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In re Koeneman

July 29, 2009


The opinion of the court was delivered by: Michael P. McCUSKEY Chief U.S. District Judge


This is an appeal from an Opinion and Order entered by the United States Bankruptcy Court for the Central District of Illinois (Bankruptcy Case No. 08-91670) brought pursuant to 28 U.S.C. § 158(a). After careful review of the arguments of both parties, this Bankruptcy Court's Order is REVERSED.


On September 30, 2008, Scott A. R. Koeneman and Nancy Lynn Koeneman (the "Debtors") filed their Voluntary Petition for Relief under Chapter 7 of the United States Bankruptcy Code. On November 3, 2008, the Trustee in bankruptcy, Jeffrey D. Richardson, filed a Motion for Turnover Order for $2,037.50 in wages earned by Mr. Koeneman, but not paid to him prior to the bankruptcy filing. The Debtors submitted an amended Schedule C, Claim of Exemptions on December 4, 2008, claiming the wages earned by Mr. Koeneman prior to the bankruptcy filing to be exempt from the bankruptcy estate under two theories. First, the Debtors argued that because Mr. Koeneman was not entitled to and did not receive the paycheck for these wages until after the bankruptcy petition was filed, these funds were not a part of the Debtors' bankruptcy estate pursuant to 11 U.S.C. § 541. Alternatively, the Debtors argued that the Illinois Wage Deduction Act ("IWDA"), which sets a limit of 15% on the amount of wages subject to garnishment by a judgment creditor, created a separate exemption allowing Mr. Koeneman to shield 85% of these unpaid wages from inclusion in the bankruptcy estate. 735 Ill. Comp. Stat. 5/12-803 (2008).

The Trustee filed an objection to the Debtors' amended claim of exemption on December 12, 2008, arguing that the wages earned by Scott A. R. Koeneman prior to the filing of the bankruptcy petition were property of the bankruptcy estate pursuant to 11 U.S.C. § 541, and that the IWDA did not create a general exemption allowing the Debtors to shield 85% of Mr. Koeneman's pre-petition wages.

On February 18, 2009, United States Bankruptcy Judge Gerald D. Fines issued a written opinion denying the Trustee's objection to the Debtors' Amended Claim of Exemption, and denying in part and allowing in part the Trustee's Motion for Turnover Order. In re Koeneman, 2009 WL 413082 (Bankr. C.D. Ill. 2009). The Bankruptcy Court rejected the debtor's argument that the wages were not a part of the bankruptcy estate, but held that the IWDA created a general exemption that allowed Mr. Koeneman to retain 85% of the pre-petition wages. Judge Fines relied on In re Meyer, a case in which IWDA was interpreted to create a general exemption that could be applied in bankruptcy. In re Meyer, 388 B.R. 869 (Bankr. N.D. Ill. 2008). Judge Fines entered a separate written Order on February 18, 2009, directing the Debtors to turn over 15% of Mr. Koeneman's pre-petition wages to the Trustee.

On February 27, 2009, the Trustee filed a Notice of Appeal to this court.


A district court must uphold a bankruptcy court's findings of facts unless they are clearly erroneous, and legal conclusions are reviewed de novo. Matter of Excalibur Auto. Corp., 859 F.2d 454, 457 (7th Cir. 1988). This court concludes that the question of whether wages earned but not paid before the date of a bankruptcy filing are subject to a partial exemption from the bankruptcy estate is a question of law. Accordingly, this court's review is de novo.

After a bankruptcy petition is filed, nearly all the property of the debtor becomes part of the bankruptcy estate pursuant to 11 U.S.C. §541, including "every conceivable interest of the debtor, future, non-possessory, contingent, speculative, and derivative." See Matter of Yonikus, 996 F.2d 866, 869 (7th Cir. 1993). Debtors are then permitted to remove certain property from the bankruptcy estate, and the reach of creditors, by claiming it as exempt from execution under state or federal law. 11 U.S.C. § 522; See In re Thomson, 867 F.2d 416, 418 (7th Cir. 1982). The Illinois legislature has "opted out" of the federal exemption scheme, thus Illinois residents may only claim exemptions that are available under Illinois law, or under any federal law other than the list of exemptions provided in Section 522(d) of the Bankruptcy Code. See 735 Ill. Comp. Stat. 5/12-1201 (2008). The Debtors in this case have not claimed property as exempt pursuant to federal law.

