In re Bentley

• Decision Date: 09 November 2020
• Docket Number: Case No. 20-10381
• Citation: 622 B.R. 296
• Parties: IN RE: Sally F. BENTLEY, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Oklahoma

622 B.R. 296

IN RE: Sally F. BENTLEY, Debtor.

Case No. 20-10381

United States Bankruptcy Court, W.D. Oklahoma.

Dated: November 9, 2020

John W. Cloar, Robert Jeffrey Haupt, L. Todd Nalagan, Lathrop Gage LLP, Law Office of L. Todd Nalagan, Norman, OK, Kansas City, MO, for Debtor.

ORDER GRANTING IN PART AND DENYING IN PART TRUSTEE's OBJECTION TO DEBTOR's CLAIMED EXEMPTIONS WITH BRIEF IN SUPPORT WITH NOTICE OF OPPORTUNITY FOR HEARING AND NOTICE OF HEARING [DOC. 33]

Sarah A Hall, United States Bankruptcy Judge

On September 30, 2020, the Court conducted a telephonic hearing on the objections of Susan Manchester, chapter 7 trustee ("Trustee"), to the exemptions claimed by debtor Sally F. Bentley ("Debtor"). At the commencement of the hearing, the Court undertook to summarize what exemption claims were actually subject to objection by Trustee because the number and timing of amendments to Debtor's claims of exemption subsequent to the filing of the Trustee's Objection to Debtor's Claimed Exemptions with Brief in Support with Notice for Opportunity for Hearing and Notice for Hearing [Doc. 33], filed on July 9, 2020 (as subsequently amended, the "Objection"), required this Court to diagram the assets claimed as exempt and the authority therefore as well as the resulting changes to Trustee's Objection.¹ The Court surmised, and the parties agreed, the following exemption claims remain subject to objection:

BancFirst checking account 3065 (the "Bank Account")	$70,256.08	$24,903.08	Okla. Stat. tit. 36, § 3631.1
Bank Account	$70,256.00	$45,353,00	42 U.S.C. 4071 ; Okla. Stat. tit. 31, § 1.A.20
Northwestern Mutual Annuity 0092 (the "Annuity")	$350,000.00	$350,000.00	Okla. Stat. tit. 36, § 3631.1
Annuity	$350,000.00	$0.00	Okla. Stat. tit. 31, § 1.A.20

Testimony was provided by Debtor, her son Nick Bentley, and Jim Lawson, an accountant hired by Trustee to analyze the deposits and withdrawals from the Bank Account ("Accountant"). Other than to highlight the apparent lack of importance Debtor and her counsel placed on the accuracy of her Schedules and SOFA, Debtor's testimony and that of her son were relatively unhelpful. The work product of the Accountant, Trustee Ex. 10 (the "Trustee Accounting"), was extremely helpful, with his testimony identifying his accounting background and the process he used to create the Trustee Accounting.

FINDINGS OF FACT

1. Debtor's late husband owned an interest in Sarah Properties, LLC d/b/a Lucky Dog Lodge (the "Business") and envisioned the income stream from the Business to be a future source of income during his and Debtor's retirement.

2. After he passed, Debtor sold the interest in the Business in 2018 and determined she needed to convert the vast majority of the sale proceeds into an income stream for her retirement. Hence, she purchased the Annuity.

3. Debtor entered into a Single Premium Immediate Income Annuity with Northwestern Mutual ("Northwestern"), effective July 10, 2018, with a single purchase payment of $350,000.00. Trustee Ex. 7, p. 1.

4. The Annuity has no cash surrender value or loan value and provides no cash refund on Debtor's death. Trustee Ex. 7, p. 6. 5. Ownership of the Annuity can be transferred, and the Annuity may be assigned as collateral. Trustee Ex. 7, pp. 13 and 15.

6. The Annuity is a non-qualified annuity.²

7. The Annuity provides for a guaranteed monthly payment of $1,570.40 ("Guaranteed Payment") commencing August 1, 2018, for a five year period (the "Period Certain"). Trustee Ex. 7, p. 1. If Debtor dies during the Period Certain, her sons, as the named beneficiaries, will receive the remaining Guaranteed Payments due during the Period Certain. If Debtor dies after conclusion of the Period Certain, the Guaranteed Payments will cease, and no death benefits will be payable. Trustee Ex. 7, pp. 1, 11, and 12.

8. In addition to the Guaranteed Payments, Debtor is also entitled to receive dividends in the amount of $603.94 per month effective August 1, 2019 (the "Dividend Payment"). Trustee Ex. 7, pp. 5 and 10. Accordingly, since August 1, 2019, Debtor has received a combined monthly payment of $2,174.34 from Northwestern.

9. Debtor receives an IRS 1099 Form for the distributions she receives from the Annuity.

10. The Guaranteed Payments and the Dividend Payments are direct deposited into the Bank Account.

11. The Bank Account is an interest-bearing checking account with BancFirst.

12. Debtor refers to the Bank Account as her retirement account, but it is not a "retirement" account. It is simply a checking account into which she deposits retirement funds.

13. Debtor's retirement funds are comprised of the following: Social Security Benefits; the Guaranteed Payment and the Dividend Payment; and required minimum distributions from Debtor's IRA ("RMDs").³ All of these funds are deposited by the payor directly into the Bank Account. Debtor believed the funds in the Bank Account were all exempt retirement funds (other than the occasional deposit made by Debtor therein).

