In re Erich Lantz And Cindy Lantz

• Decision Date: 13 July 2011
• Docket Number: No. 10–B–73859.,10–B–73859.
• Citation: 451 B.R. 843
• Parties: In re Erich LANTZ and Cindy Lantz, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

451 B.R. 843

In re Erich LANTZ and Cindy Lantz, Debtors.

No. 10–B–73859.

United States Bankruptcy Court, N.D. Illinois, Western Division.

July 13, 2011.

Scott E. Hillison, Bernard J. Natale, Ltd., Rockford, IL, for Debtors.

MEMORANDUM OPINION

MANUEL BARBOSA, Bankruptcy Judge.

This matter comes before the Court on the Trustee's objection to claim of exemption in two bank accounts and a table saw. For the reasons set forth herein, the Court will grant the objection with respect to the table saw and checking account, but will deny the objection with respect to the savings account.

JURISDICTION AND PROCEDURE

The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).

FACTS AND BACKGROUND

This Court entered a memorandum opinion in this case on March 9, 2011, finding that the fact that a year had passed without the Debtors reinvesting the sale proceeds from the sale of their homestead did not preclude them from asserting the one-year exemption for homestead proceeds under 735 Ill. Comp. Stat. § 5/12–906 because the bankruptcy petition was filed before the one-year period expired. Most of the facts of the case are set out in detail in that opinion, and will not be repeated here. As noted in a footnote to the opinion, the Chapter 7 Trustee reserved her right to object to the Debtors' claim of exemption in homestead proceeds on the alternate theory that all or part of the funds in the bank account that the Debtors were seeking to exempt were not traceable to the homestead proceeds. With the Court's leave, the Trustee filed an amended objection to claim of exemption on April 26, 2011, to which the Debtors filed a response and the Trustee filed a reply.¹ The Debtors and the Trustee generally agree on the facts, but disagree on the proper method for tracing proceeds to a bank account where the proceeds have been commingled with other funds in an account.

The Debtors deposited $24,373.43 out of the homestead proceeds into their general checking account at Alpine Bank (the “1st Account”) on July 31, 2009. Almost a month later, on August 21, 2009, they transferred $15,000 out of that account into a newly opened money market account at Associated Bank (the “2nd Account”). On or about May 25, 2010, they closed the 2nd Account and transferred the $9,242.77 then remaining in the account into a newly opened savings account at Associated Bank (“3rd Account”). On July 30, 2010, the Debtors filed their petition for protection under Chapter 7 of the Bankruptcy Code, and claimed that $9,000 of the $9,243.71 in the 3rd Account as of the petition date was traceable to the homestead proceeds.²

The 2nd Account and the 3rd Account were both segregated accounts. Other than accrued interest, the only source of the funds in the 3rd Account was the transfer from the 2nd Account when it was closed, and the only source of the funds in the 2nd Account was the transfer of the $15,000 from the 1st Account on August 21, 2009. However, the Trustee argues that the full $ 15,000 is not traceable to the homestead proceeds check because the initial deposit was commingled with other funds in the 1st Account. On the date the Debtors deposited $24,373.43 into the 1st Account, there was already a balance in the account of $884.26 from other sources. Then, between the time the check was deposited and the time $15,000 was transferred to the 2nd Account (the “Commingling Period”), the Debtors deposited an additional $7,721.96 into the 1st Account from other non-exempt sources, including the Debtors' salary. During the same period, the Debtors drew checks on the 1st Account or made payments or withdrawals from the account totaling around $16,000. According to the Debtors' bank statements, the lowest balance in the 1st Account during the Commingling Period was $16,568.91.

