Kapusta v. Rafool

Filing 5

ORDER & OPINION entered by Judge Joe Billy McDade on 6/2/2011. The Judgment of the Bankruptcy Court is AFFIRMED. Civil Case Terminated. (RK, ilcd)

E-FILED

Thursday, 02 June, 2011 02:02:08 PM
Clerk, U.S. District Court, ILCD

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
PEORIA DIVISION
IN RE:

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DONALD P. KAPUSTA,
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Debtor.
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_______________________________________)
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DONALD P. KAPUSTA,
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Appellant,
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v.
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GARY T. RAFOOL, Trustee,
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Appellee.
)

Bankruptcy Case No. 08-83354

Appeal No. 09-CV-1371

ORDER & OPINION
This is an appeal from an Order entered by the United States Bankruptcy
Court for the Central District of Illinois (Bankruptcy Case No. 08-83354) brought
pursuant to 28 U.S.C. § 158(a).

After careful review of the arguments of both

parties, the Bankruptcy Court’s Order is AFFIRMED.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
On December 11, 2008, Donald P. Kapusta (the “Debtor”) filed a Voluntary
Petition for Relief under Chapter 7 of the United States Bankruptcy Code. On June
16, 2009, Debtor amended his bankruptcy schedules and listed a bonus from his
employer which had accrued and vested on the petition date, but which was
received by him after the filing. In the amendment, Debtor claimed 85% of the
bonus, or $4,492.25, as exempt under the Illinois Wage Deduction Act (75 ILCS

5/12-803) and the Illinois Wage Assignment Act (740 ILCS 170/4).

The trustee

objected to the exemption claim, maintaining that the bonus was not exempt. The
Bankruptcy Court sustained the trustee’s objection by Order dated September 22,
2009. On November 3, 2009, Debtor filed a Notice of Appeal to this Court.1
LEGAL STANDARD
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). The parties agree 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. (Doc. 2 at 5, Doc. 3 at 5). Accordingly, this Court’s review is de novo.
ANALYSIS
After a bankruptcy petition is filed, nearly all of 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, nonpossessory, 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(b); See In re Thompson, 867 F.2d 416, 418 (7th Cir. 1989). 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
On appeal, Appellant does not contend that the Illinois Wage Assignment Act
supports his exemption claim. Consequently, the Court will not consider it.
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Bankruptcy Code. See 735 Ill. Comp. Stat. 5/12-1201. The Debtor in this case has
not claimed that the relevant property (i.e. his bonus) is exempt pursuant to federal
law, so this Court will focus its discussion on the state law cited by Debtor.
The list of personal property exemptions expressly permitted under Illinois
law has no provision specifically addressing wages. In re Thum, 329 B.R. 848, 851
(Bankr.C.D.Ill. 2005); see also 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.”2 735
Ill. Comp. Stat. 5/12-1001(b). See In re Koeneman, 410 B.R. 820, 823 (C.D.Ill. 2009);
In re Keinath, 102 B.R. 699, 702 (Bankr.C.D.Ill. 1986).

Notwithstanding this,

personal property exemptions are not necessarily limited to those expressly named
in these sections.

See In re Simpson, 115 B.R. 142 (Bankr.C.D.Ill. 1998)

(recognizing a bankruptcy exemption established by statute creating the Teachers
Retirement System); In re McClure, 175 B.R. 21 (Bankr.N.D.Ill. 1994) (finding an
exemption for benefits received under the Illinois Workers Compensation Act).
Accordingly, Debtor asks this Court to conclude that an exemption exists outside of
735 Ill. Comp. Stat. 5/12-1001 to -1006 which would partially exempt from the
bankruptcy estate those wages which he had earned as of the petition date, insofar
as they were received post-petition.

