Case Type:
Case Status:
21-1124 (9th Circuit, Dec 23,2021) Not Published
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit (BAP) affirmed the decision of the U.S. Bankruptcy Court for the Western District of Washington (BC) concluding that those portions of a federal income tax refund comprised of the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) qualified as "federal aid assistance" under the Revised Code of Washington (RCW) and, thus properly exempted under this state statute, need not be turned over to the estate, as requested by the trustee, Kathryn A. Ellis (TR), appointed in the chapter 7 case of Adelina Moreno (DR).
Procedural context:
Within a month or so of filing her chapter 7 petition, the DR received a refund based on her 2020 federal income tax return comprised of $572 from taxes withheld, $2,800 from the Recovery Rebate Credit (RRC), $1,709 from the Additional Child Tax Credit (ACTC), and $5,550 from the Earned Income Tax Credit (EITC). Subsequently, the DR amended her schedule to add this property and claim it as exempt; the United States Trustee (TR) promptly filed an objection to the DR's amended exemptions and a motion for turnover of a portion of the tax refund. After a hearing, the BC issued a memorandum decision. This decision declined to certify the matter to the Washington Supreme Court (WSC), as the DR had requested. On the merits, it ruled that: (1) 99.7% of the tax refund was property of the estate; (2) the EITC and ACTC portions of the refund were not exempt as child support; but (3) those portions were exempt under Washington law as “public assistance,” i.e., “federal aid assistance.” Consistent with this analysis, the BC entered an order (1) denying the DR's request for certification and the TR's motion for turnover and (2) sustaining in part and overruling in part the TR's objection to the DR's claimed exemptions for these funds. The TR timely appealed, but the DR did not file a cross-appeal of the issues decided against her.
The DR filed a chapter 7 bankruptcy petition on December 30, 2020. About a month later, Debtor filed her 2020 federal income tax return and received a refund of $10,631. Shortly thereafter, the DR filed amended Schedules B and C, disclosing the tax refund and claiming it fully exempt under various Washington statutes, including those that provide exemptions for public assistance and child support. The TR and DR next fought over how much of this refund was to be turned over. Of this sum, the TR sought to recover a prorated refund of $5,169.11. In response, the DR argued that none of the tax refund was property of the estate because it was received post-petition. Alternatively, Debtor argued that the refund was exempt. The amounts sought to be turned over, the DR first contended, were comprised of the EITC and the ACTC, which qualified as “public assistance” under RCW § 74.04.005(11), i.e., “federal aid assistance” under RCW § 74.04.005(8), and were thus exempt under RCW § 74.04.280; the EITC and ACTC, the DR added, further fit the definition of “child support” under RCW § 6.16.010(1)(d)(iv). Whatever confidence the DR may have had in these contentions, she ultimately requested that the BC certify the exemption question to the WSC. In reply, the TR disputed the validity of any exemption for the EITC and ACTC but did not oppose certification.
William J. Lafferty III; Julia W. Brand; and Gary A. Spraker

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