14. Debtor began having her monthly RMDs in the amount of $2,457.00 deposited directly into the Bank Account in February, 2019. Trustee Ex. 7.

15. An additional $28,594.00 was also deposited into the Bank Account from non-retirement funds. Trustee Ex. 9 and 10.

LEGAL CONCLUSIONS

Section 522 of the Bankruptcy Code permits a debtor to exempt certain property from the estate and "place it beyond the reach of creditors." In re Crowl, 415 B.R. 849, 851 (Bankr. N.D. Okla. 2009) (citing 11 U.S.C. § 522 ). A claim of exemption must be claimed by a debtor pursuant to Federal Rule of Bankruptcy Procedure 4003(a). Exemptions claimed by a debtor are presumed valid until proven otherwise. To overcome the presumption of validity, the objecting party must provide evidence in rebuttal. Fed. R. Bankr, P. 4003(a) and (C) ; Jenkins v. Hodes (In re Hodes ), 402 F.3d 1005, (10th Cir. 2005) ; Kennedy v. Martinez (In re Kennedy ), 336 B.R. 600 (10th Cir. BAP 2005). The objecting party must prove by a preponderance of the evidence that the exemption is improper. Crowl, 415 B.R. at 850. "If the trustee fails to carry the burden of proving by a preponderance of the evidence that the exemption should be disallowed, the exemption will stand. In re Mann, 201 B.R. 910, 915 (Bankr. E.D. Mich.1996) ; LaForest v. Roberts, 2010 WL 1223921 (E.D. Tenn. 2010).

If the objecting party successfully rebuts the presumption of validity, the burden shifts to the debtor to come forward to demonstrate the validity. Kennedy, 336 B.R. 600. When an issue is in doubt because of the proof provided, and the Court would otherwise be required to speculate, the party upon whom the burden of proof ultimately rests must lose. Cadel Co. v. Friedheim (In re Friedheim ), 2007 WL 2325613 (N.D. Tex. 2007).

Under 11 U.S.C. § 522(b)(1), Oklahoma opted out of the federal exemption scheme under the Bankruptcy Code, thereby limiting the exemptions available to debtors in Oklahoma to those allowed under state law. In re McMasters, 220 B.R. 419, 423 (Bankr. N.D. Okla. 1998). Consequently, the Oklahoma bankruptcy courts look to applicable Oklahoma law when determining the validity of a debtor's claim to a state law exemption. Williamson v. Hall (In re Hall ), 441 B.R. 680, 685 (10th Cir. BAP 2009).

On a side note, at the hearing, both Trustee and Debtor got side-tracked, focusing on issues not relevant to the exemption analysis. Trustee repeatedly wanted to highlight the number of amendments to the Schedules and SOFA that had been made and remained to be made, and consequently the obvious inaccuracies of the Schedules and SOFA as originally prepared, signed, and filed by Debtor and her counsel. Trustee also attempted to taint Debtor's efforts to create and protect retirement funds as if such actions were relevant to the validity of her claims of exemptions. However, the United States Supreme Court discredited the use of equitable principles as a basis to disallow exemptions in Law v. Siegel, 571 U.S. 415, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014). Gray v. Warfield (In re Gray ), 523 B.R. 170, 173 (9th Cir. BAP 2014). As a result, this Court cannot use general equitable powers to deny exemption claims as a result of Debtor's alleged bad faith conduct. Clabaugh v. Grant (In re Grant ), 658 F. App'x 411, 414 (10th Cir. 2016) (citing Law v. Siegel, 571 U.S. at 423, 134 S.Ct. at 1196 )).

Along similar lines, Debtor repeatedly focused on her intent to create a retirement account in the Bank Account and her intent to first use non-exempt funds from the Bank Account before using any exempt funds. A debtor's intent to make property exempt, does not, by itself make the property exempt. In re Smith, 570 B.R. 844, 854 (Bankr D. Idaho 2017). The debtor's actions, and the alleged exempt asset, must satisfy the requirements of the statutory exemption notwithstanding the debtor's actual intent.

In re Ludwig, 345 B.R. 310, 320 (Bankr. D. Colo. 2006) (citing In re Ellis, 274 B.R. 782, 788 (Bankr. S.D. Ill. 2002) (holding annuity for payment of lottery proceeds was not exempt under 26 U.S.C. § 408(b) merely because "in her mind" debtor entered into annuity "for purposes of retirement"); In re Rogers, supra., at 351 (holding California exemption statute "does not extend to protect anything a debtor unilaterally chooses to claim as intended for retirement purposes")).

Setting aside these arguments, the Court will first address the RMDs' exempt status. It will then address Debtor's exemption claim in the Annuity and the Bank Account.

I. ONCE DEPOSITED, THE RMDs LOST THEIR EXEMPT STATUS.

Although this Court believed Debtor no longer claimed an exemption in her RMDs in the Bank Account, the Debtor's Closing Argument asserts to the contrary. Debtor claims the funds in the Bank Account derived from the IRA are exempt pursuant to Okla. Stat. tit. 31, § 1.A.20. This Court disagrees for a simple reason. The unambiguous language of Section 1.A.20 is clear – what is exempt thereunder is "any interest in a retirement plan or arrangement...