Wednesday, February 18, 2009

Notes on Kentucky exemption law

Kentucky exemption law

See: Kentucky exemption statutes

KRS §427.005 - Definitions.

As used in this chapter:

  • (1) The term "earnings" means compensation paid or payable for personal services, whether denominated as wages, salary, commission, bonus, or otherwise, and includes periodic payments pursuant to a pension or retirement program.

  • (2) The term "disposable earnings" means that part of the earnings of any individual remaining after the deduction from those earnings of any amounts required by law to be withheld.

  • (3) The term "garnishment" means any legal or equitable procedure through which the earnings of any individual are required to be withheld for payment of any debt.

  • (4) The terms "household furnishings, jewelry, personal clothing, and ornaments" mean clothing, furniture, appliances, linens, china, crockery, kitchenware, and personal effects of an individual and the individual's dependents, but do not include:

    • (a) Works of art;
    • (b) Electronic entertainment equipment (except to the extent of one (1) television and one (1) radio);
    • (c) Antiques; and
    • (d) Jewelry other than wedding rings.

The language contained in KRS §427.005(1) through (3) is exactly the same as the language of 15 U.S.C. §1672 (Pub. L. 90-321, title III, Sec. 302, May 29, 1968, 82 Stat. 163.), which was enacted in Title III of the Federal Consumer Credit Protection Act of 1968, effectively preempting, in part, State laws relating to wage garnishment.

The Congressional findings and declaration of purpose, 15 U.S.C. §1671, reads as follows:
  • (a) Disadvantages of garnishment

    The Congress finds:

    • (1) The unrestricted garnishment of compensation due for personal services encourages the making of predatory extensions of credit. Such extensions of credit divert money into excessive credit payments and thereby hinder the production and flow of goods in interstate commerce.
    • (2) The application of garnishment as a creditors' remedy frequently results in loss of employment by the debtor, and the resulting disruption of employment, production, and consumption constitutes a substantial burden on interstate commerce.
    • (3) The great disparities among the laws of the several States relating to garnishment have, in effect, destroyed the uniformity of the bankruptcy laws and frustrated the purposes thereof in many areas of the country.
  • (b) Necessity for regulation

    On the basis of the findings stated in subsection (a) of this section, the Congress determines that the provisions of this subchapter are necessary and proper for the purpose of carrying into execution the powers of the Congress to regulate commerce and to establish uniform bankruptcy laws.

In Rice, Seiller, Cantor, Anderson & Bordy v. Fitzgerald, 824 S.W.2d 435 (Ky.App. 1992) the question before the court was "whether proceeds from a dairy farmer's sale of milk constitute 'earnings' within the meaning of KRS 427.005. If so, these 'earnings' are exempt under KRS 427.010 and partially protected from garnishment."

The Kentucky Court of Appeals cited with approval from Coones v. Federal Deposit Ins. Corp., 796 P.2d 803 (Wyo. 1990), construing a statute very similar to Kentucky's, "profits and business earnings are outside the meaning of wage and salary," and Roberts v. Frank Carrithers & Bros., 180 Ky. 315, 202 S.W. 659 (1918), which defined "wages and salary as consideration given by an employer to one who is providing the employer services."

Held: "The language of KRS 427.005 is limited in its application and does not include all compensation paid. We determine that proceeds from a diary farmer's sale of milk do not constitute "earnings" as defined in KRS 427.005. And, therefore, the proceeds from such a sale are not exempt under KRS 427.010."

The appeal in Mickler v. Mickler, 245 S.W.3d 809 (Ky.App. 2008) involved a garnishment of money owed by various insurance companies to a physician for medical services provided through his private practice. Although the Kentucky Court of Appeals approved the idea that "accounts receivable" could fall within the meaning of KRS §427.005's definition of "earnings" if the money owed "was actually derived from the personal services of the debtor," the decision hinged upon the debtor's failure to meet a burden to prove the funds represented fees for the personal professional service delivered individually by the debtor, and not also including fees for services delivered by other staff and employees in the medical practice. Specifically, there was no obligation upon the trial court "to determine a formula by which to segregate the funds attributable to Dr. Mickler's work from those earned by others."

Reinle v. Commonwealth, 170 S.W.3d 417 (Ky.App.2005) held that proceeds from the forced sale of real property to satisfy a judgment for child support was not "earnings."

Curl v. Sparkle Brite Inc., 518 S.W.2d 775 (Ky.App.1975) was a decision under prior law (KRS §425.210 Repealed, 1976) recognizing the "right of an employer to set off as against an attaching creditor such amounts which the employer could validly set off against the claim of the employee." There is an unanswered question if this right still exists under the current statutory scheme.

KRS §427.170 - Federal bankruptcy code exemptions applicable in Kentucky (but only in Bankruptcy proceedings).

In 2005 the Kentucky legislature amended K.R.S. 427.170 to read:

An individual debtor domiciled in this state is authorized to exempt from property of said debtor's estate the property specified under 11 U.S.C. sec. 522(d).

Acts ch. 141, sec. 1, effective June 20, 2005

MPM Financial Group, Inc. v. Morton
In 2007 the Kentucky Court of Appeals decided MPM Financial Group, Inc. v. Morton construing K.R.S. 427.170 to provide a general expansion of property exempt from execution for all purposes, and not just for Bankruptcy purposes.

In August, 2008, the Kentucky Supreme Court granted discretionary review of this decision. Its opinion was rendered June 25, 2009, and reversed the Kentucky Court of Appeals decision. See: MPM Financial Group, Inc. v. Morton, 289 S.W.3d 193 (2009).

Leqal word du jour - preemption

"Federal statutes impinging upon important state interests "cannot . . . be construed without regard to the implications of our dual system of government. . . . When the Federal Government takes over . . . local radiations in the vast network of our national economic enterprise and thereby radically readjusts the balance of state and national authority, those charged with the duty of legislating [must be] reasonably explicit." F. Frankfurter, Some Reflections on the Reading of Statutes, 47 Colum. L. Rev. 527, 539-540 (1947), quoted in Kelly v. Robinson,479 U.S. 36, 49-50 n. 11, 93 L. Ed. 2d 216, 107 S. Ct. 353 (1986). It is beyond question that an essential state interest is at issue here: we have said that "the general welfare of society is involved in the security of the titles to real estate" and the power to ensure that security "inheres in the very nature of [state] government." American Land Co. v. Zeiss,219 U.S. 47, 60, 55 L. Ed. 82, 31 S. Ct. 200 (1911)."
BFP v. Resolution Trust Corporation, 114 S. Ct. 1757, 128 L. Ed. 2d 556 (1994).

In the legal system of the United States, preemption generally refers to the displacing effect that federal law will have on a conflicting or inconsistent state law. The Supremacy Clause (Article VI, section 2) of the United States Constitution states that The Laws of the United States, (which shall be made in Pursuance to the Constitution), shall be the supreme Law of the land. Thus, when there is a conflict between a state law and federal law, the federal law (subject to the Tenth Amendment and Fifth Amendment and other Constitutional Law) trumps – or "preempts" – the state law, according to this theory. The term is also sometimes used to refer to the displacing effect state laws might have on ordinances enacted by municipalities.

The term "preemption" is also used in federal statutes in the context of land, such as in the historic Preemption Act of 1841, which allowed settlers the opportunity to legally obtain title to land if a settler remained on a plot of land for a certain time. This article does not cover that legal use of the term.