Opinion
Case No. 18-54750
09-27-2019
IN RE: Michael W. ANDREWS, Debtor.
Thomas McK Hazlett, Hanlon, Estadt, McCormick & Schramm, Saint Clairsville, OH, for Debtor. D. William Davis, Bridgeport, OH, for Trustee.
Thomas McK Hazlett, Hanlon, Estadt, McCormick & Schramm, Saint Clairsville, OH, for Debtor.
D. William Davis, Bridgeport, OH, for Trustee.
OPINION AND ORDER OVERRULING THE DEBTOR'S OBJECTION TO THE TRUSTEE'S FINAL REPORT AND SUSTAINING THE TRUSTEE'S OBJECTION TO THE DEBTOR'S CLAIM OF EXEMPTION
John E. Hoffman, Jr., United States Bankruptcy Judge I. Introduction
Under Ohio law, a judgment creditor may garnish up to 25% of a judgment debtor's wages, and the debtor may claim the other 75% exempt from garnishment. During the 90 days before the Debtor commenced this bankruptcy case, one of his creditors garnished the 25% portion of his wages that were non-exempt. The Chapter 7 trustee has recovered the amount of those non-exempt wages from the creditor and now seeks to distribute the funds for the benefit of all unsecured creditors holding allowed claims. The Debtor, however, wants to keep most of the funds for himself. To that end, he argues that the same exemption that protected his exempt wages from garnishment before bankruptcy allows him to exempt 75% of the non-exempt wages recovered by the trustee. Because the property the Debtor is seeking to exempt is non-exempt under Ohio law, the Court denies the exemption.
II. Jurisdiction and Constitutional Authority
The Court has jurisdiction to hear and determine this contested matter under 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(B). A dispute over whether property is exempt from the bankruptcy estate "stems from the bankruptcy itself." In re Edelson , 533 B.R. 651, 653 (Bankr. N.D. Ill. 2015) (quoting Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ), aff'd sub nom. Loventhal v. Edelson , 579 B.R. 456 (N.D. Ill. 2016), aff'd , 844 F.3d 662 (7th Cir. 2016). The Court therefore also has the constitutional authority to enter a final order in this matter. Id.
III. Background
The following background is drawn primarily from the parties' stipulations (the "Stipulations") (Doc. 40) and supplemental stipulations (the "Supplemental Stipulations") (Doc. 42). The Debtor commenced this Chapter 7 case on July 30, 2018 (the "Petition Date"). He did so after DBS Financial, a judgment creditor, effectuated a series of weekly wage garnishments by which it received a total of $1,963.56 from the Debtor's wages (the "Garnished Wages") within 90 days before the Petition Date. Stips. at 2. The amount of the Garnished Wages equaled the portion of the Debtor's earnings (25%) that section 2329.66(A)(13)(b) of the Ohio Revised Code allowed DBS Financial to garnish. Supp. Stips. at 1.
The Chapter 7 trustee, D. William Davis (the "Trustee"), recovered the Garnished Wages from DBS Financial on the basis that each of the garnishments was a preferential transfer within the meaning of § 547(b) of the Bankruptcy Code. Stips. at 2. The Trustee then filed a final report indicating that he intended to use the Garnished Wages and other cash on hand to pay administrative expenses and provide a dividend of 99.7% to unsecured creditors. Doc. 29 at 8. The Debtor objected to the final report. Doc. 32. He also filed an amended Schedule C in which he claimed 75% of the Garnished Wages as exempt under section 2329.66(A)(13)(b). Doc. 31. The Trustee timely filed an objection (Doc. 34) to the Debtor's amended claim of exemption and a brief in support (Doc. 39), to which the Debtor filed a response (the "Response") (Doc. 41). Following a telephonic status conference during which the Court made the parties aware of several pertinent reported decisions they had not addressed in their filings, the Trustee filed a supplemental brief arguing that those decisions supported his position (the "Supplemental Brief") (Doc. 43), but the Debtor declined to supplement his papers.
IV. Legal Analysis
The parties have stipulated that the Garnished Wages were "recovered by [the Trustee] from DBS Financial as a preference." Stips. at 2. Preferential transfers are recovered under § 550 of the Bankruptcy Code, and property recovered under § 550 becomes property of the bankruptcy estate. 11 U.S.C. § 541(a)(3). Property of the estate in a Chapter 7 case must be distributed in accordance with § 726(a) of the Bankruptcy Code. Under that section, the holders of allowed claims are entitled to be paid in full before a debtor may receive a distribution from property of the estate. 11 U.S.C. § 726(a)(6). Because the Debtor's unsecured creditors are receiving a dividend of less than 100%, the only way any of the Garnished Wages could be paid to the Debtor is if he were able to claim them as exempt from the estate.
Section 522 of the Bankruptcy Code sets forth the property that debtors may exempt. Section 522(b)(1) offers them the choice between exempting the property specified in § 522(d) or utilizing the exemptions provided by federal nonbankruptcy law or state law "unless the [applicable] State law ... specifically does not so authorize." 11 U.S.C. § 522(b)(2). Because Ohio has chosen to "opt out" of the federal exemption scheme, the exemptions available to the Debtor are those provided by Ohio law. Storer v. French (In re Storer) , 58 F.3d 1125, 1127 (6th Cir. 1995).
