In re Donaghy, Bankruptcy No. 81 B 20055.

• Decision Date: 12 June 1981
• Docket Number: Bankruptcy No. 81 B 20055.
• Citation: 11 BR 677
• Parties: In re John and Elizabeth DONAGHY, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

11 B.R. 677 (1981)

In re John and Elizabeth DONAGHY, Debtors.

Bankruptcy No. 81 B 20055.

United States Bankruptcy Court, S.D. New York.

June 12, 1981.

Sidney Turner, White Plains, N.Y., Trustee.

Westchester Legal Services, Inc., Senior Citizens Law Project, Yonkers, N.Y., for debtors; Stephen Norman, Westchester Legal Services, Inc., Yonkers, N.Y., of counsel.

DECISION ON TRUSTEE'S OBJECTION TO EXEMPTION CLAIMED BY DEBTORS

HOWARD SCHWARTZBERG, Bankruptcy Judge.

These elderly debtors face a battle with cancer and the trustee in bankruptcy for the use of $21,992.87 in accrued pension benefits they received while they were preparing their petition in bankruptcy and which they claim as exempt under 11 U.S.C. § 522(d)(10)(E). Because the funds were received in a lump sum three weeks before the filing of their joint petition in bankruptcy the trustee contends that they lost their status as pension monies and therefore constitute property of the estate within the meaning of 11 U.S.C. § 541.

John Donaghy, the husband-debtor, lost his job when his employer closed its plant and moved out of state. He is over sixty-two years old, inflicted with emphysema, and receives disability payments from the Social Security Administration of $495.20 per month. His wife, who is sixty-four years old has had cancer-related medical bills in excess of $10,000 during the past two years.

In November of 1980, John Donaghy consulted with an attorney with the Senior Citizens Law Project at Westchester Legal Services who advised the debtors how to prepare a petition in bankruptcy on their own since that organization did not handle bankruptcy matters. On December 10, 1980, the debtor, John Donaghy, received a letter from his former employer informing him that by January 16, 1981 the debtor had to make an election as to how he was to receive his accrued benefits. The debtor had to choose between two options; to wait until he became sixty-five and then receive monthly payments, or to elect to receive immediately a lump sum equivalent to the capitalized actuarial value of the monthly payments that he might expect to collect based upon his life expectancy. It is not disputed that the pension plan is a qualified plea as defined under 26 U.S.C. § 401 et seq.

Because of his ill health, the debtor, John Donaghy, had no confidence in surviving until the age of sixty-five. Moreover, he and his wife needed the money because their medical expenses exceeded their income from the monthly disability payments, which is their only source of income. Therefore, the debtor, John Donaghy, felt that he had only one option; to elect to receive the lump-sum payment, which he did. The payment, in the sum of $21,992.87, was received, however, before the debtors actually filed their joint petition on February 4, 1981. They put the fund in a bank account in their names immediately after receipt on January 14, 1981, and listed the account in their schedules, which they identify as accrued pension benefits for purposes of claiming their exemption under 11 U.S.C. § 522(d)(10)(E). The issue is whether or not these funds should be turned over to the trustee in bankruptcy or may they be regarded as the debtor's right to receive pension benefits within the meaning of the exemption authorized under 11 U.S.C. § 522(d)(10)(E).

Code § 522(d)(10)(E) affords an exemption for pension benefits in the following language:

"(10) The debtor\'s right to receive

. . . . .

(E) a payment under a . . . pension . . . or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor . . ." Emphasis added

The trustee argues that the pension benefits constitute property of the estate, within the meaning of 11 U.S.C. § 541, citing: Short v. Grand, 507 F.2d 425 (8 Cir. 1974); In re Parker, 473 F.Supp. 746, 1 C.B.C.2d 103 (D.C.W.D.N.Y.1979); In re Mace, 4 B.C.D. 94 (B.C.Ore.1978); In re Wilson, 3 B.C.D. 844 (B.C.W.D.Tex.1977). However all of these cases were concerned with the concept of what constitutes "property" which passed to the trustee as an asset of the estate under § 70(a)(5) of the former Bankruptcy Act, which defined "property" to mean:

"(5) property, including rights of action, which prior to the filing of the petition the bankrupt . . . could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered . . . "

These cases follow the trilogy of Supreme Court decisions defining what assets pass to the trustee under former § 70(a). See Kokoszka v. Belford, 417 U.S. 642, 94 S.Ct. 721, 38 L.Ed.2d 548 (1974); Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970); Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1965).

Since the adoption of the Bankruptcy Reform Act of 1978 it is no longer crucial to determine who has title or possession regarding property claimed by the trustee as an asset of the estate. Code § 541(a)(1) defines property of the estate in broad scope to include "all legal or equitable interests of the debtor in property as of the commencement of the case." Thus, even exempt property must first come into the estate, subject to the claim of exemption, thereby overruling Lockwood v. Exchange Bank, 190 U.S. 294, 23 S.Ct. 751, 47 L.Ed. 1061 (1933) which excluded exempt property from the estate. Therefore, the question is not whether the proceeds are an asset of the estate, because Code § 541 expressly embraces this fund. The issue to be determined is whether the lump sum...