In re Moreno

629 B.R. 923

IN RE: Adelina A. MORENO, Debtor.

Case No. 20-42855-BDL

United States Bankruptcy Court, W.D. Washington.

Signed May 11, 2021

Kathryn A. Ellis, Attorney at Law, Kathryn A. Ellis, Seattle, WA, for Trustee.

Robert G. McMillen, NW Justice Project, Vancouver, WA, for Debtor.

MEMORANDUM DECISION ON MOTION FOR TURNOVER AND MOTION TO CERTIFY ISSUES TO THE WASHINGTON SUPREME COURT

Brian D. Lynch, U.S. Bankruptcy Judge

On March 22, 2021, chapter 7 trustee Kathryn A. Ellis (the "Trustee") filed a motion for turnover of estate property (ECF No. 14) (the "Motion for Turnover") with a supporting declaration (ECF No. 16), seeking certain federal tax refunds received by debtor Adelina A. Moreno ("Debtor"). Debtor filed an objection to the Motion for Turnover (ECF No. 22) with a declaration (ECF No. 23) and memorandum of points and authorities (ECF No. 24) (together, the "Response"). Debtor separately filed a motion for certification of questions of local law to the Washington Supreme Court (ECF No. 25) (the "Motion to Certify"). The Trustee filed an objection and response to the Motion to Certify (ECF No. 26), a reply regarding her Motion for Turnover (ECF No. 27) (the "Reply"), and a declaration (ECF No. 28).

The Court held a telephonic hearing and heard arguments from counsel on April 21, 2021 before taking the motions under advisement.

I. Factual Background

The parties do not dispute the facts material to these motions. Debtor filed a chapter 7 petition on December 30, 2020. ECF No. 1. Debtor then filed her 2020 federal tax return on January 28, 2021. ECF No. 16, Ex. 1. Debtor received a tax refund in the amount of $10,631.00, id. , comprised of: $572 from taxes withheld; $2,800 from the Recovery Rebate Credit (the "RRC");¹ $1,709 from the Additional Child Tax Credit (the "ACTC");² and $5,550 from the Earned Income Tax Credit (the "EITC").³ ECF No. 12 at 10. The Trustee seeks a portion of Debtor's 2020 tax refund. Because the last day of the 2020 tax year fell postpetition, the Trustee prorated Debtor's tax refund to exclude approximately 0.3%, leaving a total of $10,599.11 potentially available to the estate.

Debtor claimed exemptions under Washington law. ECF No. 12 at 8–10. The Trustee conceded that certain portions of Debtor's prorated tax refund are exempt. First, she did not dispute Debtor's right to retain the full RRC in the amount of $2,800. She also conceded Debtor is entitled to an exemption in the amount of $2,630, representing the remainder of Debtor's exemption under Wash. Rev. Code ("RCW") § 6.15.010(1)(d)(ii) after using that subsection to claim $370 in cash and checking accounts as exempt. But the Trustee seeks to recover the remaining prorated refund of $5,169.11. Debtor argued that her entire tax refund is not property of the estate or that it is exempt.

II. Conclusions of Law

A. Jurisdiction

This Court has jurisdiction pursuant to 28 U.S.C. § 1334. Venue is proper in this District. 28 U.S.C. § 1409(a). This matter is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (B), and (E).

B. Debtor's Motion to Certify to the Washington Supreme Court

Washington is one of several states with a statute specifically authorizing certification to the state supreme court. See RCW §§ 2.60.010 –.030. Whether to certify a question of state law to a state supreme court is within the discretion of federal courts. Queen Anne Park Homeowners Ass'n v. State Farm Fire & Cas. Co. , 763 F.3d 1232, 1235 (9th Cir. 2014), certifying questions to 183 Wash. 2d 485, 352 P.3d 790 (2015).

RCW § 2.60.020 recognizes the propriety of certification "[w]hen in the opinion of [the] federal court before whom a proceeding is pending, it is necessary to ascertain the local law of [Washington] in order to dispose of such proceeding and the local law has not been clearly determined." The Ninth Circuit has further stated that "[c]ertification is particularly appropriate where the issues of law are complex and have significant policy implications." Centurion Props. III, LLC v. Chicago Title Ins. Co. , 793 F.3d 1087, 1089 (9th Cir. 2015) (internal quotations omitted), certifying questions to 186 Wash. 2d 58, 375 P.3d 651 (2016).

As explained infra , the crux of this dispute is whether the ACTC and the EITC qualify as "public assistance" under Washington law. Little local guidance on this issue exists, and this issue does have significant policy implications. But this Court does not view the issue as overcomplex. The same can be said about Debtor's argument that the ACTC and the EITC are exempt as "child support" under Washington law. Determining the scope of exemption statutes and whether property is part of the bankruptcy estate is an everyday part of a bankruptcy judge's job. Other bankruptcy courts have regularly interpreted similar statutes without certifying the question to state supreme courts.

