In re Alexander

• Decision Date: 20 April 1999
• Docket Number: No. 92,587.,92
• Citation: 1999 OK 31,980 P.2d 659
• Parties: In re: Claude R. and LaDonna J. ALEXANDER, Debtors.
• Court: Oklahoma Supreme Court

980 P.2d 659

1999 OK 31

1999 OK 31

In re: Claude R. and LaDonna J. ALEXANDER, Debtors.

No. 92,587.

Supreme Court of Oklahoma.

April 20, 1999.

B. David Sisson, Norman, Oklahoma, for Debtors.

Gary D. Hammond, Jeffrey E. Tate, Oklahoma City, Oklahoma, for Trustee.

¶ 1 KAUGER, J

¶ 2 The question certified¹ is whether the $50,000 personal injury exemption enumerated in 31 O.S. Supp.1998 § 1(A)(21)² includes funds received before and/or after a petition in bankruptcy is filed. We find that although funds received and expended pre-petition do not exhaust the exemption for personal bodily injury awards, monies in excess of $50,000 received after filing bankruptcy accrue to the benefit of the bankruptcy estate.

FACTS

¶ 3 The debtors, Claude R. and LaDonna J. Alexander (debtors/Alexanders), filed bankruptcy on September 3, 1998. Fifteen years earlier—in 1983, LaDonna Alexander began receiving monies from a structured settlement for a loss of consortium claim³ arising from the injury of a former husband. The settlement consists of two annuities. One annuity provides for monthly payments of $900. The second annuity pays a lump-sum of $4,645 every five years. It is uncontested that the debtors received in excess of $50,000 before filing for bankruptcy.⁴ However, there is no assertion that the debtors retain any of the settlement funds previously disbursed.

¶ 4 When the voluntary chapter 7 bankruptcy was filed, the debtors claimed exemptions for the two annuities arguing that pre-and post-petition payments were not part of the bankruptcy estate. Citing 31 O.S. Supp. 1998 § 1(A)(21),⁵ the Alexanders sought to exempt $40,000.00 in the monthly-pay annuity and $4,645.00 in the annuity paying a lump-sum each five years. The trustee in bankruptcy (trustee) filed an objection in the bankruptcy court to the exemptions claimed. The trustee asserted that because the debtors had received in excess of $50,000 before filing that the exemption for personal injury contained in 31 O.S. Supp.1998 § 1(A)(21) had been exhausted.

¶ 5 A hearing was held before the bankruptcy judge on October 9, 1998, concerning the debtors' claim of exemption. Finding no Oklahoma precedent to resolve the question of law, the bankruptcy court certified the question to this Court pursuant to the Revised Uniform Certification of Questions of Law Act, 20 O.S. Supp.1997 § 1601, et seq., on February 3, 1999. We set a briefing cycle which was completed when the final reply brief was filed on March 18, 1999.

I.

¶ 6 THE BANKRUPTCY ESTATE AND THE RIGHT TO EXEMPTION ARISE ONLY UPON THE FILING OF A PETITION IN BANKRUPTCY. THEREFORE, THE PERSONAL INJURY EXEMPTION AFFORDED DEBTORS BY 31 O.S. Supp.1998 § 1(A)(21) IS NOT REDUCED BY MONIES RECEIVED AND EXPENDED BEFORE BANKRUPTCY IS FILED.

¶ 7 The debtors and the trustee agree that 31 O.S. Supp.1998 § 1(A)(21) limits the value of the claimed exemption in both annuities to $50,000. The disagreement arises over how—and when—the exemption is calculated. The Alexanders assert that amounts received pre-petition are not a portion of the $50,000 exemption. The trustee contends that the language in 31 O.S. Supp. 1998 § 1(A)(21) is clear and unambiguous and that its reference to "a net amount" not to exceed $50,000 unequivocally encompasses all payments from the annuities.

¶ 8 The trustee's contention that the legislative intent in § 1(A)(21) is so apparent that the statute is not subject to interpretation is unconvincing. In two cases — In re Anderson, 1996 OK 135, ¶ 8, 932 P.2d 1110, 1112 and Peoples State Bank & Trust Co. v. Brooks, 1988 OK 12, ¶ 7, 750 P.2d 479, 480, this Court found the language of the statute ambiguous.⁶ In Anderson, we reiterated our commitment to the rule that statutes exempting property for forced sale for the payment of debts are to be given a reasonable construction to effect their intent and purpose. In cases of doubt, the doubt will be resolved in favor of the exemption.⁷

¶ 9 Two Oklahoma appellate court cases address the issue of whether the pre-petition receipt of funds will be considered as exhausting a debtor's rights to exemption under 31 O.S. Supp.1998 § 1(A)(21): Amfac Distr. Corp. v. Cella, 1989 OK CIV APP 37, 776 P.2d 571 and State of Oklahoma ex rel. The Univ. Hosp. v. Annesley, 1999 OK CIV APP 30, 70 O.B.J. 678, 976 P.2d 1109 Both released for publication by order of the Court of Civil Appeals.⁸ The debtor in Amfac received a $4,000 monthly payment from an insurance settlement resulting from the death of her husband. She attempted to have the payment exempted from garnishment proceedings under § 1(A)(21). The Court of Civil Appeals found that the debtor was not entitled to an exemption because she had received in excess of $400,000 before the garnishment proceedings were instituted. The appellate court held that the exemption extended only to the first $50,000 paid to the debtor under the settlement.

