Exemption Of Child Tax Credits And Earned Income Credits In Bankruptcy

To what extent are “child tax credits” from a debtor’s income tax refund considered exempt in a bankruptcy case as a “public assistance benefit”?  This was the question considered by the Eighth Circuit Bankruptcy Appellate Panel (B.A.P.) in the 2013 case of In Re Pepper Hardy (B.A.P. No. 13-6029).  The answer was:  not at all.  The appeal involved a Chapter 13 bankruptcy case coming from the Kansas City-based Chapter 13 Trustee, Richard V. Fink.

What happened was this.  The Debtor filed a Chapter 13 case. On her Schedule C (“Property Claimed as Exempt”), Debtor claimed exempt, as a “public assistance benefit” under RSMo. § 513.430.1(10)(a), the portion of her 2012  federal income tax refund that was attributable to a “Child Tax Credit” allowed under 26 U.S.C. § 24.  The Chapter 13 Trustee disagreed with this position, and objected to the Debtor’s exemptions.

The bankruptcy court agreed with the Chapter 13 Trustee, stating:  “The fact the additional [Child Tax Credit] is available as a refund for taxpayers whose income places them out of range for most public assistance benefits available to Missourians is a sufficient basis to conclude that the additional [Child Tax Credit] is not an exempt ‘public assistance benefit.”  The debtor then appealed.

The B.A.P. first noted that  “the federal child tax credit . . . has two distinct components–a non-refundable component, denominated on Form1040 as the ‘Child Tax Credit,’ and a refundable component, denominated on Form 1040 (under the ‘Payments’ section) as the ‘Additional Child Tax Credit.'”  In re Law, 336 B.R. 144, 146 (Bankr. W.D. Mo. 2005).”

The bankruptcy estate, the B.A.P. continued, includes contingent interests in future payments, such as tax refunds.  In re Law, 336 B.R. 780, 782 (B.A.P. 8th Cir. 2006).  The bankruptcy estate also includes the refundable portion of the child tax credit allowed under 26 U.S.C. § 24.  Id. at 783.  The debtor, however, can then claim certain property to be exempt, which has the effect of placing it outside the bankruptcy estate.  In re Benn, 491 F.3d 811, 813 (8th Cir. 2007).

In determining exemptions, the bankruptcy courts will normally look to state law.  In most situations in bankruptcy cases in Kansas and Missouri, the exemptions are created by state law.  Under the Missouri statutes, a debtor may claim exempt “[a] Social Security benefit,  unemployment compensation[,] or a public assistance benefit.” RSMo. §513.430.1(10)(a).

The debtor did not argue that the portion of her 2012 federal income tax refund that is attributable to the child tax credit is either a “Social Security benefit” or “unemployment compensation.”  Thus, the issue turned on whether that portion of her refund is a “public assistance benefit” within the meaning of  RSMo. §513.430.1(10)(a).  This was the question.

But what is the definition of a “public assistance benefit?”  The statutes are unfortunately silent on the term.  The debtor attempted to make the definition a benefit that “assists the public,” but the B.A.P. rejected this definition as overly vague and “not supported by any authority.”

Instead, the B.A.P. turned to the dictionary to find the plain-language meaning of the term:

Merriam-Webster defines “public assistance” as “government aid to needy, aged, or disabled persons and to dependent children.”  Merriam-Webster’s Collegiate Dictionary 1005 (11th ed. 2012).  Random House defines it as “government aid to the poor, disabled, or aged or to dependent children, as financial assistance or food stamps.” The Random House Dictionary of the English Language 1563 (2nd ed. 1987).  Oxford Press defines it as “government benefits provided to the needy, usually in the form of cash or vouchers.” New Oxford American Dictionary 1411 (3rd ed. 2010).

The B.A.P. concluded that none of these definitions supported the debtor’s interpretation of RSMo. §513.430.1(10)(a).  “Public assistance” is more of an aid to the needy, impoverished, or the disabled.  The debtor was none of these.

Furthermore, the reported cases supported the B.A.P.’s position.  In the case of In re Steinmetz, 261 B.R. 32, 35 (Bankr. D. Idaho 2001), the court stated:  “[T]he high income threshold adopted by Congress before the [child tax] credit starts to phase out clearly indicates the credit was not intended as a form of public assistance legislation.”

In the case of In re Jackson, Bankr. No. 12- 9635-RLM-7A, 2013 WL 3155595, at *2 (Bankr. S.D. Ind. June 20, 2013), the court stated:   “Even if [Indiana’s exemption statute] remotely could be interpreted as a ‘public assistance’ exemption which is not limited to the [earned income credit], the refund attributable to the [child support credit] here would not qualify as it was not enacted solely to assist lower income families, but applies to middle income families.”

In other words, the debtor’s position was not supported by any current authorities.

It is worth noting that the state of Kansas, unlike Missouri, has specifically exempted a debtor’s  EIC (earned income tax credit).  This exemption became effective in 2011.  It has been upheld by the bankruptcy courts in Kansas, despite a strenuous attack the some bankruptcy trustees.  In a recent case decided by Robert Nugent, U.S. Chief Bankruptcy Judge for Kansas, on February 13, 2014,  (In Re: Myers, et al, Case No. 11-12155), Judge Nugent upheld the exemption.

The exemption of tax refunds, or portions of refunds, is a complicated issue and depends on what state you live in, and what part of the refund is being considered.