Accordingly, the Court declines to certify the issues requested by Debtor to the Washington Supreme Court.

C. Tax Refunds as Property of the Estate

Whether an interest is property of the estate is determined by examining the nature of the interest on the date the debtor filed the bankruptcy petition. In re Schmitt , 215 B.R. 417, 421 (B.A.P. 9th Cir. 1997). Although federal law determines whether a debtor's interest is property of the estate, state law determines the existence and scope of a debtor's property interest. Butner v. United States , 440 U.S. 48, 54–55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).

Debtor first argued that, because she filed her tax return postpetition, her interest in the tax refund only arose postpetition and the tax refund is not property of the estate. Debtor primarily relied on MacKenzie v. Neidorf (In re Neidorf) , 534 B.R. 369 (B.A.P. 9th Cir. 2015) and 11 U.S.C. § 541(a)(7). As the Court stated at the April 21, 2021 hearing, the Neidorf case did not involve tax returns, and it is not otherwise apposite to this case. In Neidorf , the debtor's asset was a claim in a national class action, and the event that qualified the debtor for an award occurred postpetition. Id. at 372. Nor is 11 U.S.C. § 541(a)(7) applicable here. Under 11 U.S.C. § 541(a)(1), the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case. Debtor obtained an interest in the tax refund as she earned income throughout 2020. The tax credits for the prepetition portion of the tax year are sufficiently rooted in Debtor's prepetition earnings to be considered property of the estate, notwithstanding that obtaining the refund was contingent on her filing a tax return after the end of the tax year. Segal v. Rochelle , 382 U.S. 375, 379–80, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966). The tax refund accounting for all but the last day of the 2020 tax year—the only day that falls postpetition—is property of the estate.

D. The RRC Portion of the Tax Refund

As noted, the Trustee did not dispute that Debtor is entitled to the RRC. The recently enacted 11 U.S.C. § 541(b)(11), which became effective December 27, 2020, excludes RRCs from estate property. Accordingly, the $2,800 RRC received by Debtor is not part of the estate.

E. The $572 in Withheld Taxes

Debtor also claimed in her Amended Schedule C, filed March 18, 2021, that the $572 portion of her 2020 refund for taxes withheld is exempt under RCW § 6.27.150. ECF No. 12 at 10. The Trustee challenged Debtor's claim of this exemption in her Reply, ECF No. 27 at 4, but Debtor did not articulate how this statute would be applicable to the taxes withheld portion of her tax refund, nor did she otherwise rebut the Trustee. The Court need not reach the issue. As explained infra , the withheld portion of Debtor's tax refund is exempt irrespective of RCW § 6.27.150 ’s applicability, as it is encompassed by her remaining exemption under RCW § 6.15.010(1)(d)(ii).

F. The ACTC and the EITC Portions of the Tax Refund

Debtor argued that her remaining tax refund—considering that the RRC is not part of the estate and that Debtor can still apply $2,630 of the exemption under RCW § 6.15.010(1)(d)(ii) —is exempt under Washington law as either: (1) "public assistance" under RCW §§ 74.04.280 and 74.04.005 ; or (2) "child support" under RCW § 6.15.010(1)(d)(iv).

The Trustee argued that the ACTC's status under Washington law need not be determined in this case because the ACTC portion of Debtor's tax refund could be encompassed by Debtor's remaining exemption under RCW § 6.15.010(1)(d)(ii). But the remaining catch-all exemption under RCW § 6.15.010(1)(d)(ii), if not applied to the ACTC, could be applied elsewhere. If the ACTC is exempt under Washington law independent of the catch-all exemption, it would benefit Debtor by allowing her to exempt additional funds or personal property. Therefore, the Court must determine whether both the ACTC and the EITC are exempt under Washington law.⁴

1. The ACTC and the EITC are not exempt as "child support" under RCW § 6.15.010(1)(d)(iv).

RCW § 6.15.010(1)(d)(iv) makes exempt "[a]ny past due, current, or future child support paid or owed to the debtor, which can be traced." Because "child support" is not defined in Washington's exemption scheme, Debtor referred the Court to RCW § 26.18.020(3) (defining the "duty of support" as "the duty to provide for the needs of a dependent child, which may include necessary food, clothing, shelter, education, and health care") and to RCW § 74.20A.020(4) (defining "support obligation" as "the obligation to provide for the necessary care, support, and maintenance, including medical expenses, of a dependent child or other person as required by statutes and the common law of this or another state"). Debtor argued that both the ACTC and the EITC should be exempt under RCW § 6.15.010(1)(d)(iv) by advocating an expansive definition of "child support," which would make exempt any funds allocated toward the care of a child.

To ascertain the plain meaning of Washington statutes, "[a] nontechnical statutory term may be given its...