Benn And The Tax Refund Exemption In Bankruptcy Part II

(Reprinted with permission. Bankruptcy Law Network October 2011)

By Wendell Sherk, Missouri Bankruptcy Attorney

In the previous installment, we discussed the 8th Circuit’s Benn decision which began a sea change in Missouri bankruptcy exemptions.

To see how Benn‘s unusual opinion created  uncertainty in Missouri bankruptcies, one need look no further than our state teacher pension plans.  Prior to 2010, almost no one seriously imagined a state employee’s pension plan would be unprotected in bankruptcy.  Well-established pensions are like battleships, with layer after layer of armor protecting them from creditors typically.  And no single attack can get through.

In Missouri the pension plan law itself provides protection:

Neither the funds belonging to the retirement system nor any benefit accrued or accruing to any person…shall be subject to execution, garnishment, attachment or any other process whatsoever, nor shall they be assignable….  (169.090 RSMo.)

Yet Bankruptcy Judge Arthur Federman of the Western District of Missouri applied Benn and found Missouri’s laws wanting.  He reasoned Benn‘s reading of the Bankruptcy Code command that the state’s lawmakers use precise language — “magic words” in lawyer parlance — in order for a law to be an exemption in bankruptcy cases.

Benn said:

“Exemption” is a term of art in bankruptcy, and we agree with the dissenting judge of the BAP that “[w]hile exemption may mean different things in different contexts, in the context of Sec. 522, it refers to laws enacted by the legislative branch which explicitly identify property [that] judgment-debtors can keep away from creditors for reasons of public policy. (Benn at 814)

It is interesting to note however that the Bankruptcy Code itself does not actually define the word “exemption” but only defines how (and from what sources of law) a debtor may “exempt” property from the estate.

Judge Federman’s In re Nathan Smith opinion argues that the legislature enacted specific exemption laws for other pension plans but the teacher pension at issue did not use the magic word “exempt.”  And further the judge could find no legislative history to indicate the Missouri General Assembly intended to protect the pensions in bankruptcy cases.  (The lack of evidence is not surprising as the Missouri legislature does not maintain legislative history, though.)

Before any Missouri teacher panics, even Judge Federman acknowledges in a final footnote that there are other means than the statute at issue to preserve the pension in bankruptcy.  But he did expand on the dictum in the Benn decision and conclude that Missouri in fact does have a separate system of protections for consumers, inside or outside of bankruptcy, because the 8th Circuit “was quite clear that, in order to create an exemption in bankruptcy, the Missouri legislature must use that word [exemption].”

So prior to Benn, the laws of exemptions had generally been interpreted expansively to benefit the debtor because bankruptcy is considered a remedial process to help debtors obtain a fresh start. Indeed, prior to Benn, this same statute had been upheld as a bankruptcy exemption in In re Olson, 108 B.R. 232 (Bankr.W.D.Mo. 1989).  Indeed, the ruling seems to presuppose that the pension plan was even property of the estate, which seems unlikely under the Supreme Court’s 1992 Patterson v. Shumate decision.

Yet after Benn, the law of exemption became a narrowly-defined process.  In the next installment, we’ll discuss other issues created and then how things may recover in the future.


Wendell J. Sherk is an attorney in St. Louis, practicing primarily in consumer bankruptcy and debtor representation. He graduated from Washington University in 1986 and Washington University School of Law in 1989. He is a principal of the firm Sherk & Swope, LLC as well as a member of the National Association of Consumer Bankruptcy Attorneys, American Bankruptcy Institute, and The Missouri Bar. He contributes to the bankruptcylawnetwork.com blog and his e-mail is: [email protected].


No Author Biography has been linked to this Article.

Related Articles

NN Photo
March 20, 2022
A New Jersey attorney is the subject of a legal malpractice complaint for allegedly failing to properly preserve a marital tort claim as an exception to discharge. Asma J. Warsi v. Adrian J. Johnson (Case No. MID-L-001023-22, Super. Ct. of N.J., Middlesex County); In re Chaundry, 569 B.R. 372 (Bankr. D. N.J. 2017). In Chaundry, Creditor Wife had a marital...
Members
Smith Daryl Trustee 2024
February 4, 2024
Daryl J. Smith, Esq., was appointed as the Chapter 13 Standing Trustee for the Western District of Louisiana on October 1, 2023. Smith’s office is in Shreveport, Louisiana.
Members
gustafson2
Conduit vs. Direct Mortgage Payments – The Case Law To Consider1 The requirement that debtors pay their mortgage payments to their Chapter 13 Trustee as a “conduit” has advantages and disadvantages. One advantage is the fact that the Chapter 13 Trustee’s records are readily accepted by both the court and creditors in the event of a payment dispute. This advantage...
Members
M Joseph Photo 2-1-22
June 12, 2022
It is always troublesome when an individual bankruptcy petition is filed by power of attorney. It may be less of a concern in a chapter 7 case when the debtor is in the military, incarcerated, or temporarily disabled. More worrisome is the incompetent or advanced aged debtor who has been placed in a chapter 13 by someone holding a power...
Members
Brandi headshot
November 19, 2023
“The chief obstacle we have had since starting Zoom revolves around the lack of high-speed internet in our division.”
ahern_larry_regular
April 10, 2022
Larry Ahern this week begins a two-part examination of whether a Chapter 13 trustee may retain fees paid without a confirmed plan before dismissal. Part 1 is a detailed analysis of McCallister v. Evans, a recent case accepting the trustee's position considering a division in the caselaw and analyzing in detail the relevant statutes. May the Chapter 13 Trustee Keep...
Members
October 11, 2020
By Cathy Moran, Esq. (Redwood City, CA) Once again, I sat in a 341 meeting where the trustee’s representative purported to deliver vital information to the assembled debtors. She had a captive audience of anxious listeners. She had ostensible power of life and death over their financial future. They needed to know what she had to say. But as communication,...
Members
April 18, 2021
Bankruptcy Courts Grapple with the “COVID-19 Discharge” APPENDIX B Side-by-Side Comparison of 11 U.S.C. § 1328(b)-(i) and 11 U.S.C. § 1141(d)(5)(B)-(C) 11 U.S.C. § 1328(b)-(i) Discharge 11 U.S.C. § 1141(d)(5)(B)-(C) Effect of Confirmation (b) Subject to subsection (d), at any time after the confirmation of the plan and after notice and a hearing, the court may grant a discharge ....
Members
moran_cathy
December 3, 2023
“We’re confronted with a dilemma: if we pay practitioners fairly,we price ourselves out of reach of the very individuals we hope to help.”
Members
March 20, 2022
“The trouble with retirement is that you never get a day off!” [Abe Lemons] There is no better way to describe Robert Wilson in his career as an attorney, as a trustee, in his life thus far, and surely in his retirement! He has filled and will continue to fill every second of every day with meaning and purpose and...

Looking to Become a Member?

ConsiderChapter13.org offers a forum to advance continuing education of consumer bankruptcy via access to insightful articles, informative webinars, and the latest industry news. Join now to benefit from expert resources and stay informed.

Webinars

These informative sessions are led by industry experts and cover a range of consumer bankruptcy topics.

Member Articles

Written by industry experts, these articles provide in-depth analysis and practical guidance on consumer bankruptcy topics.

Industry News

The Academy is the go-to source for the latest news and analysis in the Chapter 13 bankruptcy industry.

To get started, please let us know which of these best fits your current position: