Summary of a Recent
Judicial Development in
Bankruptcy

Husband and Wife Farmers Both Allowed
"Tools of the Trade" Exemption

Harrison M. Pittman
Staff Attorney

The Bankruptcy Appellate Panel for the Tenth Circuit has affirmed the portion of a bankruptcy court's decision that held that a husband and wife were principally engaged in farming, and reversed the portion of the decision that held that the wife was not entitled to claim a "tools of the trade" exemption under Kansas state law. In re Lampe, 278 B.R. 205 (B.A.P. 10th Cir. 2002). Both the debtors, Donald and Sheila Lampe, and the creditor, Iola Bank & Trust ("the Bank"), appealed the bankruptcy court decision.

Donald and Sheila Lampe, husband and wife, had farmed together for nearly two decades. See id. at 207. Sheila performed all the various tasks on the farm except for operating some of the heavy farm equipment, such as the planter and the combine. See id. They financed their farming operation with operating loans obtained from the Iola Bank & Trust ("Bank") and the Farm Service Agency ("FSA"). See id. In the late 1990's the Lampes began to experience substantial financial hardship. See id. Consequently, Sheila began working part-time off the farm to supplement the family's farm income, but she maintained her contributions to the farming operation. See id.

In 1999, the Lampes informed the Bank that they were unable to make a payment on their FSA loan. See id. The Bank refused to renew the Lampes' operating loan and began foreclosing on the Lampes' farm property. See id. at 207-08. The Lampes then obtained off-farm employment to help alleviate their financial problems. See id. Donald began working with a farm implement dealer, and Sheila began working for a local cooperative and as a daycare provider. See id. The Lampes continued farming despite these setbacks partly because they obtained the necessary support from a local cooperative. See id. Donald and Sheila Lampe filed a Chapter 7 bankruptcy petition on June 19, 2000. See id.

The Kansas "tools of the trade" exemption, Kan. Stat. Ann. Sec. 60-2304(e), provides that:

Every person residing in [Kansas] shall have exempt from seizure and sale upon any attachment, execution or other process issued from any court in [Kansas], the . . . books, documents, furniture, instruments, tools, implements, and equipment, the breeding stock, seed grain, or growing plants stock, 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 209-10.

The Kansas "tools of the trade" exemption only applies "to the business or profession in which the debtor is principally engaged." Id. at 210 (citing Seel v. Whitman, 173 B.R. 734, 736 (D. Kan. 1994) (observing that Kansas follows the rule that a debtor may only exempt tools used in his or her principal business)). Both Sheila and Donald Lampe claimed as exempt the maximum amount ($7,500.00 each) in certain farm equipment, for a total of $15,000.00. See id. at 208.

The Bank contended that neither Donald nor Sheila qualified for the exemption because farming was not their "primary occupation." See id. The Bank and the bankruptcy trustee also argued that the exemption did not apply to the Lampes because they had abandoned farming as their primary occupation. See id. at 210. This argument was based on the facts that the Lampes were working full-time off the farm, that there was a pending foreclosure on the farm property, and that the debtors lacked operating funds to finance the farming operation. See id.

The trustee argued that Kan. Stat. Ann. Sec. 23-201 allowed only one of the Lampes to claim an exemption in the farm equipment. See id. Kan. Stat. Ann. Sec. 23-201 states, in relevant part, that:

(a) [t]he property, real and personal, which any person in [Kansas] may own at the time of the person's marriage . . . shall remain the person's sole and separate property, notwithstanding the marriage . . . . " (b) [a]ll property owned by married persons . . . shall become marital property at the time of commencement by one spouse against the other of an action in which a final decree is entered for divorce, separate maintenance, or annulment. Each spouse has a common ownership in marital property which vests at the time of commencement of such action . . . ."

Id. at 212, n.7.

The trustee contended that the Lampes' farm equipment was held in common ownership as the marital property of Sheila and Donald under section 23-201because they could not prove that the farm equipment Sheila claimed as exempt was her separate property or that she received it through gift or inheritance. See id.

The trustee argued in the alternative that neither Sheila or Donald were entitled to the "tools of the trade" exemption because the farming operation was not a sole proprietorship maintained by Donald Lampe, but rather it was a partnership between Donald and Sheila in which the farm equipment was co-owned. Id. According to the trustee, Kansas law does not allow individual partners to claim an exemption in partnership property. See id. (citing In re Kane, 167 B.R. 224, 226 (Bankr. D. Kan. 1993)). The Lampes maintained that Sheila Lampe was a co-owner of the farm equipment and was therefore entitled to claim the maximum amount of $7,500.00 under the tools of the trade exemption. See id.

