Bankruptcy Law

David N. Gunn

Refundable Earned Income Tax Credit exempt in bankruptcy as a public assistance benefit. In re Corbett (Bankr. W.D. Mo 2013, case 13-60042), Federman, J.

A Chapter 7 bankruptcy debtor claimed the portion of her tax refund attributable to the Earned Income Tax Credit (“EITC”) exempt her bankruptcy estate pursuant to § 513.430.1(10)(a), RSMo. This statute exempts money received as a public assistance benefit from attachment by judgment creditors. The bankruptcy trustee objected to the claimed exemption under the ruling of In re Benn, 491 F.3d 811 (8th Cir. 2007), which holds that statutes require specificity in order to be deemed bankruptcy exemption statutes. The trustee argued that the term “public assistance benefit” was not specific enough to include EITC, or in the alternative the EITC was not a public assistance benefit.

Held: Trustee objection overruled.
The court examined the legislative history of EITC and reasoned that it was in fact intended to be a public assistance benefit as it provides monetary assistance through the tax system for low income families with children. The court further concluded that the holding of Benn did not require the degree of specificity advocated by the trustee and that to do so would be overly burdensome on the legislature.

Employment bonuses awarded post-bankruptcy filing for work performed prior to filing is not property of the bankruptcy estate if the employer has absolute discretion as to whether or not to make the award. Seaver v. Klien-Swannson, (8th Cir. BAP 2013, case 12-6054), Federman, Schermer, and Nail, Js.

Chapter 7 debtor was eligible to receive bonuses from her employer for work performed prior to the debtor filing bankruptcy. However, the debtor’s supervisor had discretion as to how much money, if any, each of the employees she supervised would receive.

The debtor did in fact receive a substantial monetary award during the pendency of the bankruptcy and the bankruptcy trustee demanded that this money be turned over as property of the bankruptcy estate under the theory that the award was for pre-bankruptcy work. The debtor refused and the trustee brought an action pursuant to 11 U.S.C. § 727(d)(2) to revoke the debtor’s discharge for failure to turn over property of the estate. The bankruptcy court ruled in favor of the trustee and revoked the debtor’s discharge. The debtor appealed to the 8th Circuit Bankruptcy Appellate Panel.

Held: Judgment reversed.
Bankruptcy code 11 U.S.C. § 541(a)(1) states that, with limited exception, all legal and equitable property interests of the debtor at the commencement of bankruptcy belong to the bankruptcy estate. This includes contingent property interests not yet realized by the debtor.

On appeal, the trustee’s position was that the employer’s discretion regarding the award constituted a contingency and because the award was for work performed prior to the bankruptcy, the debtor’s interest in the award was a contingent property interest at the commencement of the case. The court rejected this argument because the employer’s discretion was absolute and therefore the debtor had no means of legally compelling the employer to award the bonus to her. As such, the debtor had no interest in the money at the commencement of the case, only hope and expectation.