¶ 10 In Annesley, the Court of Civil Appeals was presented with the issue of whether an annuity sought to be exempted from garnishment should be treated as fully exempt as a life insurance policy or subject to the personal injury award exemption of $50,000 under 31 O.S. Supp.1998 § 1(A)(21). Determining that the annuity was subject to the $50,000 limitation of § 1(A)(21), the appellate court relied upon Amfac in finding that the debtor's receipt of more than $50,000 before the institution of garnishment proceedings had exhausted the personal injury exemption.

¶ 11 This is the first instance in which this Court has been asked to consider the issue of exhaustion of the personal injury exemption through pre-petition payments — certiorari was not filed in Amfac or in Annesley. Additionally, the debtor in Amfac did not submit authority in support of the exemption argument⁹ and in Annesley, the appellate court relied on Amfac as persuasive of the issue. Nevertheless, the question has been addressed in the federal bankruptcy courts. Those courts have held that payments received by debtors prior to filing bankruptcy do not exhaust, deplete or reduce exemptions available to the bankrupt.¹⁰

¶ 12 The federal courts' findings that pre-petition payments do not affect the debtor's right of exemption are based on the nature of bankruptcy proceedings. When a bankrupt files a petition, all of the debtor's property becomes property of the bankruptcy estate.¹¹ However, debtors are permitted to remove certain property from the bankruptcy estate by claiming exemptions.¹² The line of separation between the debtor's property and the bankruptcy estate is settled in the bankrupt's affairs on the date the bankruptcy petition is filed.¹³ References to exemptions refer to this point in time¹⁴—when the general estate passes out of the bankrupt's control and when the creditors' and trustees' rights are fixed. It is here that the right of exemption arises.¹⁵ Exemptions allow the withdrawal of property from the bankruptcy estate which would otherwise be subject to levy and sale under judicial process.¹⁶ It is the trustee's duty to set aside the bankrupt's legally claimed exemptions.¹⁷ Property received before the filing date and depleted or expended is not within the pool of assets constituting property of the estate.¹⁸

¶ 13 The analysis of the federal courts is convincing. Payments received and expended pursuant to the personal bodily injury award before the debtors filed bankruptcy are not a part of the bankruptcy estate. The trustee cannot claim a right to the debtors' property before the bankruptcy case is commenced.¹⁹ Therefore, we find that the debtors are entitled to a $50,000 personal injury exemption pursuant to 31 O.S. Supp.1998 § 1(A)(21).²⁰ To the extent that the Court Civil Appeals opinions in Amfac Distr. Corp. v. Cella, 1989 OK CIV APP 37, 776 P.2d 571 and State of Oklahoma ex rel. The Univ. Hosp. v. Annesley, 1999 OK CIV APP 30, 70 O.B.J. 678, 976 P.2d 1109 are in conflict, they are expressly overruled.

II.

¶ 14 THE BANKRUPTCY ESTATE CONSISTS OF ALL A DEBTOR'S LEGAL OR EQUITABLE INTERESTS. THEREFORE, PAYMENTS FOR PERSONAL BODILY INJURY RECEIVED AFTER FILING BANKRUPTCY ARE SUBJECT TO EXECUTION TO THE EXTENT THEY EXCEED THE ALLOWABLE EXEMPTION.

¶ 15 Without citing any authority, the debtors argue that any monies received from the annuities after the date of filing bankruptcy are exempt. The assertion is based upon an argument that any "future" payments from the annuities are too speculative to fall within the bankruptcy estate. The trustee maintains that failing to allow execution against future payments in excess of the $50,000 exemption enumerated in 31 O.S. Supp.1998 § 1(1)(A) would clearly allow the debtors an exemption in excess of that intended by the Legislature. We agree.

¶ 16 The Alexanders make no cogent argument why the "contingent" nature of their rights in the annuities removes the property from the bankruptcy estate. Although the certification order indicates that the Alexanders refused to agree to the outlined schedule of payments,²¹ it is uncontested that the annuities exist and that the debtors have attempted to exempt both monthly and the lump-sum payments. Nevertheless, the contingent nature of the rights to the annuities is insufficient to remove them from the bankruptcy estate.

¶ 17 Filing of the bankruptcy petition moves all of a debtor's property—legal and equitable—into the bankruptcy estate.²² The fact that the asset is composed of annuity contracts which provide for future payments does not remove it from the property against which the trustee may levy. In re Ziegler, 156 B.R. 151, 154 (W.D.Penn.1993), involved an annuity contract similar to the ones at issue here—debtors expected to receive future payments in excess of the $7,500 exemption provided under federal law.²³ After finding that any pre-petition payments did not reduce the allowable exemption, the bankruptcy court stated:

". . . After the Debtor's $7,500 exemption, the remainder of the Annuity Contract

...