In re Mueller
| Decision Date | 07 November 2000 |
| Docket Number | No. 96-5-8962-JS.,96-5-8962-JS. |
| Parties | In re Frederick W. MUELLER, Patricia N. Mueller, Debtors. |
| Court | U.S. Bankruptcy Court — District of Maryland |
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Maria Ellena Chavez-Ruark, Piper, Marbury, Rudnick & Wolfe, LLP, Baltimore, for Mark J. Friedman, Chapter 7 Trustee.
Christopher C. Tsien, Columbia, for the Debtors.
The Chapter 7 trustee objected to the debtors' exemption of a deferred compensation plan. This opinion holds that The Maryland State Employees Deferred Compensation Plan and Trust (the "Plan") is a pension plan that is both excludable from the debtors' bankruptcy estate pursuant to Section 541(c)(2)1 of the Bankruptcy Code and that even if it is includable in the estate pursuant to 11 U.S.C. § 541(a),2 it is exemptible from the estate pursuant to the law of the State of Maryland.. Accordingly, the objection will be overruled, for the following reasons.
On September 17, 1996, the debtors, Frederick W. Mueller, 67, and Patricia N. Mueller, 57, filed the instant voluntary, joint Chapter 7 bankruptcy petition. Mrs. Mueller had been employed by the Montgomery County Department of Health and Human Resources as a social worker for 30 years, earning a salary of approximately $50,000 per year for 1994 and 1995, and $25,000 during the then-current year of 1996, in addition to $75 per week from a private psychotherapy practice. The debtors owned a residence as tenants by the entireties valued at $182,000, in which there was minimal equity. They listed approximately $82,000 owed as unsecured debt. They claimed as exempt Mrs. Mueller's "Retirement Account (PEBSCO),"3 a deferred compensation plan administered by the Board of Trustees of the State Retirement and Pension System,4 in the full amount of $90,618.90, in addition to the equity in their residence, Schedule C.
Mark J. Friedman, the Chapter 7 trustee, objected to the exemption on the ground that Maryland Annotated Code Article 73B Sections 17 and 1255 had been repealed.
However, the trustee's argument was without merit. While former Article 73B entitled "Pensions" was indeed repealed in 1994, the Maryland General Assembly had enacted a new article of the Maryland Annotated Code one year earlier entitled "State Personnel and Pensions" that reenacted many if not most of the provisions of the former law, gathering pension and personnel-related matters under one comprehensive article.6 Currently, Section 21-502 of the State Personnel and Pensions Article contains all of the provisions included under former Sections 17 and 125 of Article 73B.7
Nevertheless, the debtors amended Schedules B and C a third time.8 In Amended Schedule C, the debtors characterized the Plan as a deferred compensation plan and claimed an exemption in the amount of $68,000, pursuant to MD. CODE ANN., CTS. AND JUD. PROC. § 15-601.19, and in the amount of $5,000 pursuant to MD. CODE ANN., CTS. AND JUD. PROC. § 11-504(f)10. On Amended Schedule B, they added:
Amended Schedules B and C P. 26. Mrs. Mueller also claimed to be the beneficiary of a tax-exempt "rabbi trust."12
The trustee objected again, contending that Mrs. Mueller's claim as beneficiary of the Plan was property of the estate, even though ownership of the Plan was titled in the State. The trustee also objected to the serial exemption of the same property using alternative theories.
The Court holds that in the absence of fraud or bad faith, the debtors are entitled to amend their schedules, including their list of exemptions. Fed. R.Bankr.P. 1009(a). The rule is permissive, with amendment disallowed in limited instances of bad faith by the debtor or where there is prejudice to creditors. In re Butcher, 189 B.R. 357, 374 (Bankr. D.Md.1995), citing In re Yonikus, 996 F.2d 866, 871-72 (7th Cir.1993) (); Calder v. Job (In re Calder), 973 F.2d 862, 867 (10th Cir.1992); Tignor v. Parkinson (In re Tignor), 729 F.2d 977, 978-79 (4th Cir.1984) ().
