In re Hardesty, Case No. 14bk42906
| Decision Date | 07 August 2015 |
| Docket Number | Case No. 14bk42906 |
| Parties | In re: David J. Hardesty, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
MEMORANDUM DECISION
Before the court are two objections filed by Michael K. Desmond, not individually but solely in his capacity as chapter 7 Trustee (the "Trustee"), to exemptions claimed by David J. Hardesty (the "Debtor"): Trustee's Objections to Debtor's Exemptions (the "Personal Injury Funds Objection") and Trustee's Objections to Debtor's Exemption in Life Insurance Proceeds Under 735 ILCS 5/12-1001(f) (the "Life Insurance Proceeds Objection"). The Personal Injury Funds Objection seeks denial of the Debtor's exemption in payments that the Debtor will receive as part of a personal injury settlement agreement (the "Personal Injury Settlement") as well as those Personal Injury Settlement funds already received and currently held in two separate Edward Jones accounts (collectively, the "Edward Jones Accounts"). The Life Insurance Proceeds Objection seeks denial of the Debtor's exemption in life insurance proceeds (the "Life Insurance Proceeds") that the Debtor received post-petition following the death of the Debtor's step-father. For the reasons set forth herein, the Personal Injury Funds Objection is overruled and the Life Insurance Proceeds Objection is sustained.
The federal district courts have "original and exclusive jurisdiction" of ail cases under title 11 of the United States Code (the "Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under title 13 of the United States Code, or arising in or related to cases under title 11. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Operating Procedure 15(a).
A bankruptcy judge to whom a case has been referred may enter final judgment on any proceeding arising under the Bankruptcy Code or arising in a case under tide 11. 28 U.S.C. § 157(b)(1). An objection to a debtor's claim of exemption is a core proceeding. 28 U.S.C. § 157(b)(2)(B); In re Johnson, 480 B.R. 305, 308 (Bankr. N.D. Ill. 2012) (Baer, J.). The court also has constitutional authority to determine the exemption because, though exemptions may derive from state law, "[t]he right to exempt property from the bankruptcy estate is established by an express provision of the Bankruptcy Code (section 522) and is central to the public bankruptcy scheme[.]"In re Carlew, 469 B.R. 666, 673 (Bankr. S.D. Tex. 2012), aff'd sub nom. West v. Carlew, Civ. A. H-12-0913, 2012 WL 3002197 (S.D. Tex. July 23, 2012).
Accordingly, final judgment is within the scope of the court's authority.
In considering the Personal Injury Funds Objection, the court has considered the arguments of the parries at the hearing on June 3, 2015 and has reviewed the Personal Injury Funds Objection [Dkt. No. 25], the attached exhibits submitted in conjunction therewith and each of the following:
In considering the Life Insurance Proceeds Objection, the court has considered the arguments of the parties at the hearing on June 3, 2015 and has reviewed the Life Insurance Proceeds Objection [Dkt. No. 40], the attached exhibits submitted in conjunction therewith and each of the following:
The court has also taken into consideration any and all exhibits submitted in conjunction with the foregoing. Though these items do not constitute an exhaustive list of the filings in the above-captioned bankruptcy case, the court has taken judicial notice of the contents of the docket in this matter. See Levine v. Egidi, No. 93C188, 1993 WL 69146, *2 (N.D. Ill. Mar. 8, 1993) (authorizinga bankruptcy court to take judicial notice of its own docket; In re Brent, 458 B.R.444, 455 n.5 (Bankr. N.D. Ill. 2011) (Goldgar, J.) (recognizing same).
To resolve the Trustee's objections the court must first determine whether the properties at issue are part of the Debtor's bankruptcy estate and, if so, whether and to what extent the Debtor can claim an exemption in such properties. With respect to the Personal Injury Funds Objection the court must determine what impact, if any, a prepetition marital settlement agreement had on the Personal Injury Settlement funds as far as it affects the Trustee's rights to such funds as property of the estate. With respect to the Life Insurance Proceeds Objection, the court must determine whether the Debtor may properly claim an exemption in proceeds of a life insurance policy received post-petition. The court will address each objection in turn.
On July 3, 2002, more than 12 years before the commencement of the case at bar, the Debtor entered into the Personal Injury Settlement with Illinois Farmers Insurance Company in connection with personal injuries that the Debtor sustained in an automobile accident. Under the terms of the Personal Injury Settlement, the Debtor was to receive four periodic payments: $17,000 on April 24, 2008, $25,000 on April 24, 2013, $36,000 on April 24, 2018, and $51,985 on April 24, 2023. The terms also state that the payments cannot be accelerated or assigned by the Debtor. The Debtor has already received the first two periodic payments.
Before receiving the second payment the Debtor and his ex-wife filed for divorce. On July 6, 2009, the DuPage County Circuit Court entered a Judgment for Dissolution of Marriage based upon the parties' agreed Marital Settlement Agreement (the "MSA"). Article VII of the MSA specifically deals with the allocation of the Personal Injury Settlement funds. It states that the remaining payments "shall be used for the benefit of the [Debtor's] children." MSA, at 7. Upon receipt, the Debtor Id. at 8. The payments are to be first applied to the children's education and any remaining funds released to the children upon their attaining the age of 22. Last, "in no event shall said payments be retained by or used for the direct benefit of [the Debtor]." Id. After receiving the second periodic payment of $25,000 in 2013, the Debtor established the Edward Jones Accounts as section 529 college plans for the benefit of the Debtor's children and deposited the payment evenly between the two accounts. See 26 U.S.C. § 529.
On November 28, 2014 the Debtor filed his petition for relief under chapter 7 of the Bankruptcy Code. The Debtor's Schedule B separately lists both the Edward Jones Accounts and the remaining payments still owing to the Debtor pursuant to the Personal Injury Settlement. The Debtor's Schedule C claims the remaining Personal Injury Settlement payments as exempt under 735 ILCS 5/12-1001(g)(4) and the Edward Jones Accounts as exempt under 735 ILCS 5/12-1001(g)(4) and (j). The property descriptions in both schedules reference the MSA, and the restrictions that the MSA places on the scheduled property, requiring the Debtor to hold, transfer and manage the funds "on behalf of [his] children."
On March 27, 2015 the Trustee filed the Personal Injury Funds Objection requesting (1) that the court find the funds in the Edward Jones Accounts and the remaining Personal Injury Settlement payments to be non-exempt property of the estate and (2) that the court direct the turnover of funds in the Edward Jones Accounts in excess of the amounts prescribed by section 541(b)(6) of the Bankruptcy Code. On April 14, 2015, the Debtor requested additional time to respond to the Trustee's objection, which the court granted on April 21, 2015. The court set a hearing on the matter for June 3, 2015.
Prior to the June 3rd hearing, an appearance was filed on behalf of Julie Hardesty, the Debtor's ex-wife, as custodial parent for the children beneficiaries of the MSA (the "Children"). Counsels for the Trustee, the Debtor and the Children appeared at the hearing and the court ordered supplemental briefs from the parties on these issues. The parties complied with the court's order and the matter is fully briefed.1
On or about April 23, 2015, following the death of the Debtor's step-father, the Debtor received a $35,426.15 payment as part of the Life Insurance Proceeds. On May 20, 2015, the Debtor filed the Amended Schedule B to include this payment. The Debtor also filed the Amended Schedule C to...
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