However, this exemption does not help Debtor exempt his wages in this case, as he
has used up his $4,000.00 “wild-card” exemption on other non-wage assets. (Doc. 1
at 59).
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Specifically, Debtor directs this Court’s attention to the Illinois Wage
Deduction Act (“IWDA”), 735 ILCS 5/12-801 et. seq. The IWDA provides that wages
“subject to collection under a deduction order . . . shall be the lesser of (1) 15% of
such gross amount paid for that week, or (2) the amount by which disposable
earnings for a week exceed 45 times the Federal Minimum Hourly Wage . . . or . . .
the minimum hourly wage, . . . whichever is greater.” 735 ILCS 5/12-803. The
debtor argues that this 15% limit on the amount a court may order an employer to
deduct from a debtor’s wages and pay directly to a judgment creditor operates as an
exemption in bankruptcy.
Courts in Illinois are somewhat divided on whether this provision creates an
exemption for purposes of § 522(b). Three courts have concluded that the IWDA
does not create an exemption for unpaid wages owed on the petition date. In Re
Radzilowsky, 2011 WL 1740075 (Bankr.N.D.Ill. May 6, 2011); In re Koeneman, 410
B.R. 820 (C.D.Ill. 2009); In re Thum, 329 B.R. 848 (Bankr.C.D.Ill. 2005). These
courts reason that the IWDA applies only when a creditor seeks a court order
requiring an employer to pay the creditor directly from wages owed to the debtor.
The Thum court explained that Illinois law does not provide a general exemption for
wages. 329 B.R. at 851. It concluded that the language of the IWDA is not broad
enough to create an exemption for unpaid wages. Id. at 853-54.
However, the court in In re Mayer, 388 B.R. 869 (Bankr.N.D.Ill. 2008),
reached the opposite conclusion. The Mayer court explained that the IWDA applies
both to wage deduction orders and to citations to discover assets – the only other
way that a creditor could potentially take a debtor’s earned but unpaid wages.

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Because the 15% cap in the IWDA applies in both situations, the Mayer court
concluded that the IWDA operates as an exemption for 85% of all earned but unpaid
wages for purposes of § 522(b).
This Court agrees with the majority view expressed in Thum, and adopted in
Koeneman and Radzilowsky.

The IWDA does not operate as an exemption in

bankruptcy. Property is exempt if “the debtor can forever sequester [it] to himself
and place [it] completely beyond the reach of his creditors.” In re Radzilowsky, 2011
WL 1740075 at *2 (quoting In re Lawrence, 219 B.R. 786, 791 (E.D.Tenn. 1998)); see
also White v. Stump, 266 U.S. 310, 313 (1924) (An exemption for purposes of the
Bankruptcy Act is “a present right . . . which withdraws the property from levy and
sale under judicial process.”).
The IWDA does not “forever sequester” the debtor’s wages, or even his unpaid
wages. Once the wages are in the debtor’s possession, the 15% cap no longer applies
and creditors are free to attempt to obtain the wages to satisfy a judgment. See
Wienco, Inc. v. Scene Three, Inc., 29 F.3d 329 (7th Cir. 1994). The IWDA simply
puts a temporary limit on how much of the debtor’s wages a judgment creditor can
take before the wages are paid to the debtor. The Illinois legislature could have
easily exempted some portion of wages if it so desired, just as it “forever
sequestered” other types of payments by prohibiting “execution, attachment,
garnishment or other process” of life insurance proceeds, see 215 ILCS 5/238(a), and
“lien, attachment, or garnishment” of worker’s compensation, see 820 ILCS 305/21.
It chose not to do so. The narrow scope of the IWDA does not remove wages – paid
or unpaid – from the reach of creditors and, therefore, does not create an exemption

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that applies under § 522(b) of the Bankruptcy Code.3 Therefore, the judgment of
the Bankruptcy Court is AFFIRMED. IT IS SO ORDERED.

CASE TERMINATED.

Entered this 2nd day of June, 2011.
s/ Joe B. McDade
JOE BILLY McDADE
United States Senior District Judge

Debtor argues that this Court should not reach this conclusion because the Illinois
Supplemental Proceedings statute (735 ILCS 5/2-1402) was amended in 2008 (after
Thum was decided) by adding a new section (k-5). This new section provides that,
in the context of a post-judgment collection proceeding, if the court determines that
any property held by a “third party respondent” is wages, then the court shall
proceed as if a wage deduction proceeding had been filed under the IWDA. Debtor’s
argument is misplaced, as section (k-5) refers only to a “third party respondent,”
and not to a “judgment debtor,” which would be the position of the Debtor outside of
bankruptcy. As a judgment debtor in the possession of assets, the fact that they can
be traced to wages has no impact on the ability of a judgment creditor to collect on
such assets from the judgment debtor. See Wienco, Inc., 29 F.3d at 330.
Consequently, 735 ILCS 5/2-1402 continues to provide a limited non-bankruptcy
exemption for the garnishment of wages, and is not broad enough to constitute an
exemption for accrued wages in bankruptcy. See Thum, 329 B.R. at 854-856. This
Court also notes that an identical argument was considered and rejected by the
Court in Koeneman. 410 B.R. at 825-826. For the aforementioned reasons, as well
as for the reasons cited in Koeneman, this Court concludes that 735 ILCS 5/21402(k-5) has no impact on the issue in this case.
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