In staking a claim to 75% of the Garnished Wages, the Debtor relies on the provision of Ohio law that allows him to exempt "[s]eventy-five per cent of the disposable earnings owed to [him]." Ohio Rev. Code Ann. § 2329.66(A)(13)(b) (West 2019). The Garnished Wages, however, are the very 25% of the Debtor's earnings that he was not permitted to exempt from creditors. Further, the Bankruptcy Code gives the Debtor the right to exempt property recovered by the Trustee only "to the extent that [he] could have exempted such property ... if such property had not been transferred." 11 U.S.C. § 522(g). Because "the amounts held by the creditor [and recovered by the Trustee] were the non-exempt portion of the Debtor's earnings," the Debtor is not entitled to claim the exemption. In re Slane , 537 B.R. 864, 867 (Bankr. N.D. Ohio 2015). Quite simply, "[t]here is nothing in the exemption statute that would suggest that after preserving seventy-five per cent of the Debtor's earnings, the twenty-five per cent of the wages that were non-exempt could be claimed as exempt, reducing the initially non-exempt twenty-five per cent by an additional seventy-five per cent." Id. Thus, the Debtor has no right to claim an exemption in the Garnished Wages under section 2329.66(A)(13)(b).
As the Trustee concedes, Supp. Br. at 2–3, the Garnished Wages could be exempted using Ohio's wildcard exemption and the exemption for cash on hand if the Debtor had not already fully used those exemptions. See Bank of Am., N.A.(USA) v. Stine (In re Stine) , 252 B.R. 902, 905 & n.4 (D. Md. 2000) (noting that, although not subject to another personal-earnings exemption, the funds recovered from garnishor could be eligible for other cash and personal property exemptions), aff'd sub nom. In re Stine , 360 F.3d 455 (4th Cir. 2004). But the Debtor, having already fully used the wildcard and cash-on-hand exemptions, relies solely on the personal earnings exemption.
In the end, the Debtor's argument is that he could claim the personal earnings exemption if the facts were different. He contends that
[i]f the same sum, $1,963.56 were held in [the Debtor's] bank account on the [Petition Date], and that sum could clearly be traced to the deposits of [his] paychecks, then [he] would be entitled to claim the personal earning exemption for 75% of that amount under well settled law in this state.... No trustee would think of claiming that the amount in the account, representing 25% of all wages earned in the 3 months prior to bankruptcy, should be non-exempt as the 75% spent by [the Debtor] prior to filing was his exempt amount, leaving only the non-exempt 25%.
There should be no distinction whether the residue of a paycheck or paychecks are held on the [Petition Date] by [the Debtor] himself or by a third-party, provided that it is clearly identifiable as personal earnings and is otherwise exempt, as under § 522(g).
Resp. at 2 (emphasis added). According to the Debtor, the actual facts are close enough to this hypothetical scenario that the exemption should be allowed.
This argument requires some unpacking. The Debtor first posits a bucket of money equal to his disposable wages earned during the preference period. He then asks the Court to assume that he spent 75% of that bucket before the Petition Date and that, rather than being garnished, the other 25% was sitting in his bank account on the Petition Date. Next, the Debtor claims that he would have been entitled to exempt 75% of the earnings in the bank account from property of his bankruptcy estate even though he had already spent 75% of the paychecks from which those earnings were derived. And this must mean, the Debtor argues, that he is entitled to exempt 75% of the Garnished Wages even though he had already exempted 75% of the earnings that were the source of the Garnished Wages.
The italicized words reveal the flaw in the Debtor's reasoning—equating spending earnings with exempting them. Spending earnings and exempting them from debt collection are, of course, two very different things. The personal earnings exemption simply does not apply when individuals spend their earnings. In fact, a debtor could spend a lifetime of earnings and still, upon filing a bankruptcy case, exempt 75% of any that had not been spent. And so, if the Debtor had not used the personal earnings exemption with respect to particular wages and had spent 75% of those wages while depositing 25% of them into his bank account, then he could have exempted 75% of the wages that remained in the account on the Petition Date. The Debtor could have done so because the Ohio Supreme Court has held that the personal earnings exemption applies to wages deposited into a bank account maintained by the debtor so long as the source of the funds in the account can be traced back to the exempt wages. Daugherty v. Cent. Tr. Co. of Ne. Ohio, N.A. , 28 Ohio St.3d 441, 504 N.E.2d 1100, 1103 (Ohio 1986). But there was no indication in Daugherty that the debtor had previously used the personal earnings exemption to exempt any portion of the paychecks from which the funds in the bank account were derived. And nothing in Ohio decisional law or the exemption statute supports using the personal earnings exemption twice in order to exempt more than a debtor is entitled to exempt.
That is essentially what the Debtor is trying to do here. He benefitted from the personal earnings exemption when DBS Financial garnished his earnings, and the Garnished Wages that the Trustee has recovered are the very wages that the Debtor was not permitted to exempt. Because the Debtor was not allowed to exempt the Garnished Wages using the personal earnings exemption outside of bankruptcy, § 522(g) prohibits him from using that exemption to exempt them inside bankruptcy.
V. Conclusion
Although "exemption statutes are to be construed liberally," courts "cannot create an exemption from whole cloth under the rubric of liberality." In re Peacock , 292 B.R. 593, 598 (Bankr. S.D. Ohio 2002). For all the reasons explained above, the Debtor's objection to the Trustee's final report (Doc. 32) is OVERRULED , and the Trustee's objection to the Debtor's claim of exemption (Doc. 34) is SUSTAINED .