Read More: Domestic Support And Child Support In Bankruptcy

Construction Contracts, Bankruptcy, And Objections To Discharge Under 523(a)(4): Fraud Or Defalcation In A Fiduciary Capacity

Adversary proceedings objecting to the discharge of certain debts sometimes arise in the context of bankruptcy cases.  One such type of adversary proceeding, one based on “fraud or defalcation while acting in a fiduciary capacity,” is based on Section 523(a)(4) of the Bankruptcy Code.  But to prevail under this section requires that certain conditions must exist.  A recent case illustrated how such conditions may in fact exist.  The case was a 10th Circuit B.A.P. case, NM-12-017, Hawks Holding LLC v. Kalinowski, decided in 2012.

In 2008, Hawks Holdings, LLC (“Hawks”) contracted with K2 Construction Company, LLC (“K2”) to build three homes on property Hawks owned near Santa Fe, New Mexico, for a contract price of more than $3.6 million. K2 was formed in 2007 as a New Mexico limited liability company, and held a general contractor’s license issued under the New Mexico Construction Industries Licensing Act (the “Contractors Act”). K2 neither completed the construction 1 called for by the Hawks contract, nor paid all of the subcontractors and material suppliers that had contributed to the project.

The Kalinowskis filed bankruptcy in 2009.  Hawks then filed an adversary proceeding against them, claiming that their debts could not be discharged under §523(a)(4).

Karen was listed as K2’s “sole manager” in its operating agreement and organizational minutes. William was not listed as a member or manager of K2, but was authorized to sign checks on its behalf. William also was not a licensed New Mexico contractor, but admitted that he was “significantly involved in the management of the day-to-day affairs of K2.” In fact, William negotiated the Hawks contract on K2’s behalf, and represented to Hawks that he “was personally responsible for getting the projects built and paid for through K2.”

Karen and William routinely claimed to be co-owners and partners in several construction companies, and admitted that they consulted with each other and made joint decisions regarding K2’s operation and management.

Hawks paid an initial deposit of nearly $364,000 to K2 pursuant to the parties’ contract. Significantly, some of the money that Hawks paid to K2 was then “pooled” into an account held by Fourteen Pueblos Construction Co., LLC, a company that William in fact controlled. Hawks periodically received and paid draw requests from K2 for work done on the project, but some of its payments were not used to pay for the work specified in the draw requests. Ultimately, K2 ceased work on the Hawks project.

At that time, Hawks had paid a total of approximately $1,458,000 to K2. In addition, liens filed on Hawks’ property by subcontractors and suppliers that K2 had failed to pay totaled nearly $587,000.

The bankruptcy trial court ruled against the Kalinowskis.  The basis for the bankruptcy court’s ruling of non-dischargeability was that Hawks’ funds were required by statute to be held in trust by K2, and the trust had been mismanaged. Following a subsequently held evidentiary hearing on Hawks’ damages, the bankruptcy court entered final judgments against both Karen and William in the amount of $775,895.21 plus attorneys’ fees and determined they were nondischargeable pursuant to §523(a)(4).  The Kalinowskis appealed.

Exceptions to discharge under Section 523(a)(4) are not normally easy to prove.  This is because there must exist a fiduciary relationship between the parties.  The fiduciary defalcation exception in § 523(a)(4) has been particularly constrained, and it is well settled in the Tenth Circuit that a  qualifying fiduciary relationship “exists only where a debtor has been entrusted with money pursuant to an express or technical trust.”

In addition, “the fiduciary relationship must be shown to exist prior to the creation of the debt in controversy.” Finally, the existence of a fiduciary relationship under §523(a)(4) is ultimately a question of federal law, though state law obligations are certainly relevant to the inquiry.

In this case, however, there was an actual trust in existence that was created by state statute.  No express trust was alleged, so the question turned on the existence of a “technical trust.”  And one did indeed exist, arising from state law.  Technical trusts are typically created by statute and, in this case, Hawks relied upon § 60-13-23(F) of the Contractors Act of the State of New Mexico for the existence of a trust.  The statute read:

Any [contractor’s] license issued by the division shall be revoked or suspended by the commission for any of the following causes:

…conversion of funds or property received for prosecution or completion of a specific contract or for a specified purpose in the prosecution or completion of any contract, obligation or purpose, as determined by a court of competent jurisdiction.

In other words, the statute clearly imposes a fiduciary duty upon contractors who have been advanced money pursuant to construction contracts. The court found that the debtor was bound by the statutorily imposed technical trust, had violated that trust, and the debt incurred was therefore non-dischargeable under the Bankruptcy Code.  At the end of the day, Hawks placed money in trust with K2, which was mismanaged by the de facto manager of K2.

Hawks was fortunate here in that they had a specific statute to rely on.  The Debtors had argued that they did not qualify as “contractors” under New Mexico law; they also argued that they were not the actual responsible parties, and should not be held liable. The court was not persuaded by these arguments.  The Debtors were found to be exercising de facto control over operations, and that their business operations fell within the statute.  This was, therefore, one of those uncommon examples where the nondischargeability requirements of Section 532(a)(4) were satisfied.

Read More:  Bankruptcy Adversary Proceedings Under Section 523

Curtilage, Search Warrants, And Illegal Drug Seizures In Kansas

What is the “curtilage” of a residence?  Under what circumstances can law enforcement search the outside of a residence without a search warrant?  These are some of the questions considered by the Kansas Supreme Court in its recent decision in State v. Talkington (No. 107,596), decided on March 6, 2015.

The Talkington case involved a drug search in the area outside of a residence.  Three issues were implicated in the case:  (1) whether a residential backyard is part of the “curtilage” under the Fourth Amendment to the United States Constitution; (2) whether a social guest in the residence can challenge the search of host’s residence; and (3) whether drugs found on the defendant’s person after an illegal search of the curtilage should be suppressed as “fruit of the poisonous tree.”  Many search and seizure issues were implicated in this case.  It is an important case and one that deserves careful reading.

