Stites & Harbison, PLLC

In June 2009, the Kentucky Supreme Court issued a unanimous ruling in MPM Financial Group, Inc. v. Morton, 289 S.W.3d 193, eliminating the ability of Kentucky judgment debtors, through the use of KRS 427.170, to invoke the federal bankruptcy exemption set in non-bankruptcy collection proceedings.

KRS 427.170 provides that "An individual debtor domiciled in this state is authorized to exempt from property of said debtor’s estate the property specified under 11 U.S.C. § 522(d)." Prior to the Supreme Court’s decision, this provision had been used by judgment debtors outside of bankruptcy court to elect the more debtor-friendly federal exemptions. For instance, the Kentucky set permits judgment debtors to shield a maximum of $5000 in homestead equity from creditors, versus $20,200 in the bankruptcy set. Cf. KRS § 427.060 with 11 U.S.C. § 522(d)(1).

The Court’s task in MPM Financial Groupwas to determine precisely what the Kentucky General Assembly meant when it used the undefined and uncapitalized terms "debtor" and "estate" in the statute. Were those terms to be interpreted in the ordinary, non-bankruptcy sense, as the Kentucky Court of Appeals had previously held? Or, was the text referring to the Bankruptcy Code’s particular use of the terms, limiting the definition of "debtor" to a "person . . . concerning which a case under [the Bankruptcy Code] has been commenced?" 11 U.S.C. § 101(13).

The Court resolved this "latent ambiguity" by analyzing the legislative history and relying on traditional rules of statutory construction, and ultimately concluded that the terms "debtor" and "estate" mean "bankruptcy debtor" and "bankruptcy estate." As a consequence, the only Kentuckians who may elect the federal exemption set are bankruptcy debtors. Judgment debtors outside of bankruptcy are limited to the more creditor-friendly Kentucky exemption set.

Brian H. Meldrum is an Associate in the firm's Louisville office where his practice focuses on creditors' rights, corporate bankruptcy and restructuring, business and commercial litigation, and complex judgment enforcement and collection.  He can be reached at bmeldrum@stites.com.

W. Robert Meyer is an Associate in the Louisville office where his practice focuses on bankruptcy and creditors' rights matters.  He can be reached at rmeyer@stites.com.