In re McGuire

• Decision Date: 24 June 2022
• Docket Number: 20-61183
• Parties: In re: DANIEL MCGUIRE and RITA MCGUIRE, Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Northern District of New York

In re: DANIEL MCGUIRE and RITA MCGUIRE, Debtors.

No. 20-61183

United States Bankruptcy Court, N.D. New York

June 24, 2022

Chapter 13

Orville & McDonald Law, PC Zachary DeCurtis McDonald Counsel for Debtor

Mark W. Swimelar Mark W. Swimelar

MEMORANDUM-DECISION AND ORDER

Honorable Diane Davis, United States Chief Bankruptcy Judge

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INTRODUCTION

Before the Court is Trustee Mark W. Swimelar's ("Trustee") Objection to Claimed Exemption (the "Objection to Exemption," ECF No. 21) and related Objection to Confirmation of Plan (the "Objection to Confirmation," ECF No. 23) in Daniel McGuire ("Debtor Husband") and Rita McGuire's ("Debtor Wife") (collectively "Debtors") chapter 13 case. Trustee Swimelar objects to Debtor Wife claiming an inheritance as exempt pursuant to 11 U.S.C. § 522 (d)(5)^[1]("Inheritance") as having no basis in law. The Trustee also objects to confirmation of Debtors' proposed amended chapter 13 plan (ECF No. 26), and requests that confirmation be denied or conditioned on the Inheritance being paid into the plan as projected disposable income under 11 U.S.C. § 1325(b).

The Court first heard the matter at its regularly scheduled Utica motion term calendar on February 2, 2021. The Parties were then directed to submit simultaneous letter briefs by February 23, 2021, which they did (the "Trustee's Brief," ECF No. 29 and the "Debtors' Brief," ECF No. 31). On March 2, 2021, the Court heard oral argument and took the matter under advisement on that date.

JURISDICTION

The Court has core jurisdiction over the parties and subject matter of these contested matters in accordance with 28 U.S.C. §§ 1334 and 157(b)(2)(A), (b)(2)(L) and (b)(2)(O). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

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PROCEDURAL AND FACTUAL BACKGROUND^[2]

Debtors filed a joint voluntary petition under chapter 13 of the Bankruptcy Code on November 10, 2020. (Petition. ECF No. 1.) On Schedule A/B of the petition, Debtors' list real property located at 3509 Georgia Street, Endicott, NY 13760 (the "Real Property") as joint property with a value of $68,127.00 and a mortgage held by Wells Fargo in the amount of $51,835.00. (Petition, 10, 20. ECF No. 1.) On Schedule C of the petition, Debtors claim an exemption in the Real Property in the sum of $17,000.00 pursuant to § 522(d)(1). (Petition, 16. ECF No. 1.) Schedule A/B also lists various personal property including a "[p]otential inheritance from [Debtor Wife's] late brother" in the amount of $10,000.00 (the "Inheritance") and bank accounts with total balances in the amount of $7,000 (the "Bank Accounts"). (Petition, 12-14. ECF No. 1.) Pursuant to § 522(d)(5), Debtor Wife claims an exemption of $10,000.00 in the Inheritance and both Debtors claim as exempt cash in the sum of $7,000.00 held in the joint Bank Accounts. 11 U.S.C. §§ 522(d)(1), (5). According to Official Form 122C-1,^[3] Debtors qualify as below median income debtors such that their disposable income is determined under § 1325(b)(2). (Petition, 44-47. ECF No. 1.)

Debtors proposed amended plan filed on February 1, 2021, provides that they will make payments to Trustee in the total amount of $21,480.00 payable at $300.00 per month for the first two (2) months, then $360.00 per month for the remaining 58 months for a total of 60 months

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with nonpriority unsecured creditors not separately classified receiving a 1% dividend on allowed claims. (Amended Plan. ECF No. 26.)^[4]

ARGUMENTS

In his Objection to Exemption, the Trustee states the Inheritance is not an allowed exemption. He provides no statutory authority or case law in support of his Objection to Exemption as to why § 522(d)(5) cannot be used by Debtor Wife to claim the Inheritance as exempt. In his Objection to Confirmation the Trustee argues that the Inheritance is property of the estate under §§ 541(a) and 1306(a) and further that it constitutes disposable income for purposes of confirmation. According to the Trustee, confirmation should be denied because the plan does not fund the Inheritance into the Plan in its entirety in accordance with § 1325(b)(1)(B). In support of his position, he argues that the majority courts hold that property claimed as exempt under § 522 nonetheless constitutes disposable income and should be funded into the plan for the benefit of creditors. See, e.g., In re Adamson, 615 B.R. 303, 311 (Bankr. D. Colo. 2020). In the alternative, the Trustee argues that should the Court find Debtor Wife properly used § 522(d)(5) to claim the Inheritance as exempt, Debtor Wife is only allowed to claim half of the value of the joint Bank Accounts as exempt, which limits the wildcard exemption available to her under § 522(d)(5) to $9,052.50.

