In re Leck, Bankruptcy No. MM7-89-02580.

• Citation: 113 BR 500
• Decision Date: 16 March 1990
• Docket Number: Bankruptcy No. MM7-89-02580.
• Parties: In re H. Norman LECK, Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Western District of Wisconsin

113 B.R. 500 (1990)

In re H. Norman LECK, Debtor.

Bankruptcy No. MM7-89-02580.

United States Bankruptcy Court, W.D. Wisconsin.

March 16, 1990.

Denis P. Bartell, Ross & Stevens, S.C., Madison, Wis., for debtor.

Peter M. Gennrich, Jenswold, Studt, Hanson, Clark & Kaufman, Madison, Wis., for creditors.

Jerry J. Armstrong, Madison, Wis., Trustee.

MEMORANDUM DECISION

ROBERT D. MARTIN, Chief Judge.

On October 13, 1989 the debtor, Henry Norman Leck, filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. His personal property schedule included a personal injury cause of action arising from an April 29, 1988 automobile accident. Leck's exemption schedule stated that the cause of action was exempt "per Brandstaetter, 36 B.R. 369 (E.D. Wis.)." Thereafter, the Bank of Monticello, the Bank of South Wayne, and the State Bank of Winslow, ("Banks"), each judgment creditors of the debtor, filed a joint objection to the exemption of the personal injury claim.

In In re Brandstaetter, 36 B.R. 369 (Bankr.E.D.Wis.1984) the bankruptcy court relied on In re Buda, 323 F.2d 748 (7th Cir.1963), a case decided under the Bankruptcy Act of 1898, in concluding that personal injury claims are exempt under Wisconsin law. The district court affirmed the bankruptcy court's decision in Brandstaetter. Subsequently, the case was affirmed on other grounds by the Seventh Circuit Court of Appeals, which chose not to address the issue of whether a debtor could claim an exemption in the debtor's personal injury cause of action:

Both the bankruptcy judge and the district court found that since the personal injury claim had been excluded from the bankruptcy estate in Matter of Buda, 323 F.2d 748 (7th Cir.1963), and was therefore not available to meet creditors\' claims under the former bankruptcy law, this property was also exempt under Wisconsin law under the test provided by the new Bankruptcy Code. We decline to address this issue on the merits. . . .

Matter of Brandstaetter, 767 F.2d 324, 326 (7th Cir.1985).

Buda involved Bankruptcy Act § 70(a)(5), (11 U.S.C. § 110(a)(5)), which provided:

a. The trustee of the estate of a bankrupt and his successor or successors, if any, upon his or their appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this Act, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located

(5) property, including rights of action, which prior to the filing of the petition he 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: Provided, That rights of action ex delicto for libel, slander, injuries to the person of the bankrupt or of a relative, whether or not resulting in death, seduction, and criminal conversation shall not vest in the trustee unless by the law of the State such rights of action are subject to attachment, execution, garnishment, sequestration, or other judicial process. . . .

Because the trustee in Buda had conceded that a personal injury cause of action was not subject to attachment, execution, or garnishment under Wisconsin law, the appellate court's inquiry was limited to whether a personal injury cause of action was subject to sequestration or other judicial process under Wisconsin law, and thus constituted property of the estate. It concluded that such a claim was not subject to either sequestration or other judicial process, and accordingly affirmed the district court's decision that the personal injury action did not vest in the trustee.¹

Unlike former Bankruptcy Act § 70, (11 U.S.C. § 110), current Section 541(a)(1) of the Bankruptcy Code defines property of the bankruptcy estate to include "all legal or equitable interests of the debtor in property as of the commencement of the case." "The scope of section 541 is broad, and includes causes of action." Sierra Switchboard Co. v. Westinghouse Electric Corp., 789 F.2d 705, 707 (9th Cir.1986), citing United States v. Whiting Pools, Inc., 462 U.S. 198, 205 & n. 9, 103 S.Ct. 2309, 2313 & n. 9, 76 L.Ed.2d 515 (1983). The Sierra Switchboard Court continued:

In Tignor v. Parkinson, 729 F.2d 977 (4th Cir.1984) the Fourth Circuit broadly construed section 541 and held that an unliquidated personal injury claim was property of the bankruptcy estate. The court, recognizing that such claims would have been excluded under former section 70a as a non-transferable interest, unreachable by creditors, reasoned:

