In re Naranjo
| Decision Date | 31 July 2018 |
| Docket Number | Case No. 17-34055-KLP |
| Citation | 590 B.R. 126 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | IN RE: Leslie J. NARANJO, Debtor. |
Bruce W. White, Richmond, VA, for Debtor.
Roy M. Terry, Jr., Sands Anderson PC, Christian K. Vogel, Vogel & Cromwell, LLC, Richmond, VA, for Trustee.
Roy M. Terry Jr., the trustee in this chapter 7 case (the "Trustee"), has objected to the claim of the debtor, Leslie J. Naranjo (the "Debtor"), that certain life insurance proceeds she received postpetition are exempt and should be excluded from her bankruptcy estate. The Debtor bases her claim on Va. Code Ann. § 38.2-3122(B), which protects any "protected insurance item"1 from the claims of creditors of "any ... person dependent on ... the insured or owner of the ... policy." Va. Code Ann. § 38.2-3122(B)(2). In his objection (the "Objection"), the Trustee argues that the Debtor's interest in the proceeds at issue is not covered by § 38.2-3122(B) because the Debtor was not "dependent on" the insured.2
The Court held a hearing on the Objection on March 21, 2018. At the conclusion of the hearing, the Court directed counsel to submit additional memoranda on the question of whether the Debtor should be considered a "person dependent on ... the insured" within the meaning of the § 38.2-3122(B). Having considered the evidence and the oral and written argument of counsel, the Court will overrule the Objection.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and the general order of reference entered by the U.S. District Court for the Eastern District of Virginia on August 15, 1984. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
In June of 2016, the Debtor's parents moved to an assisted living facility. In December of 2016, the Debtor's mother passed away. Thereafter, the Debtor's father expressed a desire to move out of the assisted living facility. Because he was incapable of living on his own, he asked the Debtor if he could live with her, but the rental house in which the Debtor was living at the time was not large enough. The Debtor and her father therefore rented a different house, with each signing the lease. In July of 2017, the Debtor's father left the assisted living facility and moved into the rental home with the Debtor. The Debtor agreed to be her father's fulltime caregiver in exchange for compensation of $1,500 per month plus payment of the Debtor's half of the rent and utilities.
From each of the two paychecks the Debtor received from her father, taxes, Medicaid, and social security were deducted. While she was living with her father, the Debtor kept her expenses separate from those of her father. The Debtor was not claimed as a dependent on her father's tax return. Her father did not include the Debtor in the will he executed July 16, 2017, instead leaving one-fourth of his estate to each of the Debtor's three siblings and one-eighth of his estate to each of the Debtor's two children. He followed this same distribution allocation with respect to his Individual Retirement Account with Wells Fargo Advisors, a decision documented in an "IRA Change of Beneficiary and Indemnification" form executed on August 8, 2017.
The Debtor's father passed away on August 16, 2017, four days after the Debtor filed for a petition for relief under chapter 7 of the Bankruptcy Code. The Debtor was a beneficiary under two life insurance policies insuring the life of her father, receiving a total of $15,261.58 (the "Life Insurance Proceeds").
On November 29, 2017, the Debtor filed amended schedules in which she claimed an exemption in the Life Insurance Proceeds. The Trustee has objected to the exemption.4
The Debtor's financial status during 2016 and 2017, the relevant time period, was as follows. During 2016, the Debtor had two part-time jobs. One of the Debtor's jobs ended in November of 2016, and the other job ended in February of 2017. The Debtor's 2016 tax return shows an adjusted gross income of $18,105, which includes earned income of $10,771 and unemployment benefits of $7,560. In addition, the Debtor's father gave her cash gifts of $13,000 in 2016 and $13,000 in 2017, and he had contributed to her financially since her divorce in 2009. The Debtor testified that the $13,000 gift amount had been chosen for tax purposes. She was unemployed between March and July 2017 and was receiving unemployment benefits. She served as her father's caretaker in July and August of 2017. At the time she filed this chapter 7 case, the Debtor's father was paying the majority of her expenses.
