/2013 |
| Case: 13-02903-MM7 | Form ID: pdfO1 | Total: 5 |
Recipients of Notice of Electronic Filing:
| tr | Leslie T. Gladstone | candic@flgsd.com |
| aty | Daniel J. Winfree | lawyer@bkatty.com |
| aty | Geraldine A. Valdez | geraldinev@flgsd.com |
| aty | Leslie T. Gladstone | candic@financiallawgroup.biz |
| TOTAL: 4 |
Recipients submitted to the BNC (Bankruptcy Noticing Center):
| db | Sergey Egorov | 4119 Twilight Ridge | San Diego, CA 92130-8690 | |
| TOTAL: 1 |