The bankruptcy appellate panel ruled that the Lampes were principally engaged in farming. Id. at 209. The Lampes continued to farm at the time their bankruptcy petition was filed, even though the Bank was attempting to foreclose on the farm property. Id. at 210. The Lampes also intended to lease land from Donald's mother in the near future for the purpose of farming it. Id. As the panel noted, the Lampes farmed "immediately before the petition date and in the months thereafter" and expressly stated their intent to continue farming. Id. Based on these facts, the panel concluded that not only were the debtors "principally engaged" in farming for purposes of the "tools of the trade" exemption, they also had not abandoned their farming operation as the Bank and Trustee contended. Id.

The appellate panel also examined the Lampes' argument that the bankruptcy court incorrectly concluded that Sheila was not allowed to claim a "tools of the trade" exemption in the farm equipment. The Lampes contended that "in essence, that because Kan. Stat. Ann. Sec. 23-201 recognizes that married persons can hold property as co-owners, the property they acquired during the marriage from funds that had been deposited in debtors' joint bank account is presumed to be owned equally." Id. at 212. Therefore, as co-owners with an equal ownership in the property, the Lampes contended that they should each be entitled to use the "tools of the trade" exemption. See id. The Lampes also relied on Walnut Valley State Bank, 574 P.2d 1382 (1975), arguing that it established "a rebuttable presumption that jointly owned property is owned equally by the owners thereof." Id. at 211-12.

The appellate panel stated that "the debtors' argument was misplaced" because even though "a rebuttable presumption of equal ownership arises under Kansas law if a husband and wife own property as tenants in common, [the presumption of equal ownership] only arises after co-ownership is established." Id. at 213. The panel reasoned that the Lampes could not rely on the presumption of equal ownership to show that they co-owned the farm equipment. See id. Instead, the Lampes would have to demonstrate their co-ownership in the farm equipment as an initial matter to successfully argue that there was a rebuttable presumption of equal ownership. See id.

The panel, however, considered case law from other bankruptcy courts adhering to the principle that in a bankruptcy context "'courts must determine co-ownership from evidence of intent and conduct of the party claiming title.'" Id. at 213-14 (quoting In re Broiller, 165 B.R. 286, 291 (Bankr. W.D. Okla.1994)). The panel concluded that "based on the evidence of the debtors' intent, their conduct in carrying on the farming operation, in purchasing the equipment from a joint account funding by earnings from the farm, and in pledging the equipment together as security for operating loans, Sheila Lampe co-owned the property for purposes of the "tools of the trade" exemption." Id. at 213.

The final issue addressed by the appellate panel was whether, as the trustee argued, the Lampes' farming operation should be considered a partnership. Kansas law provides that "'the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.'" Id. at 214 (quoting Kan. Stat. Ann. Sec. 56a-2029(a)). Kansas law also provides that individual partners are not allowed to claim exemptions in partnership property. Id.

The trustee argued that if the operation was determined to be a partnership, then both Sheila and Donald would be precluded from claiming any exemptions in the farm equipment. See id. The panel rejected this argument, stating that the trustee's argument depended on too strict an interpretation of the tools of trade exemption. See id. (citing Nohinek v. Logsdon, 628 P.2d 257, 259 (Kan.Ct.App.1981) (stating that the "general rule regarding exemption laws is that they are to be liberally construed in favor of those intended by the legislature to be benefitted and favorable to the purposes of the enactment")).

The panel added that "the issue of whether a partnership exists is not as clear as the bankruptcy court and trustee posit." Id. The court cited In re Griffin, 141 B.R. 207, 211-212 (Bankr. D. Kan. 1992), which stated that "'the mere fact that a wife participates in the conduct of a business with her husband [does not] necessarily establish a partnership between them, unless there exist some other indicia of partnership and the intent to form a partnership is clearly proved.'" Id. (quoting 59A Am. Jur.2d Partnership Secs. 240-242). The panel ultimately concluded that the operation was not "a partnership in the legal sense, but a family business operated as a proprietorship with each debtor as a co-owner of the equipment." Id.

This case summary was prepared in August, 2002.