Claiming a Kentucky Exemption: Bank Accounts

Question: Why do creditors garnish bank accounts?

Answer: Sutton's Law. Because that's where the money is.

An assortment of State and Federal statutes provide a variety of debtor exemptions for retirement benefits, worker's compensation benefits, alimony payments and more. Generally, this means that creditors cannot go directly after the source of these funds and garnish them before they are paid. However, once these benefits are paid to the debtor and the funds are deposited in the debtor's bank account, it is a different issue. Are these exempt benefits subject to a bank garnishment?

In Matthews v. Lewis, 617 S. W. 2nd 43 (1981), the Kentucky Supreme Court addressed the following issue:

"The question presented by this case is whether assets received from a statutorily exempted source and placed by the recipient into his or her bank checking account lose their exempt status."

 After a detailed discussion of Kentucky precedent and cases from several other jurisdictions, the Kentucky Supreme Court held:

" . . . . unless they provide clearly to the contrary, Kentucky's exemption statutes, including but not limited to KRS 342.180, extend protection to deposits in bank checking accounts so long as those deposits can be identified as or traced to payments of exempt funds."

 So, basically . . . no. Subject to the debtor's burden of proving the bank account funds originate from an exempt source, they may not be garnished to satisfy an ordinary debt. Debts for taxes and child support are a different story.

The court stated, "The right to a subsistence way of life is considered fundamental," and quoted from Kruger v. Wells Fargo Bank, 11 Cal.3d 352, 113 Cal.Rptr. 449, 521 P.2d 441 (1974).

"The legislative objective in providing unemployment compensation and disability benefits — to furnish the unemployed worker and his family with a stream of income to defray the cost of their subsistence — would probably fail if creditors could seize that income and apply it to past debts. Consequently the Legislature provided that unemployment and disability benefits cannot be subjected to attachment or execution."

The court continued with,

"Our society's contemporary social programs exhibit a philosophy of relief for the distressed, the impoverished, and the victims of personal and financial catastrophes among us. The Workers' Compensation Act is simply one aspect of those social programs. Kentucky's exemption statutes are simply another necessary instrument in the overall scheme of social welfare programs. They are the teeth in the prosecution given certain deserving victims from their creditors."

The laws applicable in Kentucky provide many protections for debtors in distress, but debtors must be aware of these legal rights and they must also take effective action to assert these rights when they are threatened.

Claiming a Kentucky Exemption: Disability Indurance

I believe I once read through a disability insurance policy some forty years ago, but it was not a memorable experience. Nor is it an experience that I yearn to repeat anytime soon. I'm not that type of glutton for punishment.

So, everything I have to say about privately purchased disability insurance policies is rank speculation and conjecture. I do not know what any standard private disability insurance policy says. Caveat emptor.

In MPM Financial Group, Inc. v. Morton, 289 S.W.3d 193 (2009), the Kentucky Supreme Court granted discretionary review of an unpublished Kentucky Court of Appeals opinion which construed K.R.S. 427.170 to provide a general expansion of property exempt from execution for all purposes, and not just for Bankruptcy purposes, and reversed the Court of Appeals. The most interesting part of the case and the appeal was the part not decided.

The case arose when MPM Financial Group sought to garnish private disability insurance benefits being paid to Morton. In addition to claiming that these disability insurance benefits were exempt from execution under KRS §427.170, which didn't work out for Morton on appeal, he also claimed the exemption provided by KRS §427.150(2)(d):

"A payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;"

Yeah, disability insurance benefits being compensation for loss of future earnings makes a certain amount of sense, but the trial court ruled that Morton's disability payments were not exempt under KRS §427.150(2)(d). The trial court agreed with Morton that the disability insurance benefits were exempt under KRS §427.170. MPM Financial appealed the trial court's application of KRS §427.170 to all debtors, and the applicability of KRS §427.150(2)(d) was procedurally neglected by those involved in the appeal.

"We note that, in Morton's brief, he argues that the trial court erred when it held that KRS 427.150(2)(d) did not apply to his disability benefits. KRS 427.150(2)(d) contains an exemption for debtors who receive compensation for the loss of future earnings. Morton argues that his disability benefits constitute compensation for the loss of future earnings. While Morton's argument is interesting, he failed to file a cross-appeal regarding the issue; therefore, we cannot address its merits since it is not before us."

