In re Ronald A. SCHENA, 11-09-13165 SA.

• Decision Date: 14 October 2010
• Docket Number: No. 11-09-13165 SA.,11-09-13165 SA.
• Citation: 439 B.R. 776
• Parties: In re Ronald A. SCHENA and Rachael Schena, Debtors.
• Court: U.S. Bankruptcy Court — District of New Mexico

439 B.R. 776

In re Ronald A. SCHENA and Rachael Schena, Debtors.

No. 11-09-13165 SA.

United States Bankruptcy Court,D. New Mexico.

Oct. 14, 2010.

Louis Puccini, Jr., Puccini Law, P.A., Albuquerque, NM, for Debtor.

MEMORANDUM OPINION IN SUPPORT OF ORDER SUSTAINING HIGH DESERT STATE BANK'S OBJECTION TO DEBTORS' EXEMPTION

JAMES S. STARZYNSKI, Bankruptcy Judge.

Before the Court is the objection of High Desert State Bank (“Creditor”) (doc 48) to Debtors' claimed exemption of a checking account holding military retirement funds. This is a core proceeding dealing with the exemptions of a debtor. 28 U.S.C. § 157(b)(2)(B). The parties agreed that the Court would decide the issue based upon pleadings and memoranda (doc 85). For the reasons set forth below, the Court sustains the Creditor's objection to the Debtors' claimed exemption.

BACKGROUND

On July 21, 2009, Ronald A. Schena and Rachael Schena (“Debtors”) filed a Chapter 11 bankruptcy petition (doc 1). On August 5, 2009, Debtors filed Schedules A-J (doc 14). The Debtors elected to use the “federal exemptions” under 11 U.S.C. § 522(b)(2) ¹ . In Schedule C the Debtors claimed an exemption under 11 U.S.C. § 522(d)(10)(E), 38 U.S.C. §§ 1970(g) ² and 5301 et seq. for the “checking account located at: Charter Bank (Military Retirement)” containing the sum of $10,800 (“Account”). The Account consists solely the proceeds of military retirement checks received pre-petition by Ronald Schena, a retired United States Air Force officer. Creditor objects that the Account may not be exempted under the federal exemptions.

Therefore, there are two issues for the Court. First, whether a debtor is precluded from invoking 38 U.S.C. § 5301, a federal non-bankruptcy exemption, where a debtor has elected the “federal bankruptcy exemptions” under 11 U.S.C. § 522(b)(2). Second, whether uncommingled pension proceeds, deposited in a bank account are exempt under either 11 U.S.C. § 522(d)(10)(E) or 38 U.S.C. § 5301(a)(1).

DISCUSSION

The filing of a bankruptcy petition creates a bankruptcy estate. The estate includes all “legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1); see also Rousey v. Jacoway, 544 U.S. 320, 325, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005). In an individual's Chapter 11 case, “property of the estate includes earnings performed by the debtor after the commencement of the case, but before the case is closed, dismissed, or converted to a case under Chapter 7, 12, or 13, whichever occurs first.” 11 U.S.C. § 1115(a)(2) ³ .

[1] The Supreme Court originally held that despite retirement from active service, members of the armed services were still “in the military service of the government,” United States v. Tyler, 105 U.S. 244, 246, 17 Ct.Cl. 437, 26 L.Ed. 985 (1881). However, the Court has recently modified its position on military retirement pay from “reduced compensation for reduced current services” to “deferred pay for past services”. Dorfman v. Moorhous (In re Moorhous), 180 B.R. 138, 148 (Bankr.E.D.Va.1995), aff'd, 108 F.3d 51 (4th Cir.1997)(citing McCarty v. McCarty, 453 U.S. 210, 221-22, 101 S.Ct. 2728, 69 L.Ed.2d 589 (1981) and Barker v. Kansas, 503 U.S. 594, 605, 112 S.Ct. 1619, 118 L.Ed.2d 243 (1992)). Under the former standard, wages would be included in the estate by § 1115(a)(2); under the current standard, a pension is included by § 541(a). Therefore, military retirement pay is included in the estate and must meet criteria under § 522 to be exempt.

I. A Debtor using § 522(d) may not use 38 U.S.C. § 5301.

[2] [3] Exemptions from the property of the estate are governed in the Bankruptcy Code by § 522. Under § 522(b)(1) debtors may choose the “federal bankruptcy exemptions” in § 522(b)(2) or where applicable, the “state and federal non-bankruptcy exemptions” in § 522(b)(3) ⁴ . When a debtor elects the federal bankruptcy exemptions in § 522(b)(2), the debtor applies the exclusive list of exemptions set out in § 522(d). Carpenter v. Ries (In re Carpenter), 408 B.R. 244, 246 (8th Cir. BAP 2009), aff'd, 614 F.3d 930 (8th Cir.2010). Therefore, the Court must determine whether a debtor is precluded from invoking federal non-bankruptcy exemptions not listed in § 522(d) when they elect to utilize the federal exemption scheme through § 522(b)(2).