What were the facts of the Talkington case?  They were these.  Police searched the backyard of a residence that the defendant, Cyrus Talkington, was visiting and discovered methamphetamine near the back door.  Talkington was then arrested, and marijuana was found on his person. Talkington was charged with possession with intent to distribute methamphetamine, felony possession of drug paraphernalia, possession of more than 1 gram of methamphetamine without an affixed Kansas drug tax stamp, trafficking contraband in a correctional institution, and possession of marijuana.

What exactly is the “curtilage” of a home?  Curtilage is the area immediately surrounding and associated with the home.  It is part of the home itself for purposes of the Fourth Amendment (that is, when it comes to search warrants).  It harbors the intimate activity associated with the sanctity of a person’s home.

How do we determine what is, and what is not, the curtilage?  These four factors are weighed:  (1) The proximity of the area claimed to be curtilage to the home, (2) whether the area is included within an enclosure surrounding the home, (3) the nature of the uses to which the area is put, and (4) the steps taken by the resident to protect the area from observation by people passing by.

A suppression hearing was done at the district court.  The district court granted his motion to suppress, reasoning the methamphetamine was found in the so-called “curtilage” of the home.  It also ruled that a social guest has standing to assert a host’s Fourth Amendment rights in the curtilage, and that the marijuana found on Talkington was “fruit of the poisonous tree.”

The court reasoned that the area where the methamphetamine was found was within the curtilage because the contraband was found in very close proximity to the house.  The owner of the house had posted signs dissuading entry upon his property, and some sort of barrier had to be crossed to enter the property. The State was not satisfied with this ruling, and appealed.

The Court of Appeals reversed, and found in favor of the State.  The Appellate Court stated that the factors concerning whether the area was protected by an enclosure and whether steps were taken to protect the area from observation, (i.e., the lack of enclosed fencing which did not obstruct the view or access to the backyard), weighed in favor of the State. Thus, the Appellate Court held the backyard was not part of the curtilage, and the police could use the seized drugs as evidence.

The matter was appealed again.  So the Kansas Supreme Court was left to make the final call.  And it did, in an extremely detailed opinion.  The drugs were in fact seized in the curtilage of the home, the Court found.  The drugs were actually found “only a few feet from the back porch steps” which was an area easily within the curtilages described by case law on this issue.  Troubling to the Court was the fact that the Appellate Court tried to reweigh the evidentiary findings that the district court had originally made.  This is something that it is not supposed to do:

Weighing these factual findings, the case law supports the district court’s legal conclusion that this factor favored neither side. The ability to clearly view the backyard and its unkempt nature weighed against it being curtilage, while the fence, rock wall, and trees weighed in favor of a finding of curtilage.  Accordingly, the panel exceeded its standard of review and reweighed the evidence in concluding this factor favored the State rather than being neutral.

Thus the Appeals Court erred in reversing because the district court’s findings of facts were supported by substantial competent evidence, and case law supported its legal conclusion that the area in question was curtilage.

The Supreme Court then moved on to the question of whether a “social guest” has standing to challenge a search of a residence.  This question turned on the guest’s “expectation of privacy” in the home he was a guest at.  In this case, Talkington was a frequent visitor, he had known the owner for 7 or 8 years, and was closely acquainted with the premises:

Talkington and [the house owner] had been friends for 7 to 8 years, they worked on cars and mopeds together, and Talkington visited whenever he was in town, including the previous week. Accordingly, Talkington is entitled to Fourth Amendment protections under this analysis. Likewise applying Tenth Circuit analysis, Talkington establishes a “‘degree of acceptance into the household'” and an “‘ongoing and meaningful connection to [the host’s] home'” by virtue of his 7- to 8-year relationship with [the house owner], their working on vehicles together, and his regularly visiting whenever he was in town.

Finally, the Court found that the drugs later found on Talkington qualified as “fruit of the poisonous tree” because the original search of the curtilage had been illegal.  The “fruit of the poisonous tree doctrine holds that if a search is illegal, any evidence obtained by that search should be suppressed.  That was the situation here.  Thus, the Supreme Court reversed the Appellate Court’s decision, which had been improper.

Read More:  Drug Crimes In Kansas City

Claiming Missouri’s Head Of Household Exemption In Bankruptcy

The bankruptcy “head of household” exemption in Missouri applies to your children, and not someone else’s children.  The children have to be related to the head of the family (either a man or a woman) either biologically or by adoption.  That was the gist of a ruling by the Eighth Circuit B.A.P. in a recent Missouri case.  The case was In Re Mark Turpen (B.A.P. 12-6039), from the Western District of Missouri.

Turpen was single and lived with his two minor children, an unrelated woman, and the woman’s three minor children. He filed a voluntary Chapter 7 petition in 2011.  He then filed amended schedules B and C on February 20, 2012. The amended schedule B listed a 2011 tax refund of $8,491.00.  The amended schedule C listed claimed exemptions in that refund totaling $3,600.00:  $600.00 under § 513.430.1(3) and $3,000.00 under § 513.440, $1,250.00 for Turpen as head of the family, and $350.00 each for his two minor children and the woman’s three minor children.

The trustee objected to the $1,050.00 exemption for the woman’s three minor children on the basis that they are not related to the debtor.  The trustee also requested an order compelling turnover of $4,072.98.   A hearing was held on both motions. The parties disputed whether § 513.440 allows the head of a family to claim exemptions for unrelated children.

The bankruptcy court ruled that the language of § 513.440 is plain and unambiguous and held that to fall within the exemption, children must be related to the head of the family either biologically or by adoption.  Turpen did not like this ruling, and appealed it.