Likewise, before the Kentucky Supreme Court, "Morton did not file a cross-petition for discretionary review with respect to the availability of an exemption under KRS 427.150." Both the unpublished Court of Appeals opinion and the Kentucky Supreme Court opinion in MPM Financial Group, Inc. v. Morton are silent on the question: Does KRS §427.150(2)(d) provide a non-bankruptcy exemption for benefits paid under a private disability insurance policy?

There are two critical components to KRS §427.150(2)(d):

1. The payments are compensation for loss of future earnings, and;
2. The payments are reasonably necessary for support.

Each of these factors would be the focus of considerable proof and evidence at the trial level. The logic of equating "disability insurance" with "loss of future earnings" is not sufficiently compelling. It may be true in whole or in part, as an issue of fact, but it is not necessarily true as a matter of law. Disability insurance benefits might conceivably be wholly unrelated to future earnings, if the insurance policy is a mere casino betting game. Or, the terms of the policy may connect policy premiums and benefits with present earnings as a predictor of future earnings. However, payout benefits may include compensation for expenses associated with a disability that are unrelated to the insured's loss of future earnings resulting from the disability.

Also, KRS §427.150(2)(d) provides an exemption only "to the extent reasonably necessary for the support of the debtor and any dependent of the debtor."

As with so many things in the law, winning on the facts is a better bet than trying to win with an abstract appeal to logic. With proper proof of the terms of the disability insurance policy, the nature of the disability and how insurance benefits relate to the insured's loss of future earnings, coupled with evidence the disability insurance benefits are reasonably necessary for support, a good case can be made.

Notes: Appeal of a Kentucky eviction

Background

When a Kentucky landlord wishes to regain possession of real estate occupied by an uncooperative tenant, there is a special statutory procedure called Forcible Entry and Detainer, KRS § 383.200, et seq.. This is commonly known as an action for eviction. The law of Forcible Entry and Detainer applies uniformly throughout the Commonwealth to residential, commercial and agricultural tenancies, and an essential element of a landlord's action is to establish the tenant's possession of the property is wrongful.

The applicability of Kentucky's Uniform Residential Landlord and Tenant Act,  KRS § 383.505, et seq., however, is subject to adoption by local governments, see: KRS § 383.500. Thus, determining if and when a the tenant's possession of the property is wrongful is complicated by its geographic location, if the occupancy is "residential," landlord's compliance with the appropriate notice requirements and the terms of any written or oral agreements.

Landlord's Statutory Cause of Action In District Court

Let us set these issues aside, and simply assume a landlord can make a good faith claim the tenant's possession of the premises is wrongful. If a tenant wrongfully refuses to surrender possession of a premise, a landlord can file a complaint in District Court under KRS § 383.210. There is a standard court approved form for this: Forcible Detainer Complaint. The tenant must be given at least three (3) days advance notice of a hearing. Either party may make written demand for a jury "at the calling of the case for trial," KRS § 383.210(2). The issues will be decided by either the jury or by the judge, and a final judgment will be entered in favor of one party or the other, on the issue of possession. Issues other than wrongful occupancy and possession of a property normally cannot be included in a Forcible Detainer Action. However, I have previously speculated if Kentucky's Uniform Residential Landlord and Tenant Act might complicate the inherent straightforward simplicity of an action for Forcible Detainer. See:  Fantasy Litigation - Forcible Entry and Detainer vs. URLTA.