After her father's death in August of 2017, the Debtor was unable to obtain employment. During that time, her father's estate continued to pay the Debtor's share of the monthly rent because, according to the Debtor, her father had guaranteed her share. In November of 2017, the Debtor accepted a job with the AARP Foundation for which she received minimal compensation; her gross income was $486 in 2017.
The commencement of a bankruptcy case creates an estate comprised of "all legal or equitable interests of the debtor in property." 11 U.S.C. § 541(a)(1). However, a debtor may claim certain estate property as exempt from the estate. 11 U.S.C. § 522(b). If a state chooses to opt out of the federal exemption scheme detailed in 11 U.S.C. § 522(d), "any property that is exempt under ... State or local law" is excluded from the estate. 11 U.S.C. § 522(b)(3)(A). Because Virginia has opted out of the federal exemption scheme, see Va. Code Ann. § 34–3.1, the Debtor claimed her exemptions in compliance with Virginia law, thus raising the issue of the effect of Va. Code Ann. § 38.2-3122(B). See Mayer v. Nguyen (In re Nguyen) , 211 F.3d 105, 107 (4th Cir. 2000) ; In re Bowman , 582 B.R. 899, 901 n.1 (Bankr. E.D. Va. 2018).
The Bankruptcy Code provides that unless a party in interest objects, "the property claimed as exempt ... is exempt." 11 U.S.C. § 522(l ). In any hearing on an objection to a debtor's claim of exemption, "the objecting party has the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr. P. 4003(c) ; In re Wilmoth , 412 B.R. 791 (Bankr. E.D. Va. 2009). In this case, therefore, the Trustee has the burden of proving by a preponderance of the evidence that § 38.2-3122(B) is inapplicable to the Debtor's claimed exemption. In re Scott , 2012 WL 2576783, No. 11-37343-KRH at *1 (Bankr. E.D. Va. July 3, 2012).
The Trustee argues that the Debtor is not entitled to claim an exemption in the Life Insurance Proceeds under § 38.2-3122(B) because she was not a "person dependent on" her father at the time of his death. Section 38.2-3122(B) provides, in part:
Va. Code Ann. § 38.2-3122(B). The Trustee does not dispute the fact that the Debtor was receiving money from her father; rather, he argues that the facts demonstrate the relationship was not one of dependency but instead that of an employer and employee. In support, he relies upon the fact that in July of 2017, the Debtor entered into an agreement with her father under which he would leave the assisted living facility and live with the Debtor, who would provide full-time care for him. In exchange for this care, her father paid the Debtor $1,500 per month plus payment of the Debtor's half of the rent and utilities for the home they had leased together. The Trustee points out that the Debtor, both prior to working for her father and thereafter, was capable of employment and in fact had held other jobs. He further notes that the Debtor's father did not claim her as a dependent on his tax return nor did he include her in his will or as a beneficiary of his Individual Retirement Account with Wells Fargo Advisors.
The Debtor contends that the Life Insurance Proceeds should be exempt under Va. Code Ann. § 38.2-3122(B) because she was dependent on her father's financial help and does not have any other income or resources. The Debtor cites to In re Dry , 348 B.R. 475 (Bankr. C.D. Ill. 2006), which interpreted an Illinois statute similar to the statute at issue in this case5 , to support her position.
In In re Dry , the debtor and her partner, Mr. Kelm, had been living together in a house owned by the debtor. Although they maintained separate bank accounts, Kelm occasionally put money into the debtor's account. The debtor worked only two weeks over a period of two years and stayed home the rest of that time to take care of Kelm, who had cancer
. Kelm paid the household expenses. The court found that the debtor and Kelm "were living as a family unit and, as such, they were mutually dependent." Id. at 479. It then held that for the purpose of the Illinois exemption statute, "a ‘dependent’ is ‘an individual who is supported financially, either directly or indirectly by another, and who reasonably relies on such support.’ " Id. at 478, citing In re Rigdon , 133 B.R. 460, 465 (Bankr. S.D. Ill. 1991). After applying this test to the facts in Dry , the court overruled the trustee's objection to the debtor's claim of exemption. Id. at 479.
As in Dry , the Debtor argues that she was supported financially by her father, either...
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