Missouri’s statute 513.440 states:

Each head of a family may select and hold, exempt from execution, any other property, real, personal or mixed, or debts and wages, not exceeding in value the amount of one thousand two hundred fifty dollars plus three hundred fifty dollars for each of such person’s unmarried dependent children3 under the age of twenty-one years…

Turpen’s argument was that the word “children” as used in §513.440 is ambiguous, demanding a broader interpretation of the statute. He asserts that the Merriam-Webster online dictionary provides four definitions for the word child and that because the definition “a son or daughter of human parents” is listed fourth numerically, prioritized below three other meanings, the statute includes all children of the family.

Turpen also argued that the statute permits exemptions for children of which the head of the family is in loco parentis. He cited State v. Smith, 485 S.W.2d 461 (Mo. Ct. App. 1972).

The B.A.P. was not persuaded.  Contrary to Turpen’s argument, the court in Smith was not interpreting the word “child” but rather the phrase “any other person having the care and control.” The statute at issue here contains no comparable language regarding “any other person with care and control of such infant.” Section 513.440 plainly states that $350.00 exemptions are available only for the head of the family’s unmarried dependent children.

The bottom line here is that Missouri’s head of household exemption can only be used for situations where there is a parental relationship, either by birth or by adoption.  The ruling makes sense.  In order for the exemption to have some testability and some meaning, there needs to be a familial relationship that can be verified with some certainty.

Read More:  Secured Debts In Bankruptcy

The Good Faith Exception To The Exclusionary Rule Saves A Deficient Missouri Search Warrant

When will a search warrant be supported by probable cause?  What is the “exclusionary rule”?  And what is the “good faith exception” to the exclusionary rule?  These were some of the questions considered by the Missouri Court of Appeals last month (February 2015) in the case of State v. Gregory Robinson Sr, (WD 77664), which came out of Randolph County, Missouri.

The Defendant (Robinson) was charged with manufacturing drugs.  At his trial, his attorney filed a motion to suppress the evidence seized in the case, claiming that the search warrant used by the police officers did not show sufficient “probable cause” to search the premises.  He won his motion, and the evidence was suppressed.  The State, however, appealed.

And the appeals court ruled in the State’s favor.  It agreed with the trial court that insufficient probable cause existed, but it found that the “good faith exception” to the warrant requirement came into play.  In other words, no warrant was needed.  For this reason, the appeals court reversed.

We will examine the details here.  Prior to trial, Robinson filed a motion to suppress all evidence seized from his home. In that motion, he took issue with the statements of the two confidential sources. He argued that the statements should have fallen outside of the issuing judge’s determination of probable cause because the affidavit failed to meet the fundamental requirements to credit the statements of the confidential sources under Missouri law.

Robinson argued that the information provided by the confidential sources was unreliable because the affidavit did not include a specific time and place in which the sources observed the drug trafficking, because the sources did not specifically state that they personally observed Robinson possessing the drugs, because there was no statement regarding the qualifications of the sources, and because the information was stale by the time the officer applied for a search warrant.

So, because the warrant was deficient, all the evidence seized by the police in a search of Robinson’s residence should be “excluded” as the product of an invalid search.  Robinson also contended that the “good-faith exception” to the exclusionary rule should not be applied because the affidavit was so lacking in probable cause that the good-faith exception should not salvage the search, and would frustrate the basic purpose of the exclusionary rule.

The trial court was not impressed by the warrant.  The trial court stated that the information from the warrant’s sources contained “no specific time, or time frame, when the alleged illegal activity or contraband was observed”; “no facts that the informant personally observed [Robinson] in possession of contraband or personally observed seeing contraband” at the residence; and “no qualification” of the confidants’ reliability. The trial court found that the information was “stale” as to both sources and that the two sources’ statements failed to corroborate each.

On appeal, the State argued that the warrant was supported by probable cause.  Even if it was not, the State argued, then the “good faith” exception to the exclusionary rule should apply to save the evidence from suppression.  Even if there was not probable cause, the officers who executed the search reasonably and in good faith relied on a facially valid search warrant pursuant to United States v. Leon, 468 U.S. 897 (1984); and there was no pattern of systemic negligence by them.

But the appeals court found that the warrant was deficient.  It said:  “The ‘totality of the circumstances’ test simply cannot be stretched far enough to validate this warrant. State v. Brown, 741 S.W.2d 53, 57 (Mo. App. W.D. 1987).”

The general rule is that evidence obtained as a direct result of an unlawful search or seizure is considered “fruit of the poisonous tree” and is inadmissible at trial. However, the United States Supreme Court has held that evidence obtained by police officers in objectively reasonable reliance on a subsequently invalidated search warrant should not be suppressed pursuant to the exclusionary rule. State v. Clampitt, 364 S.W.3d 605, 613 (Mo. App. W.D. 2012).  This is the rule of United States v. Leon, cited above.

The Leon case held that “[w]hen police act in reasonable reliance on a facially valid search warrant issued by a detached and neutral magistrate, the exclusionary rule will not operate to bar evidence obtained under the search warrant, even though the warrant may be invalid.”  The Leon good-faith exception has been expanded to “police mistakes that are the result of negligence as opposed to ‘systemic error or reckless disregard of constitutional requirements.'”

The appeals court acknowledged that the warrant in this case was seriously deficient.  Yet it was prepared to overlook these problems, and said:

Though wrought with ambiguity, it is possible that the requisite details needed to support a probable-cause determination were in [the police officer’s] possession and that he simply failed to list them in his affidavit. It is entirely possible that each confidential source had a long-term history of providing law enforcement with reliable information and that each source had personally and recently witnessed the events they related to the officers.