Notes: Appeal from District Court to Circuit Court

1. KRS § 383.255 and the Kentucky Rules of Civil Procedure, Rule 72.02, allow seven (7) days after the District Court's final judgment within which to file a Notice of Appeal in the original District Court cause..
2. Civil Rule 72.02(1) provides: "Appeals from the district court to the circuit court in civil cases shall be taken by filing a notice of appeal in the district court and paying the filing fee required by KRS 23A.210."
3. Unfortunately. it appears that KRS 23A.210 was repealed in 1999, so the full meaning of CR 72.02(1) remains unclear and it will likely require a trip to a law library. Yikes!
4. KRS § 383.255(1) requires a tenant to deposit all past due rents, and future rents as they become due during the pendency of the appeal, with the Clerk of the Circuit Court.
5. Upon tenant's deposit of rents with the Circuit Court Clerk, the "court shall stay all further proceedings on the inquisition." KRS § 383.255(2).
6. CR 72.04 provides, "The record on appeal to the circuit court shall consist of the entire original record of proceedings in the district court, including untranscribed mechanical recordings made under the supervision and remaining in the custody of the district court or clerk. . . . " 
7. In addition to paying all rents to the Circuit Court Clerk, to perfect an appeal the tenant must file a Statement of Appeal as specified in CR 72.10.
8. Time for perfecting appeal: CR 72.08 provides, "An appeal from the district court must be perfected within 30 days after the date of filing the first notice of appeal."
9. As a general rule, not much by way of facts or law can be successfully argued on appeal which were not first fully presented to the trial judge and made part of the record.

Kentucky default judgment - Answers for non-lawyers

What is a default judgment?

The most common type of default judgment comes about when a defendant debtor is sued but fails to answer and defend against the lawsuit. It is like when a basketball game between two teams has been scheduled, but one team simply fails to show up for the contest. The other team automatically wins by default.

What is the effect of a default judgment?

Generally, a default judgment is treated the same as any other court judgment. If the default judgment says you owe the plaintiff creditor money and interest, all legally available collection efforts, such as wage garnishment, may proceed at the plaintiff’s option.

Can a default judgment be reopened?

The best way to avoid a default judgment is to prevent it from happening in the first place, but Kentucky law provides for setting aside a default judgment in limited circumstances and with a good enough excuse.

How long can you wait to seek relief from a Kentucky default judgment?

The longer you wait, the harder it gets.

Do active military personnel or their families have special protection against default judgment?

Yes. The U. S. Congress passed The Soldiers' and Sailors' Civil Relief Act of 1940 (SSCRA), which has been updated over the years, to provide protection to those called to active duty in the U.S. Armed Forces or who are deployed.  Reservists and members of the National Guard (when activated under Title 10, United States Code) are also protected under the SSCRA.

I never received notice that a default judgment was entered. Don’t they have to tell me?

No, they do not have to tell you. Your first indication that you have a default judgment may be when your creditor garnishes your bank account. It is always a big shock when this happens.

Do I need to hire a lawyer to seek relief from a Kentucky default judgment?

No. You have the right to represent yourself in court and to proceed without a lawyer. However, the law is complex and a non-lawyer will have a difficult time navigating the legal system alone without expert guidance, but it’s not impossible.

If I succeed in having my default judgment set aside, does that mean my debt is gone?

No. Having a default judgment set aside just brings everything in the lawsuit back to the point before the default judgment was entered against you. You will still need to defend against the plaintiff’s original claim.

Kentucky default judgment and the absence of notice

Kentucky Rules of  Civil Procedure 5.01. Service; When Required,  provides, in part,

" Every order . . . every pleading . . . every paper . . .  every written motion . . .  and every written notice, . . . shall be served upon each party except those in default for failure to appear . . . . "

From a plaintiff's point of view, this is good news. Every notice, motion or court order that a defendant might receive is potentially a catalyst to action that inspires a defendant to defend against the plaintiff's claim. Under the Kentucky Rules of Civil Procedure a defendant has virtually perpetual right to contest a default or a default judgment, in theory. As a practical matter, the longer the elapsed time between the default and and a defendant's eventual response, the less likely are the chances for the defendant to carry the day. A motion for relief from a final judgment made pursuant to  K. R. C. P. 60.02 must be made "within a reasonable time," and the grounds for relief are drastically limited after one year.

Consequently, after a default judgment has been entered against a defendant, the defendant's first actual notice of the judgment may be by way of a wage or bank garnishment. A defendant's ability to effectively respond to such an unwelcome development and to assert legitimate objections is severely handicapped due to lack of information. This is a real problem, but it is not an insurmountable limitation.

The first task at hand for any defendant in default  is to trot down to the courthouse that entered the default judgment and to carefully review the Court Clerk's case file for the specific details of the proceedings and paperwork.

(H. I. defendant's checklist)