When a debtor chooses to use § 522(b)(2), he or she is limited to the “exclusive list of federal exemptions outlined in the Bankruptcy Code.” In re Kochell, 732 F.2d 564, 566 (7th Cir.1984). On the other hand, the federal non-bankruptcy exemptions are available only where the debtor has chosen to utilize the state exemption scheme prescribed in § 522(b)(3). Id. The plain language of the statute “that the debtor must choose between the two exemption systems, rather than enjoy the benefits of both, is perfectly clear.” Walker v. Treadwell (In re Treadwell), 699 F.2d 1050, 1052 (11th Cir.1983). Additionally, Congress' intention to limit exemptions is apparent in the House Report, which concisely states: “the debtor may choose the federal exemptions prescribed in subsection (d), or he may choose the exemptions to which he is entitled under other federal law and the law of the State of his domicile.” H. Rep. No. 95-595, 95th Cong., 1st Sess., 126 (1977), 1978 U.S.C.C.A.N. 5963, 6087. See also S.Rep. No. 95-989, 95th Cong, 2nd Sess., 73 (1978), 1978 U.S.C.C.A.N. 5787, 5859.

The court in Treadwell considered this issue with respect to social security payments under 42 U.S.C. § 407. Treadwell, 699 F.2d at 1052. In that case, the debtor elected the federal exemptions and also invoked the Social Security Act (42 U.S.C. § 407) in order to exempt these funds as well. Id. at 1050. The court found that when a debtor chooses the federal exemptions he or she forfeits the protection afforded by 42 U.S.C. § 407 with respect to the accumulated social security benefits. Id. at 1052. The court stated:

Thus, the Debtor in this case could have obtained the exemption of section 407, but only by forsaking the exemptions specified in the Bankruptcy Code, 11 U.S.C.A. § 522(d), and electing the state and non-bankruptcy federal exemptions. 11 U.S.C.A. § 522(b). Nothing in the language of section 407 permits a social security recipient to claim all bankruptcy exemptions in addition to the social security exemption.

Id. Since Treadwell, Congress added that “none of the moneys paid or payable or rights existing under this subchapter shall be subject ... to the operation of any bankruptcy or insolvency law” to 42 U.S.C. § 407, which specifically excludes social security proceeds in the bankruptcy context. Carpenter 408 B.R. at 248. Nevertheless, Treadwell still stands for the proposition that debtors are not allowed to invoke non-Title 11 exemptions where they have elected to use § 522(d) exemptions.

After the amendment to the Social Security Act, the Carpenter court found that a debtor could invoke 42 U.S.C. § 407 even where he or she chose the federal exemption scheme under § 522(b)(2). Carpenter, 408 B.R. at 249. However, the court's limited holding resulted from the added language in the Social Security Act. Id. at 248. As such, the Carpenter holding is that where federal non-bankruptcy law specifically provides a protection in bankruptcy, such provision governs unless some provision of the code explicitly provides otherwise. Id. Later courts have applied Carpenter in its limited context; that is, where the federal non-bankruptcy provisions specifically protects property in bankruptcy. In re Anderson, 410 B.R. 289, 294 (Bankr.W.D.Mo.2009). The court in Anderson found that because the Civil Service Retirement Act (5 U.S.C. § 8346(a)) did not contain the “limiting language” as in 48 U.S.C. § 407, the “exemption would apply only to those debtors who choose, or are required to claim ... exemptions under state law and federal law other than § 522(d).” Id.

Therefore, this Court finds that where debtors have elected to use the exemptions specified in § 522(d) they are precluded from invoking federal non-bankruptcy exemptions, except where non-Title 11 law explicitly provides for protection of debtors in bankruptcy.

Here, the Creditor has met its burden of proof that the exemptions were not properly claimed. Fed. R. Bankr.P. 4003(c). Therefore, the Debtors, having elected the federal exemptions, may not claim exemptions for the Charter Bank military retirement account under § 522(d)(10)(E) and 38 U.S.C. § 5301.

II. Uncommingled pension proceeds are not exempt under either § 522(d)(10)(E) or 38 U.S.C. § 5301(a)(1).

[4] Where a debtor has chosen (or been forced to claim) federal exemptions, § 522(d)(10)(E) provides that the debtor may exempt the following property:

(10) The debtor's right to receive-

(E) a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

11 U.S.C. § 522(d)(10)(E) (emphasis added).

[5] [6] When interpreting a federal statute, courts first examine the plain language of the statute. Consumer Product Safety Commission v. GTE Sylvania, 447 U.S. 102, 108, 100 S.Ct. 2051, 64 L.Ed.2d 766 (1980). See also Dalton v. Internal Revenue Service, 77 F.3d 1297, 1299 (10th Cir.1996). The plain meaning of the legislation will be dispositive except where it is contrary to the clear intention of the drafters.

United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).

[7] Exemption legislation should be construed liberally in order to give effect to the purpose of Congress, that is, to protect funds for the maintenance and support of beneficiaries. Porter v. Aetna Casualty & Sur. Co., 370 U.S. 159, 162, 82 S.Ct. 1231, 8 L.Ed.2d 407 (1962) ⁵ . The language of section 522(d)(10)(E) is plain and leaves little or no room for a...