So, the appeals court was willing to give the officers the benefit of the doubt.  While it appears troubling that the appellate court was willing to make broad speculations in favor of the State, it is clear from reading the case that the court was not at all pleased with the fact that the trial court conducted the suppression hearing with little regard for the interests of the State.

There was no evidentiary hearing.  The hearing was almost cursory in its quickness.  Further, the trial judge also commented that the warrant showed a pattern of “systemic negligence in regard to the careless preparation of warrant affidavits, which is a recurring problem of law enforcement of this State.”  The appellate court was not pleased.  It found that there was no basis for this statement in the record.

Thus, the appeals court was prepared to give the State the benefit of the doubt, possibly as a remedy for the way in which the suppression hearing had been conducted by the trial court.

Read More:  Disorderly Conduct Charges

Kansas Exemptions For Life Insurance Proceeds In Bankruptcy

Under what circumstances are life insurance policies exempt in bankruptcy? Can the exemption ever be forfeited? These were some of the questions considered by the 10th Circuit Bankruptcy Appellate Panel in the case of In Re Larry Erickson and Betty Moore, filed in August 2011 (KS-11-005). Life insurance proceeds are normally exempt in bankruptcy provided certain conditions are met, but this case had an unusual set of facts.

Husband and wife Larry J. Erickson and Betty L. Moore filed a petition for Chapter 7 relief on March 30, 2010. At the time the petition was filed, Erickson owned several insurance policies on his life with respect to which Moore was the designated beneficiary. Debtors neither scheduled the life insurance policies as assets, nor claimed them as exempt.

Erickson died on May 24, 2010, within 180 days of filing the petition, thereby implicating 11 U.S.C. § 541(a)(5)(C), which operates to include the life insurance proceeds into Moore’s bankruptcy estate. Moore did not notify the Chapter 7 trustee of Erickson’s death, or of her receipt of the life insurance proceeds as beneficiary.

The Trustee contacted the debtors’ attorney about the issue. The debtors amended their Schedules B and C to disclose and exempt out the life insurance proceeds. Moore claimed two of the policies exempt under Kansas Statute § 60-2313(a)(7),7 which exempts any interest in any policy of insurance upon a person’s life exempt from process pursuant to Kansas Statute § 40-414. Moore claimed the other policy exempt under Kansas Statute § 60-2308, which exempts pensions and benefits received from qualified retirement plans.

Trustee then objected to Moore’s claimed exemptions under Kansas Statute § 60-2313, and filed a motion for turnover with respect to the insurance proceeds.  The Trustee argued Moore did not have an exemptible interest in the life insurance policies as of the petition date, and that the insurance proceeds came into the bankruptcy estate pursuant to § 541(a)(5)(C) which (he alleged) supercedes any applicable state law.

The Trustee also argued Kansas Statute § 40-414 did not exempt the proceeds paid to Moore. The bankruptcy court ruled against the Trustee, and he appealed.  On one point, the BAP agreed with the Trustee. As of the petition date, Erickson, the insured, was still living. Therefore, Moore’s interest in the life insurance policies was limited to that of a designated beneficiary subject to divestment.

The court noted that the Kansas Supreme Court had ruled that “‘[a] beneficiary has only an inchoate right to the proceeds of a policy, subject to being divested at any time during the lifetime of the insured, by transfer, assignment, or change of beneficiary.’” Thus, Moore had only an expectancy and not a legal or equitable interest in the life insurance policies that she could exempt.

However, even though the debtor could not use that provision, it could still exempt out the insurance proceeds under Kansas state law. Bankruptcy exemptions in Kansas are determined by state law. The B.A.P noted that Kansas law exempts the proceeds of a life insurance policy, whether they be cash or surrender value in the hands of the insured or proceeds in the hands of the beneficiary. Kan. Stat. Ann. § 40–414(a)(4) expressly exempts the “beneficiary’s interest” from any claims of his creditors. Kansas courts have long held that proceeds of an insurance policy in the hands of a beneficiary or deposited in the beneficiary’s bank account retain their exempt character. Proceeds held by beneficiaries remain exempt, and this has been the rule for some time.

The Trustee’s argument that § 541(a)(5)(C) somehow “superseded” this Kansas exemption statute was found to be without merit. This argument is “completely contrary to § 522(b) which provides that debtors are entitled to certain exemptions notwithstanding § 541.” It was true that § 541(a)(5)(C) operated to bring the life insurance proceeds into Moore’s bankruptcy estate because she became entitled to them within 180 days of filing her petition. But she may still claim them as exempt pursuant to Kansas Statutes § 40- 414 and § 60-2313.

The B.A.P. emphasized, once again, the firm rule that exemptions should be “liberally construed” in favor of a debtor. In other words, if there is any doubt as to whether an exemption should be applied, courts should err on the side of applicability. This is in keeping with the intention of the Code of giving debtors a fresh start.

This case highlights two important points. One is the reminder of the exemptability of life insurance proceeds. The second point is the duties debtors have to be forthright with the bankruptcy court and the trustee. Attempts to conceal assets, or failures to disclose material assets, set the stage for bad things to happen. It was not clear if the debtor’s failure to disclose the receipt of the proceeds was deliberate or simply ignorance, but the point remains valid. The debtor could have saved herself a lot of trouble by simply disclosing the asset, and then exempting it out. Not doing so created a presumption (justified or not) that something amiss was happening.

Read More:  Myths And Misconceptions About Bankruptcy

“Jury Box” Or “Hot Box” Jury Selection In Kansas Felony Criminal Trials

Does it matter how a jury is selected in a criminal case?  Can the method used in seating a jury cause reversible error?  According to the Kansas Court of Appeals, the answer is yes.  A recent case discussed these issues and how they would be applied.  The case was State v. Crabb, decided in February of this year (KS Court of Appeals No. 110,673).

