In re Starr

• Decision Date: 24 January 1991
• Docket Number: Adv. No. 90-0214.,Bankruptcy No. 88-40577
• Citation: 123 BR 314
• Parties: In re Jimmy STARR and Karen Starr, Debtors. Tamalou WILLIAMS, Trustee, Plaintiff, v. Paul D. GIAMANCO and Jimmy Starr, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Illinois

123 B.R. 314 (1991)

In re Jimmy STARR and Karen Starr, Debtors Tamalou WILLIAMS, Trustee, Plaintiff, v. Paul D. GIAMANCO and Jimmy Starr, Defendants.

Bankruptcy No. 88-40577, Adv. No. 90-0214.

United States Bankruptcy Court, S.D. Illinois.

January 24, 1991.

Tamalou Williams, Benton, Ill., pro se.

Douglas A. Antonik, Mt. Vernon, Ill., for defendant Jimmy Starr.

Paul D. Giamanco, Mt. Vernon, Ill., pro se.

MEMORANDUM AND ORDER

KENNETH J. MEYERS, Bankruptcy Judge.

Shortly before the debtors' Chapter 11 bankruptcy filing, debtor Jimmy Starr received a personal injury settlement in the amount of $100,000. The settlement proceeds were paid into a trust account of the debtor's attorney, Paul Giamanco, who disbursed a portion of the funds to pay medical bills and attorney fees. The debtor himself received a payment of $13,268.94 from the trust account immediately prior to filing bankruptcy.

During the course of the Chapter 11 proceeding, the debtor received an additional $3,150 in settlement proceeds from his attorney's trust account. This amount was used by the debtors in the ordinary course of operating their two businesses.

The debtors subsequently converted their Chapter 11 proceeding to a proceeding under Chapter 7. In an amendment to their bankruptcy schedules, the debtors claimed an exemption of $7,500 in the personal injury proceeds of $13,470.96 remaining in the trust account at the time of conversion. See Ill.Rev.Stat., ch. 110, ¶ 12-1001(h)(4).

The Chapter 7 trustee responded by filing the instant turnover action, in which she asserts that the debtor has already received the benefit of his personal injury exemption by reason of the trust account payments made both prior to and during the Chapter 11 proceeding. The trustee seeks turnover of $8,918.94 from the debtor, which represents the difference between the total of $16,418.94 received by the debtor and the debtor's $7,500 exemption amount. The trustee additionally seeks turnover from the debtor's attorney of the $13,470.96 remaining in the trust account upon conversion to Chapter 7.

The trustee's action raises two separate issues for the Court's consideration concerning, first, the settlement proceeds received by the debtor prior to bankruptcy and, second, the proceeds received during the course of his Chapter 11 proceeding and spent in the ordinary course of business. In both instances the Court must determine whether the debtor obtained the benefit of his personal injury exemption by reason of these payments and whether the exemption to which he is entitled must be offset by the amounts already received.

With regard to the first issue, the trustee does not contend that any of the settlement funds disbursed to the debtor prior to bankruptcy, or property traceable to those funds, remained in the debtor's possession at the time of his bankruptcy filing. A debtor's bankruptcy estate consists only of property in which he has an interest at the commencement of his case. See 11 U.S.C. § 541(a)(2). Under the bankruptcy exemption provisions, an exemption is claimed as to "property of the estate" (11 U.S.C. § 522(b)), and a debtor cannot be said to have obtained the benefit of an exemption as to property in which the debtor has no interest at the time of filing bankruptcy. Since there has been no showing here that the debtor retained any of the settlement funds disbursed prior to bankruptcy at the time he filed his petition, these funds did not become property of the estate from which his personal injury exemption could be claimed.

It is the purpose of federal and state exemption law to protect assets needed for a fresh start from creditor action such as judgment or attachment (see Ill. Rev.Stat., ch. 110, ¶ 12-1001), and a debtor's exemption rights do not arise and cannot be claimed or "used up" until the occurrence of such creditor action. In the bankruptcy context, a debtor's exemption rights are determined at the time of filing his bankruptcy petition. See In re Haga, 48 B.R. 492 (Bankr.E.D.Tenn.1985). In the present case, there was no creditor action or bankruptcy pending at the time the debtor received his initial trust fund payment of $13,268.94, and the amount of this payment cannot be counted against the debtor's personal injury exemption that arose upon filing bankruptcy.¹ Accordingly, the trustee's action for turnover of funds received prior to bankruptcy must fail, and the debtor will not be considered to have received the benefit of his exemption by reason of the personal injury funds paid to him prior to bankruptcy.

The second issue presented by the trustee's action is whether settlement proceeds received during the course of the debtor's Chapter 11 proceeding and spent in the ordinary course of business constitute exempt funds to be offset against the amount of the debtor's exemption. The debtor argues that since the proceeds were used in the operation of his Chapter 11 businesses rather than to benefit himself personally, they constitute nonexempt funds and should not be deducted from his $7,500 personal injury exemption. Any other result, the debtor asserts, would be contrary to the purpose of exemption law to provide debtors with sufficient personal assets to make a "fresh start" after bankruptcy.

The trustee, on the other hand, argues that since exempt funds may be used by a debtor for whatever purpose he wishes, the fact that the debtor here chose to operate his Chapter 11 businesses with funds claimed by him as exempt should not be determinative. The trustee asserts that the debtor has already received a portion of his $7,500 exemption amount while in Chapter 11 and is not now entitled to an additional $7,500 of the settlement proceeds.

The parties have not cited, nor has the Court found, any case law addressing the issue of the exempt status of the personal injury funds received by the debtor during the course of his Chapter 11 bankruptcy proceeding. Having considered the parties' arguments, the Court finds that the trustee's position overlooks the debtor's role as debtor-in-possession in his Chapter 11 case and the unavailability of exempt funds for use in the administration of the debtor's estate. The Court, accordingly, rejects the trustee's contention that the debtor used exempt funds to operate his Chapter 11 businesses.

Preliminarily, the Court notes that the debtor made a proper claim of exemption as to the personal injury proceeds by amending his bankruptcy schedules upon conversion to Chapter 7. Absent an objection or allegation of creditor prejudice resulting from the debtor's delay...