The filing of a bankruptcy petition creates an estate comprised of all of the debtor's legal and beneficial interests in property. In re Miller, 224 B.R. 913, 916 (Bankr.D.N.D.1998), citing 11 U.S.C. § 541(a). The debtor may claim certain property of the bankruptcy estate as exempt in order to obtain a "fresh start." While it is a correct statement that "before an exemption can be claimed in property, the property must first be estate property." Miller, 224 B.R. at 917, citing In re Yonikus, 996 F.2d 866, 869 (7th Cir.1993). Therefore, for purposes of ruling on this self-styled "objection to exemption," this Court will assume that the pension plan in question is property of the estate.
Because Maryland has "opted out" of the Federal exemption scheme, debtors who file bankruptcy petitions in Maryland may only claim exemptions afforded them under State law. 11 U.S.C. § 522(b)(1) (2000); Md.Code Ann., Cts. and Jud. Proc. § 11-504(g) (2000). In re Fishbein, 245 B.R. 36 (Bankr.D.Md.2000). Exemptions in Maryland are liberally construed. Butcher, 189 B.R. at 369, citing In re Taylor, 312 Md. 58, 71 n. 5, 537 A.2d 1179 (1988).
To be exempt from the claims of creditors in bankruptcy, the asset must be exempt from the claims of creditors outside of bankruptcy. In re Jones, 142 B.R. 950, 951 (Bankr.W.D.Wash.1992). However, a legal prohibition against the debtor's ability to reach the asset is not a prerequisite for her right to claim the asset as exempt.14
The State exemptions from execution made applicable to proceedings in bankruptcy are located in Md.Code Ann., Cts. & Jud. Proc. § 11-504(b), (f) and (h).15
Section 414(d) of the Internal Revenue Code, which is cited in Md. Cts., & Jud. Proc.Code § 11-504(h), refers to governmental plans.16 The Plan at issue in the instant case is a governmental plan, made exempt from execution and from bankruptcy by the Maryland exemption statute. See Solomon v. Cosby (In re Solomon), 67 F.3d 1128, 1132-33 (4th Cir.1995) ().
In U.S. v. Williams, 279 Md. 673, 370 A.2d 1134 (1977), the Court of Appeals of Maryland commented that former Section 17 of Article 73B, the predecessor statute of Section 21-502, was an exemption statute that "relates exclusively to pensions paid by the State and its subdivisions," and that they are thereby "exempt from execution." 279 Md. at 678, 370 A.2d at 1137. Cf. Lomax v. Comptroller, 323 Md. 419, 593 A.2d 1099 (1991), where the Court of Appeals dealt with an almost identical statute to the one at issue here and held that it "protected teachers' retirement pension benefits from garnishment by private creditors," but did not protect pension benefits from the State for unpaid State income taxes. 323 Md. at 424, 593 A.2d at 1101. This Court finds that the current statute likewise exempts the subject State retirement plan from execution by private creditors, thereby rendering the Plan exempt from the reach of the Chapter 7 trustee, who acts on their behalf.
It is to be noted that the trustee's objection was based solely upon the lack of proper grounds stated for the debtors to exempt this retirement Plan, and not upon any claim that the amount exempted was not reasonably necessary for the debtors' maintenance and support. Accordingly, that is not an issue before this Court, although the record reflects that for all practical purposes Mr. Mueller was retired when the petition was filed and that Mrs. Mueller was approaching retirement age. Therefore, having found that the Plan in this case was properly exempted pursuant to various statutes found in the Maryland Code, the trustee's objection will be overruled.
The Plan is not exemptible as "wages payable." By its own definition, Section 15-601.1 of the Maryland Commercial Law Article does not apply to monies deducted from Mrs. Mueller's wages as employee contributions to her deferred compensation plan. The definition of "disposable wages" contained in the statute refers to "the part of wages that remain after deduction of any amount required to be withheld by law." Md.Code Ann., Com. Law II, § 15-601.1 (1988). The wages that were deducted for her plan were "required to be withheld by law" and therefore were not exempt from attachment as "disposable wages." Section 11-504(e) of the Courts and Judicial Proceedings Article of the Maryland Code expressly excepts "wage attachments" from the scope of exemptions therein enumerated. It has been held that State exemptions for "wages payable" do not extend to a debtor's monetary contribution of wages to a retirement plan. See for example, In re Wheat, 149 B.R. 1003, 1008 (Bankr. S.D.Fla.1992).
In addition. In the case of U.S. v. Williams, 279 Md. 673, 370 A.2d 1134 (1977), the Court of Appeals of Maryland held that while military retirement pay, when actually received, constituted wages for purposes of attachment...
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