In the Crabb case, defendant Christopher Crabb appealed his conviction of one count of interference with law enforcement. Crabb claims the district court committed reversible error by using the so-called “hot-box” method of jury selection over Crabb’s objection instead of using the statutory method of jury selection set forth in K.S.A. 22-3411a.  He also argued that the district court erred in instructing the jury and that he was denied a fair trial based on prosecutorial misconduct and cumulative error.

Crabb had been charged with “running” from a law enforcement officer.  Crabb was arrested and taken into custody after allegedly running from law enforcement for an alleged parole violation.  On August 23, 2012, the State charged Crabb with one count of interference with law enforcement, a nonperson felony. The case proceeded to a jury trial in April 2013. The trial resulted in a deadlocked jury, so the district court declared a mistrial.  A second trial was conducted in 2013.  And this is where the problems began.

At the second trial, the trial judge announced that the court would be using the “hot box” method of jury selection.  What was this?  The judge elaborated:

“I decided that this morning we are going to have jury selection by what has commonly been referred to as hot box. That means we are going to call 12 people into the jury box who will be examined by the Court and by counsel. All other people will remain in the gallery and be able to listen to court proceedings. At the time that 12 people have been passed for cause, then each party will have the opportunity to exercise a peremptory challenge and the State will go first, if you wish to exercise one or you may pass. Then the defendant will have the opportunity to exercise a peremptory challenge or may pass, until such time as both parties have either passed, leaving 12 people in the jury box, or each party has exercised six peremptory challenges, then we will have our jury.”

Defense counsel objected to this method, and asked what was its statutory basis.  The Court replied that it was permitted.  The trial proceeded and Crabb was convicted of felony interference with law enforcement.  He appealed, claiming that the method of jury selection prejudiced him.  He argued that the jury selection procedure used by the district court violated K.S.A. 22-3411a, which provides that the court shall cause enough jurors to be called, examined, and passed for cause before any peremptory challenges are required.

Crabb cited State v. Mitchell, 234 Kan. 185, 192-96, 672 P.2d 1 (1983), to support his argument that the district court erred by failing to use the jury selection procedure set forth in K.S.A. 22-3411a. In Mitchell, the district court used a jury selection method identical to the hot-box method used by the district court at Crabb’s trial.

The Court found that the “hot-box” method was inferior, for two reasons.  First, as the Mitchell court noted, the hot-box method requires counsel to exercise their peremptory challenges piecemeal rather than in comparison to the entire panel. How, the Court asked, can a party properly exercise a peremptory challenge to strike a juror when the next juror seated by the court may be even worse, from that party’s perspective, than the juror who was initially challenged?

Second, under the hot-box jury selection method, after the parties have exercised all peremptory challenges and the final juror is seated in the jury box, that final juror may only be removed for cause. There is no remaining peremptory challenge for the final juror seated by the court. Thus, unless a party is successful in striking the final juror for cause, the final juror will remain on the jury.

Finally, the Court noted that the State could not prove that the error that Crabb suffered from the trial court was harmless.  The burden was on the State to prove that there had not been an error.  And this they could not do.  The Appellate Court noted that the “jury box” method was used in some federal courts, but this did not mean that it was authorized in the State of Kansas:

[T]he “jury-box” method, is permitted in some federal courts. See, e.g., United States v. Severino, 800 F.2d 42, 47 (2d Cir. 1986). The Second Circuit Court of Appeals has found that federal trial courts have broad discretion in determining how peremptory challenges will be exercised and that the hot-box method is not an abuse of that discretion so long as the defendant is not prevented from using all of his or her peremptory challenges. See United States v. Thompson, 76 F.3d 442, 451-52 (2d Cir. 1996). But the fact that some federal courts permit the use of the hot-box jury selection method does not mean that Kansas courts are free to ignore the mandate of K.S.A. 22-3411a for selecting juries in felony trials. Likewise, the fact that some federal courts allow the hot-box method of jury selection does not mean that a Kansas court’s failure to comply with K.S.A. 22-3411a is always harmless error.

Just because the jury box method was used in federal courts did not make it acceptable in Kansas.  In short, the Appellate Court ruled that there was one method—and one method only—for jury selection in felony trials in the State of Kansas.  And this was the method laid out in K.S.A. 22-3411a.  Because this method had not been used, reversible error had occurred and Crabb was entitled to a new trial.  This decision upholds the far-reaching jury selection rights that defendants have in felony criminal cases in Kansas.

Read More:  Violent Crimes

What Is A “Core Proceeding” In A Bankruptcy Case?

What is a “core proceeding” arising from a bankruptcy case?  What standard is used to evaluate this issue?  These were the questions asked by the Eighth Circuit case of In Re Schmidt, decided in 2011 (11-6028 to 11-6030).  In this case, Klein Bank appealed the bankruptcy court’s order  denying its motions to remand its replevin actions which had been removed from the state court to the bankruptcy court. In denying the motions, the bankruptcy court had originally concluded that the replevin actions were core proceedings. The Eighth Circuit B.A.P. disagreed, stating that  core proceedings are limited to those “arising under or arising in” a bankruptcy case.

In 2011, Klein Bank filed two lawsuits against David Schmidt, Douglas Schmidt, and Dale Schmidt, and several of their companies in the District Court of Wright County, Minnesota.  The lawsuits were replevin actions.  A replevin action is a civil action undertaken for the purpose of recovering some secured collateral, when there has been a default on the loan.  Then on February 28, 2011, Douglas Schmidt, David Schmidt, and Dale Schmidt, along with their respective spouses, all filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the District of Minnesota.  Neither F.H. Schmidt, Schmidt Electric, nor any of the other corporate defendants in the Replevin Actions filed for bankruptcy relief.

