Summary of a Recent
Judicial Development in
Bankruptcy

Wife Entitled To
"Tools of the Trade" Exemption

Harrison M. Pittman
Staff Attorney<

The United States Bankruptcy Court for the District of Kansas has ruled that a debtor-wife who worked nine out of ten work days off the farm as a nurse was entitled to claim the $7,500.00 Kansas "tools-of-the-trade" exemption in farm machinery. In re Kieffer, 279 B.R. 290 (Bankr. D. Kan. 2002). The court also ruled that the debtor-wife was allowed to avoid a creditor's lien on the subject farm machinery. See id. at 295.

Paula and Stephen Kieffer ("debtors"), husband and wife, filed a Chapter 12 bankruptcy petition on July 9, 2001. See id. at 293. Stephen and Paula each claimed a $7,500.00 "tools-of-the-trade" exemption pursuant to Kan. Stat. Ann. Sec. 60-2304(e). See id. at 292. They also sought to avoid a lien held by Frontier Farm Credit, PCA ("Farm Credit") on certain farm equipment. See id.

Paula worked off the farm as a nurse for nearly ten years before she and her husband filed their Chapter 12 bankruptcy petition. See id. She worked as a nurse nine out of every ten working days. See id. Paula asserted that she also worked on the farm with her husband by working cattle, moving machinery, maintaining the bookkeeping and check-writing for the farm, assisting her husband with farming decisions, and often signing promissory notes and security agreements to creditors for the farming operation. See id. at 293. Paula considered herself a co-owner with Stephen of the real and personal farm property. See id. The debtors' 2000 and 2001 tax returns, as well as their Schedule I bankruptcy schedules, indicated Paula's profession as a nurse and indicated Stephen's profession as a farmer. See id.

Kansas law provides that "'[e]very person residing in this state shall have exempt . . . (e) [t]he tools, implements, and equipment . . . or the other tangible means of production regularly and reasonably necessary in carrying on the person's profession, trade, business, or occupation in an aggregate value not to exceed $7,500.00.'" Id. at 293-94 (quoting Kan. Stat. Ann. Sec. 60-2304(e)). Exemption laws are interpreted liberally in favor of exemption. See id. at 294 (citing In re Mueller, 71 B.R. 165, 167 (D. Kan. 1987)). The party objecting to a claimed exemption has the burden of proving that the exemption is improperly claimed. See id. (citing In re Zink, 177 B.R. 713, 714 (Bankr. D. Kan. 1995 and In re Gregory, 245 B.R. 171, 174 (10th Cir. BAP 2000)). "A debtor may only claim a tools of the trade exemption for only one trade or occupation." Id. (quoting Zink, 177 B.R. at 715). If a debtor is "engaged in more than one trade, business or occupation, the tools of the trade exemption is applicable only to the trade or occupation in which the debtor is principally or primarily engaged." Id. (citing Zink, 177 B.R. at 715 and Seel v. Wittman, 173 B.R. 734, 736 (D. Kan. 1994)). To determine which occupation or business a debtor is principally or primarily engaged, a court "may consider from which occupation the debtor derives his or her principal support." Id. (citing Seel, 173 B.R. at 737).

Bankruptcy Code Sec. 522(f)(1)(B) provides, in relevant part:

"the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is . . . (B) a nonpossessory, nonpurchase- money security interest in any . . . (ii) implements, professional books, or tools, of the trade of the debtor . . . ."

Id. at 293.

Farm Credit argued that the district court should "compare the net income derived from farming activities to Paula's wages from her nursing job" to determine whether she derived her principal support from nursing or farming. Id. Paula earned $20,754.00 in gross income from nursing in 2001. See id. She earned $102,385.00 in gross income from farming in 2001. See id. Without deducting any depreciation expense, the farming operation earned $42,805.00 in net income in 2001. See id. These estimates were based upon Paula's 2001 tax return. See id.

The court stated that "[w]hile the debtor's tax returns are relevant, they are not controlling in determining the tools of the trade exemption." Id. (citing In re Zimmel, 185 B.R. 786, 789 (Bankr. D. Minn. 1995)). The court explained that "no clear rule has been established [as to] whether gross income or net income should be examined in comparing the debtor's occupations" and that no "bright-line test can be applied to determine principal support." Id. The court also stated that depreciation expense was not relevant to the court's determination. See id. at 295 (citing Seel, 173 B.R. at 737) (observing that it is not appropriate to include the depreciation expense deduction claimed on the tax return because it does nothing to demonstrate which business is actually producing support for the debtors).

Although Paula testified that she "did not perform one-half of the actual farm labor or work," the court determined that "the calculations and comparisons of income do not support a finding that Paula derives her principal support as a nurse. If only 40% of the gross farm income is attributable to Paula, she derives $40,954.00 from her farming occupation nearly twice that of nursing." Id. Noting that actual labor or amount of time spent on the farm were not the only factors to consider in determining the amount of income to attribute to Paula, the court determined that "other farm-related activities performed by Paula, coupled with her actual farm labor, amply supports a finding that Paula contributes or jointly participates 50% in the debtors' farming endeavor." Id. Based on these determinations, the court ruled that Paula was principally engaged in farming and that her principal support derived from farming. See id. (citing Zink, 177 B.R. 713) (finding that a debtor farm wife who was also a licensed beautician was principally engaged in farming) and In re Kobs, 163 B.R. 368 (Bankr. D. Kan. 1994) (ruling that a debtor farm wife who held an off-farm job as a librarian was principally engaged in farming)).

The court concluded that Paula "had an ownership interest in the farm equipment, was principally engaged in farming, is entitled to a $7,500.00 tools of the trade exemption in the farm equipment under Kansas law, and may avoid Farm Credit's lien on the subject farm equipment." Id.

This case summary was prepared in August, 2002.