The Bankruptcy Reform Act which repealed the old Bankruptcy Act is a significant change in the law applicable to the property of the bankrupt estate. Under the old Act only non-exempt property was included as part of the bankrupt estate. . . . Under the Reform Act, however, all property of the debtor is included in the bankrupt estate, including exempt property. "After the property comes into the estate, then the debtor is permitted to exempt it under proposed 11 U.S.C. § 522, and the court will have jurisdiction to determine what property may be exempted . . ." Legislative History, 1978 U.S. Code Cong. & Ad.News at 5787, 5868, 6324 . . . The legislative history of this statute is explicit . . .: "The scope of this paragraph is broad. It includes all kinds of property, including tangible or intangible property, causes of action. . . . "

The fact that the schedule of exemptions established by Congress in the Reform Act includes an exemption of $7,500 for personal bodily injury claims is another clear indication that 11 U.S.C. § 541(a) brings such claims into the bankrupt estate in the first instance. . . .

The debtor\'s claims for injuries to the person . . . are thus property of the bankrupt estate as of the commencement of the case. (footnotes omitted).

Id. at 980-81.

Sierra Switchboard, 789 F.2d at 708. The Sierra Switchboard Court noted that "By adopting a comprehensive definition of property, the Bankruptcy Reform Act reduced the bankruptcy court's cumbersome reliance on state law analysis for determining property to be included in the estate" (citations omitted), and concluded that "regardless of whether a personal injury claim is transferable or assignable under state law, such claims become part of the bankruptcy estate under section 541." Id., 789 F.2d at 709. In addition to the Fourth and Ninth Circuits, the Sixth and Eleventh Circuits, as well as various bankruptcy courts, have determined that personal injury claims are property of the bankruptcy estate under 11 U.S.C. § 541. See In re Cottrell, 876 F.2d 540, 543 (6th Cir.1989) and Jones v. Harrell, 858 F.2d 667, 669 (11th Cir.1988); see also Matter of Young, 93 B.R. 590, 592-93 (Bankr.S.D.Ohio 1988); Cowan v. Fidelity Interstate Life Ins. Co., 89 B.R. 564, 571 (Bankr.E.D.La.1988); In re Duty, 78 B.R. 111, 116 (Bankr.E.D.Va. 1987); In re Richards, 57 B.R. 662, 664 (Bankr.D.Nev.1986); In re Mills, 46 B.R. 525, 526 (Bankr.S.D.Fla.1985).

In Tignor, a case originating in Virginia, the Fourth Circuit Court of Appeals stated that "Bankrupt estate property must qualify for exemption, if at all, under the scheme of 11 U.S.C. § 522.²" Tignor, 729 F.2d at 981. Pursuant to Section 522(b)(1), Virginia had "opted-out" of the federal exemption scheme contained in Section 522(d). Accordingly, the Tignor Court's inquiry was limited to a determination of "whether and to what extent Virginia law provides an exemption for personal bodily injury claims." Id.

While noting that precedent required Virginia's exemption statutes to be liberally construed, the Court cited additional authority which provided that "`the liberal construction required to be given to our constitutional and statutory provisions does not authorize the courts to reduce or enlarge the exemption, or to read into the exemption laws an exception not found there.'" Id., citing Goldburg Co. v. Salyer, 188 Va. 573, 582, 50 S.E.2d 272, 277 (1948).

Virginia's homestead exemption statute provided an exemption of up to $5,000.00 in real and personal property, including debts due, where "debts" was defined to include "a liability incurred as the result of an unintentional tort." The Court held that the FELA claim involved therein was a claim for an unintentional tort and could be claimed as exempt under the Virginia homestead exemption statute. Id. The Court further held that the cause of action could not be claimed exempt "as a common law exemption nor as an unassignable cause of action unreachable by creditors under state law." Id.

In so holding, the Court explained:

Important considerations support our literal reading of the Virginia statute. Exemptions are strictly creatures of constitutional and statutory law, (citation omitted), and as the opinion affirmed by the district court may be read to be based upon a common law exemption, we do not think it is supportable. As that opinion may be read as not including as property of the bankrupt estate a cause of action which could not be reached by creditors in a state court, that aspect of the old Act was simply repealed by the Reform Act as we have set forth above in this opinion. The upshot of the matter is that, had the Virginia legislature not amended Va.Code § 34-4 as it did, a Virginia debtor in bankruptcy under the Reform Act could well have no exemption at all for unliquidated bodily injury claims. No statutory exemption was needed under the old Act, because under former 11 U.S.C. § 110(a)(5) and Ruebush Ruebush v. Funk, 63 F.2d 170 (1933) unliquidated bodily injury claims did not come into the bankrupt estate in the first instance. With the passage of the Reform Act, however, such claims became estate property. Once Virginia chose not to permit choosing the federal exemption scheme, such claims could not even have been exempted as homestead property unless they were a

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