Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Dec. 17 — “Tools of the trade” for Chapter 7 debtors consisting of a website and several digital photographic images are exempt property under Kansas law, a district court in Kansas held Dec. 11 (Hamilton v. MacMillan (In re MacMillan), 2015 BL 407836, D. Kan., No. 5:15-cv-04008-KHV, 12/11/15).
Judge Kathryn H. Vratil of the U.S. District Court for the District of Kansas concluded that both the website and digital photographs served an integral purpose as a business card or portfolio for the debtors to attract business to their photography business, MacMillanWorks, which debtor Colin MacMillan owned as a sole proprietor.
Construing Kansas law, K.S.A. § 60-2304(e), on exemptions liberally, the court found that the website and images would be exempt. Kansas case law doesn't limit tools-of-the-trade protection to means of production or a narrow definition of that concept, the court said. The “use” of the items is the critical issue, the court said.
Chapter 7 trustee Patricia E. Hamilton objected to debtors Colin and Cassandra MacMillan's claim that their website and digital images were exempt under K.S.A. § 60-2304(e) in their Chapter 7 bankruptcy case. In Chapter 7, a debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.
Section 60-2304(e) provides that Kansas residents may exempt “documents … 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.”
The trustee argued that the images aren't “tools” in the sense that Colin's company MacMillanWorks will use them to create goods that can be sold post-petition. According to the trustee, the website and images are stock in trade rather than means of production. The trustee also contended that Cassandra can't claim an exemption because she didn't claim an ownership interest in the website or images.
The court concluded that the images are not final products subject to sale.
The images are “dual purpose” items, the court said, serving as a portfolio or a business card but also they are for sale. According to the debtor's testimony, his primary means of selling a photograph is to print the digital image on paper or other surface, sign the printed copy, and deliver it to the buyer. This process involves some steps of production beyond creating and storing the digital images, the court said.
The court agreed with the bankruptcy court in that the trustee failed to establish that Cassandra can't claim this exemption. The trustee focused on the contention that MacMillanWorks is a sole proprietorship and that Cassandra had no ownership interest in the business, the website, or the digital images.
The test for determining whether a husband or wife own certain property in a business isn't based on the type of business entity they have formed, the court said. The intent and conduct controls, the court said, citing In re Lampe, 331 F.3d 750 (10th Cir. 2003).
Based on the debtors' intent and conduct, the bankruptcy court applied the correct “farm wife” exemption to the debtors, the court said. According to the court, there is a long line of “farmer's wife” cases in which a spouse, engaged together in an occupation with the other spouse, is able to claim the Kansas tools-of-the-trade exemption for property used to run that business if that business is the primary occupation for the spouse claiming the exemption.
The bankruptcy court correctly ruled that the debtors were entitled to the claimed exemption, the court said.
Patricia E. Hamilton, Stevens & Brand, LLP-Topeka, Topeka, Kan., represented herself as trustee/appellant; Frank D. Taff, Topeka, Kan., represented appellees/debtors Colin Edward MacMillan, and Cassandra Grace MacMillan.
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