In re Rush
| Decision Date | 01 March 2018 |
| Docket Number | Case No. 3:16–bk–30084–SHB |
| Parties | IN RE Patricia A. RUSH, Debtor |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee |
MOSTOLLER, STULBERG, WHITFIELD & ALLEN, Hannah Tippett, Esq., 136 South Illinois Avenue, Suite 104, Oak Ridge, Tennessee 37830, Attorneys for Debtor
LAW OFFICES OF MAYER & NEWTON, John P. Newton, Jr., Esq., 1111 Northshore Drive, Suite S–570, Knoxville, Tennessee 37919, Attorneys for John P. Newton, Jr., Trustee
AMENDED MEMORANDUM ON TRUSTEE'S OBJECTION TO EXEMPTIONS
This contested matter is before the Court on the Trustee's Objection to Exemptions ("Objection to Exemptions") [Doc. 25] filed by John P. Newton, Jr., Chapter 7 Trustee ("Trustee") on February 6, 2017. The Trustee objects to Debtor's claimed exemption of 100% of the back child support due to her as reflected in Amended Schedule C [Doc. 24] filed on January 24, 2017. Specifically, Debtor argues that she may exempt the back child support under 42 U.S.C. § 407 and Tennessee Code Annotated § 26–2–111(1)(A), (B), (C), and (F). [Id. ]
The record before the Court includes the six stipulations of fact submitted on September 25, 2017 [Doc. 46], together with nine exhibits admitted into evidence and the testimony of Debtor at the evidentiary hearing held on October 5, 2017. The Court also takes judicial notice of material undisputed facts of record in Debtor's bankruptcy case pursuant to Rule 201 of the Federal Rules of Evidence and has considered the post-trial briefs filed by the Trustee on November 3 and by Debtor on November 17.
The parties jointly identified the following issues:
[Doc. 46.] This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O), and this memorandum constitutes the Court's findings of fact and conclusions of law.1 See Fed. R. Bankr. P. 7052, 9014(c).
Debtor filed the Voluntary Petition commencing this Chapter 7 bankruptcy case on January 13, 2016, and the Trustee was appointed. [Doc. 1; Doc. 46 at ¶¶ 1–2; Trial Ex. 1.] Along with her other statements and schedules, Debtor filed Schedule B reflecting, inter alia , an interest in "[b]ack child support owed by Bryan Scott Rush, Florida[;] [s]upport is paid through father's social security disability" ("Back Child Support"). [Doc. 1; Doc. 46 at ¶ 3; Trial Ex. 1.] The Back Child Support was valued by Debtor at $56,000.00, and Debtor initially claimed an exemption in the amount of $5,390.80, pursuant to Tennessee Code Annotated § 26–2–103. [Doc. 1; Doc. 46, at ¶ 3; Trial Ex. 1.] Debtor amended Schedule C on January 24, 2017, to claim the full value of the Back Child Support and to add the statutory bases for the full-value exemption under 42 U.S.C. § 407 and Tennessee Code Annotated § 26–2–111(1)(A), –(B), and –(C). [Doc. 24; Doc. 46 at ¶ 4; Trial Ex. 2.] The Trustee timely objected to the amended exemptions on February 6, 2016, arguing that because Debtor does not receive Social Security benefits, she may not rely on the newly added statutes to exempt the entire amount of Back Child Support. [Doc. 25; Doc. 46 at ¶ 5; Trial Ex. 3.] One day before trial on the Trustee's objection, Debtor filed a second Amended Schedule C, adding Tennessee Code Annotated § 26–2–111(1)(F) as another statutory basis to exempt the full value of the Back Child Support.2 [Doc. 49.] The Trustee does not object to the original claimed exemption in the amount of $5,390.80 under Tennessee Code Annotated § 26–2–103, but he asserts that the remaining $50,609.20 is property of the estate available for distribution to creditors. [Doc. 46 at ¶ 6.]
The Back Child Support stems from an Administrative Order for Modification of Current Support ("Child Support Order") entered by the State of Tennessee Department of Human Services on January 16, 2014, modifying the child support awarded in Rush v. Rush , docket no. 4983A, Roane County General Sessions Court. [Trial Ex. 4.] The Child Support Order required Debtor's former husband, Bryan S. Rush, to pay $250.00 monthly beginning in January 2014 to cure child support arrearages. [Id. ]
Because the parties stipulated that the Back Child Support is, in fact, back child support, the pivotal question is whether it is property of the estate. If it is not property of the estate, the inquiry will end, but if it is property of the estate, the question will shift to whether Debtor may exempt it under any of the claimed statutory authorities. Because the Court finds that the Back Child Support is not property of Debtor's bankruptcy estate, the Trustee's objection will be overruled.
Debtor's bankruptcy estate, which included all of her property and property interests at the time, was created when she filed her bankruptcy case. 11 U.S.C. § 541(a). Nevertheless, to ensure that a debtor retains sufficient property for a fresh start, certain property interests may be exempted through 11 U.S.C. § 522 so that they are "subtracted from the bankruptcy estate and not distributed to creditors," In re Arwood , 289 B.R. 889, 892 (Bankr. E.D. Tenn. 2003) (citations omitted). In order to claim property as exempt, Federal Rule of Bankruptcy Procedure 4003(a) requires debtors to file a statement listing the property and its value, the statutory basis for the exemption, and the amount of the claimed exemption.3 Additionally, exemptions, which "are determined as of the date upon which the bankruptcy case is commenced, are construed liberally in favor of debtors, and should be construed in light of the purpose for which they are created." In re Kennedy , 552 B.R. 183, 189 (Bankr. E.D. Tenn. 2016) (citations omitted). Further, "when it is possible to construe an exemption statute in ways that are both favorable and unfavorable to a debtor, then the favorable method should be chosen." In re Chapman , 424 B.R. 823, 826 (Bankr. E.D. Tenn. 2010) (citations omitted).
The scope of the definition of "property of the estate" under § 541(a) is intended to be broad. Subsection (b), however excludes, inter alia , "any power that the debtor may exercise solely for the benefit of an entity other than the debtor." 11 U.S.C. § 541(b)(1). Also, "property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest ... becomes property of the estate only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold." 11 U.S.C. § 541(d). A debtor's listing of property in her statements and schedules does not convert such property to property of the estate because she is required to schedule all interests. See, e.g., In re Christakos , 553 B.R. 371, 375 (Bankr. W.D. Mo. 2016) (holding that because she was "absolutely required to list it," the Debtor's claiming an exemption in postpetition child support "was prudent, particularly since the question of whether it was an asset of the estate had not yet been determined" (citing Home Serv. Oil Co. v. Cecil (In re Cecil) , 542 B.R. 447, 453–54 (8th Cir. BAP 2015) ).
Debtor's bankruptcy estate was created by operation of the Bankruptcy Code, but whether she has a property right to the Back Child Support such that it is property of the bankruptcy estate is determined by state law. See In re Green , 423 B.R. 867, 869 (Bankr. W.D. Ark. 2010). The courts are split over "whether child support arrearages should be included as part of the custodial parent's bankruptcy estate." In re Poffenbarger , 281 B.R. 379, 390 (Bankr. S.D. Ala. 2002) (citing cases). Analyzing the question as one of first impression under Alabama law, the Poffenbarger court cited the following conflicting cases:
Id. After review of the foregoing case law, its careful consideration of the issue, and "the fact that the state laws at issue in Hambright , Hurlbut , Anders , Welch , King , Gardner ,...
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