Debtors agree the Inheritance is property of the estate and, to the extent the amount to be received exceeds the maximum exemption allowed Debtor Wife pursuant to the wildcard exemption, they will fund the excess into the plan as non-exempt proceeds. Debtors disagree, however, that the Inheritance is disposable income as defined under § 1325(b), because it is not an exempt asset that produces income or results in a stream of payments. Debtors ask this Court

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to follow the minority line of cases that conclude that once property is exempted from property of the estate, the property is protected from distribution to creditors under § 522(c). Debtors specifically direct the Court's attention to several cases that look to whether an exempt asset produces income.

At the hearing held on March 2, 2021, Debtors advised the Court that the amount of the Inheritance to be received remained unknown, as the decedent's estate had not yet been administered. They estimate, however, that Debtor Wife will receive approximately $6,000.00, rather than the $10,000.00 listed on Schedule C when the petition was filed.

As a matter of first impression, the issues before this Court are as follows. First, the Court must determine whether Debtor Wife may use the "wildcard exemption" to claim the Inheritance as exempt. Notwithstanding the Court's determination regarding the first question, the Court must then determine whether the Inheritance is "projected disposable income," under §§ 101(10A), 1325(b)(1)(B), and 1325(b)(2) and must be funded into the Plan to the extent not reasonably necessary for Debtors' maintenance and support. The burden of proof at confirmation of a chapter 13 plan is a shifting one. In re Powers, 554 B.R. 41, 55 (Bankr. N.D.N.Y. 2016) (citing McKinney v. McKinney (In re McKinney), 507 B.R. 534, 539 (Bankr. W.D. Pa. 2014)). The party objecting to the plan bears the initial burden of presenting some evidence to support its position and, if satisfied, the burden shifts to Debtors to prove by a preponderance of the evidence that the requirements of § 1325 have been met. Id.

For the reasons explained more fully below, the Court holds that Debtor Wife may claim the Inheritance as exempt under § 522(d)(5) and that it is immunized from creditors' claims under § 522(c). The Court further holds that the Inheritance does not constitute disposable income as that term is used in § 1325(b). Instead, and to the extent the amount received by Debtor Wife

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exceeds the allowed exemption, it must come into the Plan for the benefit of creditors under § 1325(a)(4).

DISCUSSION

A. The Exemption

With certain exceptions not applicable here, the commencement of a bankruptcy case creates an "estate" that initially is comprised of all legal or equitable interests of a debtor in property. See 11 U.S.C. § 541. Property of the estate in chapter 13 is different from property of a chapter 7 estate in that it includes not only any interest in property described in § 541(a) at the commencement of the case, but also all property acquired by the debtor after the commencement of the case under § 1306(a), including post-petition earnings from services performed by the debtor during the pendency of the chapter 13 case. See 11 U.S.C. §§ 541(a); 1306(a)(1), (2). Since Debtors agree the Inheritance is property of their chapter 13 bankruptcy estate, the Court will not address the case law cited by the Trustee in support of this argument.

To prevent distribution of property of the estate to creditors, a debtor may claim certain property as statutorily exempt under § 522 by choosing either state or federal exemptions. 11 U.S.C. § 522(b); Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992). Federal Rule of Bankruptcy Procedure 4003(b) ("Fed. R. Bankr. P." or "Rule") affords a creditor or a bankruptcy trustee the opportunity to object to claimed exemptions within 30 days of the initial § 341 meeting of creditors. Fed.R.Bankr.P. 4003(b)(1). Unless a party in interest objects to a claim of exemption within the time permitted under Rule 4003, the property becomes exempt and is no longer property of the estate. 11 U.S.C. § 522(l); Taylor, 503 U.S. at 642-43. A court has no authority to limit the application of § 522(l) to exemptions claimed in good faith. Id. Rule 4003(c) provides that the objecting party bears the burden of proof and must show by a

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preponderance of the evidence that a claimed exemption was improper. Fed.R.Bankr.P. 4003(c); see DiStefano v. Endurance Am. Ins. Co., 620 B.R. 687, 691 (N.D.N.Y. 2020) (citations omitted).

To facilitate a debtor's fresh start, a debtor may exempt certain property from the bankruptcy estate under federal or state law. 11 U.S.C. § 522(b). Some exemptions limit the exemption amount claimed under state law or under the federal exemptions specified in § 522(d). Schwab v. Reilly, 560 U.S. 770, 774 (2010); Taylor, 503 U.S. at 642. In this case, Debtors elected their exemptions under § 522(d), the federal scheme of exemptions. Under § 522(d)(5), which is often referred to as the "wildcard" or "catchall" exemption, a debtor is permitted to remove from the bankruptcy estate whatever property the debtor wants, provided the...