In addition to their full-time jobs, many individuals have their own “side businesses” which generate some income but not enough to enable them to give up their “day job.”  Many of these side businesses require assets in order for the individual to deliver the goods or services to his customers.  When that individual has to file for bankruptcy, may he or she claim a “tools of the trade” exemption in the assets used in the side business?  The Tenth Circuit Bankruptcy Appellate Panel in held a debtor may assert such an exemption in appropriate circumstances, in its decision in Larson v. Sharp (In re Sharp), 2014 WL 1400073 (10th Cir. BAP April 11, 2014).

In Sharp, the debtor was employed full time in his proverbial “day job.”  However, his dream was to become an outdoor outfitter and guide and to spend his retirement years in that occupation, and in his effort to fulfill his dream the debtor started a part-time outdoor outfitting business, Aspen Place Outfitters.  The debtor attended trade shows, and used his vacation time from his main job to provide outfitting and guide services for his customers.  The debtor had acquired various assets (firearms, boats, a camper, an ATV, utility and horse trailers and fishing poles) which he used in his outfitting business and which he owned on the date he filed bankruptcy.  The debtor’s outfitting business generated some income but not enough to enable him to quit his full time job. Although the debtor’s side business was growing, it had not yet generated a net profit by the time the debtor filed bankruptcy.

The debtor asserted an exemption to his outfitting company assets as tools of the trade, under Colorado Rev. State § 13-54-102(1)(i), which allows an exemption in the “stock in trade, supplies, fixtures, maps, machines, tools, electronics, equipment, books, and business materials of any debtor used and kept for the purpose of carrying on any gainful occupation in the aggregate value of twenty thousand dollars.”  The trustee objected to the claim of the exemption, contending the Colorado statute’s use of the term “gainful occupation” requires the occupation to generate a net profit as of the petition date in order for a debtor to assert the exemption.  Consequently, the BAP’s analysis was focused on the term “gainful” in the statute. 

The court began its analysis by noting that the Constitution of the State of Colorado requires its exemption laws to be liberally construed.  See Beneficial Fin. Co. of Colo. V. Schmuhl, 713 P.2d 1294, 1298 (Colo. 1986).  The court also noted that the purpose of the exemption is to preserve to the debtor his means of support.  Taking these concepts in hand, the BAP next agreed with the bankruptcy court’s conclusion that the term “gainful” as used in the exemption statute, is ambiguous.  The bankruptcy court had found that the debtor’s outfitting business was “an entrepreneurial business that may become viable in the near future.”  The BAP agreed that this conclusion was supported by the record, and then went on to determine whether this finding supported the bankruptcy court’s conclusion that the side business was, therefore, a “gainful occupation” of the debtor.

The BAP noted that “virtually all dictionary definitions” of the work “gainful” list “profitable” as a synonym.  The BAP then stated that the Bankruptcy Code’s fresh start policy is served only when there is some element of profitability to the trade for which the debtor seeks to exempt his tools.  Consequently, the BAP concluded the term “gainful occupation” under Colorado’s exemption statute requires some aspect of profitability to the business.  However, the BAP held that the business in question need to actually be generating a profit at the time of the debtor’s bankruptcy.  Rather, the court held that a gainful occupation consists of two elements: a business (1) which is conducted with continuity and regularity and (2) which has a profit motive, meaning an expectation or anticipation of profit in the future. 

Taking the facts indicating that the debtor’s side business was on a trend toward profitability, with the debtor devoting regular efforts to the business, the BAP concluded the debtor could assert an exemption in the assets associated with his side business as tools of his trade.