DISCUSSION

Unlike other exemption statutes such as 735 Ill. Comp. Stat. § 5/12–1001(h), which exempts “property that is traceable to” personal injury claims and certain other enumerated categories, the exemption for “the proceeds” from the sale of a homestead set forth in 735 Ill. Comp. Stat. § 5/12–906 does not expressly mention “traceability.” However, because the property that is sought to be exempted must be identifiable as the “proceeds” of the sale, there is at least some requirement to demonstrate that the debtor received the property directly in exchange for the homestead or through a series of transactions that can be “traced” back to the sale of the homestead.³ See In re Stewart, No. 10–81979, 2011 WL 1827571, at *3, n. 3 (May 12, 2011) (“The condition that the proceeds be traceable to the homestead is an implied condition.”). The concept is not identical with the concept of traceability for statutes that expressly cover “traceable” property, however. Statutes such as Section 5/12–1001(h) are broader than those that do not contain language covering all traceable property. See Fayette Cnty. Hosp. v. Reavis, 169 Ill.App.3d 246, 250, 119 Ill.Dec. 937, 523 N.E.2d 693, 695 (Ill.App.Ct.1988) (finding that, because section 12–1001(g) did not include language like that in 12–1001(h), the “legislature did not intend to exempt property which is traceable to social security benefits” and therefore the certificate of deposit purchased with social security benefits was not exempt under the statute); but see Auto Owners Ins. v. Berkshire, 225 Ill.App.3d 695, 699, 167 Ill.Dec. 1100, 588 N.E.2d 1230, 1233 (Ill.App.Ct.1992) (noting that “the principle of expressio unius est exclusio alterius, applied in Reavis, has no place in interpreting the exemption statutes when to apply it would frustrate the purpose of the statutes” and that the “concept of tracing is part of Illinois law even where the exemption statute does not specifically provide for it”). If the statute does not include language expressly covering all traceable property, more must be demonstrated than that the funds or value exchanged to acquire the property at issue were exempt property. It must also be demonstrated that the property acquired is of a type such that it would not be inconsistent with the policy behind the exemption to exempt it. As Illinois courts have stated with respect to exempt retirement benefits:

A debtor may trace the exemption from the exempt asset to the liquid form, but the concept of tracing is not limitless. So long as the debtor continues to hold and to use the funds for the support of the debtor and his family, the exemption statutes require the exemption of funds traceable from exempt payments. Conversely, if the debtor transforms the support payments into an investment, the purpose of the statutes is not being met; the funds are not being used for support and thus should lose their exempt character. Thus, the exempt funds remain exempt so long as they retain the “quality of moneys.”Auto Owners Ins. v. Berkshire, 225 Ill.App.3d 695, 698–99, 167 Ill.Dec. 1100, 588 N.E.2d 1230, 1233 (Ill.App.Ct.1992) (internal citations omitted); see also, In re Irwin, 371 B.R. 344 (Bankr.C.D.Ill.2007) (“the settlement funds no longer retained the ‘quality of moneys' or the ‘attributes' of a workers' compensation settlement after they were used to pay off the lien on the vehicle”); cf. In re Jackson, 95 B.R. 590 (Bankr.C.D.Ill.1989) (holding that the house purchased with life insurance proceeds could not be exempt under section 12–1001(f) because the life insurance proceeds had been “converted to another form of property” but that it was exempt under section 12–1001(h) because the house was “property that is traceable to ... a payment under a life insurance contract”). The Trustee does not dispute the Debtor's contention that a check deposited into a checking account, savings account or money market account retains the same “quality of moneys” to constitute proceeds of a homestead. Instead, she argues that at least a portion of the funds in the account are not “identifiable proceeds” of the sale, because they are traceable to sources of funds other than the sale. It is in this sense, of “identification” rather than “quality,” that the term “tracing” or “traceable” shall be used for the remainder of the opinion.

In Illinois, depositing funds in an account that contains other funds does not necessarily change their character or make them non-exempt. Instead, exempt funds “that are reasonably traceable retain their exemption even if they are commingled with other nonexempt funds in the same bank account.” In re Merritt, 272 Ill.App.3d 1017, 1021, 209 Ill.Dec. 502, 651 N.E.2d 680, 682 (Ill.App.Ct.1995). Illinois courts have not made clear the proper method for tracing, however. The only published opinion that the Court is aware of that actually discusses the appropriate method for determining whether funds are “reasonably traceable” to exempt funds under Illinois law is Judge Gorman's opinion in In re Lichtenberger, 337 B.R. 322, 324 (Bankr.C.D.Ill.2006), dealing with funds traceable to exempt social security benefits. Judge Gorman noted that courts in other jurisdictions have normally employed one of four methods of tracing exempt funds: “(i) the lowest intermediate balance approach, (ii) the last-in, first-out approach, (iii) the pro-rata approach, and (iv) the first-in, first-out approach.” In re Lichtenberger, 337 B.R. 322, 324 (Bankr.C.D.Ill.2006). She noted that in other contexts, Illinois courts had used both the lowest intermediate balance method and the first-in first-out method as a method of tracing commingled funds. For example, the lowest intermediate balance method has been used in Illinois to trace commingled trust funds where the trustee commingles trust funds with the trustee's own non-trust funds in a single account. In such cases “it will be presumed that the sums withdrawn were from moneys which the...