Larson v. Sharp

B.A.P. 10th Cir. 13-053 (April 11, 2014)
The Bankruptcy Appellate Panel of the Tenth Circuit (the "Court" or "BAP') affirmed the Colorado Bankruptcy Court's denial of a chapter 7 trustee's objection to a debtor's exemption for tools of the trade. The Court ruled that the "gainful occupation" requirement of the "tools of the trade" exemption under Colo. Rev. Stat. 13-54-102(1)(i) (2010) does not require "profitability" on the petition date.
Procedural context:
A chapter 7 trustee objected to the debtor's claimed exemption. After an evidentiary hearing, the bankruptcy court denied the trustee's objection. The trustee appealed. After a de novo review, the BAP affirmed the bankruptcy court.
The Debtor asserted that certain tools and equipment, specifically, firearms, boats, a camper, an ATV, a utility trailer, a horse trailer and fishing poles (the "exempt items") were exempt from his bankruptcy estate under the state exemption for tools of his trade. Colorado is an opt out state, which means only Colorado state exemptions were available to the Debtor. Once an exemption is asserted, the burden of proving that the exemption was improperly claimed rests on the objector. The Trustee argued that the exempt items did not qualify for the tools of the trade exemption because at the time the bankruptcy was filed, the occupation did not qualify as "gainful" under the statute because it was not "profitable." The exempt items were part of the Debtor’s hunting, fishing and general outdoors outfitting company. However, the Debtor maintained primary employment at all relevant times as a customer relations manager. But, as early as 2010, the Debtor was taking steps towards growing his outfitting business. Contrary to the Debtor’s expectations, as of the petition date, the Debtor had not yet achieved a net profit. Agreeing with the bankruptcy court, the BAP found that the language of the statute was ambiguous. Ultimately, the Court rejected the "profitable" test espoused by the Trustee. Instead, the Court found that in order to rebut the presumption in favor of a debtor's claim of the tools of the trade exemption, the exemption objector must show that "the debtor's occupation is unlikely to contribute to the support of the debtor and his family in any significant way within a reasonable period of time under the specific facts of each case." Although this test still appeals to profitability, it is not so narrow that it only cares about profitability at one moment in time, that being the petition date. The facts of this case weighed in favor of the Debtor. Although the Debtor's outfitting business was not currently profitable; the Debtor had made great strides to strengthen the business in the years prior to the bankruptcy. For example, the Debtor had attended various conferences seeking out business advice and clients. Further, the Debtor had set up a website and designed business brochures in efforts to advertise his business. Thus, the BAP affirmed the bankruptcy court’s denial of the trustee’s objection to the exemption.
Karlin, Jacobvitz, and Hall

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