The list of personal property exemptions expressly permitted under Illinois law has no provision specifically addressing wages. See 735 Ill. Comp Stat. 5/12-1001 to -1006. Courts have established that wages, either paid or unpaid, may be protected under the "wild card" exemption that permits a debtor to remove from the bankruptcy estate "the debtor's equity interest, not to exceed $4,000 in value, in any other property." 735 Ill. Comp. Stat. 5/12-1001(b) (2008); See In re Keinath 102, B.R. 669, 702 (Bankr. C.D. Ill. 1986). The Debtors argue that personal property exemptions are not necessarily limited to those explicitly named in these sections. Several decisions have recognized exemptions created by other statutory provisions, thus the Debtors reliance on a section of the Illinois code not dealing explicitly with bankruptcy does not immediately preclude the debtors from attempting to establish an exemption under this statute. See In re Simpson, 115 B.R. 143 (Bankr. C.D. Ill. 1988) (recognizing a bankruptcy exemption established by a statute creating the Teachers Retirement System); see also In re McClure, 175 B.R. 21 (Bankr. N.D. Ill. 1994) (finding an exemption for benefits received under the Illinois Workers Compensation Act). However, as the Trustee argues in his reply brief, the fact that exemptions have been found to exist in statutes not explicitly dealing with bankruptcy does not lead to the conclusion that a statute should be liberally construed to create an exemption if no clear indication can be found that the legislature intended for the statute to serve such a purpose.

In their brief, the Debtors urge the court to adopt the reasoning of Judge Wedoff in In re Mayer, 388 B.R. 869 (Bankr. N.D. Ill 2008). In that case Mayer filed chapter 7 bankruptcy and claimed 85% of "accounts receivable" due to him for his services as a psychologist as exempt from the bankruptcy estate pursuant to IWDA. Id at 871. The Bankruptcy Court held that the critical question in determining whether a statute created a general exemption applicable in bankruptcy was not the placement or wording of the statute, but whether it protected an asset against all forms of collection. Judge Wedoff found that even though IWDA does not expressly protect against all forms of collection, the nature of unpaid wages as "choses in action immune from these common law methods of satisfying judgments makes the broader exemption language employed in other Illinois exemption provisions unnecessary." Id. at 872. Thus Judge Wedoff found that the overall effect of the IWDA was to protect a percentage of unpaid wages from all forms of collection, despite the lack of explicit language indicating a general exemption, and held that 85% of Mayer's earned but unpaid wages were exempt from the bankruptcy estate. Id at 874.

Alternatively, the Trustee urges this court to adopt the reasoning of Judge Perkins in In re Thum, 329 B.R. 848 (Bankr. C.D. Ill. 2005), a case involving nearly identical facts to the present case in which the court found that 85% percent of a performance bonus earned but not paid before the bankruptcy filing was not exempt from the bankruptcy estate. In Thum the Bankruptcy Court detailed the language employed by the Illinois legislature when creating a general exemption:

"The Illinois personal property exemption statute expressly provides that the covered property 'is exempt from judgment, attachment, or distress from rent.' 735 ILCS 5/12-1001. Similarly, the provision exempting certain retirement plans states that such plans are 'exempt from judgment, attachment, execution, distress for rent, and seizure for satisfaction of debts.' 735 ILCS 5/12-1006. Likewise, the statute providing an exemption for workers' compensation awards quite forcefully states that no such award 'shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages.' 820 ILCS 305/21. Equally broad is the provision making certain life insurance proceeds 'exempt from execution, attachment, garnishment or other process, for the debts or liabilities of the insured.' 215 ILCS 5/238(a). As well, the Illinois Homestead Exemption law makes a person's right in and title to a homestead 'exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts or other purposes.' 735 ILCS 5/12-901. Thus, the Legislature has a demonstrable pattern, when ...

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