The Schmidts then filed Notices of Removal to United States Bankruptcy Court pursuant to 28 U.S.C. § 1452 in the replevin action.  The notice of removal asserted that (1) the respective Debtors have a legal interest in the property being replevined and, therefore, these are core proceedings which cannot be resolved without affecting the Debtors’ bankruptcy estates; (2) the Replevin Actions are related to the Debtors’ respective bankruptcy cases and, therefore, it would be more efficient and expeditious to have them heard in bankruptcy court; and (3) the United States District Court for the District of Minnesota has original jurisdiction under 28 U.S.C. § 1334.

The Bankruptcy Court determined that the replevin actions were core proceedings and, therefore, mandatory abstention under § 1334(c)(2) did not apply. The Court also declined to abstain under § 1334(c)(1)’s discretionary abstention provision, and denied the requests to remand based on equitable grounds under 28 U.S.C. § 1452(b). Klein Bank appealed.

The BAP reasoned as follows.  Section 1334(a) gives the federal district courts “original and exclusive jurisdiction over cases under title 11” – in other words, bankruptcy cases themselves. Section 1334(b) gives federal courts non-exclusive jurisdiction over “all civil proceedings arising under Title 11, or arising in or related to cases under Title 11.” Such civil proceedings are divided into two categories: core proceedings and noncore, related proceedings.  Core proceedings are those cases arising under Title 11, or arising in a case under Title 11.

The bankruptcy court originally hearing the case determined that the replevin actions were core, concluding that they may fall within as many as three of the sixteen different types of core proceedings enumerated in 28 U.S.C. § 157(b)(2). The bankruptcy court had found that the replevin actions fell within § 157(b)(2)(A) (matters concerning the administration of the estate), § 157(b)(2)(B) (the allowance or disallowance of claims against the estate), and § 157(b)(2)(O) (other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtorcreditor or the equity security holder relationship).

In essence, the Bankruptcy Court concluded that, since the Debtors showed that they would not likely be successful in their reorganization efforts if Klein Bank replevined the assets of their non-debtor corporations, that litigation falls within those three examples in § 157(b)(2). Thus, the Bankruptcy Court originally concluded, they are core, essentially regardless of whether they actually arose under or in the Debtors’ bankruptcy cases.  But the BAP did not agree with this reasoning.

According to the BAP, the replevin actions did not “arise under” Title 11 because they do not involve causes of action expressly created or determined by the Bankruptcy Code, nor do they involve a right created by federal bankruptcy law. In addition, they do not “arise in” the bankruptcy cases because they would, and indeed did, exist regardless of the bankruptcy filing.

Determinative in this case was the fact that a new Supreme Court decision had just come down that affected things.  In Stern v. Marshall, the United States Supreme Court rejected the notion that § 157 embodies a category of matters that are core, but do not arise under or arise in a bankruptcy case.  As the Court stated, “core proceedings are those that arise in a bankruptcy case or under title 11.”  That is so regardless of whether the matter can be fitted into one of the enumerated examples in § 157(b)(2).

Since the replevin actions did not arise under or arise in the Debtors’ bankruptcy cases, they are, simply, not core.  Basically the BAP also pointed out that the corporations should also have filed a bankruptcy case, not just the officers personally.  This was not done.  The lesson seems clear:  if there are issues going on both for a debtor personally and for his or her corporation, filing two cases should be considered highly.  Had the corporations also filed for Chapter 11, the outcome would have been different.

Read More:  Restaurant Bankruptcy And Food Supplier Bankruptcy 

Director Must Prove Elements Of Refusal Of Breath Test In DWI Cases

In a recent decision, the Missouri Court of Appeals upheld the standard required for the Director of Revenue to prove in DWI cases involving an alleged refusal to submit to a breath test.  The case was Ryan McPhail v. Director of Revenue (ED101307, from December 2014).  The Appellant, McPhail, argued that the Director had not proved he refused to submit to a breath test under RSMo. 577.041.1.  The Appellate Court agreed with him.

The facts were as follows.  The police officer conducted a traffic stop after observing a vehicle swerving and hitting parked cars.  The officer told the driver to get out and sit on the curb, and then told him to get his license and insurance.  The officer claimed he noticed signs of impairment, like slurred speech and stumbling; he asked McPhail to perform sobriety tests and take a breath test, and McPhail allegedly refused.  He was then arrested.

The officer informed him of Missour’s Implied  Consent Law and asked him to take a chemical breath test.  McPhail asked to speak to an attorney.  The officer told McPhail that he had twenty minutes to contact his attorney, and then he would again be asked to take the test.  McPhail was booked and processed for DWI.  The trial court found that he had “refused” to submit to a breath test, and that he would have his license revoked for one year.  He then appealed.

On appeal, McPhail argued that the Director of Revenue failed to establish a violation of the Missouri Implied Consent Law for two reasons:  (1) his refusal was equivocal in that it was conditioned on speaking to his attorney; and (2) there was no evidence that the officer asked McPhail to submit to a breath test after the 20 minute statutory period had expired.  Thus, he took the position that he never voluntarily and unequivocally “refused” to submit to a chemical test as required by RSMo. 577.041.1.  The appeals court agreed.

In Missouri, a license revocation for a refusal to submit to a chemical test will be upheld if: (1) the driver was stopped and arrested; (2) the arresting officer had reasonable grounds to believe that the driver was in an impaired condition; and (3) the driver refused to submit to a breath test.  Brown v. Dir. Of Revenue, 164 S.W.3d 121, 125 (Mo. App. E.D. 2005).  The Director is required to prove these elements.

What is a “refusal”?  It is a “declining on one’s own volition to take the test…when requested by an officer to do so.” Webb v. Dir. Of Revenue, 157 S.W.3d 769, 772 (Mo. App. E.D. 2005).  A conditional refusal is also a refusal, except when a driver qualifies a refusal on his or her having an opportunity to contact an attorney.  Id.  Section 577.041.1 states that when a driver requests to speak to an attorney, he or she must be given a 20-minute period of time in which to do so.  Once this period expires, if the driver continues to refuse to submit to any test, it will be deemed a refusal.  RSMo. 577.041.1.

Also, if the driver abandons his attempt to contact an attorney and makes a final decision before the 20 minute period expires, then it is a refusal.  Bacandreas v. Dir. Of Revenue, 99 S.W. 3d 497, 500 (Mo. App. E.D. 2003).

In McPhail’s case, it was clear that he never abandoned his attempt to speak to an attorney.  The alcohol influence report (AIR) that the officer filled out was silent about the time sequence of events, and this was something that troubled the appellate court.  The court stated that “it is entirely unclear from the AIR and its narrative whether Appellant continued to refuse to take the breath test after being given an opportunity to contact an attorney.”

Since the burden was on the Director to prove the required elements, the court had to look at what it was given in the record.  And the AIR here was simply flawed.  This was something that the court found significant:

This is a proceeding that carries with it immense repercussions for a petitioner.  There is no legal principle or presumption that allows a court to divine the officer’s meaning or to supply missing clarification where seeming errors and omissions in the AIR and its narrative create ambiguity.

All the court had in front of it was the AIR.  There was no live testimony. All it could do was base its decision on what it had in front of it, and this was deficient.  Since the officer was not called to testify, the court had to go with what it had.  And this fell short of what the director was required to prove under the statute.  Thus, the court found that the director failed to show that McPhail refused to submit to a chemical test.

Read More:  Expungement Of A DUI In Missouri

Charitable Contributions In Bankruptcy: What Is Reasonable?

How much charity should a person in bankruptcy be able to contribute?  At some point, can donations become excessive?  These issues often come up in bankruptcy cases.  Some debtors need to tithe as part of their religious obligations.  Some debtors have a need to contribute as part of their work obligations.  These were the questions under consideration in a recent 10th Circuit bankruptcy appellate case from 2012.  The case was In Re McGough (B.A.P. No. CO-11-038).

The McGoughs filed a Chapter 7 case in 2009. On November 18, 2010, the Trustee initiated an adversary proceeding by filing a complaint against the Word of Life Christian Center (or WLCC, the recipient of the debtors’ charitable contributions) seeking to avoid and recover all of the charitable contributions it had received from the Debtors during 2008 and 2009, which totaled $4,758. In its answer to the complaint, the Church admitted its receipt of donations in the specified amounts, but argued that they were excepted from avoidance as charitable contributions within the “safe harbor” provided by 11 U.S.C. §548(a)(2).

The Trustee looked back to the two years before the filing of the bankruptcy.  He argued that because the charity constituted more than 15% of the debtors’ gross income, all of the charitable contributions should be recoverable by him for the benefit of the estate.  WLCC argued that only the portion of the charity that exceeded 15% should be recoverable by the Trustee.

The issue on appeal was clear.  It was whether §548(a)(2)(A) protects charitable donations up to 15% of a debtor’s gross annual income, even when the total of the donations exceeds that threshold, or whether exceeding the threshold removes the entire donation from protection.  Some debtors like to contribute a large amount of money to charities.  The Trustee took the position that contributions over 15% were excessive, and that the other creditors should be able to recover some of this money.  The Court accepted that the Debtors made donations to a qualified charitable organization that exceeded 15% of their gross annual income in both 2008 and 2009.

Section 548 of the Bankruptcy Code allows bankruptcy trustees to avoid and recover certain transfers made by debtors prior to the filing of their bankruptcy petition on the ground that the transfers were either actually or constructively fraudulent.  This rule is not unlimited, of course.  However, a debtor’s constructively fraudulent charitable donation cannot be avoided by the trustee if the transferee establishes that: 1) it is a qualified religious or charitable entity; and 2) the amount of the donation is not more than 15 percent of the debtor’s gross annual income in the year of the transfer.

The Trustee asserted that § 548(a)(2)(A) is clear and unambiguous on its face, and its plain reading provided a safe harbor only if the contributions did not exceed a minimum threshold, but provides no safe harbor if the threshold (15%) is exceeded.  The BAP disagreed, saying that the statute was not clear on its face.  In fact, it was ambiguous.  So the Court had to look to other authority.  The Court said:

We consider the statement in the House Report that accompanied this statute’s revision in 1998 that “the safe harbor protects annual aggregate contributions up to 15 percent of the debtor’s annual income” to be particularly instructive. We read the statute’s provision of protection “up to” a threshold amount to mean that is the most that will be given. We do not read that to mean that, once the threshold is crossed, all protection disappears.

When computing their disposable income, Chapter 13 debtors thus may deduct their charitable donations “in an amount not to exceed” 15% of their gross income. This provision plainly reduces disposable income in Chapter 13 cases by an amount up to 15% of gross income. As such, Chapter 13 debtors’ post-filing charitable contributions are deductible up to the threshold amount, and would be considered to be not open to scrutiny by the bankruptcy court.

So, when all was said and done, the Trustee could only avoid a portion of the charitable contributions.  And this amount was the amount that exceeded 15% of the debtors’ income.  This decision makes sense, and should be a reassurance to the many debtors out there who perform tithing obligations, or other charitable obligations during the year.

Read More:  Damages For Violations Of The Automatic Stay In Bankruptcy